How to Set the Stop Loss (SL) and Take Profit (TP) Targets
How to Set the Stop Loss (SL) and Take Profit (TP) Targets
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Former investment bank FX trader: Risk management part II
Firstly, thanks for the overwhelming comments and feedback. Genuinely really appreciated. I am pleased 500+ of you find it useful. If you didn't read the first post you can do so here: risk management part I. You'll need to do so in order to make sense of the topic. As ever please comment/reply below with questions or feedback and I'll do my best to get back to you. Part II
Letting stops breathe
When to change a stop
Entering and exiting winning positions
Letting stops breathe
We talked earlier about giving a position enough room to breathe so it is not stopped out in day-to-day noise. Let’s consider the chart below and imagine you had a trailing stop. It would be super painful to miss out on the wider move just because you left a stop that was too tight. Imagine being long and stopped out on a meaningless retracement ... ouch! One simple technique is simply to look at your chosen chart - let’s say daily bars. And then look at previous trends and use the measuring tool. Those generally look something like this and then you just click and drag to measure. For example if we wanted to bet on a downtrend on the chart above we might look at the biggest retracement on the previous uptrend. That max drawdown was about 100 pips or just under 1%. So you’d want your stop to be able to withstand at least that. If market conditions have changed - for example if CVIX has risen - and daily ranges are now higher you should incorporate that. If you know a big event is coming up you might think about that, too. The human brain is a remarkable tool and the power of the eye-ball method is not to be dismissed. This is how most discretionary traders do it. There are also more analytical approaches. Some look at the Average True Range (ATR). This attempts to capture the volatility of a pair, typically averaged over a number of sessions. It looks at three separate measures and takes the largest reading. Think of this as a moving average of how much a pair moves. For example, below shows the daily move in EURUSD was around 60 pips before spiking to 140 pips in March. Conditions were clearly far more volatile in March. Accordingly, you would need to leave your stop further away in March and take a correspondingly smaller position size. ATR is available on pretty much all charting systems Professional traders tend to use standard deviation as a measure of volatility instead of ATR. There are advantages and disadvantages to both. Averages are useful but can be misleading when regimes switch (see above chart). Once you have chosen a measure of volatility, stop distance can then be back-tested and optimised. For example does 2x ATR work best or 5x ATR for a given style and time horizon? Discretionary traders may still eye-ball the ATR or standard deviation to get a feeling for how it has changed over time and what ‘normal’ feels like for a chosen study period - daily, weekly, monthly etc.
Reasons to change a stop
As a general rule you should be disciplined and not change your stops. Remember - losers average losers. This is really hard at first and we’re going to look at that in more detail later. There are some good reasons to modify stops but they are rare. One reason is if another risk management process demands you stop trading and close positions. We’ll look at this later. In that case just close out your positions at market and take the loss/gains as they are. Another is event risk. If you have some big upcoming data like Non Farm Payrolls that you know can move the market +/- 150 pips and you have no edge going into the release then many traders will take off or scale down their positions. They’ll go back into the positions when the data is out and the market has quietened down after fifteen minutes or so. This is a matter of some debate - many traders consider it a coin toss and argue you win some and lose some and it all averages out. Trailing stops can also be used to ‘lock in’ profits. We looked at those before. As the trade moves in your favour (say up if you are long) the stop loss ratchets with it. This means you may well end up ‘stopping out’ at a profit - as per the below example. The mighty trailing stop loss order It is perfectly reasonable to have your stop loss move in the direction of PNL. This is not exposing you to more risk than you originally were comfortable with. It is taking less and less risk as the trade moves in your favour. Trend-followers in particular love trailing stops. One final question traders ask is what they should do if they get stopped out but still like the trade. Should they try the same trade again a day later for the same reasons? Nope. Look for a different trade rather than getting emotionally wed to the original idea. Let’s say a particular stock looked cheap based on valuation metrics yesterday, you bought, it went down and you got stopped out. Well, it is going to look even better on those same metrics today. Maybe the market just doesn’t respect value at the moment and is driven by momentum. Wait it out. Otherwise, why even have a stop in the first place?
Entering and exiting winning positions
Take profits are the opposite of stop losses. They are also resting orders, left with the broker, to automatically close your position if it reaches a certain price. Imagine I’m long EURUSD at 1.1250. If it hits a previous high of 1.1400 (150 pips higher) I will leave a sell order to take profit and close the position. The rookie mistake on take profits is to take profit too early. One should start from the assumption that you will win on no more than half of your trades. Therefore you will need to ensure that you win more on the ones that work than you lose on those that don’t. Sad to say but incredibly common: retail traders often take profits way too early This is going to be the exact opposite of what your emotions want you to do. We are going to look at that in the Psychology of Trading chapter. Remember: let winners run. Just like stops you need to know in advance the level where you will close out at a profit. Then let the trade happen. Don’t override yourself and let emotions force you to take a small profit. A classic mistake to avoid. The trader puts on a trade and it almost stops out before rebounding. As soon as it is slightly in the money they spook and cut out, instead of letting it run to their original take profit. Do not do this.
Entering positions with limit orders
That covers exiting a position but how about getting into one? Take profits can also be left speculatively to enter a position. Sometimes referred to as “bids” (buy orders) or “offers” (sell orders). Imagine the price is 1.1250 and the recent low is 1.1205. You might wish to leave a bid around 1.2010 to enter a long position, if the market reaches that price. This way you don’t need to sit at the computer and wait. Again, typically traders will use tech analysis to identify attractive levels. Again - other traders will cluster with your orders. Just like the stop loss we need to bake that in. So this time if we know everyone is going to buy around the recent low of 1.1205 we might leave the take profit bit a little bit above there at 1.1210 to ensure it gets done. Sure it costs 5 more pips but how mad would you be if the low was 1.1207 and then it rallied a hundred points and you didn’t have the trade on?! There are two more methods that traders often use for entering a position. Scaling in is one such technique. Let’s imagine that you think we are in a long-term bulltrend for AUDUSD but experiencing a brief retracement. You want to take a total position of 500,000 AUD and don’t have a strong view on the current price action. You might therefore leave a series of five bids of 100,000. As the price moves lower each one gets hit. The nice thing about scaling in is it reduces pressure on you to pick the perfect level. Of course the risk is that not all your orders get hit before the price moves higher and you have to trade at-market. Pyramiding is the second technique. Pyramiding is for take profits what a trailing stop loss is to regular stops. It is especially common for momentum traders. Pyramiding into a position means buying more as it goes in your favour Again let’s imagine we’re bullish AUDUSD and want to take a position of 500,000 AUD. Here we add 100,000 when our first signal is reached. Then we add subsequent clips of 100,000 when the trade moves in our favour. We are waiting for confirmation that the move is correct. Obviously this is quite nice as we humans love trading when it goes in our direction. However, the drawback is obvious: we haven’t had the full amount of risk on from the start of the trend. You can see the attractions and drawbacks of both approaches. It is best to experiment and choose techniques that work for your own personal psychology as these will be the easiest for you to stick with and build a disciplined process around.
Risk:reward and win ratios
Be extremely skeptical of people who claim to win on 80% of trades. Most traders will win on roughly 50% of trades and lose on 50% of trades. This is why risk management is so important! Once you start keeping a trading journal you’ll be able to see how the win/loss ratio looks for you. Until then, assume you’re typical and that every other trade will lose money. If that is the case then you need to be sure you make more on the wins than you lose on the losses. You can see the effect of this below. A combination of win % and risk:reward ratio determine if you are profitable A typical rule of thumb is that a ratio of 1:3 works well for most traders. That is, if you are prepared to risk 100 pips on your stop you should be setting a take profit at a level that would return you 300 pips. One needn’t be religious about these numbers - 11 pips and 28 pips would be perfectly fine - but they are a guideline. Again - you should still use technical analysis to find meaningful chart levels for both the stop and take profit. Don’t just blindly take your stop distance and do 3x the pips on the other side as your take profit. Use the ratio to set approximate targets and then look for a relevant resistance or support level in that kind of region.
Not all returns are equal. Suppose you are examining the track record of two traders. Now, both have produced a return of 14% over the year. Not bad! The first trader, however, made hundreds of small bets throughout the year and his cumulative PNL looked like the left image below. The second trader made just one bet — he sold CADJPY at the start of the year — and his PNL looked like the right image below with lots of large drawdowns and volatility. Would you rather have the first trading record or the second? If you were investing money and betting on who would do well next year which would you choose? Of course all sensible people would choose the first trader. Yet if you look only at returns one cannot distinguish between the two. Both are up 14% at that point in time. This is where the Sharpe ratio helps . A high Sharpe ratio indicates that a portfolio has better risk-adjusted performance. One cannot sensibly compare returns without considering the risk taken to earn that return. If I can earn 80% of the return of another investor at only 50% of the risk then a rational investor should simply leverage me at 2x and enjoy 160% of the return at the same level of risk. This is very important in the context of Execution Advisor algorithms (EAs) that are popular in the retail community. You must evaluate historic performance by its risk-adjusted return — not just the nominal return. Incidentally look at the Sharpe ratio of ones that have been live for a year or more ... Otherwise an EA developer could produce two EAs: the first simply buys at 1000:1 leverage on January 1st ; and the second sells in the same manner. At the end of the year, one of them will be discarded and the other will look incredible. Its risk-adjusted return, however, would be abysmal and the odds of repeated success are similarly poor.
The Sharpe ratio works like this:
It takes the average returns of your strategy;
It deducts from these the risk-free rate of return i.e. the rate anyone could have got by investing in US government bonds with very little risk;
It then divides this total return by its own volatility - the more smooth the return the higher and better the Sharpe, the more volatile the lower and worse the Sharpe.
For example, say the return last year was 15% with a volatility of 10% and US bonds are trading at 2%. That gives (15-2)/10 or a Sharpe ratio of 1.3. As a rule of thumb a Sharpe ratio of above 0.5 would be considered decent for a discretionary retail trader. Above 1 is excellent. You don’t really need to know how to calculate Sharpe ratios. Good trading software will do this for you. It will either be available in the system by default or you can add a plug-in.
VAR is another useful measure to help with drawdowns. It stands for Value at Risk. Normally people will use 99% VAR (conservative) or 95% VAR (aggressive). Let’s say you’re long EURUSD and using 95% VAR. The system will look at the historic movement of EURUSD. It might spit out a number of -1.2%. A 5% VAR of -1.2% tells you you should expect to lose 1.2% on 5% of days, whilst 95% of days should be better than that This means it is expected that on 5 days out of 100 (hence the 95%) the portfolio will lose 1.2% or more. This can help you manage your capital by taking appropriately sized positions. Typically you would look at VAR across your portfolio of trades rather than trade by trade. Sharpe ratios and VAR don’t give you the whole picture, though. Legendary fund manager, Howard Marks of Oaktree, notes that, while tools like VAR and Sharpe ratios are helpful and absolutely necessary, the best investors will also overlay their own judgment. Investors can calculate risk metrics like VaR and Sharpe ratios (we use them at Oaktree; they’re the best tools we have), but they shouldn’t put too much faith in them. The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments.Howard Marks of Oaktree Capital What he’s saying is don’t misplace your common sense. Do use these tools as they are helpful. However, you cannot fully rely on them. Both assume a normal distribution of returns. Whereas in real life you get “black swans” - events that should supposedly happen only once every thousand years but which actually seem to happen fairly often. These outlier events are often referred to as “tail risk”. Don’t make the mistake of saying “well, the model said…” - overlay what the model is telling you with your own common sense and good judgment.
Coming up in part III
Available here Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Hi guys, I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert. I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning. When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions. The first topic is Risk Management and we'll cover it in three parts Part I
Why it matters
Using stops sensibly
Picking a clear level
Why it matters
The first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.” You have to keep it before you grow it. Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around. The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices. Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizing
The first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose. Position sizing is what ensures that a losing streak does not take you out of the market. A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples. So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000. We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be? We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator". https://preview.redd.it/y38zb666e5h51.jpg?width=1200&format=pjpg&auto=webp&s=26e4fe569dc5c1f43ce4c746230c49b138691d14 So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital. You should be using this calculator (or something similar) on every single trade so that you know your risk. Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later. The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work. As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you. Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints. For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly: https://preview.redd.it/q2ea6rgae5h51.png?width=1200&format=png&auto=webp&s=4332cb8d0bbbc3d8db972c1f28e8189105393e5b To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you. Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown. It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance. Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k. Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money. Do not let this happen to you. Use position sizing discipline to protect yourself.
If you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number? The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round. This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet. Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin. Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips. Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds. Applying the formula to forex trading looks like this: Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically. If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss. So that’s 0.3 - (1 - 0.3) / 3 = 6.6%. Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit! With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not. Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account. Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see. This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders. Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How many live trades have you done? Often they’ll have done only a handful of real trades and the rest are simulated backtests, which are overfitted. The model will soon die.
What is your risk-reward ratio on each trade? If you have a take profit $3 away and a stop loss $100 away, of course most trades will be winners. You will not be making money, however! In general most traders should trade smaller position sizes and less frequently than they do. If you are going to bias one way or the other, far better to start off too small.
How to use stop losses sensibly
Stop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them. A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter. The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’. This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK. Why are stop losses so important? Well, there is no other way to manage risk with certainty. You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter. Learning to take a loss and move on rationally is a key lesson for new traders. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Bruce Kovner, founder of the hedge fund Caxton Associates There is an old saying amongst bank traders which is “losers average losers”. It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong. Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear level
Where you leave your stop loss is key. Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible. If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200. The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up. Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD. https://preview.redd.it/moyngdy4f5h51.png?width=1200&format=png&auto=webp&s=91af88da00dd3a09e202880d8029b0ddf04fb802 If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend. So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level. There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section. There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high. https://preview.redd.it/ygy0tko7f5h51.png?width=1200&format=png&auto=webp&s=34af49da61c911befdc0db26af66f6c313556c81 Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument. Here are some guidelines that can help:
Use technical analysis to pick important levels (support, resistance, previous high/lows, moving averages etc.) as these provide clear exit and entry points on a trade.
Ensure that the stop gives your trade enough room to breathe and reflects your timeframe and typical volatility of each pair. See next section.
Always pick your stop level first. Then use a calculator to determine the appropriate lot size for the position, based on the % of your account balance you wish to risk on the trade.
So far we have talked about price-based stops. There is another sort which is more of a fundamental stop, used alongside - not instead of - price stops. If either breaks you’re out. For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part II
EDIT: part II here Letting stops breathe When to change a stop Entering and exiting winning positions Risk:reward ratios Risk-adjusted returns
Coming up in part III
Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
[Strategies] Here is My Trading Approach, Thought Process and Execution
Hello everyone. I've noticed a lot of us here are quite secretive about how we trade, especially when we comment on a fellow trader's post. We're quick to tell them what they're doing isn't the "right way" and they should go to babypips or YouTube. There's plenty of strategies we say but never really tell them what is working for us. There's a few others that are open to share their experience and thought processes when considering a valid trade. I have been quite open myself. But I'm always met with the same "well I see what you did is quite solid but what lead you to deem this trade valid for you? " The answer is quite simple, I have a few things that I consider which are easy rules to follow. I realized that the simpler you make it, the easier it is for you to trade and move on with your day. I highlight a few "valid" zones and go about my day. I've got an app that alerts me when price enters the zone on my watchlist. This is because I don't just rely on forex trading money, I doubt it would be wise to unless you're trading a 80% win rate strategy. Sometimes opportunities are there and we exploit them accordingly but sometimes we are either distracted by life issues and decide to not go into the markets stressed out or opportunities just aren't there or they are but your golden rules aren't quite met. My rules are pretty simple, one of the prime golden rules is, "the risk is supposed to be very minimal to the reward I want to yield from that specific trade". i.e I can risk -50 pips for a +150 and more pips gain. My usual target starts at 1:2 but my most satisfying trade would be a 1:3 and above. This way I can lose 6/10 trades and still be profitable. I make sure to keep my charts clean and simple so to understand what price does without the interference of indicators all over my charts. Not to say if you use indicators for confluence is a complete no-no. Each trader has their own style and I would be a narcissistic asshole if I assumed my way is superior than anybody else's. NB: I'm doing this for anybody who has a vague or no idea of supply and demand. Everything here has made me profitable or at least break even but doesn't guarantee the same for you. This is just a scratch on the surface so do all you can for due diligence when it comes to understanding this topic with more depth and clear comprehension. Supply and Demand valid zones properties; what to me makes me think "oh this zone has the potential to make me money, let me put it on my watchlist"? Mind when I say watchlist, not trade it. These are different in this sense. 👉With any zone, you're supposed to watch how price enters the zone, if there's a strong push in the opposite direction or whatever price action you're observing...only then does the zone becomes valid. YOU TRADE THE REACTION, NOT THE EXPECTATION Some setups just fail and that's okay because you didn't gamble. ✍ !!!IMPORTANT SUBJECT TO LEARN BEFORE YOU START SUPPLY AND DEMAND!!! FTR. Failure to Return.(Please read on these if you haven't. They are extremely important in SnD). Mostly occur after an impulse move from a turning point. See attached examples: RBR(rally base rally)/DBD(drop base drop). They comprise of an initial move to a certain direction, a single candle in the opposite direction and followed by 2 or more strong candles in the initial direction. The opposite candle is your FTR(This is your zone) The first time price comes back(FTB) to a zone with an FTR has high possibilities to be a strong zone. How to identify high quality zones according to my approach:
Engulfing zones; This is a personal favorite. For less errors I identify the best opportunities using the daily and 4H chart.
On the example given, I chose the GBPNZD trade idea I shared here a month ago I believe. A double bottom is easily identified, with the final push well defined Bullish Engulfing candle. To further solidify it are the strong wicks to show strong rejection and failure to close lower than the left shoulder. How we draw our zone is highlight the whole candle just before the Engulfing Candle. That's your zone. After drawing it, you also pay attention to the price that is right where the engulfing starts. You then set a price alert on your preferred app because usually price won't get there immediately. This is the second most important part of trading, PATIENCE. If you can be disciplined enough to not leave a limit order, or place a market order just because you trust your analysis...you've won half the battle because we're not market predictors, we're students. And we trade the reaction. On the given example, price had already reached the zone of interest. Price action observed was, there was a rejection that drove it out of the zone, this is the reaction we want. Soon as price returns(retests)...this is your time to fill or kill moment, going to a 4H or 1H to make minimum risk trades. (See GBPNZD Example 1&2)
Liquidity Run; This approach looks very similar to the Engulfing zones. The difference is, price makes a few rejections on a higher timeframe level(Resistance or support). This gives the novice trader an idea that we've established a strong support or resistance, leading to them either selling or buying given the opportunity. Price then breaks that level trapping the support and resistance trader. At this point, breakout traders have stop orders below or above these levels to anticipate a breakout at major levels with stops just below the levels. Now that the market has enough traders trapped, it goes for the stop losses above or below support and resistance levels after taking them out, price comes back into the level to take out breakout traders' stop losses. This is where it has gathered enough liquidity to move it's desired direction.
The given example on the NZDJPY shows a strong level established twice. With the Bearish Engulfing movement, price leaves a supply zone...that's where we come in. We go to smaller timeframes for a well defined entry with our stops above the recent High targeting the next demand zone. The second screenshot illustrates how high the reward of this approach is as well. Due diligence is required for this kind of approach because it's not uncommon but usually easily misinterpreted, which is why it's important it's on higher timeframes. You can back test and establish your own rules on this but the RSI in this case was used for confluence. It showed a strong divergence which made it an even easier trade to take. ...and last but definitely not least,
Double Bottom/Top. (I've used double bottoms on examples because these are the only trades I shared here so we'll talk about double bottoms. Same but opposite rules apply on double tops).
The first most important rule here is when you look to your left, price should have made a Low, High and a Lower Low. This way, the last leg(shoulder) should be lower than the first. Some call this "Hidden Zones". When drawing the zones, the top border of the zone is supposed to be on the tip of the Low and covering the Lower Low. **The top border is usually the entry point. On the first given example I shared this week, NZDCAD. After identifying the structure, you start to look for zones that could further verify the structure for confluence. Since this was identified on the 4H, when you zoom out to the daily chart...there's a very well defined demand zone (RBR). By now you should know how strong these kind of zones are especially if found on higher timeframes. That will now be your kill zone. You'll draw another zone within the bigger zone, if price doesn't close below it...you've got a trade. You'll put your stop losses outside the initial zone to avoid wicks(liquidity runs/stop hunts) On the second image you'll see how price closed within the zone and rallied upwards towards your targets. The second example is CHFJPY; although looking lower, there isn't a rally base rally that further solidifies our bias...price still respected the zone. Sometimes we just aren't going to get perfect setups but it is up to us to make calculated risks. In this case, risk is very minimal considering the potential profit. The third example (EURNZD) was featured because sometimes you just can't always get perfect price action within your desired zone. Which is why it's important to wait for price to close before actually taking a trade. Even if you entered prematurely and were taken out of the trade, the rules are still respected hence a re entry would still yield you more than what you would have lost although revenge trading is wrong. I hope you guys learnt something new and understand the thought process that leads to deciding which setups to trade from prepared supply and demand trade ideas. It's important to do your own research and back testing that matches your own trading style. I'm more of a swing trader hence I find my zones using the Daily and 4H chart. Keeping it simple and trading the reaction to your watched zone is the most important part about trading any strategy. Important Note: The trade ideas on this post are trades shared on this sub ever since my being active only because I don't want to share ideas that I may have carefully picked to make my trading approach a blind pick from the millions on the internet. All these were shared here. Here's a link to the trade ideas analyzed for this post specifically Questions are welcome on the comments section. Thank you for reading till here.
Former investment bank FX trader: Risk management part 3/3
Welcome to the third and final part of this chapter. Thank you all for the 100s of comments and upvotes - maybe this post will take us above 1,000 for this topic! Keep any feedback or questions coming in the replies below. Before you read this note, please start with Part I and then Part II so it hangs together and makes sense. Part III
Squeezes and other risks
Crap trades, timeouts and monthly limits
Squeezes and other risks
We are going to cover three common risks that traders face: events; squeezes, asymmetric bets.
Economic releases can cause large short-term volatility. The most famous is Non Farm Payrolls, which is the most widely watched measure of US employment levels and affects the price of many instruments.On an NFP announcement currencies like EURUSD might jump (or drop) 100 pips no problem. This is fine and there are trading strategies that one may employ around this but the key thing is to be aware of these releases.You can find economic calendars all over the internet - including on this site - and you need only check if there are any major releases each day or week. For example, if you are trading off some intraday chart and scalping a few pips here and there it would be highly sensible to go into a known data release flat as it is pure coin-toss and not the reason for your trading. It only takes five minutes each day to plan for the day ahead so do not get caught out by this. Many retail traders get stopped out on such events when price volatility is at its peak.
Short squeezes bring a lot of danger and perhaps some opportunity. The story of VW and Porsche is the best short squeeze ever. Throughout these articles we've used FX examples wherever possible but in this one instance the concept (which is also highly relevant in FX) is best illustrated with an historical lesson from a different asset class. A short squeeze is when a participant ends up in a short position they are forced to cover. Especially when the rest of the market knows that this participant can be bullied into stopping out at terrible levels, provided the market can briefly drive the price into their pain zone. There's a reason for the car, don't worry Hedge funds had been shorting VW stock. However the amount of VW stock available to buy in the open market was actually quite limited. The local government owned a chunk and Porsche itself had bought and locked away around 30%. Neither of these would sell to the hedge-funds so a good amount of the stock was un-buyable at any price. If you sell or short a stock you must be prepared to buy it back to go flat at some point. To cut a long story short, Porsche bought a lot of call options on VW stock. These options gave them the right to purchase VW stock from banks at slightly above market price. Eventually the banks who had sold these options realised there was no VW stock to go out and buy since the German government wouldn’t sell its allocation and Porsche wouldn’t either. If Porsche called in the options the banks were in trouble. Porsche called in the options which forced the shorts to buy stock - at whatever price they could get it. The price squeezed higher as those that were short got massively squeezed and stopped out. For one brief moment in 2008, VW was the world’s most valuable company. Shorts were burned hard. Incredible event Porsche apparently made $11.5 billion on the trade. The BBC described Porsche as “a hedge fund with a carmaker attached.” If this all seems exotic then know that the same thing happens in FX all the time. If everyone in the market is talking about a key level in EURUSD being 1.2050 then you can bet the market will try to push through 1.2050 just to take out any short stops at that level. Whether it then rallies higher or fails and trades back lower is a different matter entirely. This brings us on to the matter of crowded trades. We will look at positioning in more detail in the next section. Crowded trades are dangerous for PNL. If everyone believes EURUSD is going down and has already sold EURUSD then you run the risk of a short squeeze. For additional selling to take place you need a very good reason for people to add to their position whereas a move in the other direction could force mass buying to cover their shorts. A trading mentor when I worked at the investment bank once advised me: Always think about which move would cause the maximum people the maximum pain. That move is precisely what you should be watching out for at all times.
Also known as picking up pennies in front of a steamroller. This risk has caught out many a retail trader. Sometimes it is referred to as a "negative skew" strategy. Ideally what you are looking for is asymmetric risk trade set-ups: that is where the downside is clearly defined and smaller than the upside. What you want to avoid is the opposite. A famous example of this going wrong was the Swiss National Bank de-peg in 2012. The Swiss National Bank had said they would defend the price of EURCHF so that it did not go below 1.2. Many people believed it could never go below 1.2 due to this. Many retail traders therefore opted for a strategy that some describe as ‘picking up pennies in front of a steam-roller’. They would would buy EURCHF above the peg level and hope for a tiny rally of several pips before selling them back and keep doing this repeatedly. Often they were highly leveraged at 100:1 so that they could amplify the profit of the tiny 5-10 pip rally. Then this happened. Something that changed FX markets forever The SNB suddenly did the unthinkable. They stopped defending the price. CHF jumped and so EURCHF (the number of CHF per 1 EUR) dropped to new lows very fast. Clearly, this trade had horrific risk : reward asymmetry: you risked 30% to make 0.05%. Other strategies like naively selling options have the same result. You win a small amount of money each day and then spectacularly blow up at some point down the line.
We have talked about short squeezes. But how do you know what the market position is? And should you care? Let’s start with the first. You should definitely care. Let’s imagine the entire market is exceptionally long EURUSD and positioning reaches extreme levels. This makes EURUSD very vulnerable. To keep the price going higher EURUSD needs to attract fresh buy orders. If everyone is already long and has no room to add, what can incentivise people to keep buying? The news flow might be good. They may believe EURUSD goes higher. But they have already bought and have their maximum position on. On the flip side, if there’s an unexpected event and EURUSD gaps lower you will have the entire market trying to exit the position at the same time. Like a herd of cows running through a single doorway. Messy. We are going to look at this in more detail in a later chapter, where we discuss ‘carry’ trades. For now this TRYJPY chart might provide some idea of what a rush to the exits of a crowded position looks like. A carry trade position clear-out in action Knowing if the market is currently at extreme levels of long or short can therefore be helpful. The CFTC makes available a weekly report, which details the overall positions of speculative traders “Non Commercial Traders” in some of the major futures products. This includes futures tied to deliverable FX pairs such as EURUSD as well as products such as gold. The report is called “CFTC Commitments of Traders” ("COT"). This is a great benchmark. It is far more representative of the overall market than the proprietary ones offered by retail brokers as it covers a far larger cross-section of the institutional market. Generally market participants will not pay a lot of attention to commercial hedgers, which are also detailed in the report. This data is worth tracking but these folks are simply hedging real-world transactions rather than speculating so their activity is far less revealing and far more noisy. You can find the data online for free and download it directly here. Raw format is kinda hard to work with However, many websites will chart this for you free of charge and you may find it more convenient to look at it that way. Just google “CFTC positioning charts”. But you can easily get visualisations You can visually spot extreme positioning. It is extremely powerful. Bear in mind the reports come out Friday afternoon US time and the report is a snapshot up to the prior Tuesday. That means it is a lagged report - by the time it is released it is a few days out of date. For longer term trades where you hold positions for weeks this is of course still pretty helpful information. As well as the absolute level (is the speculative market net long or short) you can also use this to pick up on changes in positioning. For example if bad news comes out how much does the net short increase? If good news comes out, the market may remain net short but how much did they buy back? A lot of traders ask themselves “Does the market have this trade on?” The positioning data is a good method for answering this. It provides a good finger on the pulse of the wider market sentiment and activity. For example you might say: “There was lots of noise about the good employment numbers in the US. However, there wasn’t actually a lot of position change on the back of it. Maybe everyone who wants to buy already has. What would happen now if bad news came out?” In general traders will be wary of entering a crowded position because it will be hard to attract additional buyers or sellers and there could be an aggressive exit. If you want to enter a trade that is showing extreme levels of positioning you must think carefully about this dynamic.
Retail traders often drastically underestimate how correlated their bets are. Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large. Bruce Kovner of hedge fund, Caxton Associates For example, if you are trading a bunch of pairs against the USD you will end up with a simply huge USD exposure. A single USD-trigger can ruin all your bets. Your ideal scenario — and it isn’t always possible — would be to have a highly diversified portfolio of bets that do not move in tandem. Look at this chart. Inverted USD index (DXY) is green. AUDUSD is orange. EURUSD is blue. Chart from TradingView So the whole thing is just one big USD trade! If you are long AUDUSD, long EURUSD, and short DXY you have three anti USD bets that are all likely to work or fail together. The more diversified your portfolio of bets are, the more risk you can take on each. There’s a really good video, explaining the benefits of diversification from Ray Dalio. A systematic fund with access to an investable universe of 10,000 instruments has more opportunity to make a better risk-adjusted return than a trader who only focuses on three symbols. Diversification really is the closest thing to a free lunch in finance. But let’s be pragmatic and realistic. Human retail traders don’t have capacity to run even one hundred bets at a time. More realistic would be an average of 2-3 trades on simultaneously. So what can be done? For example:
You might diversify across time horizons by having a mix of short-term and long-term trades.
You might diversify across asset classes - trading some FX but also crypto and equities.
You might diversify your trade generation approach so you are not relying on the same indicators or drivers on each trade.
You might diversify your exposure to the market regime by having some trades that assume a trend will continue (momentum) and some that assume we will be range-bound (carry).
And so on. Basically you want to scan your portfolio of trades and make sure you are not putting all your eggs in one basket. If some trades underperform others will perform - assuming the bets are not correlated - and that way you can ensure your overall portfolio takes less risk per unit of return. The key thing is to start thinking about a portfolio of bets and what each new trade offers to your existing portfolio of risk. Will it diversify or amplify a current exposure?
Crap trades, timeouts and monthly limits
One common mistake is to get bored and restless and put on crap trades. This just means trades in which you have low conviction. It is perfectly fine not to trade. If you feel like you do not understand the market at a particular point, simply choose not to trade. Flat is a position. Do not waste your bullets on rubbish trades. Only enter a trade when you have carefully considered it from all angles and feel good about the risk. This will make it far easier to hold onto the trade if it moves against you at any point. You actually believe in it. Equally, you need to set monthly limits. A standard limit might be a 10% account balance stop per month. At that point you close all your positions immediately and stop trading till next month. Be strict with yourself and walk away Let’s assume you started the year with $100k and made 5% in January so enter Feb with $105k balance. Your stop is therefore 10% of $105k or $10.5k . If your account balance dips to $94.5k ($105k-$10.5k) then you stop yourself out and don’t resume trading till March the first. Having monthly calendar breaks is nice for another reason. Say you made a load of money in January. You don’t want to start February feeling you are up 5% or it is too tempting to avoid trading all month and protect the existing win. Each month and each year should feel like a clean slate and an independent period. Everyone has trading slumps. It is perfectly normal. It will definitely happen to you at some stage. The trick is to take a break and refocus. Conserve your capital by not trading a lot whilst you are on a losing streak. This period will be much harder for you emotionally and you’ll end up making suboptimal decisions. An enforced break will help you see the bigger picture. Put in place a process before you start trading and then it’ll be easy to follow and will feel much less emotional. Remember: the market doesn’t care if you win or lose, it is nothing personal. When your head has cooled and you feel calm you return the next month and begin the task of building back your account balance.
That's a wrap on risk management
Thanks for taking time to read this three-part chapter on risk management. I hope you enjoyed it. Do comment in the replies if you have any questions or feedback. Remember: the most important part of trading is not making money. It is not losing money. Always start with that principle. I hope these three notes have provided some food for thought on how you might approach risk management and are of practical use to you when trading. Avoiding mistakes is not a sexy tagline but it is an effective and reliable way to improve results. Next up I will be writing about an exciting topic I think many traders should look at rather differently: news trading. Please follow on here to receive notifications and the broad outline is below. News Trading Part I
Why use the economic calendar
Reading the economic calendar
Knowing what's priced in
First order thinking vs second order thinking
News Trading Part II
Preparing for quantitative and qualitative releases
Data surprise index
Using recent events to predict future reactions
Buy the rumour, sell the fact
The mysterious 'position trim' effect
Some key FX releases
*** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Disclaimer: None of this is financial advice. I have no idea what I'm doing. Please do your own research or you will certainly lose money. I'm not a statistician, data scientist, well-seasoned trader, or anything else that would qualify me to make statements such as the below with any weight behind them. Take them for the incoherent ramblings that they are. TL;DR at the bottom for those not interested in the details. This is a bit of a novel, sorry about that. It was mostly for getting my own thoughts organized, but if even one person reads the whole thing I will feel incredibly accomplished.
For those of you not familiar, please see the various threads on this trading system here. I can't take credit for this system, all glory goes to ParallaxFX! I wanted to see how effective this system was at H1 for a couple of reasons: 1) My current broker is TD Ameritrade - their Forex minimum is a mini lot, and I don't feel comfortable enough yet with the risk to trade mini lots on the higher timeframes(i.e. wider pip swings) that ParallaxFX's system uses, so I wanted to see if I could scale it down. 2) I'm fairly impatient, so I don't like to wait days and days with my capital tied up just to see if a trade is going to win or lose. This does mean it requires more active attention since you are checking for setups once an hour instead of once a day or every 4-6 hours, but the upside is that you trade more often this way so you end up winning or losing faster and moving onto the next trade. Spread does eat more of the trade this way, but I'll cover this in my data below - it ends up not being a problem. I looked at data from 6/11 to 7/3 on all pairs with a reasonable spread(pairs listed at bottom above the TL;DR). So this represents about 3-4 weeks' worth of trading. I used mark(mid) price charts. Spreadsheet link is below for anyone that's interested.
I'm pretty much using ParallaxFX's system textbook, but since there are a few options in his writeups, I'll include all the discretionary points here:
I'm using the stop entry version - so I wait for the price to trade beyond the confirmation candle(in the direction of my trade) before entering. I don't have any data to support this decision, but I've always preferred this method over retracement-limit entries. Maybe I just like the feeling of a higher winrate even though there can be greater R:R using a limit entry. Variety is the spice of life.
I put my stop loss right at the opposite edge of the confirmation candle. NOT at the edge of the 2-candle pattern that makes up the system. I'll get into this more below - not enough trades are saved to justify the wider stops. (Wider stop means less $ per pip won, assuming you still only risk 1%).
All my profit/loss statistics are based on a 1% risk per trade. Because 1 is real easy to multiply.
There are definitely some questionable trades in here, but I tried to make it as mechanical as possible for evaluation purposes. They do fit the definitions of the system, which is why I included them. You could probably improve the winrate by being more discretionary about your trades by looking at support/resistance or other techniques.
I didn't use MBB much for either entering trades, or as support/resistance indicators. Again, trying to be pretty mechanical here just for data collection purposes. Plus, we all make bad trading decisions now and then, so let's call it even.
As stated in the title, this is for H1 only. These results may very well not play out for other time frames - who knows, it may not even work on H1 starting this Monday. Forex is an unpredictable place.
I collected data to show efficacy of taking profit at three different levels: -61.8%, -100% and -161.8% fib levels described in the system using the passive trade management method(set it and forget it). I'll have more below about moving up stops and taking off portions of a position.
And now for the fun. Results!
Total Trades: 241
TP at -61.8%: 177 out of 241: 73.44%
TP at -100%: 156 out of 241: 64.73%
TP at -161.8%: 121 out of 241: 50.20%
Adjusted Proft % (takes spread into account):
TP at -61.8%: 5.22%
TP at -100%: 23.55%
TP at -161.8%: 29.14%
As you can see, a higher target ended up with higher profit despite a much lower winrate. This is partially just how things work out with profit targets in general, but there's an additional point to consider in our case: the spread. Since we are trading on a lower timeframe, there is less overall price movement and thus the spread takes up a much larger percentage of the trade than it would if you were trading H4, Daily or Weekly charts. You can see exactly how much it accounts for each trade in my spreadsheet if you're interested. TDA does not have the best spreads, so you could probably improve these results with another broker. EDIT: I grabbed typical spreads from other brokers, and turns out while TDA is pretty competitive on majors, their minors/crosses are awful! IG beats them by 20-40% and Oanda beats them 30-60%! Using IG spreads for calculations increased profits considerably (another 5% on top) and Oanda spreads increased profits massively (another 15%!). Definitely going to be considering another broker than TDA for this strategy. Plus that'll allow me to trade micro-lots, so I can be more granular(and thus accurate) with my position sizing and compounding.
A Note on Spread
As you can see in the data, there were scenarios where the spread was 80% of the overall size of the trade(the size of the confirmation candle that you draw your fibonacci retracements over), which would obviously cut heavily into your profits. Removing any trades where the spread is more than 50% of the trade width improved profits slightly without removing many trades, but this is almost certainly just coincidence on a small sample size. Going below 40% and even down to 30% starts to cut out a lot of trades for the less-common pairs, but doesn't actually change overall profits at all(~1% either way). However, digging all the way down to 25% starts to really make some movement. Profit at the -161.8% TP level jumps up to 37.94% if you filter out anything with a spread that is more than 25% of the trade width! And this even keeps the sample size fairly large at 187 total trades. You can get your profits all the way up to 48.43% at the -161.8% TP level if you filter all the way down to only trades where spread is less than 15% of the trade width, however your sample size gets much smaller at that point(108 trades) so I'm not sure I would trust that as being accurate in the long term. Overall based on this data, I'm going to only take trades where the spread is less than 25% of the trade width. This may bias my trades more towards the majors, which would mean a lot more correlated trades as well(more on correlation below), but I think it is a reasonable precaution regardless.
Time of Day
Time of day had an interesting effect on trades. In a totally predictable fashion, a vast majority of setups occurred during the London and New York sessions: 5am-12pm Eastern. However, there was one outlier where there were many setups on the 11PM bar - and the winrate was about the same as the big hours in the London session. No idea why this hour in particular - anyone have any insight? That's smack in the middle of the Tokyo/Sydney overlap, not at the open or close of either. On many of the hour slices I have a feeling I'm just dealing with small number statistics here since I didn't have a lot of data when breaking it down by individual hours. But here it is anyway - for all TP levels, these three things showed up(all in Eastern time):
7pm-4am: Fewer setups, but winrate high.
5am-6am: Lots of setups, but but winrate low.
12pm-3pm Medium number of setups, but winrate low.
I don't have any reason to think these timeframes would maintain this behavior over the long term. They're almost certainly meaningless. EDIT: When you de-dup highly correlated trades, the number of trades in these timeframes really drops, so from this data there is no reason to think these timeframes would be any different than any others in terms of winrate. That being said, these time frames work out for me pretty well because I typically sleep 12am-7am Eastern time. So I automatically avoid the 5am-6am timeframe, and I'm awake for the majority of this system's setups.
Moving stops up to breakeven
This section goes against everything I know and have ever heard about trade management. Please someone find something wrong with my data. I'd love for someone to check my formulas, but I realize that's a pretty insane time commitment to ask of a bunch of strangers. Anyways. What I found was that for these trades moving stops up...basically at all...actually reduced the overall profitability. One of the data points I collected while charting was where the price retraced back to after hitting a certain milestone. i.e. once the price hit the -61.8% profit level, how far back did it retrace before hitting the -100% profit level(if at all)? And same goes for the -100% profit level - how far back did it retrace before hitting the -161.8% profit level(if at all)? Well, some complex excel formulas later and here's what the results appear to be. Emphasis on appears because I honestly don't believe it. I must have done something wrong here, but I've gone over it a hundred times and I can't find anything out of place.
Moving SL up to 0% when the price hits -61.8%, TP at -100%
Adjusted Proft % (takes spread into account): 5.36%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%
Adjusted Proft % (takes spread into account): -1.01% (yes, a net loss)
Now, you might think exactly what I did when looking at these numbers: oof, the spread killed us there right? Because even when you move your SL to 0%, you still end up paying the spread, so it's not truly "breakeven". And because we are trading on a lower timeframe, the spread can be pretty hefty right? Well even when I manually modified the data so that the spread wasn't subtracted(i.e. "Breakeven" was truly +/- 0), things don't look a whole lot better, and still way worse than the passive trade management method of leaving your stops in place and letting it run. And that isn't even a realistic scenario because to adjust out the spread you'd have to move your stoploss inside the candle edge by at least the spread amount, meaning it would almost certainly be triggered more often than in the data I collected(which was purely based on the fib levels and mark price). Regardless, here are the numbers for that scenario:
Moving SL up to 0% when the price hits -61.8%, TP at -100%
Winrate(breakeven doesn't count as a win): 46.4%
Adjusted Proft % (takes spread into account): 17.97%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%
Winrate(breakeven doesn't count as a win): 65.97%
Adjusted Proft % (takes spread into account): 11.60%
From a literal standpoint, what I see behind this behavior is that 44 of the 69 breakeven trades(65%!) ended up being profitable to -100% after retracing deeply(but not to the original SL level), which greatly helped offset the purely losing trades better than the partial profit taken at -61.8%. And 36 went all the way back to -161.8% after a deep retracement without hitting the original SL. Anyone have any insight into this? Is this a problem with just not enough data? It seems like enough trades that a pattern should emerge, but again I'm no expert. I also briefly looked at moving stops to other lower levels (78.6%, 61.8%, 50%, 38.2%, 23.6%), but that didn't improve things any. No hard data to share as I only took a quick look - and I still might have done something wrong overall. The data is there to infer other strategies if anyone would like to dig in deep(more explanation on the spreadsheet below). I didn't do other combinations because the formulas got pretty complicated and I had already answered all the questions I was looking to answer.
2-Candle vs Confirmation Candle Stops
Another interesting point is that the original system has the SL level(for stop entries) just at the outer edge of the 2-candle pattern that makes up the system. Out of pure laziness, I set up my stops just based on the confirmation candle. And as it turns out, that is much a much better way to go about it. Of the 60 purely losing trades, only 9 of them(15%) would go on to be winners with stops on the 2-candle formation. Certainly not enough to justify the extra loss and/or reduced profits you are exposing yourself to in every single other trade by setting a wider SL. Oddly, in every single scenario where the wider stop did save the trade, it ended up going all the way to the -161.8% profit level. Still, not nearly worth it.
As I've said many times now, I'm really not qualified to be doing an analysis like this. This section in particular. Looking at shared currency among the pairs traded, 74 of the trades are correlated. Quite a large group, but it makes sense considering the sort of moves we're looking for with this system. This means you are opening yourself up to more risk if you were to trade on every signal since you are technically trading with the same underlying sentiment on each different pair. For example, GBP/USD and AUD/USD moving together almost certainly means it's due to USD moving both pairs, rather than GBP and AUD both moving the same size and direction coincidentally at the same time. So if you were to trade both signals, you would very likely win or lose both trades - meaning you are actually risking double what you'd normally risk(unless you halve both positions which can be a good option, and is discussed in ParallaxFX's posts and in various other places that go over pair correlation. I won't go into detail about those strategies here). Interestingly though, 17 of those apparently correlated trades ended up with different wins/losses. Also, looking only at trades that were correlated, winrate is 83%/70%/55% (for the three TP levels). Does this give some indication that the same signal on multiple pairs means the signal is stronger? That there's some strong underlying sentiment driving it? Or is it just a matter of too small a sample size? The winrate isn't really much higher than the overall winrates, so that makes me doubt it is statistically significant. One more funny tidbit: EUCAD netted the lowest overall winrate: 30% to even the -61.8% TP level on 10 trades. Seems like that is just a coincidence and not enough data, but dang that's a sucky losing streak. EDIT: WOW I spent some time removing correlated trades manually and it changed the results quite a bit. Some thoughts on this below the results. These numbers also include the other "What I will trade" filters. I added a new worksheet to my data to show what I ended up picking.
Total Trades: 75
TP at -61.8%: 84.00%
TP at -100%: 73.33%
TP at -161.8%: 60.00%
Moving SL up to 0% when the price hits -61.8%, TP at -100%: 53.33%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%: 53.33% (yes, oddly the exact same winrate. but different trades/profits)
Adjusted Proft % (takes spread into account):
TP at -61.8%: 18.13%
TP at -100%: 26.20%
TP at -161.8%: 34.01%
Moving SL up to 0% when the price hits -61.8%, TP at -100%: 19.20%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%: 17.29%
To do this, I removed correlated trades - typically by choosing those whose spread had a lower % of the trade width since that's objective and something I can see ahead of time. Obviously I'd like to only keep the winning trades, but I won't know that during the trade. This did reduce the overall sample size down to a level that I wouldn't otherwise consider to be big enough, but since the results are generally consistent with the overall dataset, I'm not going to worry about it too much. I may also use more discretionary methods(support/resistance, quality of indecision/confirmation candles, news/sentiment for the pairs involved, etc) to filter out correlated trades in the future. But as I've said before I'm going for a pretty mechanical system. This brought the 3 TP levels and even the breakeven strategies much closer together in overall profit. It muted the profit from the high R:R strategies and boosted the profit from the low R:R strategies. This tells me pair correlation was skewing my data quite a bit, so I'm glad I dug in a little deeper. Fortunately my original conclusion to use the -161.8 TP level with static stops is still the winner by a good bit, so it doesn't end up changing my actions. There were a few times where MANY (6-8) correlated pairs all came up at the same time, so it'd be a crapshoot to an extent. And the data showed this - often then won/lost together, but sometimes they did not. As an arbitrary rule, the more correlations, the more trades I did end up taking(and thus risking). For example if there were 3-5 correlations, I might take the 2 "best" trades given my criteria above. 5+ setups and I might take the best 3 trades, even if the pairs are somewhat correlated. I have no true data to back this up, but to illustrate using one example: if AUD/JPY, AUD/USD, CAD/JPY, USD/CAD all set up at the same time (as they did, along with a few other pairs on 6/19/20 9:00 AM), can you really say that those are all the same underlying movement? There are correlations between the different correlations, and trying to filter for that seems rough. Although maybe this is a known thing, I'm still pretty green to Forex - someone please enlighten me if so! I might have to look into this more statistically, but it would be pretty complex to analyze quantitatively, so for now I'm going with my gut and just taking a few of the "best" trades out of the handful. Overall, I'm really glad I went further on this. The boosting of the B/E strategies makes me trust my calculations on those more since they aren't so far from the passive management like they were with the raw data, and that really had me wondering what I did wrong.
What I will trade
Putting all this together, I am going to attempt to trade the following(demo for a bit to make sure I have the hang of it, then for keeps):
"System Details" I described above.
TP at -161.8%
Static SL at opposite side of confirmation candle - I won't move stops up to breakeven.
Trade only 7am-11am and 4pm-11pm signals.
Nothing where spread is more than 25% of trade width.
Looking at the data for these rules, test results are:
Adjusted Proft % (takes spread into account): 47.43%
I'll be sure to let everyone know how it goes!
Other Technical Details
ATR is only slightly elevated in this date range from historical levels, so this should fairly closely represent reality even after the COVID volatility leaves the scalpers sad and alone.
The sample size is much too small for anything really meaningful when you slice by hour or pair. I wasn't particularly looking to test a specific pair here - just the system overall as if you were going to trade it on all pairs with a reasonable spread.
Here's the spreadsheet for anyone that'd like it. (EDIT: Updated some of the setups from the last few days that have fully played out now. I also noticed a few typos, but nothing major that would change the overall outcomes. Regardless, I am currently reviewing every trade to ensure they are accurate.UPDATE: Finally all done. Very few corrections, no change to results.) I have some explanatory notes below to help everyone else understand the spiraled labyrinth of a mind that put the spreadsheet together.
I'm on the East Coast in the US, so the timestamps are Eastern time.
Time stamp is from the confirmation candle, not the indecision candle. So 7am would mean the indecision candle was 6:00-6:59 and the confirmation candle is 7:00-7:59 and you'd put in your order at 8:00.
I found a couple AM/PM typos as I was reviewing the data, so let me know if a trade doesn't make sense and I'll correct it.
Insanely detailed spreadsheet notes
For you real nerds out there. Here's an explanation of what each column means:
Pair - duh
Date/Time - Eastern time, confirmation candle as stated above
Win to -61.8%? - whether the trade made it to the -61.8% TP level before it hit the original SL.
Win to -100%? - whether the trade made it to the -100% TP level before it hit the original SL.
Win to -161.8%? - whether the trade made it to the -161.8% TP level before it hit the original SL.
Retracement level between -61.8% and -100% - how deep the price retraced after hitting -61.8%, but before hitting -100%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -61.8% to -100%. Positive 100 means it hit the original SL.
Retracement level between -100% and -161.8% - how deep the price retraced after hitting -100%, but before hitting -161.8%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -100% to -161.8%. Positive 100 means it hit the original SL.
Trade Width(Pips) - the size of the confirmation candle, and thus the "width" of your trade on which to determine position size, draw fib levels, etc.
Loser saved by 2 candle stop? - for all losing trades, whether or not the 2-candle stop loss would have saved the trade and how far it ended up getting if so. "No" means it didn't save it, N/A means it wasn't a losing trade so it's not relevant.
Spread(ThinkorSwim) - these are typical spreads for these pairs on ToS.
Spread % of Width - How big is the spread compared to the trade width? Not used in any calculations, but interesting nonetheless.
True Risk(Trade Width + Spread) - I set my SL at the opposite side of the confirmation candle knowing that I'm actually exposing myself to slightly more risk because of the spread(stop order = market order when submitted, so you pay the spread). So this tells you how many pips you are actually risking despite the Trade Width. I prefer this over setting the stop inside from the edge of the candle because some pairs have a wide spread that would mess with the system overall. But also many, many of these trades retraced very nearly to the edge of the confirmation candle, before ending up nicely profitable. If you keep your risk per trade at 1%, you're talking a true risk of, at most, 1.25% (in worst-case scenarios with the spread being 25% of the trade width as I am going with above).
Win or Loss in %(1% risk) including spread TP -61.8% - not going to go into huge detail, see the spreadsheet for calculations if you want. But, in a nutshell, if the trade was a win to 61.8%, it returns a positive # based on 61.8% of the trade width, minus the spread. Otherwise, it returns the True Risk as a negative. Both normalized to the 1% risk you started with.
Win or Loss in %(1% risk) including spread TP -100% - same as the last, but 100% of Trade Width.
Win or Loss in %(1% risk) including spread TP -161.8% - same as the last, but 161.8% of Trade Width.
Win or Loss in %(1% risk) including spread TP -100%, and move SL to breakeven at 61.8% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you moved SL to 0% fib level after price hit -61.8%. Then full TP at 100%.
Win or Loss in %(1% risk) including spread take off half of position at -61.8%, move SL to breakeven, TP 100% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you took of half the position and moved SL to 0% fib level after price hit -61.8%. Then TP the remaining half at 100%.
Overall Growth(-161.8% TP, 1% Risk) - pretty straightforward. Assuming you risked 1% on each trade, what the overall growth level would be chronologically(spreadsheet is sorted by date).
Based on the reasonable rules I discovered in this backtest:
Date range: 6/11-7/3
Adjusted Proft % (takes spread into account): 47.43%
Demo Trading Results
Since this post, I started demo trading this system assuming a 5k capital base and risking ~1% per trade. I've added the details to my spreadsheet for anyone interested. The results are pretty similar to the backtest when you consider real-life conditions/timing are a bit different. I missed some trades due to life(work, out of the house, etc), so that brought my total # of trades and thus overall profit down, but the winrate is nearly identical. I also closed a few trades early due to various reasons(not liking the price action, seeing support/resistance emerge, etc). A quick note is that TD's paper trade system fills at the mid price for both stop and limit orders, so I had to subtract the spread from the raw trade values to get the true profit/loss amount for each trade. I'm heading out of town next week, then after that it'll be time to take this sucker live!
Date range: 7/9-7/30
Adjusted Proft % (takes spread into account): 20.73%
Starting Balance: $5,000
Ending Balance: $6,036.51
Live Trading Results
I started live-trading this system on 8/10, and almost immediately had a string of losses much longer than either my backtest or demo period. Murphy's law huh? Anyways, that has me spooked so I'm doing a longer backtest before I start risking more real money. It's going to take me a little while due to the volume of trades, but I'll likely make a new post once I feel comfortable with that and start live trading again.
Part III - My 10 Minutes/Day Trading Strategy You can find Part II here: https://www.reddit.com/Forex/comments/h7m1jh/part_ii_10_minuteday_trading_strategy/ Okay I’ve thought about what to include in Part 3 and this is what I’ve landed on: Some technical nuances and tricks that build on Parts I and II. I was going to include entry and exit points in Part III but it would be waaaay too long if I did. So that will have to wait for Part 4 or 5. There’s some really good stuff in this post though, I promise. The stuff in this post will lay the foundation for the options you will have in terms of determining your entry and exit points. Technical Nuances & Tricks: In this section I want to discuss some techniques that are optional to use. I am going to keep this fairly simple and focus on 2 main topics: fibonacci and horizontal levels of support and resistance. Horizontal Support and Resistance:
There are many ways of identifying support and resistance. I personally subscribe to the K.I.S.S. (Keep It Simple, Stupid!) method when using this strategy.
When I identify a strategy setup (Off BB, Stochs overbought/oversold, indecision candle + setup candle) I will simply look to the left and see if there is any prior support or resistance that lines up with the technical strategy. I will also look for prior support or resistance levels to make sure they are not in the way of my target (will cover targets in the next subsection)
Support and Resistance are not always clear lines drawn in the sand. Usually they are areas. Areas of prior demand and/or prior oversupply in the market.
IF you want a mechanistic manner of identifying support and resistance then here’s an easy indicator: load up the Bill Williams Fractal Indicator and simply look for groupings of fractals near highs and lows of the market
KEEP AN EYE ON THE STOCHASTICS IN EACH OF THESE EXAMPLES
The way I apply fibonacci in my “normal” trading does require a lot of discretion. And it is this discretionary element that trips up a lot of traders and scares them off using fibonacci.
This strategy removes ANY DISCRETION involved in using fibonacci levels. This couldn’t be more in keeping with the entire K.I.S.S. philosophy of this trading strategy
We use Fibonacci in this strategy as an OPTIONAL tool. If you decide to use Fibonacci with this strategy, the best way of using it will be to have a mechanistic method for determining entry and exit points.
Fibonacci retracement levels can be used for limit entry orders and stop loss orders.
Fibonacci extension levels can be used for take profit orders
You can copy my fibonacci settings in the screenshot below. I use the following fibonacci % levels:
It really is a stupidly simple way we will draw the fibs (note: it will be the SAME WAY on every single trade). We simply draw the fibs over the setup candle. ALWAYS draw the fibs in the direction that price is moving ie: from left to right. So if you have a bullish setup candle you draw your fibs from the LOW to the HIGH of the setup candle. If you have a bearish setup candle you will draw the fibs from the HIGH of the candle to the LOW of the candle. I will cover in a future post which levels we use for entry and exit, although many of you will be able to figure it out quickly. Examples below:
https://eu.excentral.com/blog-article/?articleId=33121 There are many ways to trade, but there are just a few ways to open a transaction correctly. And this is one way you wouldn’t want to miss. Buckle up for a blog full of trading insight and eye-opening tips, straight from the trading world. All traders, from the less all the way to the highly experienced ones should read this blog to advance their game. Needless to say, if you’re relatively new to the world of trading, this is a blog post you should definitely read. It includes the steps you need to take to open a transaction, weighing in the facts and data you gather from trustworthy sources. However, if you’re trading like most people are breathing, then this is a blog post you might also benefit from reading, from the fact that it will give you a chance to reassess the most basic steps of trading, from a knowledgeable point of view. Read this if you want to upgrade your strategies, checking the news and what are some verified news-sources, following the economic releases calendars, all the way to ‘reading’ the charts.
Here’s what you’ll better do
Make sure you find a piece of news on an asset you understand – you can choose pretty much everything, from your country’s currency, main commodities products, indices, famous shares or even cryptocurrencies –we've got over 120 such assets. Just make sure you understand its current trend and what might impact it in the coming future. Make sure you find verified news outlets like: Reuters, Bloomberg, Investing, Business Insider, Financial Times, Market Watch, Forex Factory etc.
Check the chart (try adding some indicators) – the chart will tell you more about the trend of the asset up to the moment you’re checking it. If you’re a more analytical trader, you might get the whole picture and base your trades on the chart solely. If you’re good with indicators, try combining several, to double-check your assets.
Check the Economic Calendar for any upcoming events that impact the asset’s trend – If the chart doesn’t quite paint the picture, try combining it with the economic calendar. As an exercise, try to see which events trigger what kind of movement. Although past events can’t be an indication of future trends, they help you practice and better understand an asset’s movements.
Keep in mind that these first three steps are interchangeable. You can even start backwards, or first from the Chart, as they serve as verification methods of one another. Experienced traders can even make sense of asset’s trends using just one of these steps. But you know what they say: practice makes perfect.
A simple analysis might not be enough
Make sure you have enough margin to pursue the trades you’re planning – based on the leverage you’re using, you might hear that a handful of investors recommend using 20% of your available margin, leaving the rest as a safety net in case your scenario goes haywire. However, the truth is somewhere in the middle. You need to consider the volatility of the assets you’re trading with, the total margin available in your account as well as all the events taking place in the markets at that specific time when you’ll open the transaction.
Prepare a solid Risk Management Technique – there’s no one-size-fits all strategy we can use when trading, and actively following our transactions seems to be the best solution we have. Probably only a good Risk Handling Technique can prevail, so make sure to research yours in depth.
Analyse the right entry and exit strategies for a variety of scenarios. It’s not all about setting up stop loss and take profit. Consider the period you’re willing to hold the transaction open for, the events that might start influencing the trend, or whether you’re planning on changing the stop limits at all. For more information make sure to check out Michalis Webinars.
Don’t forget to invest in your knowledge and…
Trade – based on what you expect to happen next in the markets, buy – if you anticipate the asset’s value to rise, or sell – if you think the asset’s value will drop.
If any of the above points give you a headache, make sure you follow ourwebinars, held by eXcentral’s Market Analyst, Michalis Efthymiou. And for more information make sure to ask your Account Manager to arrange a 1-on-1 with Michalis, it might surprise you how much he knows about investing.
Part IV - Entry Options Hey everyone, you can find Part III of this series here: https://www.reddit.com/Forex/comments/h97sv7/part_iii_my_10_minutesday_trading_strategy/?utm_source=share&utm_medium=ios_app&utm_name=iossmf Welcome to Part IV where I will be discussing various entry options. I’ve said this before, but it is worth repeating here as well: identifying a technical setup is one thing. Making money off of that setup is a whole other thing. This is precisely why most signal services fail. While the quality of the signal provider is one thing to consider, the other thing to take into account is that it is very difficult to blindly trade like somebody else - even if they give you their exact entry and exit points. This is why I really want to focus on figuring out how to make MY strategy work for YOU. I will share with you a few different options for entries based on the strategy’s prototypical setup. But it is 100% on you to figure out what suits your trading style, personality, and lifestyle the best. Part V will cover exit options. Part VI will cover risk allocation & management Let’s get on with it. Basic Notes On Entries: We are assuming that all entries are referring to a setup that forms at 5pm EST. I am using 5pm EST because that is when the most trading opportunities have the potential of occurring based on this strategy. It is also when you will see the spreads widen out as the NY Session comes to a close. Therefore, you will not want to take a market order right at 5pm EST. Usually the spreads start narrowing again by 6pm EST.
Limit order (we will use fibonacci retracements to figure out where to place our limit entry orders)
Stop order (we can set a stop order beyond the setup candle’s high/low. I personally do not recommend this particular method, but I am including it here because one trader that uses this strategy has had success with it and prefers it)
The big difference between the stop order and the other entry types is pretty simple. If you are using a stop order to get into the trade, you will not have as good a risk to reward ratio as a trader that used a limit order to get into the trade. The advantage to using a stop order is that there will be some trades where you do not enter the trade because price never went beyond the high/low point of the setup candle. This means you avoid taking a loss on those trades whereas a trader who used a limit or market order to get into the trade would take a loss. The other advantage is that there may be trade setups where the limit orders don’t get filled but the stop order will. I have NOT statistically tested stop orders vs the other order types. If you want to know what works best for you, it is on you to do the testing. Okay let’s take a deeper look now into the different ways we can enter:
Limit order: We will draw our fibonacci retracement levels over the setup candle (I have updated the Fibonacci levels I use in Part III. Replaced the old screenshot with the new one with up-to-date levels). We will then look to place our limit orders just below (IF a short trade setup) / above (IF a long trade setup) the 23.6% and 38.2% Retracement levels. When I say just below or above, I am referring to the spread amount at minimum. However more above/below you want to go is up to you and your testing. Sometimes your limit orders get filled rather quickly. Sometimes they take longer (hours longer). I cancel unfilled Retracement orders if price has run to a fiboancci extension level without filling me on the trade. The obvious benefit to limit orders is that you can set your orders and then simply walk away from the screens. IF the setup candle closes past its 23.6% Retracement level then you will only take ONE limit order off the 38.2%.
Market order: Since we will not be taking a market order trade right at 5pm EST, this leaves us with options. Because a market order does not guarantee us a fill price, we do have some flexibility vs taking strict limit orders. The risk you run with using limit orders is that if your price is not met, you do not get filled. So for example, let’s say it is 6pm EST and the spreads begin to narrow once more and price just so happens to trade right around the 23.6% Fibonacci Retracement area. This is a great opportunity to simply take a market order and get into the trade. Let’s say, however, that price never retraced back into the setup candle and it looks like the trade may simply run to its profit target. What do you do? Well, you can still take a market order to get into the trade… OR you can wait to see if price will retrace back into the candle later on… OR you can write the trade off because price has already run to a fibonacci extension level. The bottom line is that if you have flexibility and you have options. **NOTE: On setups that occur outside the 5pm hour, you can obviously take market orders as soon as the setup bar closes without worrying about unusual spreads)**
Stop order: Stop orders are similar to limit orders in that you can set the orders and then walk away from the screens. If you are using stop orders you will not split your order into several parts. You will simply take one order. You will set the stop order just beyond the high/low of the setup candle.
My preferred method of entry: I like to combine the market and limit entry options myself. Again - assuming a 5pm EST setup here is what I do:
Set limit orders at 38.2 and 61.8% Retracement levels and walk away. If I get a notification that my 23.6% order got triggered, I don’t have to come back to my screens. If I don’t get a notification that my 23.6% order got triggered by 6pm EST, I’ll come back to the trade setup and execute a market order and then delete the 23.6% order. I leave the 38.2% limit order as is. Hopefully it triggers, but if it doesn’t then at least I have half my position on. IF it is a situation where the setup candle closes past its 23.6% Retracement then I will only take 1 order, whether it is the market or the limit.
This article will breakdown the top 16 trading tips you should consider , ranging from how you should trade, the risks you need to be aware of, how learning about trading can improve your trading performance, and much more! https://preview.redd.it/5mtfgzf58u951.jpg?width=750&format=pjpg&auto=webp&s=d03de717ed7528061472e763cfcb4cf34771fbef 1. Create Your Own Strategy No list of currency trading tips is complete if it doesn't mention strategies. One of the most common mistakes beginner traders make is not creating an action plan. Figure out what you want to get out of trading. Having a clear end goal in mind will help with your trading discipline. 2. Learn Step-by-Step As with every new practical learning activity, trading requires you to start with the basics, and move slowly until you understand the playing field. Start by investing small sums of money, and keep in mind the old adage 'slow but steady wins the race'. 3. Take Control of Your Emotions Don't let your emotions carry you away. It can be very difficult at times, especially after you've experienced a losing streak. But keeping a level head will help you stay rational, so you can make competent choices. Whenever you let your emotions get the better of you, you expose yourself to unnecessary risks. Exercising risk management within your trading will help you to minimise the risks. 4. Stress Less This is one Forex tip that sounds really obvious – because it really is. But guess what? Trading under stress generally leads to irrational decisions, and in live trading, that will cost you money. Therefore, identify the source of your stress and try to eliminate it, or at least limit its influence on you. Take a deep breath and focus on something else. Every person has their own way of overcoming stress – some listen to classical music, while others exercise. Listen to your mental health and learn what works best for you. 5. Practice Makes Perfect Of all the Forex tricks and tips for beginners, this is the most important. You are unlikely to succeed at anything on your first try. Only constant trading practice can yield consistently top results. But you probably don't want to lose money while learning the basics, right? 6. Psychology is Key Every trader is a psychologist at heart. When you're planning your next move, you have to analyse market movements and review your own psychology. You need to ask yourself questions such as:
Did I show signs of confirmation bias?
Did I make a trade out of frustration?
What made me choose that particular currency pair?
Mastering your psychology will protect you from many losses along the trading development path. 7. No Risk, No Success Not even Forex trading tips and tricks can guarantee you success. When you decide to become a trader, you should have already accepted the possibility of failure. In case you didn't – here's a reality check. You won't make profitable trades 100% of the time. Don't let false advertisements get in your head, either. Instead, be realistic about your Forex trading methods and goals. 8. Patience is a Virtue When it comes to trading, this old saying is not just a cliché. True success is never instantaneous. It's the result of consistent work and planning. Many beginner traders look for an easy, fast path to profit. Don't bother – it doesn't exist! 9. Continuous Education Each day you trade, there's a new lesson to be learned. Look closely at the Forex market and keep all the tips you have learnt in mind. Start analysing news, trends, and financial processes, and don't neglect the Forex basics. Most importantly, study, then practise and then study some more. Repeat this process often, and you will be well on your way to fully understanding the markets. Studying will require a lot of time and effort, but it will pay off in the long run. For starters, Admiral Markets offers the opportunity for traders to benefit from a free education centre that offers Forex tips, as well as, a range of articles and tutorials offering tips, tricks, strategies, and more, for all kinds of trading. 10. Trends are Good for You One particularly important Forex market tip to follow is to learn about trends. The ability to spot trends is a valuable one. While we don't recommend jumping on the trend bandwagon every time, but outright ignoring the trend is a recipe for disaster. Trends can show you what is coming, so you can pro-actively adjust your trading, rather than reacting when it's too late. 11. Seek Competitive Conditions It's important to choose top-notch service conditions and get favourable spreads. If you're considering trading with Admiral Markets, there are a range of different options available. Why not read more about them in our account types section? 12. Plan in Advance Forex trading is not a gamble – it's a strategic game. Carefully calculate your next move before you act. You can begin formulating a plan by asking yourself some challenging questions such as:
Have I accounted for the possibility that I may lose?
What's my plan B for the different types of scenarios that may arise?
To be successful at Forex trading, you have to expect the unexpected. 13. Know the Charts You will be trading on many different markets and will need to quickly understand the information you analyse for each trade. There are numerous tools available to traders that make trading easier, but nothing is more time-efficient than charts. Charts provide you with fast access to numerically-heavy data in the form of a simple visual, so you don't have to scroll through it. 14. Don't Run out of Chances Eagerness is good, but there is a limit to everything. If you trade too much, you are probably harming your chances of achieving success. Why? Because overtrading usually leads to weakened focus and careless trades. As you develop your trading plan, indicate the maximum amount of trades you will make per day or week. 15. Greediness Leads to Risks Greediness can make you take unnecessary risks as well. Set the maximum loss and desired profit within your trading plan. When you hit this level, stop and don't go for another trade. When it comes to fund management, this is one of the most important Forex tips and tricks to follow. 16. Use Stop-Losses Our Forex daily tips don't just focus on general recommendations. We also want to mention valuable tools, such as the highly rated stop-loss. Not setting a stop-loss is basically giving you an excuse to keep a bad position open (because you're hoping that the situation improves). But bad situations rarely improve, and neither will your capital if you don't wise up fast. A correctly placed stop-loss eliminates the risk of losing all of your money on a single bad trade. The stop-loss is especially beneficial when you don't have the ability to close positions manually.
6 Reasons To Open An Account
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The majority of this sub is focused on technical analysis. I regularly ridicule such "tea leaf readers" and advocate for trading based on fundamentals and economic news instead, so I figured I should take the time to write up something on how exactly you can trade economic news releases. This post is long as balls so I won't be upset if you get bored and go back to your drooping dick patterns or whatever.
How economic news is released
First, it helps to know how economic news is compiled and released. Let's take Initial Jobless Claims, the number of initial claims for unemployment benefits around the United States from Sunday through Saturday. Initial in this context means the first claim for benefits made by an individual during a particular stretch of unemployment. The Initial Jobless Claims figure appears in the Department of Labor's Unemployment Insurance Weekly Claims Report, which compiles information from all of the per-state departments that report to the DOL during the week. A typical number is between 100k and 250k and it can vary quite significantly week-to-week. The Unemployment Insurance Weekly Claims Report contains data that lags 5 days behind. For example, the Report issued on Thursday March 26th 2020 contained data about the week ending on Saturday March 21st 2020. In the days leading up to the Report, financial companies will survey economists and run complicated mathematical models to forecast the upcoming Initial Jobless Claims figure. The results of surveyed experts is called the "consensus"; specific companies, experts, and websites will also provide their own forecasts. Different companies will release different consensuses. Usually they are pretty close (within 2-3k), but for last week's record-high Initial Jobless Claims the reported consensuses varied by up to 1M! In other words, there was essentially no consensus. The Unemployment Insurance Weekly Claims Report is released each Thursday morning at exactly 8:30 AM ET. (On Thanksgiving the Report is released on Wednesday instead.) Media representatives gather at the Frances Perkins Building in Washington DC and are admitted to the "lockup" at 8:00 AM ET. In order to be admitted to the lockup you have to be a credentialed member of a media organization that has signed the DOL lockup agreement. The lockup room is small so there is a limited number of spots. No phones are allowed. Reporters bring their laptops and connect to a local network; there is a master switch on the wall that prevents/enables Internet connectivity on this network. Once the doors are closed the Unemployment Insurance Weekly Claims Report is distributed, with a heading that announces it is "embargoed" (not to be released) prior to 8:30 AM. Reporters type up their analyses of the report, including extracting key figures like Initial Jobless Claims. They load their write-ups into their companies' software, which prepares to send it out as soon as Internet is enabled. At 8:30 AM the DOL representative in the room flips the wall switch and all of the laptops are connected to the Internet, releasing their write-ups to their companies and on to their companies' partners. Many of those media companies have externally accessible APIs for distributing news. Media aggregators and squawk services (like RanSquawk and TradeTheNews) subscribe to all of these different APIs and then redistribute the key economic figures from the Report to their own subscribers within one second after Internet is enabled in the DOL lockup. Some squawk services are text-based while others are audio-based. FinancialJuice.com provides a free audio squawk service; internally they have a paid subscription to a professional squawk service and they simply read out the latest headlines to their own listeners, subsidized by ads on the site. I've been using it for 4 months now and have been pretty happy. It usually lags behind the official release times by 1-2 seconds and occasionally they verbally flub the numbers or stutter and have to repeat, but you can't beat the price! Important - I’m not affiliated with FinancialJuice and I’m not advocating that you use them over any other squawk. If you use them and they misspeak a number and you lose all your money don’t blame me. If anybody has any other free alternatives please share them!
How the news affects forex markets
Institutional forex traders subscribe to these squawk services and use custom software to consume the emerging data programmatically and then automatically initiate trades based on the perceived change to the fundamentals that the figures represent. It's important to note that every institution will have "priced in" their own forecasted figures well in advance of an actual news release. Forecasts and consensuses all come out at different times in the days leading up to a news release, so by the time the news drops everybody is really only looking for an unexpected result. You can't really know what any given institution expects the value to be, but unless someone has inside information you can pretty much assume that the market has collectively priced in the experts' consensus. When the news comes out, institutions will trade based on the difference between the actual and their forecast. Sometimes the news reflects a real change to the fundamentals with an economic effect that will change the demand for a currency, like an interest rate decision. However, in the case of the Initial Jobless Claims figure, which is a backwards-looking metric, trading is really just self-fulfilling speculation that market participants will buy dollars when unemployment is low and sell dollars when unemployment is high. Generally speaking, news that reflects a real economic shift has a bigger effect than news that only matters to speculators. Massive and extremely fast news-based trades happen within tenths of a second on the ECNs on which institutional traders are participants. Over the next few seconds the resulting price changes trickle down to retail traders. Some economic news, like Non Farm Payroll Employment, has an effect that can last minutes to hours as "slow money" follows behind on the trend created by the "fast money". Other news, like Initial Jobless Claims, has a short impact that trails off within a couple minutes and is subsequently dwarfed by the usual pseudorandom movements in the market. The bigger the difference between actual and consensus, the bigger the effect on any given currency pair. Since economic news releases generally relate to a single currency, the biggest and most easily predicted effects are seen on pairs where one currency is directly effected and the other is not affected at all. Personally I trade USD/JPY because the time difference between the US and Japan ensures that no news will be coming out of Japan at the same time that economic news is being released in the US. Before deciding to trade any particular news release you should measure the historical correlation between the release (specifically, the difference between actual and consensus) and the resulting short-term change in the currency pair. Historical data for various news releases (along with historical consensus data) is readily available. You can pay to get it exported into Excel or whatever, or you can scroll through it for free on websites like TradingEconomics.com. Let's look at two examples: Initial Jobless Claims and Non Farm Payroll Employment (NFP). I collected historical consensuses and actuals for these releases from January 2018 through the present, measured the "surprise" difference for each, and then correlated that to short-term changes in USD/JPY at the time of release using 5 second candles. I omitted any releases that occurred simultaneously as another major release. For example, occasionally the monthly Initial Jobless Claims comes out at the exact same time as the monthly Balance of Trade figure, which is a more significant economic indicator and can be expected to dwarf the effect of the Unemployment Insurance Weekly Claims Report. USD/JPY correlation with Initial Jobless Claims (2018 - present) USD/JPY correlation with Non Farm Payrolls (2018 - present) The horizontal axes on these charts is the duration (in seconds) after the news release over which correlation was calculated. The vertical axis is the Pearson correlation coefficient: +1 means that the change in USD/JPY over that duration was perfectly linearly correlated to the "surprise" in the releases; -1 means that the change in USD/JPY was perfectly linearly correlated but in the opposite direction, and 0 means that there is no correlation at all. For Initial Jobless Claims you can see that for the first 30 seconds USD/JPY is strongly negatively correlated with the difference between consensus and actual jobless claims. That is, fewer-than-forecast jobless claims (fewer newly unemployed people than expected) strengthens the dollar and greater-than-forecast jobless claims (more newly unemployed people than expected) weakens the dollar. Correlation then trails off and changes to a moderate/weak positive correlation. I interpret this as algorithms "buying the dip" and vice versa, but I don't know for sure. From this chart it appears that you could profit by opening a trade for 15 seconds (duration with strongest correlation) that is long USD/JPY when Initial Jobless Claims is lower than the consensus and short USD/JPY when Initial Jobless Claims is higher than expected. The chart for Non Farm Payroll looks very different. Correlation is positive (higher-than-expected payrolls strengthen the dollar and lower-than-expected payrolls weaken the dollar) and peaks at around 45 seconds, then slowly decreases as time goes on. This implies that price changes due to NFP are quite significant relative to background noise and "stick" even as normal fluctuations pick back up. I wanted to show an example of what the USD/JPY S5 chart looks like when an "uncontested" (no other major simultaneously news release) Initial Jobless Claims and NFP drops, but unfortunately my broker's charts only go back a week. (I can pull historical data going back years through the API but to make it into a pretty chart would be a bit of work.) If anybody can get a 5-second chart of USD/JPY at March 19, 2020, UTC 12:30 and/or at February 7, 2020, UTC 13:30 let me know and I'll add it here.
So without too much effort we determined that (1) USD/JPY is strongly negatively correlated with the Initial Jobless Claims figure for the first 15 seconds after the release of the Unemployment Insurance Weekly Claims Report (when no other major news is being released) and also that (2) USD/JPY is strongly positively correlated with the Non Farms Payroll figure for the first 45 seconds after the release of the Employment Situation report. Before you can assume you can profit off the news you have to backtest and consider three important parameters. Entry speed: How quickly can you realistically enter the trade? The correlation performed above was measured from the exact moment the news was released, but realistically if you've got your finger on the trigger and your ear to the squawk it will take a few seconds to hit "Buy" or "Sell" and confirm. If 90% of the price move happens in the first second you're SOL. For back-testing purposes I assume a 5 second delay. In practice I use custom software that opens a trade with one click, and I can reliably enter a trade within 2-3 seconds after the news drops, using the FinancialJuice free squawk. Minimum surprise: Should you trade every release or can you do better by only trading those with a big enough "surprise" factor? Backtesting will tell you whether being more selective is better long-term or not. Hold time: The optimal time to hold the trade is not necessarily the same as the time of maximum correlation. That's a good starting point but it's not necessarily the best number. Backtesting each possible hold time will let you find the best one. The spread: When you're only holding a position open for 30 seconds, the spread will kill you. The correlations performed above used the midpoint price, but in reality you have to buy at the ask and sell at the bid. Brokers aren't stupid and the moment volume on the ECN jumps they will widen the spread for their retail customers. The only way to determine if the news-driven price movements reliably overcome the spread is to backtest. Stops: Personally I don't use stops, neither take-profit nor stop-loss, since I'm automatically closing the trade after a fixed (and very short) amount of time. Additionally, brokers have a minimum stop distance; the profits from scalping the news are so slim that even the nearest stops they allow will generally not get triggered. I backtested trading these two news releases (since 2018), using a 5 second entry delay, real historical spreads, and no stops, cycling through different "surprise" thresholds and hold times to find the combination that returns the highest net profit. It's important to maximize net profit, not expected value per trade, so you don't over-optimize and reduce the total number of trades taken to one single profitable trade. If you want to get fancy you can set up a custom metric that combines number of trades, expected value, and drawdown into a single score to be maximized. For the Initial Jobless Claims figure I found that the best combination is to hold trades open for 25 seconds (that is, open at 5 seconds elapsed and hold until 30 seconds elapsed) and only trade when the difference between consensus and actual is 7k or higher. That leads to 30 trades taken since 2018 and an expected return of... drumroll please... -0.0093 yen per unit per trade. Yep, that's a loss of approx. $8.63 per lot. Disappointing right? That's the spread and that's why you have to backtest. Even though the release of the Unemployment Insurance Weekly Claims Report has a strong correlation with movement in USD/JPY, it's simply not something that a retail trader can profit from. Let's turn to the NFP. There I found that the best combination is to hold trades open for 75 seconds (that is, open at 5 seconds elapsed and hold until 80 seconds elapsed) and trade every single NFP (no minimum "surprise" threshold). That leads to 20 trades taken since 2018 and an expected return of... drumroll please... +0.1306 yen per unit per trade. That's a profit of approx. $121.25 per lot. Not bad for 75 seconds of work! That's a +6% ROI at 50x leverage.
Make it real
If you want to do this for realsies, you need to run these numbers for all of the major economic news releases. Markit Manufacturing PMI, Factory Orders MoM, Trade Balance, PPI MoM, Export and Import Prices, Michigan Consumer Sentiment, Retail Sales MoM, Industrial Production MoM, you get the idea. You keep a list of all of the releases you want to trade, when they are released, and the ideal hold time and "surprise" threshold. A few minutes before the prescribed release time you open up your broker's software, turn on your squawk, maybe jot a few notes about consensuses and model forecasts, and get your finger on the button. At the moment you hear the release you open the trade in the correct direction, hold it (without looking at the chart!) for the required amount of time, then close it and go on with your day. Some benefits of trading this way: * Most major economic releases come out at either 8:30 AM ET or 10:00 AM ET, and then you're done for the day. * It's easily backtestable. You can look back at the numbers and see exactly what to expect your return to be. * It's fun! Packing your trading into 30 seconds and knowing that institutions are moving billions of dollars around as fast as they can based on the exact same news you just read is thrilling. * You can wow your friends by saying things like "The St. Louis Fed had some interesting remarks on consumer spending in the latest Beige Book." * No crayons involved. Some downsides: * It's tricky to be fast enough without writing custom software. Some broker software is very slow and requires multiple dialog boxes before a position is opened, which won't cut it. * The profits are very slim, you're not going to impress your instagram followers to join your expensive trade copying service with your 30-second twice-weekly trades. * Any friends you might wow with your boring-ass economic talking points are themselves the most boring people in the world. I hope you enjoyed this long as fuck post and you give trading economic news a try!
Forex Trading: a Beginner's Guide The forex market is the world's largest international currency trading market operating non-stop during the working week. Most forex trading is done by professionals such as bankers. Generally forex trading is done through a forex broker - but there is nothing to stop anyone trading currencies. Forex currency trading allows buyers and sellers to buy the currency they need for their business and sellers who have earned currency to exchange what they have for a more convenient currency. The world's largest banks dominate forex and according to a survey in The Wall Street Journal Europe, the ten most active traders who are engaged in forex trading account for almost 73% of trading volume. However, a sizeable proportion of the remainder of forex trading is speculative with traders building up an investment which they wish to liquidate at some stage for profit. While a currency may increase or decrease in value relative to a wide range of currencies, all forex trading transactions are based upon currency pairs. So, although the Euro may be 'strong' against a basket of currencies, traders will be trading in just one currency pair and may simply concern themselves with the Euro/US Dollar ( EUUSD) ratio. Changes in relative values of currencies may be gradual or triggered by specific events such as are unfolding at the time of writing this - the toxic debt crisis. Because the markets for currencies are global, the volumes traded every day are vast. For the large corporate investors, the great benefits of trading on Forex are:
Enormous liquidity - over $4 trillion per day, that's $4,000,000,000. This means that there's always someone ready to trade with you
Every one of the world's free currencies are traded - this means that you may trade the currency you want at any time
Twenty four - hour trading during the 5-day working week
Operations are global which mean that you can trade with any part of the world at any time
From the point of view of the smaller trader there's lots of benefits too, such as:
A rapidly-changing market - that's one which is always changing and offering the chance to make money
Very well developed mechanisms for controlling risk
Ability to go long or short - this means that you can make money either in rising or falling markets
Leverage trading - meaning that you can benefit from large-volume trading while having a relatively-low capital base
Lots of options for zero-commission trading
How the forex Market Works As forex is all about foreign exchange, all transactions are made up from a currency pair - say, for instance, the Euro and the US Dollar. The basic tool for trading forex is the exchange rate which is expressed as a ratio between the values of the two currencies such as EUUSD = 1.4086. This value, which is referred to as the 'forex rate' means that, at that particular time, one Euro would be worth 1.4086 US Dollars. This ratio is always expressed to 4 decimal places which means that you could see a forex rate of EUUSD = 1.4086 or EUUSD = 1.4087 but never EUUSD = 1.40865. The rightmost digit of this ratio is referred to as a 'pip'. So, a change from EUUSD = 1.4086 to EUUSD = 1.4088 would be referred to as a change of 2 pips. One pip, therefore is the smallest unit of trade. With the forex rate at EUUSD = 1.4086, an investor purchasing 1000 Euros using dollars would pay $1,408.60. If the forex rate then changed to EUUSD = 1.5020, the investor could sell their 1000 Euros for $1,502.00 and bank the $93.40 as profit. If this doesn't seem to be large amount to you, you have to put the sum into context. With a rising or falling market, the forex rate does not simply change in a uniform way but oscillates and profits can be taken many times per day as a rate oscillates around a trend. When you're expecting the value EUUSD to fall, you might trade the other way by selling Euros for dollars and buying then back when the forex rate has changed to your advantage. Is forex Risky? When you trade on forex as in any form of currency trading, you're in the business of currency speculation and it is just that - speculation. This means that there is some risk involved in forex currency trading as in any business but you might and should, take steps to minimise this. You can always set a limit to the downside of any trade, that means to define the maximum loss that you are prepared to accept if the market goes against you - and it will on occasions. The best insurance against losing your shirt on the forex market is to set out to understand what you're doing totally. Search the internet for a good forex trading tutorial and study it in detail- a bit of good forex education can go a long way!. When there's bits you don't understand, look for a good forex trading forum and ask lots and lots of questions. Many of the people who habitually answer your queries on this will have a good forex trading blog and this will probably not only give you answers to your questions but also provide lots of links to good sites. Be vigilant, however, watch out for forex trading scams. Don't be too quick to part with your money and investigate anything very well before you shell out any hard-earned! The forex Trading Systems While you may be right in being cautious about any forex trading system that's advertised, there are some good ones around. Most of them either utilise forex charts and by means of these, identify forex trading signals which tell the trader when to buy or sell. These signals will be made up of a particular change in a forex rate or a trend and these will have been devised by a forex trader who has studied long-term trends in the market so as to identify valid signals when they occur. Many of the systems will use forex trading software which identifies such signals from data inputs which are gathered automatically from market information sources. Some utilise automated forex trading software which can trigger trades automatically when the signals tell it to do so. If these sound too good to be true to you, look around for online forex trading systems which will allow you undertake some dummy trading to test them out. by doing this you can get some forex trading training by giving them a spin before you put real money on the table. How Much do you Need to Start off with? This is a bit of a 'How long is a piece of string?' question but there are ways for to be beginner to dip a toe into the water without needing a fortune to start with. The minimum trading size for most trades on forex is usually 100,000 units of any currency and this volume is referred to as a standard "lot". However, there are many firms which offer the facility to purchase in dramatically-smaller lots than this and a bit of internet searching will soon locate these. There's many adverts quoting only a couple of hundred dollars to get going! You will often see the term acciones trading forex and this is just a general term which covers the small guy trading forex. Small-scale trading facilities such as these are often called as forex mini trading. Where do You Start? The single most obvious answer is of course - on the internet! Online forex trading gives you direct access to the forex market and there's lots and lots of companies out there who are in business just to deal with you online. Be vigilant, do spend the time to get some good forex trading education, again this can be provided online and set up your dummy account to trade before you attempt to go live. If you take care and take your time, there's no reason why you shouldn't be successful in forex trading so, have patience and stick at it!
I’ve been reading these posts on an off for quite some time now and it saddened me to see someone had recently posted their “I quit the game” statement. We all walk through fire to stand in the green valley...and the journey has to be made on foot. And alone. And it’s tough. In response, I wanted to add a list of pointers for people starting out in this insane game and to address what I’ve learned from over a decade of trading Forex. It’s long-ish but it’s based on reality and not a bunch of meaningless retail junk systems and “insider knowledge” by nitwits on YouTube or some 19-year old “whiz kid” who apparently makes ten billion dollars a week with a mystical set-up that’ll only cost you $1,999 to buy! I became a profitable trader by keeping everything simple. I lost thousands when I started out, but I look back now and realise how easily I could’ve avoided those losses. Keep Everything Simple. For the sake of disclosure, I worked for Morgan Stanley for over a decade in fixed income but learned almost everything I know from the forex guys whom I got to know as good friends. They make markets but there’s still a lot to learn from them as a small fry trader. I got into all this as a hobby after annoying the traders with questions, and all these years later it still pays me. There are still occasional nightmare accidents but they’re far rarer to the point where they don’t affect my ROI. Possibly the most clear statement I could make about Forex trading in the large institutional setting is actually a pretty profound one: Forex traders are not what you think they are: every single forex trader I ever worked with (and who lasted the test of time) had the exact same set of personality traits: 1. NOT ONE of them was a gung-ho high-five loudmouth, 2. Every single one of them analysed their mistakes to the point of obsession, 3. They were bookish and not jocks, 4. They had the humility to admit that many early errors were the result of piss-poor planning. The loudmouths last a year and are gone. Guys who last 5, 10, 20 years in a major finance house on the trading floor are nothing like the absurd 1980s Hollywood images you see on your tv; they’re the perfect opposite of that stereotype. The absolute best I ever met was a studious Irish-Catholic guy from Boston who was conscientious, helpful, calm, and utterly committed to one thing: learning from every single error of judgement. To quote him: “Losing teaches you far more than winning”. Enough of that. These points are deliberately broad. Here goes:
Know The Pairs. It amazes me to see countless small account traders speak as though “systems” work across all pairs. They don’t. Trading GBP/CHF is an entirely different beast to trading CHF/JPY. If you don’t know the innate properties of the CHF market or the JPY or the interplay between the AUD and NZD etc then leave them alone until you do. —There’s no rush— Don’t trade pairs until you are clear on what drives ‘commodity currencies’, or what goes on behind currencies which are easily manipulated, or currencies which simply tend to range for months on end instead of having clear trends. Every pair has its own benefits and drawbacks. Google “Tips on trading the JPY” etc etc etc and get to know the personality of these currencies. They’re just products like any other....Would you buy a Honda without knowing a single thing about the brand or its engine or its durability? So why trade a currency you know nothing about?
Indicators are only telling you what you should be able to see in front of you: PRICE AND MARKET STRUCTURE. Take everything off your charts and simply ask one question: What do I see happening right here and right now? What time frame do I see it on? If you can’t spot a simple consolidation, an uptrend, or a downtrend on a quick high-versus-low time frame scan then no indicator on the planet will help you.
Do you know why momentum indicators work on clear trends but are often a complete disaster on ranges? If not, why not? Do you know why such indicators are losing you tons of trades on low TFs? Do you actually understand the simple mathematics of any indicator? If the answer to these questions is “no” then why are you using these things and piling on indicator after indicator after indicator until you have some psychedelic disco on your screen that looks like an intergalactic dogfight in Star Wars? Keep it simple. Know thy indicator.
Risk:Reward Addiction. The greatest profit killer. So you set up your stops and limits at 1:1.5 or whatever and say “That’s me done” only to come back and see that your limit was missed by a soul-crushing 5 pips before reversing trend to cost you $100, $200, $1000. So you say “Ah but the system is fine”. Guys...this isn’t poker; it doesn’t have to be a zero sum game. Get over your 1:1.5 addiction —The Market Does Not Owe You 50 Pips— Which leads to the next point which, frankly, is what has allowed me to make money consistently for my entire trading life...
YOU WILL NEVER GO BROKE TAKING A PROFIT. So you want to take that 50-pip profit in two hours because some analyst says it’ll happen or because your trend lines say it has to happen. You set your 1:1.5 order. “I’ll check where I’m at in an hour” you say. An hour later you see you’re up 18 pips and you feel you’re owed more by now. “If I close this trade now I could be missing out on a stack”. So what?! Here’s an example: I trade in sterling. I was watching GBP climb against it’s post-GDP flop report and once I was up £157 I thought “This is going to start bouncing off resistance all morning and I don’t need the hassle of riding the rollercoaster all day long”. So I closed it, took the £157, went to make breakfast. Came back shortly afterwards and looked at the chart and saw that I could’ve made about £550 if I’d trusted myself. Do I care? Absolutely not...in fact it usually makes me laugh. So I enter another trade, make another quick £40, then another £95. Almost £300 in less than 45 mins and I’m supposed to cry over the £250 I “missed out on”?
£300 in less than an hour for doing nothing more than waiting for some volatility then tapping a keyboard. It’s almost a sin to make money that easily and I don’t “deserve” any of it. Shut off the laptop. Go out for the day. Does the following sound familiar? “Okay I’m almost at my take-profit...almost!.....almost!....okay it’s bouncing away from me but it’ll come back. Come back, damnit!! Jesus come back to my limit! Ah for F**k’s sakes!! This is complete crap; that trade was almost done! This is rigged! This is worse than poker! This is total BS!!” So when you were 50% or 75% toward your goal and could see the trade slipping away why wasn’t $100 or $200 enough? You need more than that?...really?! So point 6:
Tomorrow Is Another Day. Lordy Lordy, you only made $186 all day. What a disaster! Did you lose anything? Nope. Will the market be open again tomorrow? Yep. Does London open in just four hours? Yep. Is the NOK/SGD/EUR whatever still looking shitty? Yep. So let it go- there are endless THOUSANDS of trades you can make in your lifetime and you need to let a small gain be seen for what it is: ANOTHER BEAUTIFUL PROFIT.
Four or five solid but small profits in a day = One Large Profit. I don’t care how I make it, I don’t care if it’s ten lots of £20, I don’t care if I make the lot in a single trade in 30 seconds either. And once I have a nice sum I switch the computer off and leave it the Fk alone. I don’t care if Brexit is due to detonate the pound or if some Fed guy is going to crap all over the USD in his speech; I’ve made my money and I’m out for the day. There will be other speeches, other detonations. I could get into the entire process by which I trade but it’s aggravatingly basic trend-following mostly based on fundamentals. Losing in this business really does boil down to the same appalling combination of traits that kill most traders: Greed, Impatience, Addiction. Do I trade every day? Absolutely not; if there’s nothing with higher probability trades then I just leave it alone. When I hit my target I’m out for the day- the market doesn’t give a crap about me and I don’t give a crap about the market, if you see my meaning. I played poker semi-professionally for two years and it’s absolutely soul-destroying to be “cold decked” for a whole week. But every player has to experience it in order to lose the arrogance and the bravado; losing is fine as long as you learn from it. One day you’ll be in a position to fold pocket Kings because you’ll know you’re dead in the water. The currency markets are exactly the same in that one regard: if you learn from the past you’ll know when it’s time to get out of that stupid trade or that stupid “system” that sounded so great when you had a demo account. Bank a profit. Keep your charts simple. Know the pairs. Be patient. Touch nothing till you understand it inside out. And if you’re not enjoying the game....STOP PLAYING. [if people find this helpful I might post a thread on the best books I’ve studied from and why most forex books are utterly repetitious bullshit]. Peace.
Setting Static Stops. Traders can set forex stops at a static price with the anticipation of allocating the stop-loss, and not moving or changing the stop until the trade either hits the stop or ... Your stop loss would be placed at 1.3800. Notice how this is above the resistance area: the falling trendline. Let’s set profit targets at 1.3530 and 1.3450. The trade is triggered. The trendline holds as resistance and price falls. Your first profit target is hit. The second profit target is missed by a single pip but by that time, you had moved your stop loss to breakeven (where you ... Improper setting of the stop it costs both psychologically and financially as the stop-loss orders are at the heart of trading activity, especially for the short-term traders. This is why, setting ... Setting your stops based on forex charts takes a high level of chart literacy and understanding. If this is your risk-management strategy, it is important that you are adept at reading and interpreting the charts to ensure your stop loss is set at the correct point. Pros and Cons of Stop-Loss Orders Pros. They can allow you to step away from your trades. Stop losses are particularly useful ... The process of setting a Stop Loss (SL) and a Take Profit (TP) price target is one of the most important processes a retail forex trader will engage in. Markets are not always predictable, and ... Knowing how to calculate stop-loss and take-profit in Forex is important, but it is crucial to mention that exits can be end up being purely emotion-based. For instance, you could end up manually closing a trade just because you think the market is going to hit your stop-loss. In this case, you feel emotional, as the market is moving against your position, despite no price action based reason ... Stop-Loss: Setting Static Stops. Forex traders can establish stops at a static price with the expectation of allocating the stop-loss, and not moving or changing the stop until the trade hits the stop or limit price. In addition, the ease of this stop mechanism is because of its simplicity, and the ability for traders to specify that they are seeking a minimum 1:1 risk to reward ratio. We will ...
How to Place a STOP LOSS and TAKE PROFIT when Trading Forex!
Hey everyone! This is the fourth video in my “Real Forex Basics” Series going over Stop Loss and Take Profit and WHY it is important! If you would like to co... Join our Trading Room with a 7-day FREE trial and learn my proven forex strategies: https://bit.ly/2zTjjDb Entering the trade in the forex market is as simpl... "Give the market time to prove you right" - is the main message of this video. Traders often manage to predict the market but don't have the patience or the tec... Add Me Here: http://facebook.com/gavinwrobinson I can easily say as a beginner in Forex whenever I lose I learn. One of the things I have learnt is to adjust... Get FREE Stock Market Basics Training: https://cutt.ly/ufInC9r Watch this video to fully understand how to set a stop loss on the Think or Swim trading platf... How to Calculate Stop Loss and Take Profit Easily // set profit target limit order forex stocks investing day trading Want more help from David Moadel? Conta...