Breakout Entries for Ranging Markets
As market volatility dies down with the conclusion of the 2012 trading year, many traders begin to find more Forex pairs ranging. These periods can bring great trading opportunities for both traditional overbought and oversold traders (discussed in the October 8th edition of Chart of the Day), as well as for breakout traders. Below we can see the GBPNZD currency pair continuing to range and trading in a 482 pip range. The range is developed by identifying resistance at current highs near 1.9850 and support at a price level near 1.9368. With these areas defined we can then proceed with a trading plan to trade these pricing levels upon a breakout using OCO entry orders.
When it comes to trading ranges, breakout traders will look for price to either violate a standing support or resistance level. If prices break to a higher high, traders will look to buy. Conversely preferences should be given to selling the underlying currency pair if prices break to lower lows. One of the easiest ways to place both of these orders is through the use of an OCO entry order. OCO (One Cancels the Other) ordersare designed to setup two entries to enter into the market with a long position on the break of resistance of a short position with a break of support. As the name suggests, the OCO is comprised of two orders and if one order is executed the other will be cancled and no longer remain pending
Once entries outside of support and resistance levels are found, traders need to find exit points for their trade. Traders using OCO orders may choose to set their stop orders at the same price for both orders. As seen below the midpoint of the range is an excellent starting point for this value, which will be found below current resistance and above standing support. Once a stop value is decided, limits can be set using a 1:2 risk reward ratio. Using this setup traders will look for approximately the distance of the initial range in pips for setting their limit orders.
My preference is to trade the GBPNZD using an OCO entry order to buy above 1.9860 and sell below 1.9358. Stops can be set in the middle of the range near .9620 risking 240 pips. Minimum take profit targets should look for 480 pips profit for a clear 1:2 Risk/Reward ratio.
Alternatives include prices continuing to trade, offering further RSI market entries.
“What is the best expert advisor on the market?” This is one of the most frequently asked questions that we get. It is also one that is very difficult to answer. It’s not unlike walking into a car dealership and asking one of the sales reps to point out the best car. The answer depends on a number of factors. One of them is the buyer’s motive. Is the buyer looking for a sports car, a family car, or a vehicle for business purposes? The same applies to robots. The trader’s motive is paramount and will inform the choice of robot. Depending on your trading goals, some robots will be better than others. Another factor involves the trader’s location and regulatory environment. To continue with our automotive analogy, it’s all but impossible to purchase French automobiles in Canada. For some reason, they’re simply not available for distribution. By the same token, if you’re in the US, you might not be able to open certain accounts, as various account types are unavailable to American traders. If you’re a citizen of, say, Afghanistan, the choices imposed by your regulatory environment will also be very different. Your financial position is important too, as is your trading horizon (that is, whether you’re interested in short-term trades only, or whether your outlook is more long-term). The list goes on. When clients ask us about the best expert advisor, we often request more information and context in order to provide a thoughtful answer to their question. Unfortunately, the clarification that we receive often leaves us even more confused. For example, the client might tell us that he wants to start small (e.g., with a deposit of $100) and therefore needs a robot that will give him a monthly profit of 100% or even 1,000%. If everything works out, the client will then bring an investor with some $5 million in trading capital. This approach is less than ideal, and it makes it very difficult for us to recommend an optimal expert advisor. A trader with $100 to invest will require a robot that is very different from a trader with $5 million to invest. Traders should always be realistic about their goals, and they should approach the market with restrained optimism. A more realistic outlook will also help us come up with recommendations for the best robot at a given point in time. If you have $100 to trade, you can let us know that you have a deposit of $100 and would like to see this amount grow as quickly as possible. We’ll then find an expert advisor that should help you achieve your stated goal. When your situation or investment profile changes, we can reassess your situation and recommend a robot that will be more suitable for your new situation. If, on the other hand, you happen to have $5 million in trading capital right now, we will recommend another forex robot that is appropriate for this kind of capital and, potentially, for the more long-term outlook that usually accompanies very large deposits. You need to know that sky-high monthly profits on the order of 300-400% are practically unrealistic. While you may be able to obtain such profits if you use a solid arbitrage trading strategy, this will only work in the short term. Remember that brokers monitor account performance, and any trading accounts that show suspiciously high profits on a regular basis will get flagged. Sooner or later, your trading will be suspended and your account will be shut down. If your broker is a regulated one, your initial deposit and your trading profits will be returned to you, with the understanding that you won’t be able to use that broker again – the broker will simply turn you away. If you’re working with an unregulated broker, in most cases, you will only get your deposit back; the profits will be withheld. If you’re in it for the long haul, you need to have a realistic outlook when it comes to profit expectations. This will also help you choose the right trading product for your needs. If you are looking for a robot or software that will deliver monthly profits of 40-60% with small risk (i.e., almost 0%) and low drawdown, an arbitrage trading strategy is your best bet. When it comes to arbitrage, we typically recommend lock arbitrage. There are a number of reasons for that. As lock arbitrage emulates manual trading, it masks your arbitrage activity, leading the broker to believe that you’re trading manually and not engaging in arbitrage. Unlike standard arbitrage orders, lock trading orders remain open for longer periods of time. Also, they are opened before arbitrage situations appear; the only thing that happens during arbitrage situations is the closing of lock orders. Lock arbitrage is a low-risk type of arbitrage (the risk is typically close to 0%), while monthly profits can range from 60% to 100%, and even higher. However, note that monthly returns of 100-150% will eventually prompt the broker to take a closer look at your trading. Even in this case, though, you’ll be in a better position: if your setup was done properly, with our help, and IP changers were used, it will be difficult for the broker to refuse to turn over your profits to you. We are also often asked whether we recommend trading the news or arbitrage trading as the best trading strategy. This question is just as challenging to answer as the one about the best robots. These are two distinct styles of trading, and each one appeals to a different type of trader personality. Traders who are somewhat addicted to volume are drawn to arbitrage trading, as it lets them trade daily. At the same time, when it comes to profitability, arbitrage trading involves a high number of small profits. In other words, the trader is trying to capture a small profit on each trade. The drawback here is that an inordinate number of daily trades is likely to get the broker’s attention. A strategy such as trading the news will not be attractive for traders who want to trade often. Trading the news, on the other hand, is for those who prefer to place large orders but are happy to do so infrequently. News traders don’t trade daily. A news trader might have no more than 5-10 trades per week. However, these trades will probably involve big lots. A news trader will trade a suitable news item with a large lot size and then remain idle, waiting for the next piece of news. A news trader does not need a lot of activity. In fact, we’ve noticed that experienced news traders filter even those triggers that we recommend for use, selecting only the triggers that they believe to be the most important ones. They then use these triggers with an outsized lot. Typically, fewer than 5 triggers are used after the filtering. Essentially, when it comes to trading frequency and the nature of profits, trading the news is the opposite of arbitrage trading. You need to determine which approach is best, given your personality and trading preferences. If you’re interested in trading the news, you have to realize that while a profit of 100% on a single trade is possible, you might have to wait a week or perhaps even a month for that trade. Ask yourself if that is acceptable to you. Another question we frequently see is why we offer latency arbitrage when we recommend lock arbitrage. The answer is that many traders want to make money quickly, and it is easier to do so with latency arbitrage. This is because latency arbitrage involves fewer swap- and commission-related losses. This can actually work for traders who are interested in fast profits, as long as they understand that it is easier for brokers to flag latency arbitrage traders than lock arbitrage ones. Moreover, our VIP latency arbitrage software is designed to camouflage arbitrage activity and make it look like manual trading, and our software also allows users to hedge trades in the same account. Nevertheless, latency arbitrage software offers traders less protection than lock arbitrage software. But latency arbitrage works for many traders. This kind of arbitrage does not require orders to be open for longer periods of time, and that is exactly what many arbitrage traders need. As with everything else, there are pros and cons. Ultimately, your personal requirements will determine whether you want to use latency arbitrage, lock arbitrage, or whether trading the news is best. Equally, your personal requirements will determine the kind of robot that best meets your needs. Sometimes traders approach us to ask whether it won’t make more sense for them to use an ordinary robot and make it transparent to their brokers that they are using arbitrage strategies. We don’t think that is a good idea. As we have said time and again, all trading strategies are legal. If a broker refuses to accommodate arbitrage strategies, it is most likely a B-book broker – a broker whose business model requires you to lose money in order for the broker to make money. This is not a broker you want to work with in the first place. Alternatively, if you do want to work with that kind of broker, you should feel free to use any trading strategy that can enhance your trading performance. The broker’s job is to provide you with a trading platform. While the broker might ask you to take your business elsewhere if your strategy is not to the broker’s taste, it makes little sense to put up with unreasonable restrictions on your trading strategy. To put it bluntly, your trading strategy is no business of the broker. If you don’t want to engage in arbitrage trading, we can certainly offer you ordinary expert advisors. However, you need to understand that no expert advisor can generate the kinds of profits that you can get from arbitrage trading – not unless you’re willing to take on a lot more risk. Even with scalping strategies, stop losses are placed farther away from prices than they are with arbitrage strategies, where we have a good idea as to where the market will move. The farther away the stop loss, the higher the risk. If, instead of a scalping strategy, you use some long-term strategy or intraday strategy, then your stop losses will be placed farther still. Some traders use various money management strategies with averages in order to reduce drawdown rates. But these also increase risk. Traders using such strategies first set an average in testing mode before applying the average in real-life trading. The problem is that these tests are usually ineffective when you have to trade in the real world. For example, a money management strategy can generate an average of 3 losing trades during testing. The trader then uses that average to trade, but in real life the trader might face 4 or 5 consecutive losing trades. The market is inherently unpredictable. The only way to predict the market – or at least to mitigate its unpredictable nature – is to use arbitrage trading or news trading strategies. These strategies allow us to obtain information in advance. There is nothing wrong with working with the same broker for a long period of time. It is perfectly acceptable to stick to the same broker throughout and to use ordinary robots that accommodate such trading preferences, if that’s what you want. But you have to be aware of two things. One is that your risk level will be higher. The other is that even the use of an ordinary robot is no guarantee of hassle-free trading. Your broker might still flag your account. If you’re using a scalping strategy, the broker can increase your order execution time and your slippage to make your trading unprofitable. Other methods might also be used to negatively affect your profitability. Again, your risks will be higher. Whatever you decide to do, the upshot is that before you commit yourself to trading, you have to determine your objectives. You need to figure out if your objectives will be better served by long-term or short-term performance. You should also decide whether you prefer to work with only one broker, or whether you’re willing to change brokers as needed – a more cumbersome strategy, perhaps, but one that offers higher profits and lower risk. You should also be mindful of your geography. If you live in a country that is under sanctions or one with the kind of regulatory environment that currently exists in the US, you will be limited in your choice of brokers. In that case, it might make more sense for you to trade cryptocurrencies, or perhaps to use an ordinary expert advisor to trade forex. While an ordinary advisor might be underwhelming performance-wise, in a regulatory environment dominated by several brokers that take advantage of their oligopolistic position, an ordinary expert advisor will at least let you earn some money from trading.
Factors Affecting Dollar ValueThe methodology can be divided into three groups as follows:* Supply and demand factors* Sentiment and market psychology* Technical factorsWe'll take a look at each group individually and then see how they work together as a whole.Supply Versus Demand for DollarsWhen we export products or services, we create a demand for dollars because our customers need to pay for our goods and services in dollars. Therefore they will have to convert their local currency into dollars, so they sell their currency to buy dollars so that they can make the payment. In addition, when the U.S. government or large American corporations issue bonds to raise capital, and if these bonds are bought by foreigners then again the bonds have to be paid for in dollars and the customer will have to sell their local currency to buy dollars so they can effect payment. Also, if there is strong growth in the U.S. and companies are expanding their earnings then the desire by foreigners to own corporate stocks in the U.S. also requires that they sell their currency to buy dollars to pay for the purchase of stocks.These situations create more demand for dollars, and that in turn puts pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars. On top of this, the U.S. dollar acts as a safe haven during times of economic uncertainty, so demand for dollars can often persist despite the performance of the U.S. economy.Sentiment and Market PsychologyBut what if the U.S. economy weakens and consumption slows due to increasing unemployment? Then the U.S. is confronted with the possibility that foreigners may sell their bonds or stocks and return the cash from the sale in order to return to their local currency. Hence they sell the dollars and buy back their local currency. This type of activity has a dampening effect on the dollar.Technical Factors That Impact the DollarAs traders, we have to gauge whether the supply of dollars will be greater or less than the demand for dollars. To help us determine this, we need to pay attention to various news and event items. This includes the release by the government of various statistics, such as payroll data, GDP data and other economic information that can help us to determine what is happening in the economy and to estimate whether the economy is strengthening or weakening. (For a comprehensive overview of 24 major indicators, take a look at our Economic Indicators Tutorial.)In addition, we need to determine the general sentiment regarding what the players in the market think the outcome of events is likely to be. Very often, sentiment will drive the market rather than the fundamentals of supply and demand. To add to this mix of prognostication, we also have the historical patterns generated by seasonal factors, support and resistance levels, technical indicators and so on. Many traders believe that these patterns are repetitive and therefore can be used to predict future movements. (Learn about the basics of technical analysis in our Technical Analysis Tutorial.)Bringing Them All TogetherSince trading relies on the ability of a trader to take a risk and manage it accordingly, traders usually adopt some combination of the three above methods to make their buy or sell decisions. The art of trading exists in stacking the odds in your favor and building an edge. If the probability of being correct is high enough, the trader will enter the market and manage his hypothesis accordingly. To stack the odds in our favor we therefore need to take into account each one of the three methodologies and hopefully find them to be congruent, meaning that they all point in the same direction.An Example of a Dollar ShiftThe economic conditions during the recession that began in 2007 forced the U.S. government to play an unprecedented role in the economy. Since economic growth was receding as a result of the large deleveraging of financial assets taking place, the government had to take up the slack by increasing government spending to keep the economy going. The purpose of their spending was to create jobs so that the consumer could earn money and increase consumption thereby fueling the growth needed to support economic growth. (For a review of the recession during this time period, refer to The 2007-08 Financial Crisis In Review.)The government took this position at the expense of an increasing deficit and national debt. It financed this increase by essentially printing money and by selling government bonds to foreign governments and investors - resulting in an increase in the supply of dollars. The dollar depreciated as a result.The Bottom LineIt may be helpful for a trader to keep an eye on the Dollar Index chart to provide an overview of how the dollar fares against the other currencies in the index. By watching the patterns on the chart and listening to the sentiment in the market, as well as monitoring the major fundamental factors that affect supply and demand, a trader can develop a big picture sense of the flow of dollars and develop an insight to choose profitable positions in future trades.
Many people think that trading foreign exchange (FX) requires a lot of time to research the market and to identify trading opportunities. However, I believe the 24 hour nature of FX makes it easier for traders to take advantage of trends in currencies because they are not bound by when an exchange allows them to trade. So regardless of what your busy schedule is like, there are trends in the market you can take advantage of with as little as 30 minutes of time invested per week. There are several different ways to approach the market if you are short on time. Today, I want to share with you one of these strategies to trading FX in your spare time. Today’s strategy is called the Simple DNC Breakout. I chose this strategy because the tools involved in identifying trades are fairly intuitive even if you have never traded FX previously.Before I get into some specifics of the strategy, you may be wondering how a trader can effectively find good trades if they are not constantly watching the market? You see, the essence of this approach is that you will place orders to enter into the market at strategic price points. When the market trades through these prices, this will be our signal to enter the trade and your resting order with your broker will take care of the entry and exit automatically.So the strength of this strategy depends upon the strength of the trend. We want to utilize the strongest trends in the market at the moment…the stronger the trend the better. When these strategic price points are reached, we want to enter the trade in the direction of that strong trend.As a result, there are 2 significant benefits to this type of strategy.1 No need to baby sit the trades. Place orders to enter the market at specified prices then simply let the market enter you into these trades at these strategic prices. Many of these trades will trigger while you are away from your computer, sleeping, or busy with other time commitments.2 This strategy can keep you out of SOME losing trades. Don’t get me wrong…you will still have losing trades. However, it happens frequently where you will be wrong on a trading idea but you never get entered into the trade…which would have been a losing trade. You see, if the market never trades to your strategic price point, then your entry into the market does not get triggered. This means you are kept away from the losing trade.The Simple DNC Breakout StrategyTools Needed:*A price chart set to the daily bar*The Donchian Channel (DNC) indicator*A strong trend*30 minutes of time to identify strategic price pointsTo get started, open up a price chart of a currency pair that has been in a strong trend. The Australian Dollar has been one of the strongest currencies for the past 3 years. So the AUD/USD is a good place to start. A daily price chart means each bar or candle on the chart represents one day’s worth of price action.Secondly, add the DNC indicator to the chart (most charting packages include this for free). The DNC indicator will calculate the highest high and the lowest low price for the past X number of bars.Set the input value of the DNC indicator to 8. This means we want to see the highest high price and the lowest low price for the past 8 days worth of trading. Your chart should look like this. Identifying the Strategic Price PointsNow comes the fun part. Since the AUD/USD has been in a strong up trend for the past 3 years, we want to filter our trades so that we are only looking to buy this strong up trend. Conversely, if we were trading a strong down trend (like the EUR/AUD), then we would filter for only sell trades. Setting up the trade is a simple 4 step process. Rules to Buy:We will use the upper DNC line as are strategic price point to enter1 our position as a buyer (green circles).2 We will use the lower DNC line as our stop loss.3 Manually trail the stop loss at the lower DNC line.4 Exit the trade when price reaches the lower DNC line (pink circles).The opposite is true for selling a strong down trend.1 Use the lower DNC line as the strategic price point to enter a sell trade.2 Use the upper DNC line as the stop loss point.3 Manually trail the stop loss at the upper DNC line.4 Exit the trade when price reaches the upper DNC line.You can see in the above chart, there were 3 trading opportunities from October 2011 to the present. When price tagged the upper line, we are entered into the market as a buyer. Our exit point in the trade is the lower DNC line.Spare TimeWhile logging into your charts, most of your time will be spent reviewing the location of the upper and lower DNC lines. If the location of these lines moved since your last review, then you would change the entry orders in your brokerage account according to the strategy rules.Since we are interested in the highest high price for the past 8 trading days, these price points likely won’t move much on a day to day basis which affords us the opportunity to check on them at least 1 time per week. As you can imagine, it doesn’t take very long for check the change in the strategic price points and it can usually be completed within 30 minutes.