You know how to build a good support system for your job as Forex trader – you have a broker you can trust, you have forums and websites where you learn and discuss ideas, you may have several trader friends with whom you converse on a daily basis. Maybe you attend conferences and seminars regularly. All of this professional support will contribute to your success. But your non-professional, personal support system is just as critical to your success. Maybe even more so. If you have a spouse or partner who does not trade, it’s imperative that he/she understands exactly what you are doing, and how he/she can help. First of all, does he/she understand what you need in terms of atmosphere? Do you require complete and total concentration? All day, or only at particular times of the day? Must you monitor your trade closely, or can you set your entries and exits and then leave the computer? Many work-at-home people discover that their partners have unclear ideas of what they do while they are home, and form unrealistic expectations because of that. For example, many work-at-home women, with partners who work outside the home, find that they are expected to cook and clean and otherwise act as though they do not have a job at all, simply because “they are home.” It is not an uncommon situation for a partner who has been at work all day, to come home with the expectation that dinner will be ready and the table set, just because the work-at-home partner was “home all day.” This can cause a huge amount of misunderstanding and hurt, so these expectations must be addressed very early in the trader’s career. Just because you are home all day, doesn’t mean you are doing nothing. You are working very hard, and your partner needs to understand that. In this case, an agreed-upon division of labor can really help. Negotiate the situation, and choose chores that you *can* accomplish – you might not be able to cook dinner because you are concentrating on the last hour of the trading day – but you can wash up afterwards, after the market is closed. Traders also sometimes have very unusual schedules. If your trading plan involves the European session, and you live in California, you will be getting up at 1:00 AM, and will likely be going to bed at 5:00 in the afternoon. This could really cause a lot of misunderstanding with a partner who works 9:00 – 5:00 and wants to spend the evening with you. Trading can be a very emotional job, and there will be times when the market gets you down. No matter how strongly you try to control your feelings, there will just be some bad trading days that might cause you to shy away from socializing, or even from being close and intimate with someone else. The sooner you explain possible situations that may arise to your partner, the more likely he/she will be understanding when something actually comes up that affects you negatively. Likewise, you may get angry, and you want to be clear upfront that your anger is not directed toward your partner. Your partner needs to understand that, just because you don’t want to talk about it, doesn’t mean that you are excluding him or her. Remind your partner that in situations where the market has made you angry or upset, that he/she needs to be especially patient with you. Likewise, you need to be sure to keep your feelings in check, and not take out your frustration on your partner. Keep your business and personal emotions separate. A little bit of conversation prior to these events will hopefully prevent them from becoming terrible misunderstandings in the future, and will go a long way toward relieving your mind, and allowing you to relax and focus on your trading, rather than on what your partner may or may not be thinking or feeling. These are just a few tips for ensuring the support of your partner, but the subject is definitely worth a closer look. With your partner’s full and unconditional support, you have eliminated one more important barrier to your trading success.
The Forex market can be tricky to trade. It can often deceive you into thinking it is either way too hard to trade in or way too easy, and in the long run neither is true. However, if you learn a simple trading method that works, and combine that with sound emotional/psychological self-discipline and good money management, you really can be successful in trading. One simple trading method that works well is using a pivot point strategy. Pivot points are highly probable price levels based on previous trading time frames. They can help in predicting if a move will be bullish, or if it will turn bearish, and where your take profits and stop losses should be placed. It is all centered on a specific mathematic calculation based on recent prior trading results. The calculations include using the open, high, low, and close of the previous time frame you are trading. A great thing about this trading method is that it can be used on various time frames. For this article, we will focus on the H1 time frame, but swing traders often use the same principles on the Daily time frame very successfully. Another reason Forex traders like this simple trading method is because it is predictive versus lagging. Learn this Simple Trading Method To trade this method you first calculate the pivot point (I’ll explain this later), and its support and resistance levels. Once you have the pivot point calculated, you watch to see where the trade opens at the top of the hour. If the trade opens to the upside then the probability is that your trade will be bullish. If the trade opens to the downside then the probability is that your trade will be bearish. Once you know the direction the trade will likely go, you can set your take profit at the first resistance or support level and your stop loss approximately halfway to the opposite support or resistance level of the pivot point. The good news with the calculations is that there are a number of pivot point calculators available online for free if you do a search. With these calculators, you simply enter the information from the previous hour, and it will do the math for you. If you use the Daily for swing trading, you enter the information for the day. But with the hourly trading method, you need to enter new information with each hourly trade. The actual calculations for this method look like this: Resistance level 3 = high+2*(pivot-low)Resistance level 2 = pivot+ (R1-S1)Resistance level 1 = 2*pivot-lowPivot Point = (high+close+low)/3Support 1 = 2* pivot – highSupport 2 = pivot – (R1-S1)Support 3 = low – 2*(high-pivot) As you can see with the formula, the calculation provides up to 3 support and resistance levels. Statistics show that about 42-44% of the time the trade will actually go beyond the first level of support and resistance. So if you do multiple hourly trades in a day, just setting your take profit at the S1 or R1 (depending on if the move is bullish or bearish), you can trade with confidence, and know at the end of the day, you will have a fair amount of pips. Below is an example of using the simple trading method. The blue arrow shows the previous H1 candle. From this the pivot point, as well as S1 and R1 were determined and marked by the red lines. The pivot point is marked with a blue “X” and is the center red line; and S1 is the line below, R1 is the line above. You will note that the new H1 candle (marked by the blue checkmark) opened to the upside, which meant it was likely to be bullish. You can see that it did move bullishly, and passed through R1 up to 1.31192, and it actually hit R2 (1.31191) before pulling back. If the stop had been at a conservative R1 you would have netted about 7 pips. If it had been set at a slightly riskier R2, it would have netted about 12 pips. Now this doesn’t seem like much, but with even just 2-3 trades like this you could have 20-40 pips in a day. And if you have an account with just $500 in it, but net an average of 100 pips a week, you could potentially make $100,000+ in just a few months with compound trading. You don’t need to make a large amount of pips to make a large amount of money. You just need to find a simple trading method that works fairly consistently, and work it consistently. Let your money stay in your account for a few months, trading a conservative percentage of your balance, and you will see your account balance grow faster than you could imagine. A few simple tips for H1 pivot point trading: >> Once your H1 pivot point is set, watch the M15 to confirm the immediate direction and the M5 for the best entrance timing. >> Even when a trade opens to one side of the pivot point, it is common for it to pull back to the opposing direction for a few pips before turning to move in the originally given direction. >> The strength of the market will usually tell you the likelihood of if your trade will move beyond the first support or resistance levels for a bigger take profit. >> If the trading range is getting tighter, you may want to set out for a trade or two as a reversal of H1 direction is likely occurring. It really doesn’t matter what level of trading you are at. Learning pivot points as a simple trading method can be an asset for anyone looking to make money in the Forex market. Just combine this trading method with self-disciple and good money management, and you are on your way to financial freedom.
MetaTrader 4 (MT4) is a feature-rich and user-friendly platform for forex traders to navigate the market. With plenty of order types, charting tools and technical indicators, it helps with comprehensive market analysis and risk management, thereby allowing traders to take control of their strategies. MT4 is also a multi-device platform, which means that traders can access their accounts and trading positions from anywhere in the world and at any time. All they need is internet connectivity. MT4 is a powerful trading terminal. Traders of all styles and skill levels can use it. While experienced traders might understand how to use the platform, there are many small features that go unnoticed. Here’s a look at 5 effective features of MT4 that can further enhance the trading experience. 1 Creating Customised User Profiles Profiles are a useful feature of the MT4 platform. They make it easy for traders to group different asset charts for easy access. This helps in improving productivity and efficiency. For instance, one profile can contain all Euro based currency charts, like the EUR/USD, EUR/GBP or EUR/JPY, while another could be for exotics, like the TRY/USD or MXN/USD. Instead of switching between timeframes, you can create multiple profiles for different markets. To use this feature, first group your charts and then click on the “Profile” tab at the bottom of the screen. Select “Save profile as” on the dropdown menu. After this, you can name the new profile. All profiles can be managed from a single menu that can be accessed by clicking on the button on the standard toolbar. Profiles can be stored or deleted from this sub-menu too. You can also press Ctrl+F5 to open all profiles one by one. 2 One-Click Trading You can significantly reduce the time to place a trade through the “One-Click Trading” feature. This allows you to bypass the two-step process of placing an order, where you need to open a trade order window and then select the appropriate order type, including various parametres, before clicking on the buy , sell, modify or close button, based on your strategy. In one-click trading, you can enter an order anywhere: >> The one-click trading panel on the chart: To activate this, you have to select “One Click Trading” on the chart’s context menu. >> Click the Trading tab in the MarketWatch window >> Trade levels on the chart: For this, you need to enable the “Show trade levels” option in the terminal settings. So, just right click on a chart, and then left-click on “one-click.” When the option is used for the first time, you will get to see a window displaying the terms and conditions, set by the broker. Once you have accepted the terms and conditions, an internal window will appear at the top left corner. Now, you can click on buy or sell and execute orders in less time. 3 Drag and Drop Orders on Charts The built-in drag-n-drop feature in MT4 allows you to assess your trades very closely. You can ensure that all important levels, like stop-loss and take profit, are clearly visible. >> Press Ctrl+O or go to the Tools and select “Options.” >> Under the “Charts” tab, select “Show trade levels.” >> Check “Use ‘Alt’ key,” so that you don’t accidentally move the stop-loss or take-profit level, when you are moving other objects on the chart. >> Click F8, and then go to “Charts” and then “Properties.” In the “Colours” tab, adjust the colour of your stop loss level, so that it is can be clearly seen against the chart’s background. Now you can easily drag and drop stop-loss and take-profit levels on your chart. Simply hold the “Alt” key while choosing the area over the chart with your cursor. Click, drag and release to adjust the levels. 4 Set Up Price Alerts Setting price alerts ensures that you don’t miss out on trading opportunities. You can stay informed of significant price moves, without having to monitor your charts continuously. Creating alerts on MT4 is easy. >> Press Ctrl+T to open the Terminal window and choose the “Alerts” tab. >> Right-click in the space created by the tab and select “Create.” >> A new “Alerts Editor” window will open, where you can enter the parametres and create alerts based on certain markets and specific timeframes. You can also choose an expiry date, after which the alerts will be turned off. >> Click “OK” to confirm the alert. 5 Turning Off Grids on the Charts For some traders, the grids on the charts can be a nuisance, crowding their view. If you feel similarly, you can turn off these grids to enable you to see the price action clearly. >> Press on Ctrl+G. >> Click on the “Charts” tab on the top left of the screen and then select “Grid” in the dropdown menu. >> You could also right click directly on the chart and select the “Grid” option. >> You can also press F8 to open the charts context menu. Then you get to see the “Properties” window, which includes various elements of the chart, including the “Grid” option. To disable the grid, click on the “Common” tab in the same window. Then uncheck the “Show Grid” box. These were only some of the features that MT4 offers to make the trading experience satisfying. The trading platform is loaded with many more amazing features. To familiarise yourself completely with the platform, it is a good idea to practice on a demo account. Once you are fully aware of and comfortable using the features, your strategies might become more effective. Now, you can try them in live market conditions.
Trading is a very psychological endeavor. Dealing with the psychological highs and lows that come with trading success and failure, respectively, has been a distinct challenge in my own trading. In order to be successful at trading, not only do you need a profitable trading system, you also need to have great understanding and command of your own tendencies and limits as a trader. Absent either of these, trading will likely be very costly and painful for you. Professional traders know that attitude is everything in trading. Successful trading can make you feel like the king of the world at times. Yet, after a big loss, or a period of drawdown, you may feel like you’re not cut out for trading at all. Professional traders have cultivated a successful attitude for dealing with the inevitable psychological highs and lows that all traders go through. 7 Steps for Dealing with the Psychological Highs and Lows of Trading Are you committed to becoming a better trader? If so, how do you deal with these psychological highs and lows in your own trading? Below are 7 things that professional traders do to maintain a successful trading mindset: 1. Manage Your Money Wisely – Good money management is critical to the success of any trading system. Professional traders know that you should only risk a small amount of your account each trade. Most professionals only risk 1-2% per trade. Very expert traders that use a trading system with a very high strike-rate might risk 3% per trade. You might risk a little more in the stock market as well, but the point is that you should be risking a relatively low percentage of your capital per trade. It takes a little longer to reach your monthly goals that way, but this technique eases the pain when losses happen. And you will have losses. If you’re very good, you might have perfected a trading system that wins 80% of all the trades that you take over a large sampling of trades. In that scenario, you still lose 20 trades for every 100 trades that you take. Average traders win much less. You must be prepared to protect your hard earned money. Risking a small amount of it per trade is a good start. 2. Do Not Overtrade – Average and losing traders tend to trade too much. They often trade for the fun. They don’t like to be out of the market. Professionals know that the only advantage that retail traders have over institutional traders is that retail traders don’t have to be in the market all the time. Successful traders trade less often and consistently make more each month than the “active” traders. Successful traders have the patience to wait for good trades to come to them. They wait for “all the stars to align” before getting into the market. 3. Do Not Revenge Trade – Revenge trading is jumping right back into the market to recover a loss you recently took. Overtrading and revenge trading will kill your trading account faster than anything. Always take the best setups your trading system offers, and when you inevitably take losses, realize that losses are just a business expense in the business of trading. Trading is hard enough to do when you don’t make any mistakes. The last thing you need to do is jump right back into the market just because you took a loss. Wait for the good ones. Don’t needlessly give your money away with costly mental mistakes. 4. Log your Trades in a Journal – This is so key to becoming a better trader, as well as having the right mindset to get you through the drawdown periods. Keeping an accurate trading journal isn’t going to turn everything around for you if you still haven’t found a good trading system, or you haven’t had the patience or discipline to follow the rules of that trading system. However, once you have a good system, a trading journal is a must. This is true for many reasons. A detailed trading journal, when reviewed at the end or the week, month, etc… can show you what you’re doing right and what you’re doing wrong. It allows you to determine if it’s you or your trading system that is causing losses. Are you sticking to the rules or forcing trades? How many mistakes did you make (how many times did you break the rules of your trading system)? How much would you have made if you had followed the rules with discipline? What kind of trades are you losing/winning on (buy/sell, breakouts/news trades, swing trades/scalping trades, etc…)? If you are trading multiple systems on one account, the way many traders do, you need to know how each system (or which setups within each system) is performing. You cannot get any of this information by just totaling your monthly profit or loss. All of this information will help you tremendously, not only in becoming a more successful trader but also in keeping the right mindset when you have a losing period. 5. Do Not Overcomplicate Trading – The majority of traders lose. Don’t get caught up taking random trading advice from lots of traders. There are tons of forums and websites available where there are no shortage of self-proclaimed experts telling you how you should be trading, or what’s missing from your charts. Most of these places will only lose you money, and make you feel more lost than when you first started out. Trading doesn’t have to be complicated. The natural tendency is to make trading more complicated because it’s easier to blame your charts, experts, trading methods, etc… for your lack of success than to actually find out what YOU are doing wrong. The complicated part of trading is the psychological aspect. Your trading system, itself, can be as simple as a naked chart showing candlesticks (price action). Find something that works for you and stick with it. Many new traders jump ship or add/subtract rules from their trading system(s), at the first sign of losses. The point is to find something that makes sense to you, prove that it works, and then let the edge that it provides you play out over time. 6. Demo or Paper Trade – Even if you’re already a successful trader, anytime you introduce a new technique to your methodology, you should always demo trade or paper trade the new technique for, at least, a few of months. There are several benefits to doing this. In order for any trading system to work for any trader, two things have to happen: 1, your trading system must be a truly profitable system with consistent results; 2, you must truly believe in your trading system. Demo or paper trading can accomplish both of these things for you. If your trading system is truly profitable, you should see consistent results over a period of, at least, a few months. If you do, you will have proven to yourself that your trading system works, and you can truly believe in your trading system. This will be invaluable to you for keeping you discipline after losses, or when long periods of drawdown in your system occur. The transition from demo trading or paper trading to live trading is not as smooth for most traders as they might assume it would be. Growing up broke, like I did, only compounds the issues. Many traders get nervous or uncomfortable with real money on the line, and that can lead to poor decision making. Proving your trading system is profitable first, before risking any of your hard earn money, can help you see that money as capital in a profitable investment. 7. Focus on Your Trading System – If you’ve proven that your trading method is a winner, and that you have the patience and discipline to execute it correctly, then you just have to take each trade as mechanically as possible. This will help you take some of the emotions out of your trading. I realize that not every aspect of every trading system can be completely mechanical, but you should strive to execute your trading system as mechanically as possible. If a trading setup occurs that meets all of the rules of your trading system, that’s a valid trade. Take that trade – even if it’s ugly. If a trading setup occurs that doesn’t meet those same requirements, that’s an invalid trade. Don’t take that trade – even if you’ve been waiting so long for a setup to occur, and even if you’re down for the month, and even if it’s the last trading day of the month. Stick to your rules. Be mechanical. Realize that no system is capable of catching every move the market makes. Don’t get caught up in thinking about how many pips you left on the table by missing that breakout. Focus on what your system is providing you. Stick to it, and let your edge play out over a large sample of trades. Trading can be Simple but is Always Stressful Trading is one of the easiest – if not the easiest – ways to get started in your own business. It can be extremely simple, and yet, it can also be one of the hardest, most stressful things you’ll ever try to do. So what is the key? Why do some traders make it, while the majority of traders fail? Emotion plays a huge role in trading. Not everyone can deal with the psychological highs and lows that come along with putting your hard earned money at risk. Letting your emotions dictate your trading experience will be disastrous for you. Unfortunately, there are more moving parts to successful trading than just the psychological aspect; however, if you can minimize and control these emotions, you have a much better shot at success. Taking the steps I mentioned above will help to keep you trading through the hard times. These steps will help you trade more mechanically, and less emotionally. As unnatural as trading can feel from time to time, there are many reasons to stick with it. Trading can be a great business to go into if you can handle the stresses involved. Hopefully, these 7 steps will help you deal with the psychological highs and lows in your own trading as much as they have helped me in mine.
Have you ever needed to create a custom currency symbol set in your Metatrader 4 (MT4) Market Watch list? This can come in very handy if you only trade a few currencies (which is recommended, so that you can specialize in those markets). In this article, I’m going to show you, step-by-step, how to create your own custom Market Watch currency set/list. The standard Market Watch list in Metatrader 4 usually includes most of the currencies and commodities that your broker allows you to trade. Instead of searching through the entire list to find the currencies that you prefer to trade, wouldn’t it be easier to simply remove the unwanted currencies and commodities from your Market Watch list? Maybe you trade certain currencies and/or commodities with one trading system, and you trade other currencies and/or commodities with another method. Having separate custom symbol sets to switch between could save you lots of time and confusion in the long-term, and make you a more efficient trader overall. Create a Custom Market Watch Currency Set in 3 Easy Steps Step 1: Select “Show All” Currency Symbols Step 1: Simply right-click inside the Market Watch list somewhere, and select “Show All” (see the image above). This will reveal all the currencies that are hidden in the current symbol set/list that you are viewing. You may or may not need to perform this step. If all the currencies that you would prefer to add to your custom currency set are already showing, you can skip this step. Step 2: Delete The Currencies You Don’t Want On Your List Step 2: Now you will need to remove all of the currencies/commodities that you do not want to show up on your custom symbol list. To do that you need to select a symbol and right-click (or simply right-click on the symbol that you want to remove) and select “Hide … Delete” from the menu (see the image above). Note: You must repeat this step until you have removed all of the unwanted symbols from your list, and you are left with just the symbols that you want to include in your custom symbol set. Step 3: Save Your Custom Currency Set Step 3: Now you can save your custom currency list for future use. Simply right-click inside the Market Watch once again, scroll down to “Sets,” and select “Save As…” (see the image above). Name your list, and you’re done! Now You Can Load Your Custom Currency Set! Now you can access your custom currency list anytime you need it. Simply right-click inside the Market Watch window, scroll down to “Sets,” and select the name of one of the custom symbol sets that you’ve created. Metatrader 4 is not the best Forex trading platform on the market, but it’s free. It’s also the most used trading platform by Forex traders. Nothing else even comes close. MT4 has its limitations, but it’s backed up by a massive community of creative traders and programmers, which is why many traders, including myself, still use this free platform. Now you know how to create a custom Market Watch currency symbol set in Metatrader 4 (MT4). I hope you found this short article useful. Come back soon to learn more ways to customize MT4.
If you’ve been trading Forex for a while, you’re probably pretty familiar with the standard Forex trading platform, MetaTrader 4 (MT4). It was released by Metaquotes in 2005 and is by far the most popular Forex trading platform. In fact, Metaquotes has since released its successor, Metatrader 5, but it was not received as well by the Forex trading community. As a result, the majority of brokers still use MetaTrader 4. Although there are some limitations to MT4, this free and simple trading platform is powerful and versatile enough for most Forex traders. This is due, in part, to its thriving community of coders for the many different indicators, scripts, and Expert Advisors, which add so much functionality to the platform. Whether or not it will be enough for you really depends on what type of trading system you are using, and how far you are willing to go for a small advantage. For those of us that are sticking with MT4 for now, the useful hotkeys and shortcuts below are a must. Check Out These Useful Metatrader 4 Hotkeys & Shortcuts! These Are The MT4 Hotkeys That I Use The Most Ctrl+E – enable/disable attached Expert Advisor Ctrl+I – open the “Indicators List” window Ctrl+M – open/close the “Market Watch” window Ctrl+N – open/close the “Navigator” window Ctrl+T – open/close the “Terminal” window Ctrl+Y – show/hide period separators F7 – open the properties window of the Expert Advisor that you have attached to your chart F9 – open the “New Order” window F11 – enable/disable full-screen mode F12 – move the chart ahead by one candlestick/bar Shift+F12 – move the chart back by one candlestick/bar – – zoom the chart out + – zoom the chart in (must use with the Shift key) Numpad 5 – restore automatic chart scale after it’s been changed or return the chart into visible range (if the scale is defined) F5 – switch to the next profile Shift+F5 – switch to the previous profile Delete – delete all selected graphical objects Other Useful MT4 Hotkeys ← – scroll the chart to the left → – scroll the chart to the right ↑ – fast scroll to the left or scroll up (if the scale is defined) ↓ – fast scroll to the right or scroll down (if the scale is defined) Page Up – fast scroll to the left Page Down – fast scroll to the right Home – move the chart to the start (earliest record you have downloaded) End – move the chart to the end (current price) Backspace – delete the last object added to the chart Enter – open/close fast navigation window F1 – open the user guide F2 – open the “History Center” window F3 – open the “Global Variables” window F4 – open MetaEditor F6 – open the “Tester” window (must have an Expert Advisor attached to the chart) F8 – open the chart properties window F10 – open the “Popup Prices” window Alt+1 – display chart as bars Alt+2 – display chart as candlesticks Alt+3 – display chart as a broken line Alt+W – open the chart management window Alt+F4 – close Metatrader 4 Alt+Backspace – undo last deleted object(s) Ctrl+A – revert all indicator window heights to default Ctrl+B – open the “Objects List” window Ctrl+D – open/close the “Data Window” Ctrl+F – enable crosshair Ctrl+G – show/hide grid Ctrl+H – show/hide OHLC line (top left) Ctrl+L – show/hide volumes Ctrl+O – open the “Setup” window Ctrl+P – print the chart Ctrl+R – open/close the “Tester” window Ctrl+W – close the chart window Ctrl+F6 – switch to next chart window Some Helpful MT4 Shortcuts That I Use The new versions of MetaTrader 4 allow you to drag and drop your stop loss and take profit levels. Previously, you had to use an Expert Advisor to add this function. In order to see your stop loss and take profit levels, use Ctrl+O or go to Tools –> Options. Select the Charts tab and check the box that says “Show trade levels”. Now you can see your levels, making it easier to drag them. I also like to check the box directly underneath that says “Use ‘Alt’ key to drag trade levels”. With this box checked, you have to hit the “Alt” key to activate the drag and drop feature in MT4. Note: I use the “Alt” key to drag and drop my levels so that I don’t accidentally move my trade levels while I’m clicking and dragging other objects on my charts. This next shortcut is commonly used, but helpful if you don’t already know it. You can use “Ctrl” to duplicate any object on your chart. Simply double click the object to select it, then hold the “Ctrl” key and drag. This technique is especially useful if you use multiple colors when drawing objects (like trend lines and support/resistance levels). You probably already know this next shortcut, but it is essential. You can click in the price grid (on the right of the chart) and drag down to shrink the scale of the chart. This can be helpful for placing stop losses, take profits, support/resistance levels, etc… that are outside the current automatic range of the chart. To return the chart scale to default, simply click and drag up on the price grid. If you use automatic chart scaling, you can just hit Numpad 5. These are the most useful MetaTrader 4 (MT4) hotkeys and shortcuts that I use on a regular basis, and some others that I’ve used before. If you found this article useful, please share it with other traders, and feel free to suggest any hotkeys or shortcuts that I’ve missed. Good luck and happy trading!
How much do Forex traders make per month? What is the monthly earnings potential of the average Forex trader? If you’re reading this article, you’re probably fairly new to Forex trading, so I don’t want to misguide you. In fact, I’m going to tell you some hard truths that you probably don’t want to hear, but they are absolutely necessary to learn if you ever want to become a successful Forex trader. Your initial reaction may be discouragement, but there is a light at the end of the tunnel. Please fight the urge to roll your eyes and move on to something more uplifting. Sometimes the truth hurts, but I will absolutely guarantee that if you don’t listen to what I’m about to tell you, you will NEVER be a successful, long-term Forex trader. So how much do Forex traders really make per month? This question is a little misleading for a couple of reasons: 1. Most Forex traders are not profitable 2. No profitable trader in any market makes the same percentage of profit each month These are the questions you NEED to ask: Why are most Forex traders unprofitable? Despite what you may have heard about how easy it is to make money in the Forex market, the truth is that most traders fail. It is also true that you will probably fail at trading, but you don’t have to. The real reason traders fail is probably not what you think. This is why traders actually fail: Greed Most new Forex traders have unrealistic profit expectations. They think it will be possible to make 25% – 50% or more month to month. They have dreams of turning their small account into a very large account in just a few years. This is totally unrealistic. If it were possible we would all be doing it. Most successful traders make a much lower average monthly profit (3%-7% is common). If you’ve averaged 10% or better for more than a year, you’re a rockstar in the trading world. Take this into consideration: If you could sustain a 10% average monthly gain, you would more than triple your account every year. By averaging 6%, you would more than double your account every year. Starting with $5,000, and averaging only 3% per month, your account would grow to over $170,000 in 10 years. Warren Buffet became a billionaire trader averaging only 30% per YEAR! I’m not saying it’s impossible to make 25% or more in a month. I’ve done it, and many others have done it. I’m saying its impossible to MAINTAIN such a high average monthly gain. In order to shoot for such a high goal, you will be pressured to take bad trades, overtrade, and overleverage (which brings me to my next point). Overleveraging Poor money management is one of the worst account killers for new traders. This goes back to greed, because traders typically overleverage while shooting for unrealistic profit targets. You should be risking a small percentage of your account on each trade, and you should be risking the same amount on each trade. I recommend never risking more than 2% per trade. Many successful Forex traders risk 1% or less per trade, and some very successful and experienced traders risk 3%. Risking more than a small amount per trade is a death sentence for your trading account because all trading systems go through periods of drawdown. If you’re risking too much during one of these periods, you will, at least, wipe out much of your progress, if not completely wipe out your account. Consider these two examples: If you lost 10 consecutive trades, risking 2% per trade, your account would be down about 18%. You would need to earn about 22% of the remaining account just to get back to your starting balance. If you lost 10 consecutive trades, risking 10% per trade, your account would be down by more than 65%. You would need to earn nearly triple the remaining account (187%) just to get back to your starting balance. Not only does responsible money management help preserve your capital during losing streaks, it also helps to keep you trading your edge mechanically. That’s because losing 1% or 2% on a trade does not sting nearly as much as losing 5%, 10%, etc…. It’s easier to deal with the losses, psychologically speaking. You’re more likely to pull the trigger on the next trade, and let your edge work itself out over time. And that’s exactly what you need to do, if you know you have a profitable trading method working for you. Insufficient Testing I cannot stress this point enough. Testing is the backbone of a successful trading program. Most new traders are too impatient and undisciplined to thoroughly test new strategies. I think this, again, goes back to greed, because we all want to fire our bosses as soon as possible. You want to get that account snowballing quickly, but this is a costly, rookie mistake. The problem is that, without sufficient testing of your trading system or any new trading setup, you’re not going to know how it will hold up during changing market conditions. You need to know if your trading system can stay profitable through increasing/decreasing volatility, growing/shrinking average daily range, impactful news events, etc…. I would not even consider a new trading strategy unless it had proven itself to be profitable after, at least, a couple hundred backtesting trades – either through my trading platform or using a backtesting software, such as Forex Tester 3. Next, I would forward test (with a demo or micro account) the new strategy for, at least, a few months. The more time you spend doing this the better off you will be down the road because you will have absolute confidence in a system that has proven to be profitable over time. Knowing exactly what your system is capable of, and proving to yourself that your trading system is profitable over months or (preferably) years worth of different market conditions will go a long way in helping you to mechanically trade the edge that your system gives you – even when you’re experiencing a losing streak. Lack of Discipline I’ve mentioned discipline a few times already, and it’s an import factor in profitable trading. It’s another psychological aspect of trading that can either make you or break you. Most new traders lack discipline in every aspect of their trading, from testing to execution. It takes discipline, as well as patience, to properly test a new trading strategy. Most traders don’t have the discipline to do any manual backtesting at all. They simply learn a new trading method, and demo trade it for a week or two, or worse, they go straight to live trading. It takes discipline to keep trading when you’re losing. If you’ve done your due diligence, then you already know for sure that you’re trading a consistently profitable trading system. With discipline, you will be able to keep pulling the trigger on the next trade and let your edge play out over time. Sometimes you just have a bad feeling about a trade, although it meets your criteria. It takes discipline to mechanically trade every setup that comes along, but it’s a must. As soon as you start trading subjectively, you’ve abandoned your edge and you’re gambling. Note: There is limited room for some subjectivity in some aspects of trading when you become much more experienced, but you should strive to trade as mechanically as possible even then. Lack of discipline can also lead you into catastrophic behaviors, such as overleveraging (which I mentioned above) and revenge trading. Revenge trading is when you re-enter the market because you’re trying to earn back money that you’ve just lost – not because your trading system has provided another quality entry trigger. Overtrading could be mentioned in the same breath. Successful, disciplined traders trade less, because they only take the best trade setups. They have the discipline to wait for the market and their trading system(s) to provide them with quality setups, rather than trying to force bad setups to meet some unrealistic profit target. System Hopping If you’re a new Forex trader, it’s absolutely necessary to find a consistently profitable trading system to start testing. As of right now, there are three profitable trading systems reviewed on this website that I have personally traded and recommend. However, I mostly use Day Trading Forex Live now. If you’ve been trading for a year or two, the truth is that you’ve probably already traded a few profitable trading systems. You just were not confident enough in them, or disciplined enough to let their edge play out over time. You probably didn’t test long enough, started trading your hard earned money, lost a bunch of it, blamed the trading system you were using, and moved on to the next system. This is a constant, destructive cycle that a large majority of unsuccessful traders are trapped in. There is no “holy grail” in trading. The point is to find a system that makes sense to you, and test it to see if it actually works. Just as importantly, you need to test it to prove to yourself that it will be profitable in the long term. You’re looking for something that will provide you a verified edge in the market. You need to have an unwavering belief in the trading system that you are using. Once you do, you simply have to continue to trade the edge that your system provides for you with discipline. Many traders unwittingly give up on profitable trading systems because they don’t trade them long enough, or with enough discipline, to let the edge work out for them. Even the best traders in the world lose lots of trades, but they have the discipline to let their edge play out. What is a realistic average monthly profit expectation for a successful trader? This question is more in line with the way you should be thinking, although its answer may be just as discouraging: It depends on the trader, their trading system, the market, etc…. Successful traders simply trade the edge that their trading system(s) give them, and take what they can get. They don’t set goals and they don’t force trades to meet those goals. A really good year for a successful trader might look like this: January +5%February -2%March +9%April +12%May +3%June +9%July +15%August +20%September +7%October -4%November +5%December +5% A trader with this record, if no money was withdrawn from the account along the way, would have earned over 120% – more than doubling their starting balance! Their average monthly profit percentage would be 7%. Even as I’m writing this I can picture the amateur traders saying to themselves, “That’s not enough! I’ll never be able to do this for a living at that rate.” That is greed and impatience doing what they do to every inexperienced trader. You could make more than what is depicted in the example above, but if you don’t change your attitude and expectations, you will most likely make much less. Instead of asking yourself, “How much can I make per month as a Forex trader?” you should be asking yourself, “Am I willing to do what it takes to become a successful Forex trader?”
One of the most powerful technical indicators that you can use in any market is the MACD oscillator, invented by Gerald Appel in 1979. The MACD, which is short for moving average convergence divergence, is one of the most popular lagging indicators among traders as well. Many traders use this indicator to trade divergence between the indicator and price, which can be a powerful trading technique if done correctly. Are you trading MACD divergence correctly? In this article, I’m going to show you how to trade MACD divergence like the pros. Are You Trading MACD Divergence Correctly? For starters, you should determine whether or not you are using the best MACD indicator for the job. For instance, the default MACD indicator in MetaTrader 4 does not use the original MACD formula and is completely useless when it comes to trading traditional histogram divergence. I’ve also seen MACD indicators, in other trading platforms, that only display the histogram, leaving out the MACD and signal lines. In order to trade MACD divergence the way I’m going to teach you, you need to use a true, traditional MACD oscillator. The image above is an example of a traditional MACD oscillator. You can see the histogram (bar graph) in gray, the MACD line in blue, and the signal line in red. Of course, the colors can vary between platforms and indicators, or due to user settings. The MACD line is the fast line. The signal line is the slow line (average of the MACD line). The histogram shows divergence between the MACD line and signal line. What is MACD Divergence? The typical definition of MACD divergence is when price and the MACD indicator are going in separate directions. As a trading method, at least in our case, we’re not talking about the divergence between the MACD line and the signal line. MACD divergence is, for example, when price is making lower lows while the histogram or MACD line is making higher lows or double bottoms. The idea is that the slowing momentum displayed by the indicator could be an early sign of a reversal. In the example I mentioned, we would have bullish divergence. We would have bearish divergence if price were making higher highs while the histogram or MACD line was making lower highs or double tops. Similarly, price could make a double top while the histogram or MACD line made lower highs. In the image above, I marked the bullish divergence in green and the bearish divergence in red. Notice that I marked divergence when price was either down trending or up trending. I completely ignored the range bound period. There are a couple of shortcomings to trading MACD divergence, and trading from a ranging market is one of them. During a ranging market, the MACD and signal line will cross the zero line frequently. You should avoid trading divergence, and possibly trading altogether, during these periods. Note: It’s also important to trade MACD divergence from distinguishable higher highs or lower lows in price. For instance, the bearish divergence (red) in the image above barely qualifies, because there were such small retracements in price during that uptrend. Keys to Trading MACD Divergence Correctly When traders first realize how powerful trading MACD divergence can be, they often make the mistake of trying to trade the MACD on its own. I don’t recommend this because the MACD can give many false positives on its own. Instead, I recommend using MACD divergence strategies with other trading strategies – preferably ones that use leading indicators, like price action or support and resistance. The right combination of lagging and leading indicators can provide you with a real edge in the market. In the image below, I marked the bullish divergence (green), the bearish divergence (red), and an example of bad divergence (gray). I also marked some entry signals. For the purpose of this article, we will be using price action signals in conjunction with the different forms of MACD divergence. Starting from the left, you can see some traditional MACD histogram divergence. The histogram is making higher lows or double bottoms, while price is making lower lows. If we were using price action as our confirming entry signal, we would have skipped the first two examples of bullish divergence, because there were no bullish candlestick signals to confirm our entry. The next two examples show both histogram and MACD line divergence. They also both developed bullish engulfing signals which could be used to confirm entry at each of those divergence points (click the image for a better view). Note: Oddly enough, according to the way I trade candlestick patterns, I would have made a full take profit (2:1) after the first bullish engulfing pattern. I would have been stopped out at break even, if I had taken the second bullish engulfing pattern. At first glance, you would think it should be the other way around. Next, we have an example of bearish divergence. A strong candlestick signal, the bearish engulfing pattern, developed at this point as well, confirming its significance. During this period, the divergence occurred between price and the histogram. Divergence also occurred between price and the MACD line. You’ll notice that the MACD line only made a small kink (or micro divergence). Micro divergence can occur when price is making smaller retracements, or during periods of high volatility. Either way, micro divergence can be a very significant signal in the right situation. After that, I marked a bad example of divergence. The reason this doesn’t qualify as a good example of divergence is because the retracement that made the first low was so small that it’s barely noticeable. Remember what I said about distinguishable higher highs or lower lows in price being important? Price action through this area is too smooth. There was not enough up and down movement in price to establish any distinguishable lows. Compare this period to the downtrend on the left of the image. There you can see very distinguishable lower lows in price. The lows on the histogram were also very distinguishable, which is helpful but not critical. Next, we have another example of bullish histogram divergence. This bullish divergence also coincided with a possible bullish candlestick signal, a bullish engulfing pattern. However, the real bodies of the candlesticks are relatively small compared to the other candles in the area. For that reason, I would have skipped this trade, although it would have worked out. Finally, we have another example of bullish divergence that occurred between price and both the histogram and MACD line. In this case, there was no candlestick signal to confirm a trade, so we would have stayed out of the market. Hopefully, you can see from the examples that I’ve given that learning how to trade divergence between the MACD and price can be a very powerful tool in your arsenal. Trading MACD divergence in combination with almost any other type of trading strategy can increase that strategy’s profitability exponentially. Final Thoughts: Trading MACD divergence, if done correctly, can provide you with a real edge in the market. It can be a powerful early indicator of trend reversals when combined with another trading system – preferably a system based on leading indicators. MACD divergence isn’t foolproof. This technique does not work well in range bound markets, and on its own MACD divergence will often give you many false positives. This is especially true when the market is trending strongly in one direction for an extended period of time. It is important to only trade divergence signals that occur during periods of distinguishable higher highs or lower lows in price. Strong, parabolic moves in price, in one direction or another, with little to no retracement, do not make good divergence signals. Are you trading MACD divergence correctly? Hopefully, this article shed some light on any mistakes you might be making with this popular trading technique. Like anything else in trading, you can’t expect to be an expert divergence trader overnight. Be sure to do plenty of backtesting and demo trading before trying any new trading strategy in your live account.
Your reward to risk ratio is an important part of any successful Forex trading plan (or any trading plan for that matter). It’s not an arbitrary number that you can just choose for more profit. It has to actually work. In this article, I’m going to show you why your reward to risk ratio is one of the most important aspects of your trading system. I’m also going to discuss the pros and cons of raising or lowering your reward/risk target and give you some practical tips on what works in different scenarios. What is Your Reward to Risk Ratio? In trading, your reward to risk ratio is defined by what your profit target is and how much you are risking per trade. For instance, if you’re shooting for 100 pips, and you’re risking 50 pips, your reward to risk ratio is 2:1 (100/50=2). You are shooting for twice what you are risking. If, however, you’re shooting for 100 pips, and you’re risking 100 pips, your reward to risk ratio would be 1:1 (100/100=1). You would be shooting for the same amount of pips that you have at risk. Note: The reward to risk ratio that you shoot for is not the same as your actual reward to risk ratio, which can be affected by breakeven trades, trailing stops, closing trades early, etc. The Importance of Your Reward to Risk Ratio The reason your risk to reward ratio is so important in trading is because with a 1:1 ratio and a 50% strike rate (win rate), you would break even. In fact, you would end up losing money due to spread costs, commissions, and any other operating fees. However, with a 2:1 reward/risk ratio and a 50% strike rate, you would make plenty of profit. In fact, you could still be profitable with a 35% strike rate (not counting trading fees). Of course, realistically, depending on the rules of your trading system, you will not reach your full profit target on every winning trade. For instance, you may need to exit early with a partial profit before a big news event. As you can see from the graphic above, the higher your reward to risk ratio is, the fewer trades you need to win to be profitable. So why not just shoot for the moon? Why not go for a 10:1 ratio? Pros and Cons of Adjusting Your Reward to Risk Ratio The obvious advantage of targeting a better risk to reward ratio is that you can be profitable with fewer wins. However, the bigger your profit target is, the less likely it is that you will hit that target (see the image below). In the example above, we took a bullish engulfing candlestick pattern as our entry. Stop loss is in the standard position. You can see that a 1:1 and 2:1 reward/risk were fairly easy targets, and we could have even gotten 3:1 before running into our first major resistance point. However, the market never quite made its way up to the 4:1 level, and reversed well before the 5:1 level. This was an exceptional example of a bullish reversal too. Most trades will not go 3:1 in your favor. The Best Reward to Risk Ratio for Forex Trading The reward to risk ratio that you target could vary depending on the trading system that you’re using. At Day Trading Forex Live, we use a 2:1 ratio. The Infinite Prosperity and Top Dog Trading systems both use a stepping stop loss method, so there is no set risk/reward ratio. When I’m trading Japanese candlesticks, I usually target a 2:1 reward to risk ratio. There are exceptions to the rule. In the image below, you can see two bearish harami candlestick patterns followed by a bullish harami candlestick pattern. In my opinion, it’s necessary to shoot for, at least, a 3:1 ratio with the harami patterns, because they’re not strong patterns, so they don’t work out as often as some of the stronger signals. Note: The harami patterns will usually give you nice risk to reward scenarios that have a realistic chance of working out because the small second candlestick in the pattern usually keeps your risk (in pips) relatively small. As you can see from the image above, a 3:1 ratio works out well for the harami patterns. Sometimes you can even profit from these patterns during small retracements (notice the first trade on the left). As a general rule of thumb, 2:1 or 3:1 is a good reward/risk target in Forex trading (or any type of technical trading). It really depends on your trading system and what kind of follow through you can expect from your trading setups. Scalping traders often shoot for a 1:1 ratio or less. Instead of a high reward to risk ratio, scalpers rely on a high strike rate for profits. Those same scalping systems would not work if you adjusted the reward to risk ratio much higher because scalping setups typically have very little follow through. Position traders often aim for 10:1 ratios because they are entering positions based on long-term fundamental or technical triggers. Your reward to risk ratio needs to be determined by what kind of setup and follow through your trading system actually provides you. How do you find the ideal reward to risk ratio for your trading system? If you’re creating your own trading plan, you have to do lots and lots of back testing and demo trading to see what works for you. So what reward to risk ratio do you personally target? What’s your strike rate? Have you found a winning combination? Leave a comment below to let me know.
Covariance is a statistical measure of the extent that 2 variables move in tandem relative to their respective mean (or average) values.In the investment world, it is important to be able to measure how different financial variables interact together.Covariance can provide clues to the following two questions:Are there common factors affecting the returns of your investments?How can you measure the magnitude of this relationship?It is calculated by taking the product of two variables’ deviations from their average values.The practical applications of covariance are quite significant in statistics, economics, finance, and portfolio management.Investment decision-making based on covariance analysis can have serious financial implications, and as such, it is important to be well-grounded in its understanding.Formula of CovarianceQuite often, covariance analysis aims to assess historical relationships among variables of interest.If we obtain a sample of monthly returns for two stocks, X and Y, covariance can be calculated as: Where,Xi = return (%) for stock X for period iYi = return (%) for stock Y for period iX = sample mean or average value of X for sample nY = sample mean or average value of Y for sample bn = sample size (12 observation implies n=12)Note: the formula above is the covariance computation for a sample of data. When working with a population (the entire data), the denominator changes to (n) rather than (n-1).We calculate covariance using the formula above: Therefore, there is a positive relationship between the returns of Stock X and Stock Y. In other word, the returns of both stocks tend to move in the same direction for the sample of interestLimitations of CovarianceThe major limitation of the covariance measure is in its interpretation. While we can gauge the directional relationship between the variables, the magnitude in itself, is not very informative. From the above example, a covariance of 0.91 does not tell us how strong the relationship between the returns of Stock X and Y is, and as such, our conclusions are limited. One way we can work around this shortcoming is to determine the correlation coefficient.Another short-coming in covariance is that the result is highly sensitive to the volatility of the variables’ variances. For example, the presence of just a few outliers in a data set can significantly skew its result, rendering it as a potentially misleading statistic, in terms if interpretation.Covariance in Portfolio Management TheoryPortfolio management theory (or Modern Portfolio Theory (MPT)), as developed by Harry Markowitz in the 1950s, makes extensive use of the covariance measure. The theory posits that an efficient frontier exists, which is derived from the expected returns and variances (or standard deviation) of sets of investment portfolios. Given varying weights in two asset classes (e.g. stocks and bonds), we can determine risk-efficient points on a graph plotting the expected returns and standard deviations of the portfolio. The line of the graph is the efficient frontier. In other words, the EF plots the maximum return possible given a level of risk (variance).The role of covariance in MPT lies in its impact on the diversification effects of adding an individual investment, portfolio, or different asset class to an existing portfolio. Thus, given an existing portfolio, it is possible to reduce its inherent risk (for a given expected return) by adding an investment whose returns exhibits a low covariance with those of the existing portfolio.ConclusionCovariance is a statistical measure of the extent and direction of co-movement between two variables deviations from their respective means. It can be used to assess the association between important economic and financial data such as stock returns, equity indexes, bond returns, inflation, interest rates, and a multitude of relationships of interest. Covariance analysis can also be used to assess the diversification benefits of adding different asset classes into our portfolio. Its limitation is the difficultly in its interpretation, since the strength of the relationship cannot be strongly gauged from its result.
Learn the classic market cycles of accumulation, mark up, distribution and mark down so that you can time the market -consistently – and make steady profits any time. When you hear someone on TV say that “market timing” is impossible, they are wrong. Let me be the first to say that market timing is not only possible, but also profitable on a consistent basis. As a technical trader, your purpose is to find the best trades and to time your entry and exit points. After all, you can find the best trade in the world, but if it is not timed well, it may turn into a loss. Every stock or asset class goes through a classic market cycle. When you look at the chart of any stock or index, it moves in cycles. We are all going through a life cycle, and we are also in the autumn stage of the seasonal cycle. By observing cycles, we know what to expect next. This is true for stocks. If you noticed, all three were homebuilders and they have completed their market cycles which has ranged from 5 to 10 years. If you are a long-term investor or trader, your understanding of market cycles will greatly benefit you. Let’s talk about each stage and what is going on during each stage of the cycle:Stages of a Market Cycle* Accumulation Phase – This is the bottom (or near the bottom) of the market for a particular stock, sector, or general market. At this stage, prices do not move upward but rather stay within a neutral range. At this level, the smart money begins to buy up large blocks of shares to accumulate a large position for their portfolio. They are patient enough to be able to wait years, if needed, because it is difficult to determine how long a stock or sector will be in this stage. Regular individual retail investors do not even consider buying at this level because, in most cases, they have recently sold close to the lows. It is at this stage where you pick up the biggest discounted stocks. This is where long-term investors should be buying to realize the greatest long-term gains.* Mark Up Phase – This phase follows the Accumulation phase and the way to know if this phase is occurring is to see a stock or sector that has “broken out” of its neutral range. This means that it must break above the upper trend line of the neutral range. From this point on, you should see an obvious increase in volume. Most of the institutions and individuals who are aware of this early trend will jump on board and bring along significant buying power with them. Another way to tell if you’re in this stage is to see if we are forming higher lows and higher highs, confirming the start of a new uptrend. Toward the end of the mark up phase, you will see full market participation, meaning everyone from the shoe shiner to the cab driver will most likely have made an investment. This sets us up for the next phase:* Distribution Phase – This is the top of the market for a particular stock, sector, or general market. Supply overwhelms demand after the smart money sells their shares to the “greater fools” who buy at the top. Because there are no other buyers left to raise the price, a stock or sector cannot advance higher, and thus, will collapse under its own weight. The sentiment is extremely bullish. This phase is marked with extreme greed and fear. The best way to identify a top is through chart patterns, most notably, the head-and-shoulder and double top formations combined with breakdowns at the 200-day MA. This phase is usually marked by the greatest volume levels for a stock until we reach the Accumulation phase once again.* Mark Down Phase – Prices are in free fall and stocks are in full liquidation mode. This group is made up of people who held beyond the Distribution phase and did not sell, or those who bought at or near the top and refuse to sell at a loss. Either way, a loss will be incurred, and the size of it will be determined when an investor wishes to cut it. You should not be buying at this stage and those that try to find a bottom will be disappointed.Return to Accumulation PhasePhase StrategiesAccumulation PhaseInvestors: Cash » BuyTraders: Cover/ BuyMark Up PhaseInvestors: BuyTraders: BuyDistribution PhaseInvestors: Sell » CashTraders: Sell/ ShortMark Down PhaseInvestors: CashTraders: ShortSentiment CycleIn addition to the actual price cycle, there is also a sentiment cycle which accompanies each stock, sector, or overall market. Here is the general range of emotions that follow (each chart is different, so this model is not exact for every situation): You may have found yourself within each of these emotional phases. Now that you know what to expect for each cycle, you’ll have to harness your emotional involvement and separate it from your trading activities. You are your own worst enemy because emotions give room for destructive impulse trading. By understanding each cycle and what emotions follow, you’ll be better prepared. By now, you understand why high flying stocks crash to their lowest levels. Market cycles are a normal and necessary function in balancing the financial markets and restoring equilibrium to the forces of supply and demand. You are now positioned to take advantage of every market cycle for every stock and every sector in the future. Take a look at 3-year charts for TRA, CROX, and MON for additional examples of full-length charts.
The Moving Average Convergence-Divergence (MACD) indicator is one of the easiest and most efficient momentum indicators you can get. It was developed by Gerald Appel in the late seventies. The MACD moves two trend following indicators and moving averages into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The result is that the MACD gives the best of both worlds: trend following and momentum. The MACD is continually changing above and below the zero line while the moving averages come together, cross and diverge. Traders can search for signal line crossovers, centerline crossovers as well as divergences to generate signals. For that reason the MACD is unbounded, it is not necessarily useful for identifying overbought and oversold levels. Note: MACD is pronounced as either “MAC-DEE” or “M-A-C-D”. Take a look at the sample chart with the MACD indicator in the lower panel:MACDCalculationMACD Line12-day EMA - 26-day EMA)Signal Line:9-day EMA of MACD LineMACD Histogram:MACD Line - Signal LineThe MACD Line is the 12-day Expotential Moving Average(EMA) minus the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of the MACD Line is plotted with an indicator to function as a signal line and identify turns. The MACD Histogram denotes the difference linking MACD and its 9-day EMA, the Signal line. The histogram stays positive when the MACD Line is above its Signal line and negative when the MACD Line is below its Signal line. The values of 12, 26 and 9 are the typical setting used with the MACD, but other values can be exchanged depending on your trading style and goals.InterpretationThe MACD is about the convergence and divergence of the faster and slower moving averages. Convergence occurs when the averages move towards each other. Divergence occurs when the averages move away from each other. The shorter moving average is faster and more responsive. The longer moving average is slower and less reactive to price changes. The MACD Line moves above and below the zero line – also known as the centerline. The direction, of course, depends on the direction of the moving average cross. A positive MACD is when the shorter moving average crosses above the longer moving average. As the shorter moving average moves further above the longer moving average (diverges) this means the stock price upside momentum is increasing. When the short moving average drops below the long moving average, it demonstrates that the stock shows a downward momentum.The yellow area shows the MACD Line in negative territory as the short line is below the long line. In this chart, the crossing occurred at the end of September (see the black arrow) and the MACD moved diverged further into negative territory as the short moving average moves further away from the long moving average. The orange area highlights the period of positive MACD values, which is when the short moving average moves above the long moving average. Notice that the MACD Line stayed below during this period (red dotted line). The red line means that the distance between the slow EMA and long EMA was less than 1 point, which is not a much of a difference.DivergencesDivergence forms when the MACD line moves away from the price line of the stock. Bullish divergence are formed when a stock’s price records a lower low and the MACD hits a higher low. The lower low for the stock confirms the downtrend, but the higher low for the MACD line shows less downward momentum. Downside momentum still outpaces the upward momentum as long as the MACD remains negative. When the downward momentum slows, it can foreshadows a trend change or a upside rally. The next chart uses a Google (GOOG) chart with a bullish divergence for Oct-Nov 2008. Notice that there were clear lower troughs as both Google’s price line and its MACD line bounced in October and late November. Notice that the MACD line formed a higher low as Google’s price line formed a lower low in November. MACD is signalling a bullish divergence as the signal line crosses over in early December. Google’s price line confirmed the reversal with a breakout.A bearish divergence forms when a stock price records a higher high and the MACD line forms a lower high as the faster MA crosses the slower MA. The higher high for the stock price is quite normal for uptrends but when the MACD shows a lower high, this illustrates less upside momentum. Even though upside momentum may have declined, upward momentum is still out performing downside momentum as long as MACD is positive. Declining MACD upward trends can foreshadow a trend reversal or forecast a large price decline. Below we see a chart for Gamestop (GME) with a large MACD bearish divergence from Aug to Oct. The stock chart demonstrates a higher high above 28, but the MACD line falls short of the previous high and shows a lower high. The following MACD crossover is bearish. On the GME price chart, notice how the support is broken and turned into resistance on the following bounce in Nov as we see with the red dotted line. This momentary price bump provided another chance to sell or sell short.We should be careful interpreting a MACD divergences. Bearish divergences are quite common for strong uptrends as do bullish divergences during a strong downtrend. Price uptrends quite often begin with a strong advance which will produce strong upside momentum for MACD. Even though we can see that the uptrend continues, it continues at a slower pace than started the uptrend which causes the MACD to decline. Even when upside momentum is not as strong, upside momentum still outpacing the downside momentum as long as the MACD line is above zero. We can see the opposite occuring when a strong downtrend begins. The next chart shows SPY which is the S&P 500 ETF. This chart shows four bearish divergences from Aug to Nov 2009. Despite the slower upside momentum, SPY’s price line continued higher because the uptrend was strong. Notice how SPY’s price continues a series of higher highs as well as higher lows. Remember, as long as MACD is positive the upside momentum is stronger than downside momentum.ConclusionsMACD is a special indicator as it brings together both momentum and trend in one technical indicator. This unique combination of trend and momentum can be used with daily, weekly and monthly charts. The standard moving average lines for MACD use the difference between the 12 and 26-period EMAs. Chartists that are looking for a more responsive indicator can use a shorter short-term moving average and a longer long-term moving average. A MACD(5,35,5) is far more responsive than the more standard MACD(12,26,9) and can be a better indicator for weekly charts. Chartists looking for a less sensitivity indicator can use lengthening the moving averages. A less responsive MACD will still oscillate above/below zero but the frequency of the crossovers centerline and signal line crossovers will decline. Finally, remember that MACD is calculated using the difference between two moving averages. This means that the MACD line is dependent on the price of the stock. For example, the MACD line for a $20 stock may move from -1.5 to 1.5 while the MACD line for a more expensive $100 stock can move from -10 to +10. You cannot compare the MACD charts for several stocks with far different prices. If you want to compare the momentum of various stocks you should probably use the Percentage Price Oscillator (PPO) rather than MACD.
DefinitionVolume-Weighted Average Price (VWAP) is often used as a trading benchmark by traders, pension funds, mutual funds and market makers. It can allow traders to get a sense of how successful they were in obtaining a good price. A buy order filled below the VWAP would be considered a good trade.Using VWAPA lot of people will wonder why not just use the average price, it’s a lot easier to calculate and isn’t it essentially the same thing anyway? As we can see, the difference is that it tracks volume as well. By tracking volume you also get information about liquidity as well as the amount of money that traded, not just the price.CalculationVWAP calculation can vary greatly depending on the time frame and time horizon you choose, as well as the price calculation. However, VWAP is typically used within one trading day and uses a one minute time frame.The formula for VWAP is:VWAPformulaThe price can be used as the last price in a time frame or the price calculated using the high, low and close in a given time frame. Here is an example of the calculations:Volume Price Price * Vol Time VWAP 1 min20 10.15 10.15*20 = 203 9:30 203/20=10.15030 10.21 10.21*30 = 306.3 9:31 (203+306.3)/(20+30)=10.18675 10.22 75*10.22 = 766.5 9:32 (203+306.3+766.5)/(20+30+75)=10.206We can see from the calculations that the VWAP is cumulative and thus a price at the beginning with high volume will have more effect than a price at the end of the day, since it is now just a drop in all the trades placed over the day. It would take a very large volume and/or price change to change the VWAP at the end of the day (depending on the time frame you use). Another important thing to notice is the time frame, a smaller time frame (such as every trade or tick) will be more accurate, but for a stock that trades a lot this could be data for 50,000 trades. If you are doing multiple stocks, this could easily slow down or even crash your computer if you started storing and calculating enough days.GraphThe greatest change in the results and calculation of VWAP is the time frame. If we look at the difference below between a 1 minute time frame and a two minute minute time frame we will see there is a discrepancy. As we can see the two minute does not follow as closely as the 1 minute since it is only “checking” the price every two minutes.Another ratio we can use similar to VWAP is the moving VWAP (MVWAP) that is similar to a simple moving average. This will use a different period and will sometimes be carried over from day to day depending on the period used. Essentially, instead of starting at one day, we will calculate our MVWAP using the data over the period we wish to study. For example, we can say we wish to take a period of 10 minutes and thus we will essentially have a VWAP that started it’s “day” ten minutes before.
Trading is all about taking a risk based on incomplete data and becoming an expert at this should lead to profitability.Learn from the mistakes you make but make sure the lessons are the right ones.Using historical charts can lead us astray because in hindsight, everything is obvious. So how do we avoid thinking that the past will equal the future?Learn from the mistakes you make but make sure the lessons are the right ones. – James BoswellBe An Expert Hindsight TraderLooking back on the market in hindsight allows us to see the obvious, but only because we have all the facts at hand as to what subsequently happened. Reviewing the market like this is useful to the extent that you can see how it developed in respect to your various reference points.But if you are trying to achieve the ultimate goal of being consistently profitable, then is this what you need to be looking at?My argument is no, it’s not and here’s why.When a trader who is either yet to be profitable or is struggling looks at what has happened and why they lost money, they are looking for what they “should” have done in those specific circumstances. Emotion leads the mind to looking at the “nice” moves and ignoring what didn’t work.We will find what we seek and if all we are looking for are the places we would have made money, that is exactly what we will find.trading quoteIn my experience, this unfortunately leads to a right or wrong type attitude and masks the information salient to making positive changes to your trading.You Can’t Ignore The Ones That Didn’t WorkWhen you search for what works in this way, you are kind of doing a form of curve fitting and skipping over the places where the same things did not work. This leads to the tendency for denial when a trade doesn’t work even though it looks almost exactly like that one from yesterday that was a great trade.Remember, you’ve probably missed those times when in the same period, the trading setup didn’t work at all or at least spent much more time looking at the ones which did work. Then you get the emotional stuff come into play which we all know about.Trades don’t work sometimes regardless of how perfect the set up is. If you have done proper testing, you’ve seen the expectancy of your trading strategy including how many losses your trading system can take.Denial in trading in terms of skipping the losing trades and only seeking the winning trades, is deadly.But You Can’t Ignore HistoryLooking over historical charts is important and I do it just as I’m sure you do too. But using it to identify the market’s current behavior or to work out why you didn’t make money, are not always the same thing.So what is the salient information?* Where you traded and whether it was according to your plan is a start.* What your overall emotional state was at the time* Where your stop should have been and if you took it* Did you exit in a timely manner or hold on for too long/too short a time and what made you do this?* Where else might you have taken trades within (or outside of) your plan and what would the result have been?None of these things are about where the best trading opportunities were. We don’t know for certain how good a trade will be until it is completed. Historical charts can and will make your view biased if you’re not thinking in this way.Think of historical charts as potential…not probability.The quote at the beginning of the article is one I always try to remind myself.
Netpicks has seen traders come and go over the years and we’ve been able to see a number of recurring themes in traders in regards to their trading edge.We also believe it’s possible to recognize certain trader types whereby personalities broadly conform.Therefore their strengths, their weaknesses, the things which they’re able to do with ease and the challenges they will likely face can often be identified by the recognition of their type.Of course there are going to be crossovers between types and also individuals will have specific traits that are unique to them, but thinking like this can be a great starting point.Forsaking One Trading Edge For AnotherOne such type is the “kid in a candy store” (KICS) type. Simply put, the KICS type trader wants to explore everything new and exciting to them.Every new system or indicator has them jumping about as they love finding out about different approaches traders can take. And while a healthy interest in these is certainly a good thing, there’s a point at which it becomes detrimental to a trader.* It’s good to have a broad understanding of how different market players are trading.* It’s good to have the ability to select effective parts of these alternative approaches to bolster your own method.* It’s good to recognize how markets shift over time and how therefore, some methods dwindle in their efficacy and some experience a greater degree of success than they previously did.But if a KICS trader is not successful – and often will never be so (depending on their definition of success) – there’s a distinct danger that with each new thing, rather than it adding to their knowledge and experience it becomes the sole focus of their efforts.The problem is also that not every trading system available has a true edge in the market.Even then, overall, an actual trading edge is quite small.When looking at an edge with your system, ask yourself why something should happen when what you have determined as a signal occurs.A trader will have the best of intentions but will often times simply jump to another method (and they will have to prove that has an edge) and that takes time. During that time, the losses pile up as this trader tests/trades this system.What happens next?The last thing which was going to be the latest and greatest in their quest to succeed gets dropped in favor of what’s now surely going to be the winning formula.Quest For Perfection From Fear Of FailureSo what is it that drives this sort of defining behavior in certain traders?Why are many unable to just buckle down and work with what is right in front of them?I believe it’s a manifestation of the fear of failure. Don’t get me wrong here, they believe to their very core that it’s possible to make it as a trader and to think otherwise would be a betrayal of reality as they know it to be.But they haven’t found anything which they have been able to make successful.As they use a system, they find imperfections that they didn’t initially see that makes it less appealing. The deep seated fear of failure means that any level of concern about an approach forces them to explore alternatives as failure is simply not an option.* They want only the best.* They believe that success is possible and the rush of excitement and optimism when they find a new technique masks their misgivings about their own ability to succeed.* They don’t want to fail.* They don’t want to face their own demons.Because they’re looking for immediate results, they often skip over things like psychology and money management in favor of finding a trading solution which simply makes them money. But a system or indicator is just one part of long-term successful trading.A trading system that has an edge is not the only key you need.So whatever the strategy, unless an individual is willing to get their hands dirty with the less glamorous side of trading, they will likely never achieve consistent success.And so to overcome the issues a KICS type trader experiences, it’s perhaps even more of an imperative than with other trader types that you have to change your trading mindset.Take Your Trading Losses With GraceYou must first realize that by the very nature of trading, every trader will take regular losses as a matter of course. Often times you will have a string of losing trades.Understanding that you have no way of being certain when those losses will come and therefore the importance of being true to the execution of a strategy and trade plan with a proven trading edge is essential to your success.You must trust your trading system and therefore your trading edge to truly find the success you desire.This is what trading day to day is about – not chopping and changing as you go along.The trouble is that people don’t see this from successful traders. And why would they?Most systems aren’t sold on the merits of how effectively they take their losses are they?But in fact it’s these kinds of details that have the potential to determine the success of a system in the live markets.Not only that, but some of the most important information that can change your level of performance is staring you right in the face.Trading statistics about things such as success by time of day, trading errors and how a market moves subsequent to your exit can have a huge impact on the level of performance of a strategy.The issue with statistics is that without a well-planned journal (which you do, right?) this data either becomes so time consuming to gather that a trader won’t want to tackle it or it is lost entirely.Stick To One Trading EdgeSo if you are this sort of trader who can’t resist new and exciting systems and indicators and quickly move on to the next, maybe it’s time to step back and think how much effort you should really be putting into this part of trading.There are many different traders who make money using differing methods and there are many different traders who lose money using differing methods.And so by focusing on trading strategies and indicators alone, you’re missing out on other really important aspects that could make the difference to your performance.Find a method and then work with it until you have enough information to understand whether it works or not in terms of really being an edge.And if you still get all excited by investigating new ideas, by all means do so.But instead of dropping your current method, figure out whether there’s anything that you can borrow from the new technique in order to support how you already trade.
I like to think of myself as a risk manger first and a trader second. This ensures that I never forget the importance of a stop-loss when entering any trading position.If you think that how you manage risk will, in part, define how you succeed in trading, you already understand the importance of limiting your trading losses.You have the discipline to not only set your stop-loss but also respect it when price is dangerously close to ending your trade.Stop-Loss Is UniqueMost traders understand market orders and limit orders but a protective stop order is unique. You set a stop-loss to manage the amount risked on a trade but sometimes your risk parameters are exceeded.Here Is How A Stop Order Works In The Market:* Stop-losses are sitting in the market as limit orders waiting to be filled* When triggered, your stop turns into a market order* Market orders are filled at the best price available* A runaway market can have your stop price filled at a worse price than you originally intended.This is called slippage and for many traders, it is not a risk that is thought about nor accounted for in their trade plans. You never know when slippage can occur (remember it can also happen on entry into the market as well) and it is something that is difficult to plan for.It’s a risk that is present when volatility enters the market (or in markets that lack liquidity) and I’ve really only seen it be an issue for me when I thought I could trade the news releases.One frustrating issue for many traders is when your protective stop gets triggered and then price continues back in the direction of your just exited trade. The market is an order filling machine and when stops are triggered it causes order flow which, depending on which side of the fence you’re one, is a good or bad thing.For big players, triggered stops allow them to exit and enter positions with little slippage because the volume is there to support it.For smaller players, these locations do allow you to not only get a good price, but also ride the wave caused by the bigger positions at play.For those stopped out, it’s a frustrating and account churning process.Stop-Loss PlacementTo protect your account, you need a stop in the market.The question becomes “where do you place it”?Stop-Loss Areas* Use an average of the prices such as a 20 period moving average* Place it around trend lines* Place it on the opposite side of support or resistance* Use market structureThere are some drawbacks to each of these methods:1 A moving average is simply an average of previous price. There is not really an edge in using it.2 Trend lines can be subjective at the best of times and while they can measure the rhythm of the market, it’s just a line.3 Support and resistance are very popular places for stops which makes them prime targets for stop runs.4 Market structure can be used especially if you use a location where the trade would be invalidated.There is no perfect location but whichever you choose, ensure you are consistent in their usage and place your stop just outside of the noise of the market.Structure Based Protective StopThink of price action as the pen and structure as what the pen draws. Price moves in waves and leaves traces of where it’s been.In an up trending market, we have price making higher swing lows and higher swing highs. As long as this pattern is intact, we can expect our trades to be relatively safe. Even if the highs start getting lower, it’s not a sure thing that the move is completed and it may even be an opportunity to buy into this market.Once the lows get broken, then we have an issue. This chart is a continuation of the one just above. You can see where the bulls were running out of steam with the higher high (HH) but once the lower low (LL) was printed, buying resumes although temporarily.Price is in a range (R) and with one large bear candle, the bottom is shattered.I want to draw your attention to the arrow. The candle where bulls stepped in is an obvious reversal candle – a swing point – and where did the buyers place their stops? Just below it and the size of that momentum bear candle indicates that those stops were taken out.One main point is that this particular chart is after a long run up in price. Buying (or selling) after such a large move is a risky venture as those who bought in at the bottom look to take their profits.The Stop RunThat chart showed that the structure low was a great spot to place your stop as price continues to fall after the retest. Many times though, the next chart shows what happens. Where the dotted lines start on the left, we can see price dropped as sellers stepped into the market. Following the textbooks, many of the shorts probably have their stop just above the pivot thinking that if it is violated, it’s the end of the move.Price pulls back, runs the stops to the red line and on the same candle, the sellers stepped in and drove the market down.The Stop-Losses Were Inside The Noise Of The Market.Small pierces of support/resistance do not indicate the move is invalid and if you scroll through many charts, you will see this play out time and time again. The problem is that most traders want a tight stop which will allow them to increase their position size.This desire also puts them in the line of fire with stop runs. Yes you want your stop around the pivot area but also far enough away that these runs won’t hurt you.You will still risk the same on the trade it’s just that you will have to live with a smaller position size.Is it foolproof?No and as we had seen in a previous chart, when the pivots break, the move continues in that direction. You still are not risking more by having your stop outside the normal fluctuations of the market and you may increase your chance of staying in when many are taken out.Define The Loss & Protect Your Account1 When a potential trade lines up, where is your stop going to go? Outside a pivot or range high/low AND adjust for the noise of the market.2 Define your dollar risk on the trade and calculate the number of contracts you can afford according to your defined risk amount.3 Enter the trade and ensure that your stop-loss is in play.4 Allow the stop to execute when adverse price action takes place.Your stop-loss is your friend that is meant to save your account from destruction. Let it do its job by ensuring you place one on every trade and as you can see, it is not difficult to define the location. Just remember to account for the noise and stay within your risk tolerance.
When new traders see positive simulated trading and then negative live trading, it can make you question the validity of sim trading.If you dig a little deeper and look at cause and effect, you begin to see that while virtual trading has issues, it’s not your problem.The true problem is a reality that many traders have difficulty facing because it makes them totally accountable for the results they get.Win or lose. Succeed or fail.The problem is you and how you approach the simulated portion of your trading career.Simulated Trading Is A Perfect WorldThe act of trading is trading regardless of what you do and the three biggest thing in sim trading that you may experience that can lead you astray are:Perfect fillsTemptation to curve fit.Lack of the same emotional roller coaster ride you get with real capital.Never underestimate the power slippage (and fees) can have on the trading results you get through testing and trading online with a simulated trading account.Slippage (skid for commodity traders) can actually turn a winning system on paper, into a losing system once all the statistics are accounted for.While logging your trades, you could account for slippage and account fees in your results which will give you a better estimate of the validity of your trading system.If we assume we are not going to have to deal with slippage in simulated trading mode, what else won’t we be dealing with?Pressure That Trading Real Money Can Put On You.Most people look at paper money the same way they do Monopoly money. There is no attachment to it and just as easily as you collect $200 by passing go, you can collect new virtual funds easily as well.It takes a mind shift to look at paper money as real money but that is exactly what you have to do.Before talking about emotions, let’s look at one temptation that can cause your forward testing results to be miles apart from historical.Curve Fitting Your Trading SystemThe benefit of hind-sight can cause you to tweak your trading rules to give yourself a superb historical trading record. Most times, traders will tweak a trading indicator setting that sets up the perfect trade.This can be extremely tempting and at the same time lead to disastrous results over time.One way to combat this temptation is to understand the main types of trades that we can take as traders:* Trend continuation trades* Trend termination trades* Support/resistance holding/failing tradesDevelop a trading system that takes into account these categories of trades as well as including a momentum variable.The issue with system development is that people put far too many variables in play and start to optimize so everything lines up.Complex Does Not Equate To Trading Results.You need simple rules and minimal variables to have a more robust trading system and to allow you to consistently apply your rules with limited room to optimize everything.A basic understanding of “naked chart trading” can help you to see the mechanics of the market, and will allow you to sensibly apply a few well thought variables to take advantage of the main types of trades.Step Up And PerformWith real money, now you have to perform.Now a loss will take away from your trading account and depending on your account management, it could clean out your account.Each loss decreases your position size. Soon, your 3 contracts are 1 contract or worse, you don’t have the required margin to trade any longer.Real money introduces stress for most people.Fear of loss is a real fear, a stress, and that can cause a person to take actions not related positive trading protocols.Watch your real money trade go against you and tune into your body. How do you feel?Most people get anxious and can almost hear their heart beating.Blood is pumping through your body even faster as the stress mounts.You feel real anger as the market “is out to get you”You watch price tick your stop and your account balance is now down, in a perfect world, the exact amount you risked on the trade.You Don’t Automatically Reset Internally But Decide To Make Back The Loss.The same trading rules you stuck to in sim trading now become more of a guideline that you can blur. Marginal trades happen.I remember when I started that I didn’t actually think I was breaking my rules. It was not until I started to go over the trades for the day/week that I realized that I have taken liberties with the rules.Either do something right or don’t do it at all.If you are not prepared to twist your mind around a sim account as real money, don’t bother trading sim.I know some traders that when they are feeling loose with their rules, sim trade instead of using their real account.What a horrible idea.There is the saying “practice makes perfect” but that is not complete.“Perfect Practice Makes Perfect” Is The Better Mantra.If you allow yourself to freely break your rules, that habit becomes ingrained and your path to successful trading is going to be a much longer one. The path may even never have an ending as you continually break protocols and trading success eludes you.If I swing a bat without looking at the ball, most times I am going to miss.If I continue to practice that way, ignoring technique, what are the chances I will ever hit a home run?Slim? None?Simulated Trading ConsequencesIn my experience, it is about the stress of real money. It is the inability to attach importance to the paper money.This has to change.So what can you do?One thing that may help that attachment is to donate a percentage of your paper trading losses. Not a lot but enough that causes you to wince.Let’s say you took a $100 sim trade loss on a trade where you broke your trading rules. That money is not real and that loss has no immediate consequence.What if you were to take a real loss by donating a small percentage of the virtual loss?Take a small percentage of the paper loss from your simulated trading account that was a result of not following your trading plan and donate it. Not only will it do you some good as there was a real consequence to your action but you will be helping someone out along the way.What else can this do?It can ensure that you are trading a percentage of the sim account that you could afford if trading live. There is no sense trading a $25000 sim account at 2% risk per trade ($500) if you can only fund your account with $5000.Ensure that the virtual trading account you are using is the amount you will fund your trading account with.
There are lots of reasons why a trader might not execute their trading plan properly and not wanting to be wrong is a big one.If you have been trading for any length of time, you understand that it’s impossible to take winners 100% of the time and avoid all trading losses.For those just beginning to trade, the fact that you will lose is a lesson in itself.All data on your charts is historical which means you’re only able to assess what has happened already.Everybody is perfect in hindsight.As smart as you are you can never really know who is sitting ready to act and so a big trade or unexpected event can change everyone’s perspective of what a fair price currently is regardless of what has traded before.Then there’s the fact that the market can make you wrong for a tick whether or not the concept for a specific trade was valid or not. Until you’ve closed the trade, you cannot be certain that it will achieve your profit target.Ego In Trading Is A MistakeWe know we will be wrong at various points in our trading, then what’s the reason why we often see traders having a hard time in “letting go” of unsuccessful trades?Surely by knowing that we are all but certain to take losing trades on any given day, it should be easy to just click the mouse and exit the trade, right?Wrong.And I believe it’s not really to do with being wrong at all but all about the way in which a trader loses that leads to many of the problems they face.FACT: Trading Is Not About Being Right We have a deeply ingrained aversion to being made to feel/look like a fool. Perhaps this is down to evolution and the drive for a mate. But it’s certainly observable in many walks of life.People often revel in denigrating those who have said or done something silly or naïve. Many a comedy moment is centered on this type of thing (think Homer).At many mainstream schools, much of the learning is focused on being right or wrong as opposed to reasoning (part of the problem I believe with producing genuinely capable people at the end of education – rather than people who have learnt to pass exams).So it is with trading that not being made to feel like a fool, not having your money taken from you in a silly way and proving to yourself that you really do know what you’re doing can become a millstone around a trader’s neck.This taps into some pretty strong instincts – ones which when we’re already in a heightened state of emotion, can be extremely difficult to negate.The compounding effect of multiple experiences can lock you into negative behavior patterns until you’re really able to recognize what’s going on.Here is just a sample of situations you may be able to relate to:1. Getting Stopped Out To The Tick AgainYou don’t want to be the patsy at the table who keeps getting their stop taken out right before the market moves to target. This can lead to trading on the edge to try to exit out of the position when your price starts to get traded out.The problem with this is that there’s a seemingly invariable jump through your price and you end up missing your exit.Another observation is where a trader just keeps moving their stop until they are so committed to the trade that they refuse to take the loss at all.2. You Skip Parts Of Your Trading PlanYou take a loss because you missed an important piece of information that’s normally part of your decision making process because either you weren’t paying attention or didn’t prepare properly.You want to avert this feeling of inadequacy and acting in a stupid way and so only take high probability setups – in reality ones which you feel will definitely be winners, so when they lose you either refuse to accept the loss or feel betrayed by the market.3. You Don’t Ever Want To Miss A MoveThe market keeps acting in a certain way that it doesn’t usually do and you’re taking loser after loser because of this. You don’t want to feel like a fool when you stop trading and it reverts to its usual self so rather than sit on your hands, you keep trading and taking losers.Either this or you start trading “off plan” which could be disastrous. You start to feel like you know what’s going to happen whilst you’re in a trade, so you mess with your plan “on the fly”.4. Trading For RevengeYou take an impulse trade that ends up a losing and you know you should have followed your plan instead. Rather than trading your plan, you try to make up for it by taking further impulse trades whilst digging yourself into a deeper and deeper hole.If you can never truly be right on a trade, how can you ever really be wrong?Your Trade Outcomes Are Never WrongWe appreciate we will take losses in our trading so what does “Never be Wrong Again” actually mean?Trading is as much to do with changing your mindset and therefore behavior as it is to do with strategies, money management and everything else.Perhaps more so as everything else is dependent on how well you grasp these concepts.Being right is NOT about taking winners and you can do some real damage when you profit with poor logic. Being rewarded for bad plays will cause you to repeat the mistakes.It’s about being able to assess a situation, what is more likely to happen next and apply a strategy properly and consistently where appropriate. If your reasoning is sound and you take your trade, you have done the right thing in spite of the outcome of the individual trade.You have identified your trading edge and given it the opportunity to play out in the market.But if being right is about taking a trade and not the outcome then surely you can still be wrong?Of course but not how you think you can be wrong.Focus On The Act Of TradingThe point is that if you view it this way, your focus is on trading properly.You can never be wrong about the outcome because you know it’s uncertain.The only thing we can fully control in trading is when we trade and how we trade.The proper way of being wrong….the only way in an uncertain environment..is not doing what we know we should do.In order to give yourself the best possible chance of assessing an opportunity correctly and executing your strategy consistently there are a few simple (but uncertain – there’s no concrete right or wrong) steps you can take:You need a clear and simple enough plan of how you will trade and under what circumstancesLeaving the level of discretion to a minimumBy monitoring market conditions (for example, as simple as whether the market is trending or consolidating) you can understand when the strategy is likely to work better and therefore what you should be looking for leading up to a trade.Strip the word wrong from your trading vocabulary by following your trading plan.If you have a strategy that has a genuine edge in the market, the most important step to success is being able to execute it effectively and eliminate trading errors.These errors often stem from the strong emotions that come with being made to feel silly and can be averted by changing your mindset on what being right or wrong is all about.Change yours and never be wrong again.
Multiple time frames analysis can be overwhelming for some. In one frame, we are in an uptrend while, in another time frame, we are in a downtrend.Add in more time frames to check for “confirmation” and confusion can become so severe, people tend to simply freeze.The issue is that there comes a time where the multiple time frames mesh and either the higher or lower time frame takes over.Patterns in one-time frame take on a whole new meaning when looked at in the context of another time frame.There is the belief that the higher time frame carries more weight but remember at any time, one time frame can take over and a turn over happens.In This Piece, I Want To Show You:How to draw different trend linesHow to determine trendHow to trade counter-trend using trend linesTrend Lines And TrendSince the trend on one time frame can become the dominant trend at any time, it’s not a bad idea to see where we are in the bigger picture.Trend lines are good tools to use for trend determination and in the right hands can become a stand-alone trading tool.Related – What Story Does Your Chart Tell You?Not only can they help determine your trend direction, they can also point to the rate of the trend which is great information to have in terms of taking a trade.In defining how to draw a trend line, we open an entirely different issue. Connecting swings in price can be subjective especially if we include internal trend lines.The key is to be consistent at every turn when you draw the lines. This is the standard way of drawing trend lines and because we are using the same anchor for different swings, this is known as fanning a trend line. Trend lines define the relationship between the swings that are used and are useful to determine an accelerating or decelerating trend.1. You can see how the lines start off steep and slowly begin to decrease in the steepness of the line.2. Smaller trend lines marking off the corrections are short term trend lines and can be useful in determining a trade entry3. Internal trend lines also offer opportunity in terms of trade opportunity as they can be useful in an early warning of trend reversalsOne way you become more objective in trend line usage is to only connect to obvious swings and only after a high or low is taken out.Multi-Time Frame Trend Line UsageThe drawing of trend lines is not very difficult and now the question becomes; how to use that information to aid us in our decision making.Drawing lines on the higher time frame charts is simple as you have fewer swings to deal with. The chart below has a daily down trend using trend lines (not seen due to space limitations) and this is an intra-day chart using the one-hour time frame.You can see we have a few more options as a number of swings has increased. Keep in mind this is the 60-minute chart in the context of a daily down trend. The daily down trend has been determined by drawing trend lines over obvious swing highs.1. These dashed lines used to form down trend lines off and kept you on the short side intra-day OR provided targets for counter-trend trades. All three have been broken.2. We started to get higher swing lows which allowed us to draw up trend lines off the lows. Each time price met a down trend line, it gave inflection points for possible action.3. You can see the lines getting steeper indicating the rate of up trend was increasing in the context of a higher time frame down trend.When the trend starts to increase, you can see the trend line is taking a sharper direction and in this case, we may be seeing a resumption of the overall down trend. One thing I hope you have noticed is that at each line, there is some type of reaction.This Does Not Always Happen Of Course But It’s Something To Take Note Of.Often times when a trend line breaks, it is simply moving into another trend rate that is either new or has been shown through an earlier trend line. Keeping in mind previous rates of trend plus the larger time frame trend, can help keep you from being overly anxious to jump into a move.Trend Line TradesI want to dial down into each point in time where price met one of the dotted lines. Dropping the time frame to a factor of four allows a better view of the action and possible opportunity around each point. I have to reiterate that we are in a down trend on the daily chart which we objectively know through our trend line. I also must add that if we continue up from this current area, there is not a trend line offering an inflection point on the previous chart.1. After price breaks the lowest trend line, it reacts off the upper trend line.2. After reacting at #1, price returns to the break out price zone and offers a trading opportunity.3. Price breaks through the tested trend line and travels all the way to another trend line before…..4. Offering a pullback trade opportunity off a formed demand line.5. Price breaks up through the tested trend line and is now sitting at a make or break point.The point is that even though we are a higher time frame down trend, usage of trend lines offered not only a time frame dependent up trend but also trading opportunities.Your Trend Line Trading PlanIn a future piece I am going to expand on the usage of trend lines including channels. For now, take it upon yourself to lay out a trade plan using the trend line information found above. It may not be a plan you trade, but it will give you great insight on how valuable trend lines can be for your trading and may find its way into your trading.Trend lines can help you define the strength of a trend, if a trend is even present, and perhaps give you a signal that the current move is coming to an end through an parabolic push. Just be consistent and clear with their usage.
Have you ever had a feeling that some greater power in the market has singled you out and is doing everything in their power to make your trading life a misery. Because it seems every time you enter a Forex trade, almost immediately you find the market reversing on you? The market is probably just ‘rigged’, or it must be your broker stop hunting you right? Did you ever consider you might be chasing price around the chart, consistently entering the market at bad prices. In this article we are going to take a look at why ‘chasing’ price around the charts is impractical, ineffective and why it will unravel you mentally. The feeling that you might ‘miss the train’ Have you ever been sitting in front of your trading desk, watching the candlesticks tick higher and lower and then noticed a significant price event unfolding in front of your eyes? This event could be price breaking through an important support or resistance level, or maybe a trend line. Whatever the situation, the price action makes your eyes light up like a Christmas tree. You whip out the trade order window as fast as you can. You proceed to enter a Forex trade at the ‘market price’ with a high level of urgency. You’re in the trade, fuelled up on adrenaline, and on the edge of your seat watching the market go crazy as price breaks through the key point on the chart. You’re thinking to yourself, ‘oh this is going to be a massive breakout and land me the big trade I’ve been waiting for’. Then all of a sudden the movement reverses and now you’re on the wrong side of the market. Stop chasing your own tail An event like this could leave the un-educated trader banging their head on the keyboard, repeating ‘what went wrong?’ I know the feeling, but the market doesn’t work the way as everything else does in your everyday life. It operates in a more counterintuitive way, what you think might be the right way to do something is often the wrong way. You believe you enter a forex trade with military precision when really you’re as sloppy as a 2 year old with a crayon. The markets are full of deception, emotions, traps and psychological torture that will absolutely rip you apart mentally if you’re mind isn’t ready for trading. Trying to trade the market uneducated, or unconditioned is like trying to navigate your way through a land mine field, blindfolded. If a commercial airliner crashed without warning, investigators would act quickly taping off this accident scene to do some crime scene investigation. So let’s quarantine this type of aggressive trading and get a bit more of an understanding of why so many people churn and burn. When you enter a Forex trade by chasing price, there is an obvious lack of planning in the trade execution. Throwing orders at the market on the back of impulsive price movements might seem like the right thing to do in the heat of the moment. A decision making process like this is generally derived from ‘emotionally fuelled distorted logic’. Secondly, the trader has allowed the market create a high level urgency within themselves. Inducing that feeling of ‘if you don’t jump in RIGHT NOW, you’re going to miss this move and never get another chance’. The high sense of urgency throws trader’s into ‘panic mode’ and the need to take action, superseding any rational thinking. We’ve all been guilty of ‘chasing price’ at one stage. The market slapped us back in the face for it too. If you impulsively enter a Forex trade like this and it actually works out, you are at a high risk level of being a victim of the random reinforcement principle. You’re rewarded for the bad behaviour, which encourages you to do it more often. You won’t get the same result each time. It will be like a drug user ‘chasing that first high’. It eventually unravels you completely as a trader. If you really are passionate about trading and want to become a good trader, focus train of thought away from brute force attacks on the market. Projected your time toward proper risk management and logical trade execution. Trade the right timeframe Timeframes are going to play a huge part in how successful you are as a trader. Generally when we first embrace Forex trading, we are easily lured into the lower timeframes. Other trades make promises that the lower timeframes offer ‘more trading opportunities’ and the ability to ‘make more money’. What they don’t tell you are the signals have much less value on the lower time frames as they do the with the higher timeframes. Low timeframes – Lots of signals, but low quality. Plenty of breakout traps to be caught up in, and lots of market noise. High timeframes – Less signals, but with low risk high reward profiles. Less breakout traps and more market stability and clarity. Don’t fall into the idea of trading on the lower timeframes will make you more money or enter a Forex trade via lower quality signals. You’re taking trades that contain no real substance or value. They don’t contain enough price action data, and expose you to a high level of risk. Intraday noise on the low timeframes can be so intense, trying to trade it is really just ‘chasing ghosts’. On the 15 min chart below, we observed an aggressive 15 candle that closed below a support level. Something a lot of traders would have shorted into. It looks like a really large move and some uneducated traders would call this a ‘market crash’. Because we are on the 15 min chart the move looks bigger than it is. The total move is only about 30 pips… Then this happens… Just another typical breakout trap that occurs very often on these lower timeframes, like the 15 min chart. It’s hard to make sense of what’s going on here using these charts. Even with the best Forex trading strategy, you will still have to deal with the high level of noise and ‘false signals’ that plague these intraday charts. Now let’s have a look at a typical scenario on the daily timeframe… Market closes below support level and produced clear bearish breakout follow through. See how the daily chart just paints a much better picture of what’s going on in the markets. At first glance it’s easy to see this market has a dominant bearish trend momentum with very little noise. That’s why we recommend to make the switch to the higher timeframes. The signals are lower risk, the market has more stability and clarity, and you have less chance of being caught up in any whipsaw type movements. Create your own traps, Enter a Forex Trade Using limit and stop orders There are generally two ways you can approach your trading. You can be like most traders and sit there in front of the computer screen, watching the market tick around all day patiently wait for a signal to develop. Or, you can identify signals by checking in on the markets from time to time, using pending orders to enter a Forex trade. Pending orders are great for setting up your own ‘price trap’ to catch price exactly where you want and automatically enter the market for you. This saves you the mental punishment of staring at the charts, waiting for price to reach your desired entry point to pulling the trigger manually. There are two types of pending order options, Limit and stop orders. Stop orders are used to buy the market above current price, or sell below current price. Stop orders are used to catch breakout trades and we would typically use stop orders when setting up Inside Day and Indecision Candle breakout trades. Limit orders are used to buy the market below current price, or sell above the current price. These are great for when you want to catch market retracements. We use limits orders all the time with our retracement entry method… Here is a rejection trade I recently entered on the USDJPY daily chart. I wanted to take advantage of market retracements, so I used a ‘buy limit’ order to set up my price trap… As anticipated a retracement did occur and my limit order was hit and automatically converted into a market order. Once you’re order is set, its hands free from there. This type of ‘fire and forget’ trading is something we practice a lot. The price trap played out as anticipated and caught the retracement. This automatically converted my limit order into a market order. We use these type of entry / stop combo with our end of day trading strategies. It’s less work for us, and yields more results from the market. Think of it this way, you’ve got a problem with a rat that you need to get removed from your house. You’re not going to run around shooting off a rifle at anything that moves hoping to randomly hit it. Instead you set up a trap, bait it and let the rat get caught. The ‘set and forget’ approach here can be applied to the markets just as easily. Set up your price traps, let price come to you. Don’t chase the market around and enter a Forex trade at random price movements. Avoid being caught in a trap yourself There are certain spots/conditions on the charts that are considered to be high risk zones to trade into, and should be avoided. One of these areas are weekly support and resistance levels, which are one of the major turning points in the market. If you’re fixated on the 15 min chart, you may not even be aware of these levels. Open up your weekly chart and map out these major termination points. You will be amazed at the price action you can take advantage of here. Sometimes the market will create the illusion that a ‘breakout’ is occurring through these levels, drawing in unsuspecting traders into very bad positions. Weak traders enter a Forex trade from impulsive reactions triggered by events like this. Once all the suckers are positioned in on the bad move, the market will pull back the curtain and reveal its true intentions… The break through the weekly level was a classic bull trap and absolutely destroyed everyone who ‘jumped in’ with the buying frenzy. Avoid trading into these major turning points on the chart unless you have a damn good reason. The market lays down these traps to wash out weak traders. Focus on trading away from these major turning points. Use strong reversal signals, or by waiting for a breakout then a retest from the other end. Stop swinging your sword around like a mad man, set your trades up then walk away Are you guilty of using a ‘machine gun’ mentality, and offloading a bunch of orders into the market hoping one of them hit a target. If you really want to become a good, consistent trader, it’s time to move away from this savage mentality. Start trading with a cool, calm and collected approach. Plan out your trades more carefully, only load your weapon with one bullet. Pull the trigger and enter a Forex trade when the probabilities are in your favour. Make every shot count. After you’ve entered a position, try to be at least involved with it as possible. How many times have you missed out on potential profits from a trade because you’ve emotionally intervened? Don’t stare at the charts, don’t stare at your trades. Fire off your order, walk away and go live your life. If you think you you’ve been smothering the market too much and need to put some distance between you and the charts. But you still want to be an active trader at the same time. You may be interested in becoming a war room member where we do exactly that every day. We teach price action trading techniques that allow to you to have a minimalistic approach to trading. You can achieve good returns on investment, with plenty of time during the day to do things you like to do. Stop by the war room info page, if you’re interested in more information on our War Room membership package. Cheers to your trading success.