Trading news announcements like Non-Farm Payrolls can be dangerous, and to anyone going into a news release without fear of how badly an account can be ravaged by volatility should probably avoid doing so, and instead – wait for quieter markets.But to the trader that always protects their downside, adheres to strong money management, and protects their account by avoiding the number one mistake Forex Traders make – News announcements can offer compelling opportunities for a lot of movement in a very short period of time. Price Action, as discussed in The Forex Trader’s Guide to Price Action can assist greatly in the initiation of trades.This movement and volatility can bring a significant amount of pips to a trader’s account. It can deplete even more if not done correctly.What follows is one of the more common ways traders can look to trade the news – regardless of which way the announcement comes out; but before we get into that – let’s establish a couple of important points.1_ Nobody can tell the future (which is why risk management is so important in the first place).2_ We will likely never know what the news will be before the release (see #1 as to why)3_Even if we did know what the news announcement would be; we still don’t know exactly how the market will react to this news.To sum it up, trading news announcements adds additional volatility to the trader’s charts. By many accounts, trading news is very similar to trading in ‘panic’ situations. The more important the news announcement, the more potential volatility that may enter into the market and the more similar to a ‘panic’ situation that news release is. An announcement like NFP (Non-Farm Payrolls) can bring some significant movement as much of the world is watching this figure for signs of future direction.Step 1: Observe Price Leading into the AnnouncementAt 8AM Eastern Time, approximately 30 minutes before the NFP announcement the trader can plot support and resistance based on price action. This can be done by observing the past few hours immediately prior to the release, and drawing a rectangle around the high and the low that was hit during this period. This can be done on the 5, 15, or even 1 minute chart – the high and low of this time period will be the same.If looking for maximum movement, often one of the ‘major’ currency pairs (any currency with USD in it) will suit that need; if looking for a more conservative approach cross-pairs can certainly work as well (pairs without the US Dollar). Below is a chart of the most popular currency pair in the world, the EUR/USD for the 14 hours leading into last month’s Non-Farm Payrolls report: Step 2: Identify Support and ResistanceAs you can see, for 14 hours leading into Non-Farm Payrolls in April 2012 price respected a 25 pip range. The reasons for this can be numerous; key amongst them is the fact that liquidity providers and market makers that set the prices we can execute our trades against are cautious of NFP as well.They fully realize that a surprising number can spark a rally or a sell-off in a very short amount of time. And leading into the announcement, any significant positions taken on (by liquidity providers or retail investors executing trades) bear significant risk.Below is a chart of EURUSD ahead of the March Non-Farm Payrolls report. Notice, the same type of phenomenon takes place here, as the market stays range-bound leading into the announcement. Step 3: Set Entry OrdersNow that we’ve plotted support and resistance, based entirely around the price action taking place leading into an announcement – we can begin to set our game plan.The one thing we know, for certain, going into a news announcement is that there will probably be volatility. Predicting which direction that volatility may move is what makes trading news difficult. But, we don’t need to know the direction that volatility will push prices, as we can set entry orders on either side of support and resistance. The picture below will illustrate more fully: Step 4: Manage OrdersWhat if price comes down to open up our short position, and then moves directly back to prior resistance to trigger us in a long position?For traders in the United States, where FIFO (First in-First Out execution) is the standard, it may close out our short position at a loss. So going into the trade, you have to know how you would want this situation handled.If you would like the entry order to go long to be canceled as soon as the short position is entered (or vice versa), you can set an ‘OCO,’ or ‘One Cancels Other,’ order. That way, when the short position is entered into, the long entry gets canceled.Step 5: Add Stops/LimitsBecause we are anticipating volatility during a fast-moving environment, it behooves us to add proper risk management parameters in our trades.We have to keep in mind that The Number One Mistake that Forex Traders Make is risking too much to make too little. Despite lofty winning percentages, that type of inverse risk-reward ratio doesn’t allow for much long-term success. Directly from the Traits of Successful Traders series compiled by DailyFX, David Rodriguez states:“Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.”Because we have identified support and resistance previously when setting up our entry orders, we can look to place our stop on the other side of the range.So for the short entry looking for breaks of support – stops can be placed slightly above resistance.For the long entry hoping for breaks of resistance – stops can be placed slightly below support.And profit targets or limits should be, at a minimum 100% of that amount. If you are risking 50 pips on the trade idea, look for a minimum of 50 to make sure that is worth your time. Many traders will look for far more than the number of pips risked, seeking a much higher risk-to-reward ratio such as 1-to-3 (50 pips risked, 150 pips sought) or 1-to-5 (50 pips risked, 250 pips sought).
The market sentiment seems to flip flop back and forth on a daily basis between a “Risk On” and a “Risk Off”. Reading Risk Sentiment is as simple as following the direction of the US Stock Market.Each day, it seems a new rumor is produced and the stock markets shifts accordingly. The seesaw action can take a toll on a trader’s emotions.One way to gauge an underlying trend in the market is through the risk appetite of investors. The benefit of understanding the mood of the market is it allows you to align your trades in the direction of the market sentiment.When you see the stock market increase significantly, that is an indication that risk is “on”. A risk “on” environment is a mood of the market where investors feel good about the future prospects of the economy. Therefore, they take their capital and speculate in the stock market and high yielding instruments. This generally increases the value of the stock market and high yielding currencies which lately are the Australian Dollars (AUD) and New Zealand Dollars (NZD).At the same time, low yielding instruments tend to gain less on a relative basis or possibly even lose value. Low yielding currencies tend to be sold to fund the purchase of a higher yielding currency. This selling of a low yielding currency while simultaneously buying a high yielding currency is called the Carry Trade. So an effect of a risk “on” sentiment is an increase in the stock market and demand for high yielding currencies. As a result the Carry Trade strategy tends to perform well. (See additional resources below for more information on the Carry Trade Strategy.) In the chart above, since the AUD has historically been a high yielding currency, when the risk sentiment was ‘ON’ (Green shaded areas) the AUD/USD exchange rate was likely to rise and the carry trade strategy worked well. When the risk sentiment turned ‘OFF’ (pink shaded areas) the AUD/USD exchange rate tended to fall and the carry trade strategy would not have performed inconsistently.When you see the stock market fall like we did earlier this week that is labeled as risk “off” in the media. That means investors and traders are averse to risk…they want to avoid risk and risky instruments. Therefore, the investors pull their money out of stocks by selling their shares and sell their risky instruments like high yielding currencies. In a risk “off” market mood, the carry trade does not work. Although a trader is gaining a daily dividend, the movement of the exchange rates is so adverse that is wipes out any interest gains.In a risk “off” environment, traders are better served buying safe haven currencies like the US Dollar (USD) or Japanese Yen (JPY). (Until August 2011, the Swiss Franc was also considered a safe haven currency, but the recent intervention by the Swiss National Bank is trying to curtail the buying of the Franc.)The risk assets like the US Stock market and high yielding currencies like the AUD are near resistance levels. This may mean a return to risk aversion and a selloff in the stock market and AUD/USD.
The most important consideration in trading is the direction of the overall trend. This is especially true in Foreign Exchange as trends tend to stay in place longer than in any other market. The reason is that FX reflects actual money moving from one economy to another. Whether the flow of money from one economy to the other is caused by trade between the two economies or investments (capital flows), once those natural forces are in place, they can stay in place for extended periods of time. It is sort of like a fully loaded supertanker in the open ocean at full speed, even if you cut the power, it will continue to drift in that same direction for an extended period of time.How do we determine the overall trend? The first step is to just look at the chart. The strongest trends should be visible from across the room. A currency pair’s position in relation to the 200 Day Simple Moving Average is also a popular method. Support and Resistance lines can help the trader look for entries in the direction of the overall trend. On the Chart above, we can see that the USD/CHF is in a clear downtrend. The trend is visible from across the room. Prices are well beneath the 200 Day Simple Moving Average. If we connect the highs, we can see short term and long term resistance lines that can help us when looking for specific entries.However, there are other tools that can give us insight into the relative strength of the overall trend. The ADX or Average Directional Index is another tool a trader can add to their arsenal. The ADX is unique in that it measures the strength of the trend alone. In other words, if one pair is in a strong uptrend and another pair is in a strong downtrend they will both have high ADX readings.To apply the ADX indicator, right click on any Marketscope chart and select add indicator. ADX is located under the Trend Strength section. I would suggest using the standard default setting of 14. Here is a general guideline of how to read the ADX indicator:0-25 = Absent or weak trend25-50 Strong Trend50-75 Very Strong Trend75-100 Extremely Strong Trend Once the ADX is applied, it gives us the ability to see a little deeper into the true nature of the trend. For example, on the USD/CHF chart above, we can see that during the last short term down move, ADX was well above 60. However, during the recent decline, ADX only managed to move to the 50 area. While these both are still considered very strong trends, we can see that the first circle down move was stronger than the second circle down move. This means that while the trend is strong, it could be weakening in relative terms.
Margin accounts enable investors to use a small amount of money to deal in larger volumes. Using a margin account means that a trader essentially borrows funds to further increase the possibility of a higher return on investment. Margin accounts are used by investors with the leverage provided by the borrowed money; this is to make larger trading positions possible. These margin accounts are also used by currency traders dealing in the Forex market. Simply put, trading on margin means an investor is trading using short-term borrowed capital. By using a margin account, investors can arrange deals, as well as trade large amounts by using a small amount of capital. For example, if he wants to invest in positions amounting to $10,000 or even $100,000, he can do so using funds as little as $50 or $100. Starting Margin Accounts If an investor is interested in trading using a margin account, then he must sign up first with a regular broker, or he can use an online Forex discount broker. After choosing the broker he’ll be dealing with, that’s when the margin account will be set up. Before the trading process, money should first be deposited into the margin account. The amount will depend on the percentage agreed upon by the broker and the investor. The percentage will usually be around 1 or 2% if the currency units are about 100,000 or more. If the investor deposits 1% for trading, then the remaining 99% will be provided by the broker. The investor will not be charged interest on his borrowed amount, but if he does not close the position before the agreed delivery date, then the amount will be rolled over, and that’s when interest will be charged, depending on his position. Margin Calls Brokers of margin accounts use $1000 as security. If the investor he’s dealing with starts to face losses that reach $1000, the broker may initiate margin calls. The broker would either ask the investor to put more money into his account, or just to close the position completely to limit further losses. Some brokers tend to liquidate positions once a margin call is reached. Risks = Forex Using margin accounts will help you deal in larger amounts that your capital usually cannot support. Be sure to check all the conditions that come along with margin accounts; seek additional advice if needed. Forex carries a high degree of risk; however, profit will not be made if you’re not ready to deal with that risk.
This article will teach traders to build positions through multiple entries as opposed to putting on the entire position right up front. Below we will offer a mannerism in which traders can look to increase their position size ONLY if the trade is moving in their favor.While at dinner recently with a group of analysts and traders, the topic of scaling in to positions came up, and a vigorous debate ensued. After 30 minutes of lively conversation, something became very clear: Even amongst professionals, scaling in to a trade is a hotly debated topic.Risk management is a huge part of trading; and since one of the few factors in a trader’s control is the size of the lot that they are trading, the topic of ‘scaling in’ positions certainly warrants attention.This article will explain what scaling in is, how to do it, and in which circumstances traders may want to look to ‘scale in’ to positions.What is scaling in?Scaling in is the process of entering a trade in pieces as opposed to putting the entire position on in one entry.A trader that is looking to scale into a trade might break their total position size in to quarters, halves, or any other division that they feel might let them take a more calculated approach to putting on a trade.Let’s say, for instance, that a trader was looking to take EURUSD up to 1.3300, but was afraid of a near-term movement against them. As opposed to putting on the entire trade right up front, the trader can look to ‘scale in’ to the position. The picture below will illustrate further:Scaling in every 100 pips If the trader wants their total position size to be 100k, they can choose to open 25k every 100 pips that EURUSD moves up. So, our trader can open 20k to start the position when price is at 1.2900, and once moving up to 1.3000 our trader can put on another 25k. This has the added benefit of allowing the gains in the first part of the position to assist in financing the second.After price moves up to 1.3200, the trader takes on another 25k, and again at 1.3200. Once price hits 1.3300, the trader can close the position at a strong profit.Why Scale In?In the above example, let’s assume our traders stop loss was at 1.2800 when they opened their initial EURUSD position at 1.2900. But instead of our trader scaling in, let’s assume they opened the full lot at the outset of the trade, and this time, unfortunately - the trade didn’t work for them as EURUSD ran directly to their stop at 1.2900. This means our trader takes a loss of $1,000 (100 pips X $10 per pip (100k lot)).If our trader instead looked to enter using a scale-in approach the trader would have a much more moderate loss of $250 (100 pips X $2.50 per pip (25k lot)).And the trader using a scale-in approach could have used trade management to assist in the risk management of the trade if the position moves in their favor.Let’s say that EURUSD moved up to 1.3000 shortly after our trader entered, but then reversed moving down to 1.2800. Once again, if our trader had opened the entire position up front they are faced with a $1,000 loss. But to the trader that had scaled in, adding a second part of the lot at 1.3000 - the loss would, once again, be much smaller.If the trader’s stop remained at 1.2900 while scaling in, the total loss on the position would be $600 ($200 for the first 20k scale, and $400 for the second (200 pip loss X $2 per pip)).But why would the trader be required to leave their stop at 1.2900 after the pair had moved in their favor 100 pips on the initial part of the lot? Many traders will use this type of movement as an opportunity to move their stop up to break-even, in an effort to remove their initial risk on the trade.So, as EURUSD moved up to 1.3000, the trader can open the second part of the lot, and also adjust the stop on the first part of the lot to 1.3000 from 1.2900. That way, if price reverses against the trader, they can get stopped out at break-even on the first part of the lot, taking a loss on only the second part of the position.This process can be continually instituted on all 4 parts of the scale-in approach, so that by the time the trader enters their final 25k of the position at 1.3200, stops have been moved to break-even on the previous 3 parts of the position, and the trader only carries, at maximum - $200 of risk on the position (assuming a 100 pip stop on any of the 4 legs of the position at 25k per leg).When to scale in?Traders often prefer to scale in when they are looking for a large move in a currency pair, but want to use a more risk-sensitive approach than putting on the entire lot right up front. The downside to scaling in is that you won’t get the entire move for the entire position.Whereas in our above example, the trader would be able to look for 500 pips at $10 per pip, a trader scaling in would only be looking for 500 pips on the first part of the position, with the second part seeking 400 pips, the 3rd looking for 300 pips, the 4th seeking 200 pips, and the fifth and final part of the lot looking for 100 pips. But keep in mind, scaling in also allowed the trader to take on far less risk during the trade than had the entire position been initiated right up front.
Finding and trading long term movements is the primary goal of Forex trend traders. However once a trend is found, it can be difficult to time an exact entry point for market orders. Below we can see an example of the EURGBP currency pair trending 413 pips higher over the past three months. How can traders plan their potential market entries? Today we will identify opportunities to trade the EURGBP trend using the Rate of Change indicator. The Rate of Change indicator (ROC) can be extremely useful in pinpointing entries in the Forex market. Used as an oscillator, the ROC displays the amount a currency has changed over a designated period of time in reference to a zero line. A reading above the zero line indicates that the market price of the currency is greater than the start of the ROC period. A reading below is the opposite and contends that price is trading lower compared to the first ROC period. It is important to note that ROC is an unbound oscillator similar to CCIand that the higher or lower a reading is, the greater the previous change in price.Taking the trend into consideration should always be primary when using ROC. Below we can see the EURGBP daily trend heading towards higher highs, meaning trend traders will look to buy the EURGBP. These new buy positions can be found using one of the most popular ROC signals, a zero line crossover. Traders in an uptrend will wait for the market to retrace, allowing the ROC oscillator to move below the zero line. As momentum returns with the trend buy signal may occur when ROC closes back above the zero line. Once a trade has been entered using ROC, risk can be managed by setting stops under a trendline or other area of support while setting up a positive risk/reward ratio. Using the ROC indicator, my preference is to buy the EURGBP on a new zero line crossover near .8030. Stops should be set under trendline support near .8000. First targets can look for a minimum 60 pips profit for a 1:2 Risk/Reward ratio.Alternatives scenarios include the EURGBP breaking support and moving to lower lows.
Student’s Question:In the Range Trading Webinar, a multiple lot strategy is mentioned where one lot can be closed to lock in profit while the other lot can be left open for the potential of a greater gain. Could you show how that would work with a chart?Appreciate it.Instructor’s Response:Good question……Take a look at the chart below…… In a range we want to buy at support. So at the green support zone, we would buy two (multiple) lots and set our stop at the level of the yellow line below the lowest wick that penetrated support.Then, at approximately half way through the range, we would close out (sell) one of the lots, thereby locking in that amount of profit and move the stop to breakeven on the remaining lot.We would then let the remaining second lot trade up to resistance (the top of the range) and close it out at that level or just before. That would be the ideal scenario. However, if the trade does not make to the top of the range and simply retraces all the way back down to support, we would be stopped out with a breakeven stop…in other words, no loss/no gain. But we would still have the profit from closing out the first position at the halfway point.This strategy allows a trader to lock in at least a moderate level of profit (assuming of course that the trade has moved in their favor to a certain degree) even if the trade does not make it all the way to the desired target level or limit.
Most traders find themselves analyzing a currency pair for trading purposes on a single time frame. While that is all well and good, a much more in depth analysis can be accomplished by consulting several time frames on the same pair. Think of it as trying to “size up” a person based on meeting them on one occasion versus meeting them several times. You will have more insight regarding both the person and the trade if you view them from more than one vantage point.Since a currency pair is moving through multiple time frames at the same time, it is beneficial for a trader to examine several of those time frames to determine where the pair is in it “trading cycle” on each time frame. Ideally a trader will want to postpone their entry until momentum in each time frame is aligned…all bullish for an uptrend or all bearish for a downtrend.The entire process regarding trading in general and Multiple Timeframe Analysis (MTFA) specifically begins by identifying the trend the direction in which the market has been moving the currency pair in question over time. For our purposes here, the trend can be identified on the Daily chart.On the Daily chart of the GBPUSD pair below, we can see that the pair has been in an uptrend since mid-January. The pair has been trading above the 200 SMA (green line) and pulling away from it. Price has also been building higher highs and higher lows, and, at the time of this chart the GBP is strong and USD is weak. Also, when we look at Slow Stochastics, we can see that the indicator is giving us a very bullish look in that the two moving averages which comprise Stochastics are at a strong upward angle and the separation between them is increasing meaning momentum is becoming stronger.All this adds up to bullish (upside) momentum. This means that we only want to buy the pair when each time frame is reflecting that same bullish momentum.So now that we know the direction that we want to trade the pair, let’s check out the lower time frame charts to see how they line up with the Daily so we can “fine tune” our entry.In looking at the 4 hour chart we see that the uptrend is present here as well after a mild retracement. Stochastics reflects the pullback that took place but is still poised to crossover to the upside should bullish momentum ensue. We can now check out our one hour chart for our entry signal… The one hour chart provides us with our optimum entry signal. Notice how Stochastics has retraced, moved below 20 and then crossed over to the upside and continued to move above the 20 line.That crossover in the red circle would be our entry signal since that is the point when bullish momentum kicks back in on the one hour chart. When that bullish crossover takes place, the one hour time frame is now aligned with both the four hour and the Daily chart. They are all moving in the same direction at the same time and our Multiple Time Frame Analysis objective is accomplished.While MTFA will not guarantee a winning trade, by employing it in our analysis we are putting another trading “edge” in our favor and increasing the likelihood that we will have a successful trade.Bottom Line: To implement Multiple Time Frame Analysis, after we establish the trend, we want to check a couple of lower time frame charts and not enter the trade until they are in agreement with the longer time frame chart that we used to establish the trend. Once they are all in agreement, we enter the trade. It is like aligning the tumblers in a lock. Once that is accomplished, the lock will open freely.
One of the main driving forces for Forex traders is to escape the confines of their daily monotonous grind. We all fantasize about breaking free of conventional jobs and experiencing freedom while making money from our computers. But, does that mean you can just sit on your couch and casually press buy and sell buttons while watching Game of Thrones? Probably not. The reality is, you’re leaving a world that you’ve been raised to survive in and jumping into one that nothing has prepared you for. In Forex, a different set of rules exist. As a trader, we know in the back of our minds how important risk management is – not only for our account’s health, but our mental health as well. Get it wrong and you will take a nose drive financially and emotionally – get it right and the returns will naturally flow in. The approach of the average trader makes it very difficult for them to ever earn profits or sustain real growth from Forex trading. I talk with a lot of traders everyday, and there seems to be a few common mistakes that keep reoccurring. Today, I wanted to talk about risk management, and highlight some of foundations you might be building your money management ‘mentality’ from, which could be harming your chances of getting where you want to be. Don’t Be Money Goal Orientated Some of the most common questions go a little something like this: Can I make 10% per month? How many signals per week can I expect? How long will it take to double my account with $1000? All these questions really have a strong focus point – the urgency of making money really fast. The big issue I have with these kind of ‘goal orientated’ questions, is that you really can’t definitively answer them the way the trader ideally wants them answered. The market is a dynamic environment. One month could be absolutely pumping, and be ‘easy pickings’ with very lucrative trade signals. The following month could be a complete dead zone, where price consolidates, churns in low volatility, and doesn’t allow you to make any money off price movements. Don’t try to force rigid monetary, or money management goals on a fluctuating environment. How are you going to meet your criteria if the market flattens out? Picture this, you’re on the last week of the month: What are you going to do if you’re no where near close to completing your ‘monthly quota’? How are you going to respond to the self-inflicted pressure you’ve placed on yourself to reach your monetary goal? With a sense of urgency, you may feel the need to be more aggressive and start forcing trades out of the market, trades that you wouldn’t normally pull the trigger on – but you feel like you need to take decisive action under this pressure. The best way to remedy this is to not set any goals at all, instead concentrate on becoming an excellent trader who is a ‘master chart reader’ and manages risk very well. Just learn to embrace what the market offers you. Only take action when the market offers your system’s trade signal, you know the ones that provide an edge with the probabilities in your favor. So limit yourself to them. No signal = No trade. We don’t like admitting that we can’t predict or control what’s going to happen every single time we look at the charts. Sometimes the markets are just noisy and very hostile to trade in, and it is that simple. They become a black hole, you keep throwing money at it, and it gets consumed in consolidation. Some months you will do well, others you may not see any gains, or even suffer a loss. The last thing you want to do is define your success with absolute numbers leading into self-inflicted emotional pressure, and a negative self-evaluation if they are not met. The Forex markets are not really designed to send your financials into the stratosphere at breaking speeds. If they were, there would be a lot more Ferrari’s on the road. If you try to make money fast, you will be taking on incredibly elevated risk – and most people find themselves on the wrong side of it. Checkpoint It is not logical to give yourself ‘time based monetary goals’ in a fluctuating environment like Forex. You don’t know if the month is going to offer really high quality trade signals with good price response, or offer a whole month of terrible churning. Learn to work with what the market gives you, don’t force trades just because of an arbitrary number you’ve set for yourself or a ‘deadline’ that you feel you must meet for your ‘end of month performance evaluation’. Measuring Success in Pips If you stop by any public forum you will see traders measuring their trade outcome with pips, or ‘how many pips they are up or down’ for the day. It’s become the social standard for Forex traders, we’re all used to talking with each other in this fashion, using pips as a reference point for performance. But, the truth is it isn’t really the correct way for a serious trader to assess how well a trade went, or to evaluate risk. Pips are just a measurement of distance on the price chart – catching the move is great, but what is more important is how the trade was setup in order to catch the move. You see, a pip to me will have a different meaning to you, and a different meaning again to another trader. Pips are relative measurements and have relative values. If you ‘make 150 pips’, but your stop loss was set with a distance of 500 pips – it’s a negatively geared risk/reward trade that doesn’t give you any bragging rights. Above the example trade is illustrated – It becomes clear how suicidal this type of negative geared trade setup is. You’re risking more pips, in order to make a few. So you might think someone did already because they ‘won 100 pips’, but if they told you they risked 500 pips to get it, you might hold back the applause. Also you have to keep in mind a 100 pip move will look very different on say the EUR/USD compared to the EUR/AUD, and different again on Gold. If you seen the EUR/USD move 100 pips, it wouldn’t be uncommon to see the EUR/AUD move 250 pips in the same day. Gold can easily move 2000 pips in one session, and when you compare all the charts side by side, they all look very similar despite the drastic differences in pip movement. Even though both candlestick charts look the same – they move a drastically different amount of pips for day. Gold moves 10x as much as the EURUSD, but you wouldn’t pick that just by looking at the candlesticks. 100 pips on the EURUSD is not the same as 100 pips on Gold. Again, pips are a relative measurement and aren’t really comparable to one another across different markets. To throw things out even further – Pips also contain a ‘pip value’ that is unique to each trade. A pip value is determined by the: - lot sizing of your trade - the quote currency of the instrument you’re trading - the currency your account is in If your trading account has USD in it – then any pair that has XXX/USD will have a pip value of $10 per lot. If you where using AUD in your account instead, and trading a XXX/USD pair, then the pip value will be determined by the AUD/USD exchange rate and the lot sizing of the pair you’re trading. Let’s say GBP/USD was opened with 5 standard lots, and the trading account contained USD – then each pip would be worth $50. The trade would increment or decrement $50 for every pip gained or lost. A 100 pip move ‘in the money’ would put you ahead $5000. Compare the same situation to another person who takes the exact same trade but uses Australian Dollars instead – the ‘pip value’ will be different, and you need to make up this difference by adjusting your lot sizing to compensate. I won’t get into the math here, that’s all covered in our Price Action Course. So, when someone tells you that they won 200 pips on their trade – it really doesn’t mean much. If it was the EURUSD, the move was pretty decent, probably a good trade – but if the trade was on Gold, it is much less of an achievement. Remember, the real measure of a trades success is how much return on investment you were able to get out of it. The bottom line for trading is money – we’re not trading with magic beans here, we’re looking to make $$$. So, the final outcome of a trade’s performance needs be counted as return on investment. If you had to risk $1000 to make $100 – then you’re flirting with an account meltdown. If however, you risk $100 and make $1000 you’ve done well, banking 1000% ROI. These sort of trades can happen, I got about 900% ROI on this trade. We all know to fit into the social crowd, you’ve got to fall back to the classic way of talking about pip moves here and there, but when it comes recording your own data, don’t be a pip counter when measuring your success. Checkpoint Don’t use pips as a measure for your trading success – pips are relative and not comparable in a 1:1 fashion across different markets. Always asses your risk and measure performance in terms of ROI. Trades should offer positive return on investment, not ‘pips’. Trades risk should be assessed in dollar value, not pips. Under Capitalization How many accounts have you severely compromised or totally wiped out, because you just were not happy with the profits you were making, and decided to amp up your risk to over compensate? A serious Forex trader knows trading should be treated like a business. New businesses in general have a high failure rate, not just Forex ventures. Even the online startups or the classic brick and mortar stores have a poor success rate. One of the most common failures for a small business is under capitalization – not having enough money. The ironic thing with Forex funding is that you can ‘start up’ and operate with small amounts of money. Technically you can trade with initial investments from as little as $100! Having said that – if you want Forex to generate you $500 a week from a $100 start up, then you’re very under capitalized! Under capitalization affects a trader deeply on the psychological level. Under capitalized traders want the high income they desire, but don’t have the account power to make it happen so they are likely to risk more and over expose themselves. This can lead to a quick wipe out and a frustrated, angry trader. It’s best to have realistic goals, and save up the money that you really need to be able to generate the kind of returns you want to see. If you aren’t satisfied with what you’re achieving – you’re most likely going to ‘turn up the dial’ to try move the needle more quickly. Don’t be the one who overexposes their account to massive risk under desperation to hit ‘the big win’. This is a gambling mentality that provides the wrong frame work for a trader to develop their mindset. It’s better to start up with investment capital that you don’t have to worry about living off of, then you can just concentrate on growing it with good risk management. Once it reaches a certain threshold you’re happy with, you might make the decision to start pulling out money from time to time. Once you’ve gotten used to the occasional withdrawal and you’re still able to maintain account growth – then you can consider jumping over to full-time trading. Checkpoint Under capitalization is not a money problem, it’s more of a psychological issue. If you don’t have enough money to generate the income you desire, you’re very like to increase your risk to dangerous levels to compensate for your small account by over-leveraging, etc. Start up with investment money that you can grow without withdrawing from, and build from there. Cutting Trades Off Too Early One of the quickest ways to shoot yourself in the foot is to become the ‘Forex micro manger‘ – the trader who sits there making many fine tuned adjustments to their open positions. Sometimes you may feel like you need to sit there and babysit your trades and nurture them into profit, or cut them loose if there are any signs of negativity. You think you’re the caring mother, but what you’re really like is the crazy doctor performing ‘open trade surgery’. Stop ‘hacking’ into your trade and scarring your account. When a trader makes adjustments to their stop loss or moves a stop loss to break even – or does anything that is outside of the original trade’s plan, it will generally result in an unfavorable outcome. Don’t sit there and watch your floating P/L, every tick will boil up more and more emotions – especially when the trade ticks against you. By doing this, you are more likely to close a trade based off emotions even when there are no clear exit signals. Think about all the times you’ve tampered with your open trades and all it has managed to do is deprive you of potential profits that you would have otherwise collected. Price won’t move in the straight line you want it to. Instead it moves in wave like motions, or a zig-zag kind of pattern. It’s only logical to expect a trade to phase in and out of profit as the market gradually moves where it wants to go. This is the basic principles of swing trading. Do yourself a favor, set your trade up in a logical manner that you’re confident in and then just walk away. Close your trading terminal down and don’t even look at it until the next day. This ‘set, forget & collect’ system will do wonders for you, financially, mentally and emotionally. One of the best ‘hands off’ approaches is to use ‘end of day signals‘, then set and forget them. A lot of traders use this approach to work their trading into a busy life schedule. A trader could check the markets at a key time, like at the end of day New York close, place their trades and continue with their normal daily routine – like a day job, study, look after the kids, etc. When you take this hands off approach, it really removes the risk of making those deadly ‘mid-trade’ decisions – and you can catch some really strong market moves with little effort as a result. I am a big fan of keeping Forex simple by putting less effort into trading, setting trades up, and letting the markets do the rest of the work for me. It’s a good feeling when you only take 15 minutes of your day to analyze the market, set up a trade, and it turns out to produce 600% ROI. If you would like to learn how to put less effort into the markets, but reap more rewards – you should have a look at the War Room Membership which contains our Price Action Course. I have 3x money management models inside the course. One specializes in removing risk from the market very quickly, so you can have open trades open with zero risk to your capital, another is a more aggressive pyramid strategy, which is for experienced traders seeking a profit multiplication strategy. We also have ‘set, forget and collect’ trade builds, as many of the war room traders also have busy lives they need to work around. Set, forget, and collect trading works very well, but if you like to be a bit more active then we do have London breakout setups and the chat room is always buzzing with intra-day trading discussion. I hope you enjoyed today’s article, please leave a comment below and let me know if you’ve caught yourself in some of the behaviors we’ve discussed today. Good luck on the charts this week, talk soon.
Forex trading has come of age, as its popularity has soared over the past decade, but that does mean that we can turn a blind eye to the possibility of fraud, especially if it disguised within a cloak of bad business practices. The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) are the “policemen”, if you will, in this investment arena, providing regulatory oversight and administering a host of programs to protect and educate the average consumer/investor. Retail forex trading is now a safer environment, indeed, due to the tireless work of these two organizations, but, despite many arrests and convictions, there will always be a criminal element within our society that attempts to prey on the unwary. As any security professional will tell you, your first line of defense against these thieves is awareness. Once you understand how you could be possibly duped, then it is up to you to be skeptical and ever mindful of where danger may be lurking. Listen to your gut, then be prepared to walk the other way. A vast majority of the participants in the forex industry, however, are legitimate, but the Internet has lulled us into a false sense of security when dealing with the “unseen” business partner on the web, allowing our trust to be obtained rather easily. When you add greed to the equation, the fraudster can ply his various schemes with ease. Your primary focus will be on your broker, but you must also be wary of fund managers, software and signal providers, and just about anyone with a clever marketing pitch that promises high rewards with very little risk. Here are a few tips to guide your protective efforts: - Overseas Forex Brokers: There are plenty of them, and many got their start in London, the financial center of foreign exchange. Look for longevity, as a rule, and validate that they are in compliance with a good regulatory agency. Rules are not as strict as in the U.S., and a few brokers may cross the line occasionally. A safe broker will always segregate your deposits in a Tier-1 bank, far away from their operating offices. The favored fraud scheme is to promise large sign-up bonuses to get your initial deposit, but when it comes time to withdraw, you run may into a stonewall. Just remember that trying to exert your legal rights in a foreign jurisdiction is fraught with peril. - Domestic Forex Brokers: Be careful here, too. Check with the CFTC for registration credentials and that they maintain the proper level of net capital. Experience counts, but review testimonials to validate claims made. - High-Yield Investment Programs (HYIP): Beware any program that promises an easy path to riches or high returns with little risk. This tip applies to both brokers and all marketing types that wish for you to buy their management expertise, trading robot, system, or signal service. If it were so easy, why aren’t they off making millions instead of pressuring you for a few bucks? If it sounds too good to be true, it most definitely is in the forex world. - Re-quotes, Slippage, and Stop-Loss Hunting: Market makers, as opposed to ECN/STP brokers, can be tempted to manipulate the bid/ask spreads offered. Good brokers do not do this, but if you notice a high prevalence of questionable executions of your orders, then it may be time for a change. These are a few tips to help get you started, but the CTC website can help broaden your awareness, the key to fraud prevention.
Entering the world of forex trading is both easy and hard. It is easy in the way that anyone can become a forex trader. There are no college degrees needed, no extra special training required, and no licensing requirements. But it is also hard in that your purpose for trading is to earn profits but it is something that can be hard to achieve especially if you’re quite new to forex trading and still learning the ropes. More often than not the average new forex trader will incur losses during his first few months of trading. While losses are a recognized risk when trading, losing all of your investment is a painful experience and can discourage the most ardent of traders. One of the best ways to minimize losses when starting out in currency trading is to go into copy trading. In this type of trading, the new trader can get to copy the trades of other more experience traders. Copy trading has many advantages. Among them are: - It allows a new trader to trade with the same level of efficiency as a veteran trader. It takes a lot of time for a new trader to learn all of the intricacies and technicalities of trading. Copying the trades of an experience trader allows him to trade just like a veteran. - Copy trading or mirror trading is a simple process. In fact, many trading platforms have made it easy for the trader to do it by enabling this option in just a few steps. No complicated steps are needed to activate it. After the process has been setup, all one has to do is to select a trader that will be followed and the trading platform will do the rest. - There is no immediate cash out to try copy trading. There are options open that will allow for a trader to be followed for free on a trial basis. Only when the new trader has been satisfied with what he is seeing and in the results can he decide to shell out money and pay for the trading signals. - Aside from the previously mentioned advantage of being able to trade like a veteran trader and profiting at the same level as a veteran, the risk to the new trader remains relatively minimal. The reason for this is that the trading volumes are set based on the amount of money that is in the account of the trader. There is no chance that the new trader will get wiped out following the same volumes of the veteran trader. - Finally, using copy trading shortens the amount of time a trader goes from novice to experienced. The constant interaction with other traders, studying trading patterns and mirroring their moves and strategies allows the new trader to learn a lot about currency trading because he is learning from experience. Some people have quite accurately called it a form of social trading. Copy trading allows the new trader to learn by example, and this is probably the biggest advantage of this form of trading.
What is Slippage?Slippage is when an order is filled at a price that is different than the requested price.Most conversations I hear regarding slippage tend to speak about it in a negative light, when in reality, this normal market occurrence can be a good thing for traders. As the video above mentions, when orders are sent out to be filled by a liquidity provider or bank, they are filled at the best available price whether the fill price is above or below the price requested. To put this concept into a numerical example, let’s say we attempt to buy the EURUSD at the current market rate of 1.3650. When the order is filled, there are 3 potential outcomes.Outcome #1 (No Slippage)The order is submitted and the best available buy price being offered is 1.3650 (exactly what we requested), the order is then filled at 1.3650.Outcome #2 (Positive Slippage)The order is submitted and the best available buy price being offered suddenly changes to 1.3640 (10 pips below our requested price) while our order is executing, the order is then filled at this better price of 1.3640.Outcome #3 (Negative Slippage)The order is submitted and the best available buy price being offered suddenly changes to 1.3660 (10 pips above our requested price)while our order is executing, the order is then filled at this price of 1.3660.Anytime we are filled at a different price, it is called slippage.What Causes Slippage?So how does this happen? Why can’t our orders be filled at our requested price? It all goes back to the basics of what a true market consists of, buyers and sellers. For every buyer with a specific price and trade size, there must be an equal amount of sellers at the same price and trade size. If there is ever an imbalance of buyers or sellers, this is what causes prices to move up or down.So as traders, if we go in and attempt to buy 100k EURUSD at 1.3650, but there are not enough people (or no one at all) willing to sell their Euros for 1.3650 USD, our order will need to look at the next best available price(s) and buy those Euros at a higher price, giving us negative slippage. But of course sometimes the opposite could happen. If there were a flood of people wanting to sell their Euros at the time our order was submitted, we might be able to find a seller willing to sell them at a price lower than what we had initially requested, giving us positive slippage.Good trading!
One of the most widely used indicators is Stochastics. A question that is oftentimes asked in our live sessions is what is the difference between Slow and Fast Stochastics.Below is a Daily chart of the USDCHF with both a Slow and Fast Stochastic indicator on it…Slow Stochastics above and Fast Stochastics below. In principle, the trading rules are the same...a cross above 80 with a close below 80 indicates that momentum on the pair is bearish...to the downside. Conversely, a cross below 20 with a close above 20 indicates bullish momentum.We would advocate the use of the Slow Stochastics from the standpoint that it is more "readable" since it does not react as dramatically to each price action movement, be it major or minor, that the pair may have.As can be seen on the chart below, Fast Stochastics is much more sensitive to price action and, as such, is often used by shorter term traders.Keep in mind that oscillators such as Stochastics will not “predict” trends. Rather they indicate momentum based on price action.A trader will identify the trend on the Daily chart and then use an oscillator like Stochastics to time their entry in the direction of the trend on the Daily chart when momentum is shown as being in that direction.So if the daily trend on a pair is bearish as it is on this USDCHF pair, a trader using Stochastics to enter the trade, would enter a short position when Stochastics had been above 80 and then closed below 80.
If you are cooking something and you check on it and you see that it is “overdone”, what is your immediate reaction? Exactly…you take the dish out of the oven. Remove it from what caused its current overdone state and the sooner the better.What if your car’s engine is “overheated”? Same deal…you do what it takes to get the engine cooled down. Immediately stop doing what caused the engine to become overheated in the first place.Given these natural reactions, it is easy to see why the initial and almost immediate reaction by many newer traders to an overbought or oversold trading scenario is to do the opposite in that case as well.They reason that since many buy (long) orders moved price up and pushed the indicator into overbought territory, we must do the opposite and take a short (sell) position. Conversely, if many sell orders caused price to drop and the indicator to move into oversold territory we must begin to take long positions. It’s almost as though they expect price to snap back like a rubber band when it reaches these overextended zones.Well…what is the proper reaction for casseroles and car engines is not necessarily the right reaction when trading.When an indicator goes into the Overbought/Oversold areas, remember that it can remain there for quite some time. Just because the RSI or Slow Stochastics indicator reads Overbought for example, does not mean that price action on the pair is like a tightly compressed spring that is going to immediately snap back toward the Oversold area.Let’s take a look at the Daily chart of the NZDJPY below for an example on this… Notice on this chart that the first time Slow Stochastics went above 80 into the Overbought area, price continued to go up for another 780+ pips and Stochastics stayed overbought the entire time. Clearly a trader who went short when it first went into Overbought territory would have missed out on a great move. They also would have gotten stopped out of their short position in fairly short order.To see an example of where price retreats when Slow Stochastics goes into Overbought territory we need to look no further than the area labeled “A” on the chart. In this case the candlesticks around “A”, dojis, spinning tops, shooting star and a hammer, indicate the potential for a pullback.The point to be made is that either scenario can play out so don’t have a knee jerk reaction to the Overbought and Oversold areas of an indicator.Remember…Only take entry signals from an indicator that is in the direction of the longer term trend.For example, if the trend has been strong and prolonged to the upside, it stands to reason that the indicator will be in Overbought territory since it reflects the bullish push of price action. To take a short position at that point would be to trade against the trend and that would be introducing more risk into the trade.
Trade size is an important aspect of every trading plan. Traders quickly forget this to their own peril. Many traders are not reaching their trading goals because their trade size was too large for their account equity which leads to reluctance of letting go of losing trades.This article will present an easy way to determine what trade size is appropriate for your account.When trade size gets out of hand and too large, all the analysis in the world is worthless. The risk can quickly outweigh the benefits. Because of this, having a formula to manage your risk is of extreme value for your trading career. If you’re not a math major, no worries at all. A simple formula is provided at the end of the article for you apply moving forward.Here is a visualization of the risk you take based on your trade size from Mark Douglas’ Trading in the Zone. To borrow his analogy on trade size, imagine there is a large valley much like the Grand Canyon that you are about to cross. The width of the bridge you will cross is directly related to the number of lots you will trade. As you can imagine, if you’re about to cross the Grand Canyon on a 10 lane highway bridge, you’re not going to fear walking across. You know the potential of pain is small because the bridge below you is steady. Now, the larger trade size you open in relation to your account, the smaller the road below you shrinks. Using the utmost leverage available, you’re essentially walking a tight rope. As you can imagine, the smallest fluctuation in the market can throw you over board.Now, let’s walk through the application in finding the right trade size for you.*Examples below will be filtered through the eyes of a $10,000 account with 2% max trade risk rule to determine trade size.Here are the two aspects you’ll need to answer before determining appropriate trade size:* Percent risk you’re willing to accept per trade –We recommend less than 2%* Where do you want your stop in terms of pipsPercent risk you’re willing to acceptThis will have nothing to do with the market and everything to do with your account balance. You determine your risk, not the market. Your money management system will tell you where to get out of every trade. We recommend you limit your risk per trade to less than 2% of your account equity. Noting this before you enter a trade is being proactive and will prevent you from increasing your exposure based on how good a set up looks to you. All good traders look to limit risk and most poor traders neglect this.Many good traders will keep a trade journal that will have their current account equity updated and how much they should risk on any one trade. Our $10,000 account example with the 2% max trade risk tells us that before we look at the charts, we are only willing to lose $200 on a single trade. For most traders, this relieves stress by itself.Converting that risk into Trade SizeNow that we know how much is at risk, we next decide the best trade size for us based on our pip based exit. Here is a simple formula to use to determine your trade size:Proper Trade Size Formula:Your three inputs will be your account balance, what percentage you want to risk, and the number of pips you are willing to allow the market to go against you before you exit the trade. Account balanceX% risked / stop loss distance in pips = maximum value per pip Using our example above and plugging into the formula, here are the three inputs.Account balance = $10,000Percent Risk = 2%Stop loss distance = 100 pipsPlugging them into the formula:$10,000 X 2% / 100 pips = $2 per pipIf you want a larger trade size, we recommend you find another trade that better suits your account size or add more funds to your account.Why do we advise limiting your trade size?DailyFX recently went through 12 million live trades to find the common traits of our successful clients. Leverage was a main focus because many traders know what amount of leverage is available but few knew what was amount was best. Many new and inexperienced traders over expose themselves and when the market went against them, a large percentage of their account dissipated. Successful traders in our study consistently stayed under 10 X effective leverage and were often closer to 5 times effective leverage.Here is a graph from the study to show you profitability percentage and it’s correlation to lower effective leverage. We encourage you to always define risk specific to your account and limit your leverage to assist in the longevity and success of your trading business.
There is a phenomenon that almost every trader struggles with at some point in their career. For some, it even happens before they ever get started. For me, it was most prominent in my career when I was making the switch to FX from trading stocks and options.And that is the ever-present, but occasionally more prominent fear of failure.Fear can stupefy traders into in-action; allowing their trading accounts to sit idly while their dreams dissipate into the realities of indecision. Fear can affect us individually, and it can become a pervasive theme throughout markets, wreaking havoc across the globe; 2008 is evidence how poisonous this emotion can become. In this article, I’m going to share with you some of the best advice that I’ve ever received on the topic of fear; a short, sweet axiom that I can utter to myself whenever I have a question about whether or not I should take that trade that instantly dissolves any fear that I may have.Before we get to the quote, there is an important question that every trader needs to have the answer to at all points throughout their trading day. The answer to this question will add perspective to our fear; it will show us how insignificant this emotion can be and even more importantly – it will encourage us to battle through difficulties to get to the promise land. And that question is:Why do you trade?There isn’t one right answer to this question… The answer can be different for all of us.Some of us just want to make a little extra money so that we can spend more time with our families, while others have plans and hopes for full-on global financial domination. The answer to this question is your driver. This is what can make the tough times easy.Whatever the answer is, it needs to be important to you.This is your goal. This should be posted on the top line of your trading plan as a reminder of what you hope to get out of all your hard work. It’s of vital importance to keep this in mind, because when we are trading, there is a litany of factors to stay on top of. Our primary objective can easily become obscured, which can lead to paralysis by analysis.One Trade Won’t Make Your Career, but It Sure Can Break itThis is how the conversation came about with my friend in which I ultimately found the error of my ways. The friend, also a former stock trader, had moved into the FX market earlier than I had. He had adapted his game before FX was the prominent asset class it is today. He has since ‘retired’ and now spends his days on the sunny shores of San Diego or Hawaii, wherever his mood takes him. He still trades FX, but primarily for fun as he doesn’t really need to earn another dollar for the rest of his life.Coming from stocks and options, I was a ‘patient’ trader. I would find a stock I liked and a reason I liked it (usually a fundamental story of some kind such as a biotech company with a product up for FDA approval), and I would then watch the technicals to find a comfortable way to play it. The inclusion of options, essentially, gave me the opportunity to ‘leverage’ my ideas. Trading in gaps was a near necessity if I wanted to catch the bigger moves, and because of this I comfortably developed myself as a swing-trader.The FX Market can be intimidatingEven after trading in stocks for over nine years at the time I had moved up to FX, the speed of the Forex market was impressive. The fact that the market never closes was only partly as interesting to me as the amount of liquidity behind each of the major currency pairs. The availability of 400 times leverage (which has since been lowered to a maximum of 50 times leverage per Dodd-Frank in the United States), made these moves seem even more threatening.Just as I had done with stocks, I was patient. I waited. I looked for an opportunity, a theme with which I could look to begin to build a position.And when I finally found that theme, my first entry hit its stop.I attempted to re-enter, thinking that my analysis was strong, and I now had an opportunity to enter at a better price. That got stopped out as well.I worked through this uncomfortable, awkward period of trading a stock-traders strategy in a Forex traders market, and didn’t see results resembling anything close to what I had put up trading stocks. For the first time in a long time, I was looking at a negative profit line and I began to question whether I really wanted to adapt to the FX market, or whether I wanted to go back to trading stocks and options.A trader’s psychology is of the upmost importance, I knew that then as I know it now, and I realized that I was starting to dig myself into the pit of despair that traders will occasionally find themselves languishing within.So, I talked to my friend. And he started the conversation by asking me the very same question that I began this article with: “Why do you trade?”I gave him my answer, and he then asked me –“Do you honestly think you are going to achieve all of that with one trade?”To which I replied, ‘well, no but….’ At which point he promptly cut me off.He then went on ‘a lot of people like to trade because of the feeling of being right [which was not the reason I had provided him.] It’s not all that different than the reason people will sit in front of a slot machine throwing away their children’s inheritance one quarter at a time. They know that the odds are against them, they just want to feel that emotion of winning. It's an easy trap for human beings, who innately desire to be right, to fall into.’He continued: “with your goal, you are going to need a heck of a lot more than one trade, aren’t you?”I looked at him like the wizard that he had just become to me, and nodded in agreement.He went on to say, “while you may need a lot more than one trade to get what you want, any one of those trades can easily drain your account, and end your game pretty quickly. So James, the answer is simple: You need to learn to be wrong more often because any trade you take is going to be but one of a thousand insignificant little trades in your career.”One of a thousand insignificant, little tradesThat line hit me like a freight train carrying a ton of bricks. It showed me where my perspective had become skewed when moving from trading stocks to FX; the fact that all of this additional leverage I now had at my disposal was not necessarily something that I had to use. It merely gave me more flexibility, which – like freedom, is best in abundance so that we can choose how or how not to impact our own fate.More importantly that that – this phrase puts into perspective the fact that any one trading idea you have is, at its very best, a hypothesis. Nobody knows for certain what price will do next. There is risk in every single trade that we place, and every single idea that we have.Counter Fear with PlanningThe best way to counter fear in the FX market is planning. After the conversation with my friend, I built risk parameters into my trading plan that will not allow me to lose more than 5% in any given day, or more than 1% on any given trade idea. This is what allows me to look at every trade I place as insignificant in the grand scope of my overall trading career; because the most that it can hurt me is 1/100th of my account value.Some ideas work out, others don’t. But worse-case scenario, I come back to the game tomorrow with at least 95% of today’s account equity, and a very real chance to move one step closer to my goal.This part of my plan has truly made each trade I place but one of thousands of insignificant, little trades. There is a big reason that this is important advice. Because if we are ever to attain our goals, there is but one way to do it: By placing lots, and lots of trades. Fear is the enemy in that paradigm, and sitting on the sidelines is only wasting time. Even if it’s a surreal market condition, trade it on a demo account until you have a strategy that you feel is consistent enough to put real money to work.Because the only thing you will never have the opportunity to gain more of in this world – is time. Time is the only asset available to you in a finite amount. You can make more money, you can buy more stuff, and you can get more of anything else. But you cannot get more time.Trading gives us the opportunity to make the most of this precious time. Use it wisely.
Trading signals are the perfect solution for the traders who are new to the trading world or do not possess enough self-confidence to trade on their own. By being a subscriber to trading signals, one can assure that they are a part of the active trading process and are making profits as much as expert traders. There are many Advantages of Trading Signals for Subscriber. These include: - The trading signals can make even a new trader capable of trading like an expert. The novice trader who is new to trading will obviously not know the tips and tricks of the trading world. Thus by being able to copy the moves of a professional trader, they will be able to have a look at the efficiency of the experienced trader and also be able to trade in a similar manner. - Another advantage is that this form of trading is extremely simple and does not require an individual to even be an expert in the usage of any particular trading platform. The trading signal subscription can be completed in a few clicks. The subscriber to-be just needs to have a trading account with their desired broker. Then the trading client is to be installed and the wanted trader to be followed be selected. The software takes care of everything that needs to be done next. - The biggest advantage of trading signals for subscriber is that one is able to attain the profits of an experienced trader without devoting the time or energy to acquire that amount of knowledge. Moreover, having huge profits equivalent to an experienced trader does not come at the cost of similar risk. It is made sure that the trading is done within the price range of the subscriber by assessing the amount present in the account of the subscriber. - Since example is always better than precept, by looking and following the moves of an experienced trader, one is able to grasp the tricks and rules of trading quickly and easily. The trading pattern of a professional trader when followed is sure to give more profit in a shorter time and also teaches the subscriber to use similar methods. - Apart from the aforementioned advantages, a to-be subscriber is also given the option of following a trader for free for a certain period of time. Only when the person is completely sure with the account monitoring of the trader who is to be followed can one opt to be become a subscriber to the trading signals and avail its benefits. Thus there are a lot of advantages of trading signals for subscribers. This is a quick method for one to learn to trade well and also a good method to make sure that their account is not left idle till the point one gets the confidence or knowledge to trade on their own. Also, by looking at the trading pattern of other traders, one will be able to get a grip on the trading process and be able to trade wel on their own too.
You know that the right trend can make your month or year as a trader. Who can blame traders for wanting to hunt for trends? We do not and we certainly recommend you take advantage of clear trends like the EUR/NZD below when trends presents themself. However, as a trader, you must be familiar with how to identify a false breakout over a legitimate break out. Many traders try and force trend entries when a breakout occurs even though the market has no intention of honoring that breakout. Any trend follower is familiar with the feeling of entering into a bad trade when they prematurely entered into a trade. It feels like a trap. It’s time that you come to grips and learn how to tell if a breakout is real or if you should fade the breakout and take advantage of the great risk: reward ratios that are available when you notice a false breakout.This article will help you to take advantage of false breakouts that experienced traders love to trade and that trap new traders.Here are the tools we’ll use to protect ourselves against getting trapped into a false breakout.1_ Average True Range (14 periods)2_ Support & Resistance3_ Candlestick AnalysisHere’s what it will look like on your screen: Average True Range (ATR)The average true range indicator allows you to see the volatility behind the pair you’re trading by measuring daily moves. You can use ATR to test the validity of a breakout when price pierces support or resistance. The reason we use the ATR is to determine the amount of pips the range must be broken by before we enter into the trend or decide to fade the breakout. As an example, the ATR (14) for AUD/USD is 68.0 pips as of today’s reading. The ATR (14) for GBPJPY is 114.6 pips. This tells you that the GBPJPY is 2X more volatile in pip terms than AUDUSD. We would look for a breakout from a range above 68 pips and 114.6 pips respectively before we enter with the new trend. If this doesn’t occur we look to take a high probability trade back into the newly expanded range with a strong money management system.Rule One of trading false breakouts is that if price doesn’t break the range by the ATR, the breakout is false and we should fade the overextended move. If the pair pushes through by more than the ATR then we are looking at a legitimate trend to follow that should now be on our watch list.Support & ResistanceAs time goes by, traders focus more on support and resistance for one reason. The market focuses on support and resistance. You should too when determining a new trend or an expanded range. Support is seen as the floor that price rests on before shooting back up. Resistance is the ceiling that price reaches before revising back to the price range. If a new trend breaks out to the upside, then what was resistance now becomes support.Support and resistance do not require an indicator but an eye to look at the chart and see when buyers stop buying in an uptrend or sellers stop selling in a down trend. We also recommend you treat them like a flexible fence as opposed to a glass floor or ceiling that will be shattered if pierced. How this applies to false breakout trade: If you recognize a false breakout below support, you can enter a buy entry near support (range low) and you can adjust trade size so that should the market reverse and move back below support to hit your stop, no more than 2-5% is risked on the trade. Finding respected levels of support and resistance is very helpful in finding high-probability trades.Many professional traders feel that trading ranges is a higher probability set up and that because following trends is tempting but has a low probability play out, they’re better off sticking to ranges.Candlestick Analysis Few methods are as valid and time tested as Candlestick analysis. Candlesticks allow you to see real-time market sentiment so that you can identify tipping points as they’re developing. Sentiment is important for you to know so you can see when buyers are heading for the exits when a supposed upside breakout occurs. Similarly, you can look at candles around support to see if sellers have lost confidence and are not willing to hold on to their trade. This allows you to take advantage of the false breakouts in real-time.The two signals we see here are the Bullish & Bearish Engulfing signals which are two very strong reversal signals at very important points on the chart. As a side note, candlestick patterns take on a critical importance around support and resistance or against major pivot levels or moving average levels because this is where sentiment of traders are key.Knowledge of false breakouts and how to trade them appropriately with ATR, Support and resistance, and Candlestick analysis can add a lot to your trading. Remember to always be patient and when you see price alerting you to a new trend or a false breakout, you will now how to approach it with confidence.Happy Trading.
The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. Are the markets really so enigmatic that few can profit or are there a series of common mistakes that befall many traders? The answer is the latter.The good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid risk management techniques.Today, we will discuss 2 key aspects of risk management.1_ Risk a little to make a lot – use at least a 1:2 risk to reward ratio2_ Risk a small portion of your account – risk less than 5% of your account on all open tradesUse at least a 1:2 Risk to Reward RatioLast fall, DailyFX published their Traits of Successful Traders. We went through extensive research on the behaviors why most traders lose. Most traders lose money simply because they do not understand or adhere to good money management practices. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money (see chart above).To resolve this paradox, establish your risk and reward parameters ahead of time. Insist on taking trades that offer at least a 1:2 risk to reward ratio. This means that for every pip of risk you are taking in the trade, seek out at least 2 pips of potential reward. By doing so, you are relieving the pressure from yourself to have to be right in the trade.As James Stanley eloquently points out in his trading plan, you can be right only 50% of the time when using a 1:2 risk to reward ratio to give yourself a shot at consistent returns. Risk no more than 5%However, there is another element to consistent risk management. How much of your account are you risking?Too often, I hear from clients via twitter or during our live webinars that they are risking a small amount, just 20 pips on the trade. However, the true risk on the trade is how much of your account balance are you exposing?Is it possible that Trader A can have a stop loss set at 10 pips and risk more than Trader B with a 50 pip stop loss? Yes! As you can see from the above example, the trade size (and resulting cost per pip) multiplied by your stop distance determines your risk on the trade.In our courses, we suggest risking no more than 5% of your account balance on all open trades. That way, if you are wrong (and we established from the first key point that it is ok to be wrong 50% of the time), then you still have over 95% of your account balance available to trade tomorrow.The formula to calculate risk on the trade is: Cost per pip X pip’s risked = Account Balance Risked For example, if I’m trading the AUDJPY with a current pip cost of $1.25 per 10k position, then a trade with 50 pips of risk is $62.50 risked in my account. [ $1.25 X 50 pips = $62.50 ]
The first time I ever looked at a price chart, it was intimidating. There were boxes, lines, zigs and zags and I had no idea how to begin deciphering the information displayed in front of me. But once I got a grasp of the basics, charts slowly grew to become an integral step in my analysis process. Charts tell us a story about how price has moved in the past with the hope that we can use it as guidance for the future. My focus in this article will be unmasking popular chart types, explaining how time frames work, and the difference between bid vs. ask prices.Chart TypesThere are 3 types of price charts that you are likely to experience in your trading career: Candlestick, Bar, and Line charts. They are all created using the same price data, but display that data in different ways. To explain, the image below displays all 3 types of charts using the same set of price data.Learn Forex: Three Most Popular Chart Types Candlestick ChartsThis chart type displays the opening, high, low, and closing (OHLC) prices for each period of time designated for the candle. The “body” of each candlestick represents the opening and closing prices while the candle “wicks” display the high and low prices for each period. The color of each candle depends on the applied settings. But in the image above, every candle that is blue means the price closed higher than where it opened (often called a bullish candle), and every candle that is red means the price closed lower than where it opened (often called a bearish candle). This is by far the most popular chart for trading forex.Bar ChartsThis chart type displays the opening, high, low, and closing (OHLC) prices for each period of time designated for the bar. The vertical line is created by the high and low price for the bar. The dash to the left of the bar was the opening price and the dash to the right was the closing price. You can see the similarities between this chart type and a candlestick chart when they are sitting side by side.Line ChartsThis chart type usually only displays closing prices and nothing else. You will see this type of chart used on television, newspapers and many web articles because it is simple and easy to digest. It gives you the less information than candlestick or bar charts, but is much easier on the eyes with a quick glance.Time FramesA chart's time frame describes the amount of time it takes to complete a single candle. If you select a 1-hour chart, that means a new candle is created every hour on the hour. If you create a daily chart, that means a new candle is created each day (at 5pm ET). If you select a 1-minute chart, that means a new candle is created every minute. Etc.Forex traders looking to decide what time frame to use can read about How Chart Time Frames Affect Forex Analysis.Bid vs. AskThe last piece of our Forex chart is decided by whether we want to look at Bid prices or Ask prices. The side we choose will depend on whether we are wanting to place a sell order or a buy order. Remember, there are two prices for every Forex pair.The bid price is where we can open a short(sell) position or close out a long(buy) position.The ask price is where we can open a long(buy) position or close out a short(sell) position.To be clear, we are free to place any type of order that we want no matter what chart we are looking at, but if it appears like our trade opened at a strange price or we were stopped out early on a trade when referencing the price chart, this is most likely due to us looking at the wrong side of the price.Are you ready to access real-time Forex charts on a fully loaded trading platform for free? Try out a FREE Demo account.Good trading!