Large Stop-Loss Forex Strategies
Novices need to acquire trading experience in order to be able to select good stop-losses and profit targets for all the positions that they open. These are important activities to master because Forex has such an unpredictable and volatile nature that it is easily stop-out positions protected by small stops only i.e. up to 50 pips. The following chart taken from a forex trading platform shows such a trading setup.
In the above diagram, price is trading a tight range before it breakouts to the downside. A new short is opened protected by a stop-loss positioned about 50 pips above the old resistance level. Unfortunately, in this case a large bull spike stopped out the short forcing a loss.
Those people that are involved in options trading, CFDs, binaries and other derivatives are also advised to develop trading strategies that have good risk-to-reward and win-to-loss ratios. However, these techniques also take time to master. Do novices have any plausible shortcuts available to them? Yes, they do because a trading strategy has been designed to overcome these problems.
How does a Large Stop-loss Strategy work?
Although this strategy looks strange as its main concepts appear to contradict many of the recommended principles associated with Forex Trading, many traders have achieved success using them. The basic principle is that you trade using a very large stop, in the order of 500 pips, while plundering profits of 50 pips or so per position.
This idea could even be consider as a macro version of scalping strategies. Again, the central idea behind scalping strategies is to nip in and out of positions quickly which will minimize your risk exposure as well as capturing small profits of 5 to 10 pips. With regards to large stop-loss strategies, you will appreciate that a large stop-loss of 500 pips is difficult for price to stop-out. This concept therefore provides a basis for beginners to trade because they no longer need to develop the skills to protect normal positions using smaller stop-losses.
The risk-to-reward ratio of 1 to 10 of this type of trading strategy is not very good. However, the central point is that the effort required by the price to stop-out a 500 pip stop is exponentially higher than that a 50 pip one. So, the idea is to attain an impressive win-to-loss ratio which will then counter a weak reward-to-risk ratio. For example, if you could record 6 wins of 100 pips against 1 loss of 540 pips, then you would register a profit of 60 pips.
Overcoming Potential Problems
However, although this theory appears plausible, you must perform this strategy accurately. This is because your trades could become stranded in negative territory. Price could simply remain within this area for extensive time periods. Should such a development then you would not be able to record any new profits for some considerable time.
To resolve this issue, you need to deploy a well-proven money management strategy. For example, you should just wager between 0.1% and 0.2% of your total equity per trade. You will provide optimum protection for your equity by doing so. You will also be able to permit a few trades to become isolated until they record profit status. Also by risking such minimum amounts, you will be able to initiate a quantity of positions concurrently. The following chart illustrates this problem.
The above chart shows that a new short position was opened after the breakout identified towards the bottom left. A large stop-loss was used and positioned above the blue line at the top of the chart. Unfortunately, price reversed direction leaving the position in limbo before it finally return to profit months later.
An important benefit of this trading strategy is that it permits the less experienced trader more room to make errors which they would not otherwise be able to if they persistently instigated trades protected by smaller stop-losses. Some newbies enquiry why they cannot wager a greater percentage of their account balance e.g. 10%. They believe that this action should be possible because they are utilizing such a large stop-loss.
However, this is definitely not a good idea if you acknowledge that 10 consecutive losses risking 10% per trade would lose in excess of 66% of your account balance. In comparison, by risking just 2% per position than a series of 10 successive losses would lose about 17% of your account balance. Clearly, the latter produces significantly better protection.
Although the concepts of large stop-loss strategies appear strange at first, they can be molded into effective tools possessing many benefits especially for novice traders.
What is Arbitrage Strategy: In foreign investments, the strategy identified by the name arbitrage helps the investor to clasp the profit by simultaneously selling and buying an identical asset, currency, commodity or security across two distinct markets. This strategy helps the investor to gain benefit on the varying prices for the same said security across the two different fields represented on each portion of the trade. Highlighter -The arbitrage takes place when an asset is purchased from one market and concurrently sold on a higher price in another financial market. - The difference (temporary) in the amount of the same security in two different financial markets leads the investor to lock in profit. - Investor often tries to utilise the arbitrage opportunity by purchasing a share in the foreign exchange where the stock cost has not been set for the varying exchange rate. - There is comparatively low risk associated with the arbitrage trade practice. - This term is principally used for trades in financial instruments, including stocks, commodities, currencies and bonds. The people engaging in this process are called arbitrageurs. What Is Arbitrage? It is defined as the process of simultaneously purchasing an asset from one market and selling it in another market at a higher cost. It enables the trader to lock in gain from a temporary difference in the price per stock. In the share market, an investor makes use of arbitrage opportunities by buying a share on a foreign exchange where the stock price (equity) has not still set for the rates of exchange; it is in a static condition of flux. Therefore, the cost of share on foreign trade is undervalued as compared to its value in the domestic or local exchange, enabling the investor to reap profits from this differential. This whole process appears to be a little bit tricky and complicated to the inexperienced investors. However, it is a relatively easy and straightforward way and hence considered comparatively less risky. Example of Arbitrage For better knowledge, consider the following example for: TD or TD Bank trades on both the NYSE (New York Stock Exchange) and TSX (Toronto Stock Exchange). Let us assume that on a given trade day the share trades for $63.50CAD on the Toronto exchange and $47.00USD on New York exchange. Further assume that the exchange rate of USD/CAD is $1.37 (means $1.37CAD = $1USD) hence, $47USD is equal to $64.39CAD. Under such condition, an investor can buy TD stocks for $63.500CAD in TSX and can concurrently sell the same share for $47.00USD at NYSE this is the equivalent of $64.39CAD. Finally, the lock-in profit of trader for this transaction is $0.89, which is nothing just the difference between $64.39 and $63.50. Conditions For Arbitrage Arbitrage can only be applied if the following conditions are met: 1) Always remember the law of a single price which states that the same security does not trade at the exact cost on all markets. 2) Two securities having the same cash flows do not exchange or trade at a similar price. 3) The security is never traded at its future price or discounted at the risk-free rate of interest (or have storage value) even if its future price is known. This situation is only applicable to things like a grain but not for assets or securities. Arbitrage-free If no profitable arbitrage is not allowed on the financial market costs, then these costs are said to create an arbitrage-free market or an arbitrage equilibrium. An arbitrage-free exchange and equilibrium is a primary condition for a usual economic equilibrium. The term no arbitrage is used in quantitative finance for measuring a neutral risk cost for derivatives. Considering the Transaction Costs When considering the arbitrage opportunities, one should beware of transaction cost along with it. The reason for this is if the prices are prohibitively high, they will tend to nullify the profits from the trades. We are again considering the scenario mentioned earlier if the fee (trading) per stock surpass more than $0.89, the aggregate return on arbitrage will neutralise those profits. Amount variances across the financial markets are usually small in size, so strategies of arbitrage are practical only for trader having substantial securities to invest in a particular trade. The Bottom Line – Arbitrage strategy If all the financial market were excellently efficient and, the foreign exchange halted to exist, there would be no arbitrage opportunities left. But in reality, the market is rarely perfect, which gives investors (arbitrage) many opportunities to gain benefits on pricing disparities.
Talking Points:* Sentiment helps decipher traders feelings towards an asset* SSI shows net positioning on currency pairs* Changes in sentiment provide insight into trends, and market reversalsSSI (Speculative Sentiment Index) is a proprietary tool to display retail positioning in real-time to display retail-market sentiment. Once a trader understands how SSI works and how to read the sentiment data, it can then be worked in to any existing trading strategy.So today we will examine what sentiment is and how you can analyze sentiment through SSI data. Market SentimentMarket sentiment in its most basic definition, defines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude sentiment can become negative.While sentiment is not unique to the Forex market, it can be directly translated to currency pairs. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment. The graph above shows sentiment in action. Going back to November of last year sentiment has been negative on the GBPUSD, however prices have continued trending higher. Sentiment has recently become even more extreme as the majority of traders in this case are attempting to pick a top on the GBPUSD.Now that you are more familiar with sentiment, let’s look how we can analyze sentiment in the Forex market. SSISSI is a ratio that gives us a picture of trader sentiment. SSI reveals trader positioning by determining if there are more positions net long than short, and if so by how much. Above we can see the current SSI ratios posted on DailyFX.com.If clients are net short a currency pair SSI will be negative, and if clients are net long the number will be positive. As mentioned above, the more extreme the SSI reading becomes, the more credence the information should be given.Using our example again with the GBPUSD, the last reading on SSI was -8.15. This ratio means that trader’s positions are net short at a rate over 8 to 1 when compared to all open buying interest. This can be interpreted again as traders attempting to position themselves for a possible turn in the market. Contrarian investors knowing this can look to open new long GBPUSD positions back in the direction of the prevailing trend. Changes in SSILastly, traders should also be aware of changes in sentiment. Changes in sentiment can be used to decipher whether trends are set to continue, pause or even reverse. In the event that sentiment is at an extreme, a reduction in net open interest can signal that a trend is winding down. Likewise if a pair with neutral sentiment begins changing rapidly, in one specific direction, this can signal a potential change in market direction.
How to Get Profit Out Of Currency TradingForex is the acronym for Foreign Exchange, which is the direct trading of currencies of different countries. Earlier, this type of trading in foreign exchange was limited to institutional traders and large banks. With the advancements in technology, smaller traders are able to take advantage of the several benefits of currency trading, simply by taking up various trading platforms, mostly online.A floating exchange rate is used for the various currencies in the world. All currency trading is always done in pairs such as, Dollar/Yen, Euro/Dollar, etc. Trading of the major currencies takes up nearly 85% of the daily transactions all over. Trading forex involves mostly four major currency pairs. These are US dollar against Swiss franc, British pound versus US dollar, US dollar versus Japanese yen, and Euro versus US dollar. In the trading market, they will look like USD/CHF, GBP/USD, USD/JPY, and EUR/USD. However, it must be noted that in forex trading no one pays dividends.The basic pattern of making money out of currency trading works like this. If you think, one currency is going to appreciate over another, you exchange the second currency to obtain the first, and wait. Provided things go as per your estimate, you may eventually exchange this currency back to the first, collecting the profits in the transaction.Dealers at major banks or forex brokerage companies perform the transactions on the forex market. In the worldwide market, forex occupies a necessary activity, which is carried out at all times. When traders in the US are asleep, dealers in Japan are trading currency with their counterparts in Europe.This means, you are right in assuming the forex market is forever active the whole 24 hours, and dealers are working in three consecutive shifts. Clients can place stop-loss and take-profit orders with brokers for execution overnight.Compared to the stock market, where the variations are sudden, and large jumps are often the routine, the price movements are far smoother on the forex market. A new investor can enter or exit the market without any major upheaval, since the daily turnover in the forex market is of the order of $1.2 trillion.The Forex market is also known by many other different names like the FX market, or the foreign exchange market. The forex market, being one of the largest as well as the oldest financial markets of the world, never stops. It is also the biggest and the most liquid market known to the world, trading through the 24-hour day inter-bank currency markets.When you compare the various markets, you will observe the futures market is only one percent of the forex market. Moreover, the stock and futures market are centered on an exchange. This is not so for trading currency. Currency trading moves from major banks in the US to New Zealand and Australia, then to the Far East, next to Europe and finally back to the US, going like a full-circle game of trading.