Stop chasing price, set traps instead. Enter a Forex trade the smart way
Have you ever had a feeling that some greater power in the market has singled you out and is doing everything in their power to make your trading life a misery.
Because it seems every time you enter a Forex trade, almost immediately you find the market reversing on you?
The market is probably just ‘rigged’, or it must be your broker stop hunting you right?
Did you ever consider you might be chasing price around the chart, consistently entering the market at bad prices. In this article we are going to take a look at why ‘chasing’ price around the charts is impractical, ineffective and why it will unravel you mentally.
The feeling that you might ‘miss the train’
Have you ever been sitting in front of your trading desk, watching the candlesticks tick higher and lower and then noticed a significant price event unfolding in front of your eyes? This event could be price breaking through an important support or resistance level, or maybe a trend line.
Whatever the situation, the price action makes your eyes light up like a Christmas tree. You whip out the trade order window as fast as you can. You proceed to enter a Forex trade at the ‘market price’ with a high level of urgency.
You’re in the trade, fuelled up on adrenaline, and on the edge of your seat watching the market go crazy as price breaks through the key point on the chart. You’re thinking to yourself, ‘oh this is going to be a massive breakout and land me the big trade I’ve been waiting for’.
Then all of a sudden the movement reverses and now you’re on the wrong side of the market.
Stop chasing your own tail
An event like this could leave the un-educated trader banging their head on the keyboard, repeating ‘what went wrong?’ I know the feeling, but the market doesn’t work the way as everything else does in your everyday life. It operates in a more counterintuitive way, what you think might be the right way to do something is often the wrong way. You believe you enter a forex trade with military precision when really you’re as sloppy as a 2 year old with a crayon.
The markets are full of deception, emotions, traps and psychological torture that will absolutely rip you apart mentally if you’re mind isn’t ready for trading. Trying to trade the market uneducated, or unconditioned is like trying to navigate your way through a land mine field, blindfolded.
If a commercial airliner crashed without warning, investigators would act quickly taping off this accident scene to do some crime scene investigation. So let’s quarantine this type of aggressive trading and get a bit more of an understanding of why so many people churn and burn.
When you enter a Forex trade by chasing price, there is an obvious lack of planning in the trade execution. Throwing orders at the market on the back of impulsive price movements might seem like the right thing to do in the heat of the moment.
A decision making process like this is generally derived from ‘emotionally fuelled distorted logic’.
Secondly, the trader has allowed the market create a high level urgency within themselves. Inducing that feeling of ‘if you don’t jump in RIGHT NOW, you’re going to miss this move and never get another chance’. The high sense of urgency throws trader’s into ‘panic mode’ and the need to take action, superseding any rational thinking.
We’ve all been guilty of ‘chasing price’ at one stage. The market slapped us back in the face for it too. If you impulsively enter a Forex trade like this and it actually works out, you are at a high risk level of being a victim of the random reinforcement principle. You’re rewarded for the bad behaviour, which encourages you to do it more often. You won’t get the same result each time. It will be like a drug user ‘chasing that first high’. It eventually unravels you completely as a trader.
If you really are passionate about trading and want to become a good trader, focus train of thought away from brute force attacks on the market. Projected your time toward proper risk management and logical trade execution.
Trade the right timeframe
Timeframes are going to play a huge part in how successful you are as a trader. Generally when we first embrace Forex trading, we are easily lured into the lower timeframes. Other trades make promises that the lower timeframes offer ‘more trading opportunities’ and the ability to ‘make more money’. What they don’t tell you are the signals have much less value on the lower time frames as they do the with the higher timeframes.
Low timeframes – Lots of signals, but low quality. Plenty of breakout traps to be caught up in, and lots of market noise.
High timeframes – Less signals, but with low risk high reward profiles. Less breakout traps and more market stability and clarity.
Don’t fall into the idea of trading on the lower timeframes will make you more money or enter a Forex trade via lower quality signals. You’re taking trades that contain no real substance or value.
They don’t contain enough price action data, and expose you to a high level of risk. Intraday noise on the low timeframes can be so intense, trying to trade it is really just ‘chasing ghosts’.
On the 15 min chart below, we observed an aggressive 15 candle that closed below a support level. Something a lot of traders would have shorted into. It looks like a really large move and some uneducated traders would call this a ‘market crash’. Because we are on the 15 min chart the move looks bigger than it is. The total move is only about 30 pips…
Then this happens…
Just another typical breakout trap that occurs very often on these lower timeframes, like the 15 min chart. It’s hard to make sense of what’s going on here using these charts. Even with the best Forex trading strategy, you will still have to deal with the high level of noise and ‘false signals’ that plague these intraday charts.
Now let’s have a look at a typical scenario on the daily timeframe…
Market closes below support level and produced clear bearish breakout follow through. See how the daily chart just paints a much better picture of what’s going on in the markets. At first glance it’s easy to see this market has a dominant bearish trend momentum with very little noise.
That’s why we recommend to make the switch to the higher timeframes. The signals are lower risk, the market has more stability and clarity, and you have less chance of being caught up in any whipsaw type movements.
Create your own traps, Enter a Forex Trade Using limit and stop orders
There are generally two ways you can approach your trading. You can be like most traders and sit there in front of the computer screen, watching the market tick around all day patiently wait for a signal to develop. Or, you can identify signals by checking in on the markets from time to time, using pending orders to enter a Forex trade.
Pending orders are great for setting up your own ‘price trap’ to catch price exactly where you want and automatically enter the market for you. This saves you the mental punishment of staring at the charts, waiting for price to reach your desired entry point to pulling the trigger manually.
There are two types of pending order options, Limit and stop orders.
Stop orders are used to buy the market above current price, or sell below current price. Stop orders are used to catch breakout trades and we would typically use stop orders when setting up Inside Day and Indecision Candle breakout trades.
Limit orders are used to buy the market below current price, or sell above the current price. These are great for when you want to catch market retracements. We use limits orders all the time with our retracement entry method…
Here is a rejection trade I recently entered on the USDJPY daily chart. I wanted to take advantage of market retracements, so I used a ‘buy limit’ order to set up my price trap…
As anticipated a retracement did occur and my limit order was hit and automatically converted into a market order. Once you’re order is set, its hands free from there. This type of ‘fire and forget’ trading is something we practice a lot.
The price trap played out as anticipated and caught the retracement. This automatically converted my limit order into a market order. We use these type of entry / stop combo with our end of day trading strategies. It’s less work for us, and yields more results from the market.
Think of it this way, you’ve got a problem with a rat that you need to get removed from your house. You’re not going to run around shooting off a rifle at anything that moves hoping to randomly hit it.
Instead you set up a trap, bait it and let the rat get caught. The ‘set and forget’ approach here can be applied to the markets just as easily. Set up your price traps, let price come to you. Don’t chase the market around and enter a Forex trade at random price movements.
Avoid being caught in a trap yourself
There are certain spots/conditions on the charts that are considered to be high risk zones to trade into, and should be avoided. One of these areas are weekly support and resistance levels, which are one of the major turning points in the market. If you’re fixated on the 15 min chart, you may not even be aware of these levels. Open up your weekly chart and map out these major termination points. You will be amazed at the price action you can take advantage of here.
Sometimes the market will create the illusion that a ‘breakout’ is occurring through these levels, drawing in unsuspecting traders into very bad positions. Weak traders enter a Forex trade from impulsive reactions triggered by events like this.
Once all the suckers are positioned in on the bad move, the market will pull back the curtain and reveal its true intentions…
The break through the weekly level was a classic bull trap and absolutely destroyed everyone who ‘jumped in’ with the buying frenzy. Avoid trading into these major turning points on the chart unless you have a damn good reason. The market lays down these traps to wash out weak traders.
Focus on trading away from these major turning points. Use strong reversal signals, or by waiting for a breakout then a retest from the other end.
Stop swinging your sword around like a mad man, set your trades up then walk away
Are you guilty of using a ‘machine gun’ mentality, and offloading a bunch of orders into the market hoping one of them hit a target.
If you really want to become a good, consistent trader, it’s time to move away from this savage mentality. Start trading with a cool, calm and collected approach. Plan out your trades more carefully, only load your weapon with one bullet. Pull the trigger and enter a Forex trade when the probabilities are in your favour. Make every shot count.
After you’ve entered a position, try to be at least involved with it as possible. How many times have you missed out on potential profits from a trade because you’ve emotionally intervened? Don’t stare at the charts, don’t stare at your trades. Fire off your order, walk away and go live your life.
If you think you you’ve been smothering the market too much and need to put some distance between you and the charts. But you still want to be an active trader at the same time. You may be interested in becoming a war room member where we do exactly that every day. We teach price action trading techniques that allow to you to have a minimalistic approach to trading. You can achieve good returns on investment, with plenty of time during the day to do things you like to do.
Stop by the war room info page, if you’re interested in more information on our War Room membership package. Cheers to your trading success.
Since the Great Depression of the 1930s, no financial crisis in history has ever had such far-reaching consequences as the 2008 recession. This was probably because times are different, with greater media coverage and an inter-connected global economy, where every country’s economic affairs are affected by what happens across the world. It has been more than ten years since September 15, 2008, when the investment bank Lehmann Brothers collapsed. America’s fourth largest bank, the kingpin of securitising sub-prime debt, declared bankruptcy. So high had been their risk-taking activities that the effects magnified to a global level. In the next three weeks, world leaders and financial regulators worked tirelessly to prevent a possible collapse of the world financial system. Despite their best efforts, the global recession occurred. According to a report published by the US GAO, the 2008 crisis caused the US alone $22 trillion. How it All Began While September 2008 was when the world sat up and took notice, the factors that contributed to this crisis came into play a long time back. Let us look at the causes and understand how things unfolded. Consider them the main actors in a full-fledged theatrical production (there are plenty of guest stars too!). 2006: Fall in Real-Estate Prices The US housing market started to decline, but realtors believed that the market was just overheated and would soon return to sustainable levels. What they didn’t know was that too many home-owners had questionable credit scores. The reason? The Gramm-Rudman Act 1987 allowed banks to trade in profitable derivatives, to be offered to customers. These mortgaged-based securities were supported by home-loan collaterals and created increasing demand for more mortgaged-based loans. Banks started letting people get loans at 100% or more of their home values. This was a time when years of lesser inflation and stable growth of the global economy had resulted in complacency and increased risk-taking by financial institutions. Irresponsible mortgage-lending started in the US, to “sub-prime” borrowers, who barely managed to repay them. Pooled-Mortgage Securities The big banks turned these risky-mortgages into low-risk securities and put a large number of them in pools. Risks related to each loan have to be un-correlated for pooling to work properly. But the big banks’ theory, that the housing markets in different American cities are unrelated to each other, proved false with the housing slump of 2006. Now, these pooled mortgage-backed securities, known as collateralised debt obligations (CDOs), were divided into different categories, based on the level of exposure to default. Credit rating agencies, on the behest of big banks, gave them generous scores. Investors trusted these scores and these instruments, which provided them higher returns, compared to other products in the market. Lower Interest Rates The emerging economies around the world, like China, took a stance of “saving over investment” in their countries. Those savings found their way into safe US government bonds, driving down interest rates. Economists often consider the prevalence of lower interest rates as a major contributor to the overall mess. Lower interest rates made investors go for riskier securities with higher returns, as did banks, hedge funds and other bodies. They went one step further by incentivising these borrowers, on hopes that returns would exceed the cost of borrowing. Investors put their money in longer-dated, higher-yielding securities. A Chain Effect Starts With the fall of the housing market in the US, a chain of reactions started in the money markets. Pooling didn’t provide protection to consumers and CDOs turned worthless, despite all the high ratings. So, many banks relied on short-term funding, using property assets as collateral, but now none of these assets had takers in the market. The “mark-to-market” accounting rules required banks to revalue their assets at current market prices. Losses that hadn’t yet taken place had to be put in the books. Capital reserves of major banks depleted. AIG and Its Credit Default Swaps Why did small pension funds invest in such risky assets? They believed that Credit Default Swaps protected them. The seller of such an instrument agrees to pay the buyer, in case the third-party defaults on loans. Here, it was AIG, a US insurance giant, who sold these swaps. As the derivatives failed, AIG realised that it didn’t have enough cash reserves to honour its swaps. The whole system was revealed as a major Ponzi scam. Banks had inflated their account statements, with not enough capital reserves to take in losses. A Dangerous Cycle of Mistrust between Financial Institutions As Lehman Brothers went bankrupt, panic set in the markets. Trust deficit prevented banks from lending. Companies worldwide froze their operations, unable to pay workers and suppliers. The global economy went down. Regulators had made the mistake of allowing Lehman Brothers to go bankrupt, thinking that it would solve issues and reduce government intervention. But things didn’t work out quite as planned. To curb panic and possible violence, government regulators worldwide went into a recovery mode, rescuing many companies from bankruptcy. From October 5 to 11, 2008, £90 billion was wiped off the value of Britain’s companies, a record since the Black Monday crash of 1987. As the credit crunch magnified, the IMF was sent requests for emergency loans by countries across the world. Other Causes of the Meltdown As we pointed out earlier, many factors came together to create this crisis. For example, the failure of the US Federal Reserve to see global current-account imbalances. Net capital inflows from Asian countries and the big capital inflows from European banks were overlooked too. All this created lenient or loose credit conditions in the US. The ECB didn’t see the current account imbalances in the EU region, due to overheated housing markets in countries like Spain. They thought it irrelevant in a monetary union. But, bankers and regulators are not the only actors responsible for economies, political entities are too. They encouraged risk taking among consumers. In short, excessive financial liberalisation in the latter half of 20th century, combined with a lack of regulations, can be said to be the cause of the 2008 recession. It left millions of people unemployed and homeless, which is why lessons need to be learnt from this debacle so that history doesn’t repeat itself.
Trading is part art, and part science – and nowhere is this art more prevalent than when it comes to closing positions. Many traders will close the entire position with one action, but scaling out can present some clear advantages to traders. Below, we will discuss those advantages and how traders can look to use them beneficially.As we discussed, the overall position size, and selection of when to ‘add’ to a position can be a very valuable tool to the trader’s risk management; as it affords the opportunity to increase trade size as the position moves in the trader’s favor.Scaling out of positions is another manner in which traders can take greater control of their trades, and with a ‘scale out’ approach - the trader is often looking to remove pieces of the position as the trade moves further in their favor.This article will discuss how traders scale out of positions, and when they may want to utilize this type of trade management.Why Would Traders Scale Out of Positions?The primary reason that traders would look to scale out of positions is greed; and to the trader's line - this can be a good thing.Quite frankly, we never know how long a trend might continue, or how many pips might be generated from a single position. Scaling out allows the trader to observe the market, removing parts of the position as the market moves in their favor. Traders will also commonly look to utilize break-even stops when using a scale-out approach in order to remove their initial risk.For example, let’s say that a trader is opening a trade ahead of NFP, or Non-Farm Payrolls, and is looking at entering the position with 50 pips of risk.As a priority - they know they want to avoid The Number One Mistake that FX Traders Make, so they are looking for an absolute minimum of 50 pips on the reward side of the trade.If they decide to use a 1-to-1 risk-to-reward ratio, the trader is likely looking at one of two outcomes: Either a 50 pip stop, or a 50 pip limit. But let’s look at this same situation from the vantage point of the trader that wants to scale out of their position: If the market moves in their direction 50 pips, they can look to ‘scale out’ of ¼ of the position, and then they can move their stop to break-even; so worst case scenario, of price reverses against them - they are out of the remaining ¾ of the trade at no gain, and no loss.But what if the market keeps moving in their direction? This is where things get fun for the trader using a scale out approach, as our trader can essentially close additional pieces of the position as price continues to move in their favor.If EURUSD moves up 100 pips, the trader can choose to take off another ¼ of the position, and perhaps even adjust their break-even stop deeper in the money in order to lock in additional gains. If price moves another 50 pips, they can look to scale out of another ¼ of the position. The picture below illustrates further:Scaling out allows additional return, with no additional risk if stops are adjusted The primary benefit of this type of trade management is that if the EURUSD is going to embark upon a big move, our trader can potentially capture a much larger portion of this move than if they had settled for a 50 pip limit on the trade.When to Scale-Out?Scaling out works best with trend and/or breakout market conditions.With ranges, support and resistance is often well-defined; and if price is going to test resistance (in the case of long positions), or support (in the case of short positions), then why should traders cut their potential gains short by taking profits any sooner on any parts of the lot?In trending, or breakout markets - prices are moving with a bias in one direction. This increases volatility, as the faster price moves in one direction - the higher the probability of a reversal in the opposite direction. These reversals can quickly wipe out gains, which is one of the reasons that a trailing stop can be such a beneficial tool for traders using these trade management strategies.As the market moves in the trader’s favor - they can look to close additional pieces of the position in an effort to grasp more gain than they could have initially hoped for.
In case you haven’t heard of him, Seth Godin is a business philosopher. At least, that’s what I call him. He’s a seriously deep thinker, and he applies his thinking to the purpose of understanding and improving business and businesspeople. Most of his endeavors have been in the specialty of marketing. He coined the phrase “permission marketing,” and was one of the first to recognize that, due to new technologies and consumer habits, the entire concept of marketing needs to change significantly, from “interruption marketing” that bothers people and interrupts what they are doing, to “permission marketing,” which is something that people look forward to receiving because it adds value, is personalized, and is relevant. On December 5th, Seth wrote a blog post, “Confusing Lucky With Good.” I feel this is completely relevant to Forex trading and decided to explore the topic further. People are wired to accept good things that happen to them as contingent upon something they did, and bad things as something that happened to them without their input. This is human nature. When something good happens, we are likely to take credit for it; when something bad happens, we are likely to blame it on others. The problem with this sort of thinking is that we often accept credit for circumstances that really didn’t depend on our actions. An excellent example of this is the money that was made during the 1998-2000 technology stock bull market. During that time, it was almost impossible NOT to make money. Nearly everyone who participated in that market made money at that time, and for many of us (myself included), it was substantial money. I personally thought I was a genius. What I didn’t understand, and what many of my fellow traders didn’t understand, is that we were not smart, and we were not talented. We were lucky. Of course, the technology crash of 2000 made fools of us all, and we quickly learned that lucky was not the same as smart. This is the fallacy inherent in trading. A string of winning trades may make a trader feel that he is “good,” that he really knows what he is doing, and that may, in turn, encourage him to trade more aggressively. But when it turns out that he was just lucky, he is apt to get clobbered. “Good” requires effort, study, and persistence. Godin says that “Success at the beginning blinds us to the opportunity to get really good instead of coasting.” What he means is, if you are lucky at the beginning, you tend to not put in the work required to actually get “good.” You do not spend the time and energy in learning, which is what is really needed. You do not apply that knowledge to your trading practice, in order to gain experience. According to another great business thinker, Malcolm Gladwell, author of “Outliers: The Story of Success,” it takes approximately 10,000 hours’ worth of practice to get really good at something. 10,000 hours, broken down into a 40-hour work week, 50 weeks a year, is in the neighborhood of 5 years. Gladwell breaks apart the idea that there is any such thing as an “overnight sensation.” In his research, he discovered that most such people actually put in thousands of hours of work before they achieved success. He applied this concept to everyone, from the Beatles to Bill Gates, demonstrating that hard work is the key to success – not luck. The key to talent, as opposed to luck, is that the action is repeatable. If you once have a great winning streak, and then can never again do the same, then clearly you were just lucky. In order to make your results repeatable, you have to have a definite pattern that you can utilize more than once. Strict adherence to a well-planned trading method can make your results repeatable. On the other hand, if you can’t clearly outline what you did that was successful, then you can’t repeat it, and it definitely proves that you were lucky and not good. Going back to Godin’s blog piece, he concludes that most successful people did not succeed on their first try, or their second, or even their third. They did not find success until they had put in a significant effort. Thus, persistence and practice lead to success. Or as the old proverb goes, “Luck favors those who are prepared.”