HIGH PROBABILITY TRADING This page intentionally left blank. HIGH PROBABILITY TRADING Take the Steps to Become a Su. High Probability. Trading. Strategies. Entry to Exit Tactics for the Forex, Futures, and Stock Markets. ROBERT C. MINER. John Wiley & Sons, Inc. Carolyn Boroden (Scottsdale, Arizona) High Probability Trading Printer: Yet to come. High Probability. Trading. Strategies. Entry to Exit Tactics.
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P1:a/b P2:c/d QC:e/f T1:g fm JWBKMiner August 18, Printer: Yet to come High Robert Miner - High Probability Trading terney.info Low-Risk/High-Probability Trading Strategies. 3. Risk Disclaimer. There is a very high degree of risk involved in trading. Past results are not indicative of future. terney.info: High Probability Trading Strategies: Entry to Exit Tactics for the Forex, Futures, and Stock Markets (): Robert C. Miner: Books.
This is trading in the real world, not the idealized version presented in textbooks. This is why many professional traders will often scale out of their positions, taking partial profits far sooner than two times risk, a practice that often reduces their reward-to-risk ratio to 1. Clearly thats a mathematically inferior strategy, but in trading, whats mathematically optimal is not necessarily psychologically possible. Before entering every trade, you must know your pain threshold.
This is the best way to make sure that your losses are controlled and that you do not become too emotional with your trading. Trading is hard; there are more unsuccessful traders than there are successful ones. But more often than not, traders fail not because their idea is wrong, but because they became too emotional in the process. This failure stems from the fact that they closed out their trade too early, or they let their losses run too extensively.
Risk MUST be predetermined. The most rational time to consider risk is before you place the trade - when your mind is unclouded and your decisions are unbiased by price action. On the other hand, if you have a trade on, of course you want to stick it out until it becomes a winner, but unfortunately that does not always happen. You need to figure out what the worst case scenario is for the trade, and place your stop based on a monetary or technical level.
Do not let your emotions force you to change your stop prematurely. Nothing is certain in trading. There are too many external factors that can shift the movement in a currency. Sometimes fundamentals can shift the trading environment, and other times you simply have unaccountable factors, such as option barriers, the daily exchange rate fixing, central bank downloading etc. Make sure you are prepared for these uncertainties by setting your stop early on.
Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small.
Money management becomes extremely important in this case. Referencing our rule of never let a winner turn into a loser, we advocate trading multiple lots. This can be done on a more manageable basis using mini-accounts. This way, you can lock in gains on the first lot and move your stop to breakeven on the second lot - making sure that you are only playing with the houses money - and ride the rest of the move using the second lot.
The FX market is a trending market; and trends can last for days, weeks or even months. This is a primary reason why most black boxes in the FX market focus exclusively on trends. They believe that any trend moves they catch can offset any whipsaw losses made in range-trading markets. Although we believe that range trading can also yield good profits, we recognize the reason why most large money is focused on looking for trends.
Therefore, if we are in a range-bound market, we bank our gain using the first lot and get stopped out at breakeven on the second, still yielding profits. However, if a trend does emerge, we keep holding the second lot into what could potentially become a big winner. Half of trading is about strategy, the other half is undoubtedly about money management. Even if you have losing trades, you need to understand them and learn from your mistakes.
However, if the failure is in line with a strategy that has worked more often than it has failed for you in the past, then accept that loss and move on. The key is to make your overall trading approach meaningful but to make any individual trade meaningless. Remember: In trading, winning is frequently a question of luck, but losing is always a matter of skill. No Excuses, Ever One time our boss invited us into his office to discuss a trading program that he wanted to set up.
I have one rule only, he noted. Looking us straight in the eye, he said, no excuses. Instantly we understood what he meant. Our boss wasnt concerned about traders booking losses. Losses are a given part of trading and anyone who engages in this enterprise understands and accepts that fact.
What our boss wanted to avoid were the mistakes made by traders who deviated from their e-book High Probability Trading Setups for the Currency Market 17 Part 1 Top 10 Trading Rules trading plan. Now anybody, even with a limited budget, has a chance to come closer to being on the same playing field as institutions spending millions. Through the Internet, individuals can pretty much get at a relatively low cost the same tools and information that once were limited to institutional traders.
Despite having everything readily available in real time, many novice traders still hope to compete successfully by using free but delayed quotes, charts, and news. Now that traders can get all that for themselves, they should take advantage of it.
If traders want to be on the same playing field, they need to consider paying for the proper tools; though it may cost a little, it can dramatically improve their bottom lines. Just a few years ago having the ability to see real-time charts, quotes, and news was something very few nonprofessional traders had. When I first started trading, day trading was for floor traders and a few select professionals; it was just too costly to get the data and charts needed for the average trader to do it properly.
Today with , , and point intraday swings common, an Internet connection, and dirt-cheap commissions, there is an opportunity for the average trader to make money day trading and scalping. As more and more people started day trading, the liquidity improved and the spreads narrowed, taking away some of the power that market makers and specialists held while giving more people a chance to succeed.
Bypassing a broker and paying less in commissions was a dream come true for many investors. Online trading allowed people to trade hassle-free at less than half the price they used to be able to, creating a tremendous advantage for experienced, active traders.
Besides the cheaper rates, some people hate having to deal with a live broker, especially the pushy type. Traders like the independence of being able to trade when they want to and not having to worry about what a broker will think. They like the fact that they can take their sweet time in making decisions and can cancel an order 50 times if they want to without feeling like a nuisance. Trading online has revolutionized the brokerage business and has become a tremendous advantage for the average retail trader.
Though it has its benefits, I do not recommend it for traders who are starting out. There is just too much to learn at the beginning, and it is so easy to make mistakes, that a broker will, without a doubt, be helpful. In other markets, the time it takes to place and get an order executed has dropped dramatically as well. The overall result is that day trading is easier for the average trader. Flexibility Entering, changing, parking, and canceling orders has become easy and convenient to do.
There is no need to call a broker every time you want to do something. No-Pressure Trading Online trading lets you avoid pushy brokers calling with the recommendation of the day or trying to get you out of good positions so that you generate more in commission revenues. Information News, quotes, charts, fundamentals, and research reports are available at no extra cost when you have an online account.
With just a click of the mouse, pretty much everything that you could need is there for you. Not Knowing How to Place Orders Until one learns all the different type of orders, the guidance of a broker is invaluable; otherwise it is too easy to make a mistake.
Without any supervision people can trade themselves into a deep hole. A good broker can alert a trader when he is getting into trouble, while an online trading platform cannot. Makes It Easy to Overtrade A trader sitting behind his computer with access to real-time quotes, charts, and news can let it go to his head.
He may think he is as good as a pro and can easily overtrade and take on too much risk. If you need something, you can pretty much find it on the Web. Though you may still have to pay for most things, there is an abundance of free information.
The only difference between what you can get for free and what you pay for usually lies in the flexibility of what can be done and time delay versus real time. The things available on the Web these days can be generic, such as simple quotes and charts, or very specific and directed toward people who use Gann, Elliott wave analysis, or neural works.
Quotes and Charts Quotes and charts are vital to a trader, without them he is trading blindly. Quotes alone will just tell you where the market is at the current moment, but a picture is worth a thousand words, and if you want to see what the market has been doing, you need charts.
It is not the cheapest software available, as it does much more than just give charts and quotes: It also gives me the ability to write and test systems and then keep track of them, alerting me anytime they generate a signal.
It gives you a unique hands-on feel for the market that a computer cannot. CRB Futures Perspective www. I also manually update monthly charts to get a big picture of the market.
Not too long ago this was the only way for the average trader to get charts, but now anyone with an Internet connection can get free charts at the end of the day.
At the very least one should print out these charts, updating and drawing in trendlines by hand. News News is another important option one should have, not so much to trade off, but because one may want to know why a stock or commodity is doing what it is doing.
If something acts differently than it should, I like to know why. I keep CNBC on all day. It keeps me informed on what the market is doing and what it has done but, unfortunately, not on what it will do, and after sitting in a room with 12 guys all day, Maria Bartiromo is easy on the eyes. System-Writing Software If you are serious about trading, look into a program that can backtest your ideas. Besides being an Leveling the Playing Field 53 advance quotes and charting software all the charts in this book were made with TradeStation , it allows one to create indicators and write and test systems with historical data before risking real money.
I find TradeStation to be an invaluable tool in my trading. It allows one to write anything from simple little moving average crossover systems to the most advanced systems and indicators imaginable. If you want to improve on your trading, this is the program to get. It may be a little more difficult to use and a bit more expensive than some of the other programs, but it is the industry standard for the serious trader and brings you one step closer to leveling the playing field.
I then started using TradeStation on that computer, and every time I called up a chart, it would take a few seconds for it to come up, but I still thought I had the greatest setup on earth. The difference a few years made is like night and day. Instead of one slow computer and a tiny monitor, I now have two computers and look at three giant monitors to give me all my charts, news, quotes, and positions. Having multiple screens is important to me because I need to be able to keep charts on several stocks and futures while also looking at a quote board, news headlines, my positions, and any software I have, all at once.
If I were using my old computer to do what I do now, I think it would explode. As soon as I got it, I began backtesting the systems I had been using and discovered why I had been losing money. After evaluating them, I abandoned them to work on better ones. The money I spent on the program was nothing compared to what it saved me as I stopped losing as much.
Even when they have the same tools, amateur traders still need to realize that they may not be on the same playing field or have the same edge that a professional does. Professional traders get catered to and pay hardly anything in commissions, while small traders are seen as a nuisance.
An institutional trader has an edge because he can call the pit himself, get accurate bids and offers, find out any relevant information, and even stay on the phone all day with a floor clerk; these traders get preference because of their size. Some even have their own personnel on the floor to ensure quick execution and better fills. Traders such as hedge funds, CTAs, and big accounts of all types will pay a fraction of the cost a regular retail account pays.
This allows them to make a profit with less of a move. People who find that they are constant losers may be so because of what they pay in commissions. If one had the same rates as a pro, getting over the hump could get easier. Leveling the Playing Field 55 Apart from the money they save, the big advantage comes from the service the big traders receive. Large traders are sought after by brokers, who will bend over backward to satisfy them.
This means they get preferential treatment and excellent service. They have the ability to bypass a broker and call the floor directly; they can get accurate quotes while being able to work an order based on those quotes. When a regular trader calls his broker to get a quote, the broker usually gives it to him from his screen, but by the time the trader places an order on the floor, that quote may be off a bit.
Having the advantage of getting direct to the floor service gives someone an incredible edge over a trader who has to put in a market order without knowing the exact price of the market. It can easily mean two ticks a trade, and that adds up in the long run. Professional traders also have an advantage in that they have order flow and downloading power behind them. When a small trader downloads something, it means nothing to the market.
When a mutual fund downloads a stock, it could move the market. Professional traders can start downloading discreetly until they build a position, and only then will they start openly showing their interest to download and try to drive up the price. They can start showing huge bids and make it known that they are downloading in order to get the attention of other traders, who can help lift the price. Small traders are always the last to know, as they have to wait to hear or read on the news about why a stock has moved.
By the time they find out, the move may already be over. For all these reasons and more, it is tough for a small independent trader to get ahead, which is why one should try to do everything possible to level the playing field. The average trader now can pretty much have all the same information in front of him that a trader at the biggest firms has.
Back in the days when nobody had a personal computer or an Internet connection, day trading was limited to a select few. Today everyone has that chance.
Becoming a better trader includes doing your best in getting as good technology and information as you can. My trading got much better when I invested in the proper tools. Day traders especially have to take advantage of anything that can help tilt the tables in their favor. And try to pay the lowest commissions you can without sacrificing service. Remember, you are competing against people who pay next to nothing in commissions. Though online trading may be the cheapest way to go, one should really know how to trade before venturing to trade without supervision.
However, once you are comfortable trading, then by all means take advantage of the low cost of trading online. The last thing to keep in mind is that no matter what you do, you are still competing with the best traders, the ones who have the most money, experience, technology, and access, so do whatever you can to be on the same playing field as they are. Every little step you take will get you just that much closer to succeeding as a trader.
Lacking the proper technology Lacking experience Lacking real-time information Lacking the proper trading capital Getting slow execution on trades Not having access to the trading floor Paying too much in commissions Lacking order flow and downloading power Leveling the Playing Field Things to Help You Level the Playing Field 1. Make sure you have enough capital. Get real-time quotes, charts, and news. Use the Internet to your advantage.
Get a quick and reliable Internet connection. Use free information on the Web. Update charts by hand. Take advantage of online trading. Pay lower commissions Use system writing software. Get a fast computer. Do I need a faster computer? Do I need real-time quotes? Are my trading costs too high? Should I be trading online? Well look at Chart 4—1 and see what happened; the article pretty much pinpointed the bottom of the bear market in crude. The moral here is to be wary of what you read and hear; a major news event or story may just be the signal that the smart money was waiting for to get out and end the move.
There is also a middle ground where traders use both, but those traders are basically technicalists or fundamentalists who use the other source to 60 Copyright by Marcel Link. Calling the Bottom confirm a belief. A technical trader can use fundamentals when evaluating market conditions or to see if overall market sentiment has shifted.
Fundamental traders tend to be long-term traders who are looking for major economic shifts in a market. They use fundamentals to determine what the overall direction of the market should be, not to jump into trades. Some are short-term traders who believe that every move in the market is based on the smallest news item relating to it.
But most moves in a stock are not a result of earnings expectations, and not every move in the grain market is a direct result of the latest change in the weather forecast. If a person were to base all trading decisions on what he read or heard, odds are, that person would be a losing trader.
Instead they are more concerned with how the market reacts to the news. Many read an article in the Wall Street Journal and barrel into a trade, not realizing that the news was discounted in the market days or weeks earlier.
They forget that top trading firms have departments whose job it is to know exactly what is going on with any given stock or market before it becomes general knowledge. They have their own meteorologists who have determined the long-term weather report before the average trader gets it on the Internet.
They have economists and analysts who are always trying to be one step ahead of everyone else. More important, they can get to the source of the news before anyone else can. Think about it: Most of the time when the public gets information, it has to hear or read a news story somewhere. That means that someone already knows it.
For if you see a story on Reuters, the reporter had to type it in first, and so he had to know it before you; that means he got it from someone else who knew it before he did. What makes you think that the chain is that short? The story easily could have found its way to a trading desk at Goldman Sachs by the time it reached the reporter, and by the time he reports it and you hear it, a trader at Goldman could have reacted already. Once the public gets hold of news, it is probably not fresh anymore, and it may have already been taken advantage of.
Many times you will see the market react first and wonder why it did so, only to hear the news a little later; by this time it may be too late to do anything, and the best thing to do is to ignore it completely. Never chase a news-related spike. Let the market settle down first and digest the news. If you miss the trade, there will always be another one. Again, let the market settle down before doing anything. Trading the News 63 Example of How the Public Is the Last to Know A great example of how the average trader is the last to know something and of how once people do know, it has already been factored into the price, happened to me recently while I was trading the stock Rambus RMBS Chart 4—2.
Luckily, I was on the right side of this move. I was short in the stock, and then all of a sudden it dropped hard, as if it had fallen off a table. The stock market in general had opened sharply lower that morning because of bad unemployment numbers see Chart 4—3 but had been ripping higher all day long after that.
I had mostly long positions, but to balance such positions I like to find some stocks that are reacting weakly in a strong market. Rambus was one of those; it was not able to uptrend and stay positive on a day when most stocks were going much higher. There was obviously something wrong with it. RMBS appeared on my screen as a relatively weak stock.
Looking at a chart, I saw that it was not as strong as everything else, and so I shorted it at around 1 p. Then, all of a sudden, at 2: Finally, at 3: Immediately after it resumed trading, it was down another buck fifty.
I placed a market order to get out because more times than not after a news item is known, things have a tendency to trade opposite to their initial reaction; besides, I had made a nice profit in it.
When a stock drops before an announcement and then opens up even lower, it is common to see people take profits and for it to trade back up. Then, sure enough, it went right back down after I got out. I did the right thing by getting out because it was rallying and I thought it would shake off the bad news and go right back up to retrace the drop.
Trading the News 65 Looking at this example, one can see that some people had to know in advance about the pending news release: So how do some traders have a head up on the news? Why were some people able to react before the trading was halted? The reason could be that institutions have direct access to important personnel and information in the companies they make a market for.
If a major court decision is about to come out, they may be on the phone all day with someone at the company. It fell 20 percent on the day, but most of that came before the news was made public. Unless one knew beforehand, there was no way to act on it. The next thing they realize is that they just bought the high of the market as they watch it dip hard.
They know that the news has already been factored into the current price of the market, and once the market gets what it was expecting, the anticipation is gone. With the anticipation gone, people take their profits and get out, causing the market to reverse. As soon as news comes out, the smart traders look to see how the market reacts and what the other traders are doing. It probably means that the market has already discounted the news.
On the flip side, if good news comes out and your stock or commodity fails to rally, the high probability trade is to short it. Experienced traders look to see what happens after a news item comes out, and then they react accordingly. They hope to see a market fail to react the way it should have and then fade the news. The more anticipated the news is to be positive or negative, the more likely it is that it will be potentially disastrous to trade on the side of the report.
If the market was expecting good news, it may have run up accordingly before getting it so that the market is priced with the news taken into consideration. Many times the reason for the market to end its move when news comes out is that traders were already long in anticipation of news, a rate cut, or a heat wave, and then the event or news does come out as expected. Once it comes out, the market may fail to continue because it may be saturated with longs and there is no one left to download.
As the final suckers rush into the market, the smart money sees it as an opportunity to take profits. When the news does make the market react the way it should, the best thing to do is to wait for it to settle and then get in on the right side. If you jump into it early, there is always a good chance that you may get caught in a retracement or spike.
The same morning that the RMBS situation happened, the monthly unemployment numbers were released, and it was the biggest jump in new claims in a decade.
This was a great example of how to trade news. After the first half hour, however, it could not break lower and began to rally. As you can see, the market tried to go lower but failed and then broke highs.
At that point people started covering their shorts and going long. It also was the case in this situation that bad news was good news as people started thinking that the weakening economy would encourage the Federal Reserve to cut interest rates again. What defines good news is often subjective and hard to determine because good economic news can be counterproductive to getting the Fed to cut rates. Traders need to be alert to a situation such as the bad unemployment data described above.
There are also many times when a company announces that it will be laying off people. This sounds like bad news for the company, but many see it as a cost-cutting method and thus a way for the company to improve its bottom line down the road. This type of news can make a stock rally even though one would perceive it as negative news.
Initially the response is a rapid, hard move the other way, but once traders take a deep breath and reevaluate, the market normally will continue in its set trend. Fundamentals should be believed only as long as the technical signals agree. Too many times a trader will stick with a news story and not let go no matter what the market ends up doing.
If the market shakes off news and continues its trend, a trader should ignore the news and follow the market. After being in a huge downtrend for weeks, the market exploded upon hearing this unexpectedly good news. Yet the facts were that the economy was weak, and by cutting rates unexpectedly, the Fed acknowledged this. The next few days, as people came to their senses and the initial euphoria of the cut wore off, the market backed off and began to continue the downtrend it had been in.
It took a few more days for people to begin expecting the Fed to cut rates again at the next Open Market Committee meeting on January 31, and this caused the market to start drifting up in anticipation. Instead, it immediately sold off, marking the top of the upwave that had been created soon after the initial cut. The news was the same—the Fed cut the discount rate by 50 basis points—yet one time the market had an intraday explosion and the second time it failed miserably.
Because the second time it was expected that the Fed would make a cut after its meeting, and the market had rallied for weeks on that expectation. As soon as the market got what it wanted, there was nothing more to look forward to. How are crops in Argentina doing?
What about Europe—can they take up the slack? What is worldwide demand? Are there are stockpiles? If you plan to trade effectively using fundamental analysis, you need to look at the overall picture of any news involving the market. A lazy trader may get only a piece of the puzzle. For example, when trading crude, one may want to know what the current productions levels are, where stockpiles stand and how they compare to previous months, what OPEC is doing increasing production or cutting back , and the weather.
All these things affect the overall picture of the market and can give you a general direction in which the market should be heading. For example, if stockpiles are high, production is expected to stay strong, and the winter is expected to be warm, you can assume that prices will keep going lower, and so you would want to trade the market from the short side.
How is the sector? How are retail sales? How is consumer confidence? Are interest rates going up or down? Has the gross domestic product been in an uptrend? What is the unemployment situation? I just like to know these things so that I can have a general idea of what the stock and market should be doing. Trading Scheduled News Releases The most important thing a high probability trader wants to do before a scheduled news release is to be flat.
The market can go either way when a report comes out, and by having a position you are adding too much risk to your trading.
When a trader starts doing this, he becomes a gambler, not a trader. The way I like to trade a scheduled report is by looking at how the market reacts just a few minutes before the release of scheduled news. If the number is in line with expectations, this is the direction the market should move, and any surprises may cause it to go the other way.
If the market cannot continue in the direction it had been moving and the news was as expected, the best thing to do is to fade it because it just failed to react according to what it should have done. Many times the initial response after the announcement is a spike upward which quickly retraces, sometimes to keep going lower and sometimes to come back and rally.
Part of high probability trading is not taking high-risk trades; jumping onboard too quickly before the direction is determined is dangerous. The best thing to do in these situations is to sit back, wait until the market picks a clear direction and the noise settles, and then jump onboard.
I used to try to trade the initial spike, but I ended up getting hurt badly a few times, so now I wait. Once the market has picked its direction, there is still a lot of room to make money. Chart 4—5 shows a great example of how the market faded the news after a Fed cut. Though this was good news for the Trading the News 71 market, it was anticipated that the Fed would do what it did.
The initial response in the first 15 minutes was a drop followed by a quick strong move up, but not much higher than where the market had been before the news. Soon afterward, the run-up failed to continue and the market started coming off again. This would be the time to start thinking about shorting. Yes, a half hour has gone by, but now you have a clearer picture of what the market is doing.
As soon as it breaks the lows it made right after the announcement Point B , one should begin shorting. At that point the market has digested the news and picked its direction, and so one should forget the news and trade the market. Due to the ideal weather, there should be a banner crop and corn prices should drop. Yet after a few weeks the price fails to drop even though the temperature and rainfall have remained perfect.
The stubborn traders will stay with this position and even add to it because they have become set in their opinions. This happens a lot in the stock market. When the NASDAQ market began to collapse in March , many people refused to acknowledge it because they had the opinion that the economy was booming and that many of the tech and Internet companies they had invested in would keep going up nonstop. They failed to realize that these overvalued stocks would go back to being fairly priced when the economy slowed down.
When the market started dropping and was clearly in a major downtrend, people stayed long because they were married to their opinion that their stocks would go higher. The drop in prices kept screaming that the market was no longer a strong market, but many people saw it as an opportunity to download more at discount prices or hold on to their original positions because the market should have started to return to its strength. They were wrong and paid dearly for not changing their opinions.
It tells Trading the News 73 you the market is going up, down, or sideways. If you are long a stock and the chart is not going higher or is pointing lower, whatever you thought would make it go up is not working anymore. Two people can hear the same news and look at it completely differently because of their positions.
A typical example occurs when an economic number comes out that is good for the economy. By focusing on the market and not on the fundamentals, one can be more objective and have a better grasp of what is going on. Start by getting a fundamental picture of the market. Whether you trade corn, pork bellies, Japanese yen, JP Morgan, or Microsoft, you should find out what is making it move in the direction it is moving.
Look at the whole industry and any world events that may have an impact on your market or stock. If you can determine that corn is going higher because world production has been slow the last 2 years, you have a small advantage over many traders. If the corn chart is going up, you know that the fundamentals are working, but if it is flat or going down, you need to question it. As a trader you must be willing to change your opinion often because the market never stays the same. A lot of traders fail because they hold on much too long if they believe the market has to move with the news.
Instead, try to determine what should happen and then react according to what the market does. If it is good news and the market keeps going up, download on a dip.
If news is due to come out, set up different scenarios in advance of what should happen; that way you will be prepared to react no matter what happens. The Problems of Trading the News 1. Get the whole picture. Use fundamentals to determine what is driving the market. Complement it by using technical analysis. Get a long-term idea of where the market is going. Let the market digest the news. Be able to change your opinion.
download the rumor, sell the fact. Remember, bad news may be good for the market. Be flat before a report. Which way should the market respond to this news? Did I give the market enough time to digest the news? Am I married to my opinion? They just discuss the indicators and patterns that I have found to work best for me in finding high probability trades. There are countless numbers of different indicators and patterns one could use, and since each person has a different trading style, it is best to get a full understanding of technical analysis before deciding what works best for you.
Though fundamental analysis can help one get a good idea of the direction in which the market should be going, it is hard to get an edge over other traders unless one has prior knowledge that something is happening. However, having proficiency in technical analysis can be a great asset to a trader and could supply the edge one needs. A technical analyst believes that a chart already discounts any effect news has on the market, and many traders ignore the news because of this.
They know that if anything is important, it will be spelled out in the charts. Whatever the news is, knowing how to read a chart will give a trader a clearer picture of what the market is doing. Even those who are sticklers for fundamental analysis can benefit by looking at charts not only to confirm the news but also to time their trades. Increasing Your Chances with Multiple Time Frames 79 Looking at a chart, it is easy to see if prices are going up, down, or nowhere; what is difficult is trying to make heads or tails of indicators, price patterns, and what the market will do in the future.
Five different people can look at the same chart and see five different things, making technical analysis a bit hard. Some indicators will tell you what has happened, while others will try to predict what will happen in the future.
No matter what you look at, though, they all have one thing in common: This is why different people will see different things when looking at them. In the next few chapters I will go over a few types of trading strategies trend following, breakout, reversal, and range-bound based on technical analysis.
Each requires looking at different things and using a different style of trading.
In a trend-following situation one uses different indicators or the same indicators differently than one does in a range-bound market. Trendlines and moving averages, for example, are excellent trend-following indicators. In a rangebound market one can look more at oscillating indicators, such as stochastics and RSI, which can help pick turning points in the markets.
As you read these chapters, one thing to keep in mind is the importance of using volume when you are looking at what the market is doing. Volume is used to confirm price movement. When price moves with strong volume, the market is more likely to follow through, whether it is a reversal or a matter of following the trend. Volume shows the demand for the stock or commodity and determines the strength of the trend. If price moves up while volume increases, a trend is more likely to stay strong.
When volume begins to wane, it could indicate that everybody who wants to be long already is. At that point there is no one left to participate in the downloading, and so momentum may soon change.
Even though it is not an exact science, I believe the traders with the best working knowledge of technical analysis have an advantage over other traders. They are able to pick out the better trading opportunities and have a better sense of where to place stops. For simplicity, I will not always give examples for the long side and the short side of the market. He had always been a good trader, making money regularly first on and then off the floor.
He primarily traded crude oil, and after crude closed at 3: Despite looking primarily only at one market at a time, he had an arsenal of computer monitors in front of him. He used CGQ charting service, and they provided him with four computer monitors. He had charts of crude oil with different time lengths on them. On one screen he had 2-, 5-, and minute charts; another screen had and minute charts; the third had daily and weekly charts; and he used the last one for news and quotes.
I was quite impressed with his setup. By comparison, I had one monitor that was divided into four 5-minute charts, each looking at a different market. Who do you think had a better view and an advantage in trading crude? I asked him which time frame he used to trade with, and he told me he used all of them. His trading strategy was to make a trade only when he got confirmation in all the different time frames.
First of all, he would trade primarily in the direction of the overall trend, and he used the daily and weekly charts to get that trend. These two time frames gave him a clear picture of the overall direction and where the major support and resistance levels in the market were. Then he would narrow down his point of view by looking at the and minute charts. These were the time frames he used to decide what he wanted to do. He liked to see them trending or reversing and thought they gave a clearer picture of the market for the next several hours to a couple of days.
Once he had determined what he wanted to do, he would monitor the 2and 5-minute bar charts closely to time his entry. When everything matched up, though, the probability of a trade working greatly improved. Watching his setup and the way he traded opened up my eyes to a higher level of trading, that of using multiple time frames. A long-term trader may focus on daily, weekly, and monthly charts, while a shorter-term day trader may look at 1and 5-minute bar charts. There is also an in-between ground where swing traders may hold positions for 2 or 3 days and mostly use and minute charts for their analyses.
All these people can do quite well sticking to the time frames that work best for them, yet they should not narrow their views to just one time frame. Since each time frame has a different perspective on the market and traders can make money at each level, why not use them all to benefit your trading no matter what time frame you prefer?
Each trader has to pick the time horizon that best fits his style of trading. Traders prefer different time perspectives for many reasons. Some feel they can control risk better by getting in and out of trades quickly and focus on a shorter time frame. Some like to be in position longer term and are not concerned about the intraday ups and downs of the market.
Longer-term traders may want to use a wider first target such as 50 or pips. Managing each individual trade is always more art than science. In trading.
We never cease to be amazed how hard-boiled. Successful trading is simply the art of accumulating more winners than stops. Logic Wins. How much profit you bank and by how much you trail the stop is dependent upon your trading style and the time frame in which you choose to trade.
In FX. On the other hand. The point is that trends in the FX market can last for a very long time. Part 1 Top 10 Trading Rules sharply higher. Although many novice traders may find impulsive trading to be far more exciting. He was right on the direction but picked a top impulsively. Even if he is wrong like trader A. The pair rallies higher and the trader is convinced.
Prices stall. Trading books are littered with stories of traders losing one. The impulsive trader who is certain that they are very near the top decides to triple up his position and watches in horror as the pair spikes higher. No matter how certain the trader may be about a particular outcome. You may have missed the very top. A few hours later. The best way to avoid such fate is to never suffer a large loss. Even if you sustained 20 consecutive losses. Large losses.
By controlling your losses. The art of trading is not about winning as much as it is about not losing. Getting into this kind of trouble as a trader means that. While that is certainly not a pleasant position to find yourself in. Enter and Exit Technically Should you trade based upon fundamentals or technicals?
Fundamentals are good at dictating the broad themes in the market. Against the Japanese Yen. We have often seen fundamental factors rapidly shift the technical outlook. The real key. The question of which is better is far more difficult to answer. We know all too well that both are important and have a hand in impacting price action.
They let the market know very early on that they were going to be engaging in a long period of tightening. Technicals are based on forecasting the future using past price action. In the middle of A perfect example was the rally from Fundamentals do not change in the blink of an eye: Part 1 Top 10 Trading Rules 4. Trigger Fundamentally.
These pullbacks were perfect opportunities for traders to combine technicals with fundamentals to enter the trade at an opportune moment. The retracement paused right at the So our answer to the question is to use both.
This policy created an extremely dollar-bullish environment in the market that lasted for the entire year. The true fan knows who the team can easily beat, who they will probably lose against and who poses a big challenge.
Although we are talking about baseball, the logic holds true for any contest. When a strong army is positioned against a weak army, the odds are heavily skewed toward the strong army winning. This is the way we have to approach trading. When we trade currencies, we are always dealing in pairs - every trade involves downloading one currency and shorting another. So the implicit bet is that one currency will beat out the other.
If this is the way the FX market is structured, then the highest probability trade will be to pair a strong currency with a weak currency.
Fortunately, in the currency market we deal with countries whose economic outlooks do not change instantaneously. Economic data from the most actively traded currencies are released every single day, and they act as a scorecard for each country. The more positive the reports, the better or stronger a country is doing; on the flip side, the more negative reports, the weaker the country is performing. Pairing a strong currency with a weak currency has much deeper ramifications than just the data itself.
Each strong report gives a better reason for the central bank to increase interest rates, which in turn would increase the yield of the currency.
In addition to looking at how data is stacking up, an easier way to pair strong with weak may be to compare the current interest rate trajectory for a currency.
The breakout occurred to the upside because Europe was just beginning to raise interest rates as economic growth was improving. On the flip side, the U. In fact, U. Because strength and weakness can last for some time as economic trends evolve, pairing the strong with the weak currency is one of the better ways for traders to gain an edge in the currency market.
Or your lying eyes? The fact of the matter is that eyes do not lie. If a trader is short a currency pair and the price action moves against him, relentlessly rising higher, the trader is wrong and needs to admit that fact, sooner rather than later.
In FX, trends can last far longer than seem reasonable. Traders looking at the fundamentals of the two currencies could not understand the reasons behind the move since all signs pointed to dollar strength. True enough, the U. In addition, U. GDP was growing at a better than 3. The Fed had even started to raise rates, equalizing the interest rate differential between the euro and the greenback.
Furthermore, the extremely high exchange rate of the euro was strangling European exports - the one sector of the Eurozone economy critical to economic growth. As a result, U. But imagine a trader shorting the pair at 1. Could he or she have withstood the pressure of having a point move against a position? Worse yet, imagine someone who was short at 1. Could that trader have taken the pain of being 1, points in drawdown?
The irony of the matter is that both of those traders would have profited in the end. They were right but they were early. Yet in currency markets, unlike in horseshoes, close is not good enough. The FX market is highly leveraged, with default margins set at Even if the two traders above used far more conservative leverage of In FX, successful directional trades not only need to be right in analysis, they need to be right, in timing as well..
If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same thing as being wrong.
Know the Difference Between Scaling In and Adding to a Loser and Never Make That Mistake One of the biggest mistakes that we have seen traders make is to keep adding to a losing position, desperately hoping for a reversal.
As traders increase their exposure while price travels in the wrong direction, their losses mount to a point where they are forced to close out their position at a major loss or wait numbly for the inevitable margin call to automatically do it for them.
Typically in these scenarios, the initial reasoning for the trade has disappeared, and a smart trader would have closed out the position and moved on. However, some traders find themselves adding into the position long after the reason for the trade has changed, hoping that by magic or chance things will eventually turn their way.
We liken this to the scenario where you are driving in a car late at night and are not sure whether you are on the right road or not. When this happens, you are faced with two choices. One is to keep on going down the road blindly and hope that you will find your destination before ending up in another state.
The other is to turn the car around and go back the way you came, until you reach a point from where you can actually find the way home. This is the difference between stubbornly proceeding in the wrong direction and cutting your losses short before it becomes too late.
Admittedly, you might eventually find your way home by stumbling along back roads - much like a trader could salvage a bad position by catching an unexpected turnaround.
However before that time comes, the driver could very well have run out of gas, much like the trader can run out of capital. Adding to a losing position that has gone beyond. Because trading is not logical but instead psychological in nature.
In finance. In this case. After all. Here is one example of why in trading what is mathematically optimal is often psychologically impossible. But trading is less of a science than it is an art. On the surface this appears to be a good idea.
Armed with such stellar research. If your intention is to ultimately download a total of one regular What Is Mathematically Optimal Is Psychologically Impossible Novice traders who first approach the markets will often design very elegant. Part 1 Top 10 Trading Rules the point of your original risk is the wrong way to trade.
The conventional wisdom in the markets is that traders should always trade with a 2: The majority of such strategies have extremely impressive win-loss and profit ratios. This type of strategy is known as scaling in. This is a popular strategy for traders who are downloading into a retracement of a broader trend and are not sure how deep the retracement will be. There are. Risk Can Be Predetermined. The most rational time to consider risk is before you place the trade.
This is trading in the real world. Trading is hard. Imagine the following scenario. But you remain calm. This is why many professional traders will often scale out of their positions. Do not let your emotions force you to change your stop prematurely. The price moves in your direction. You are seeking a 2: Once again. But more often than not. Price is now 1.
Before entering every trade. But Reward Is Unpredictable If there is one inviolable rule in trading. This is the best way to make sure that your losses are controlled and that you do not become too emotional with your trading. At first. This failure stems from the fact that they closed out their trade too early. In practice however. You need to figure out what the worst case scenario is for the trade. Risk MUST be predetermined.
In effect. You are left with the realization that you let a point profit turn into a point loss. Losses are a given part of trading and anyone who engages in this enterprise understands and accepts that fact. Money management becomes extremely important in this case. This way. Half of trading is about strategy.
Make sure you are prepared for these uncertainties by setting your stop early on. Sometimes fundamentals can shift the trading environment. Looking us straight in the eye. This is a primary reason why most black boxes in the FX market focus exclusively on trends. The FX market is a trending market. Ever One time our boss invited us into his office to discuss a trading program that he wanted to set up.
What our boss wanted to avoid were the mistakes made by traders who deviated from their e-book High Probability Trading Setups for the Currency Market The key is to make your overall trading approach meaningful but to make any individual trade meaningless.
Nothing is certain in trading. When a currency moves. This can be done on a more manageable basis using mini-accounts. There are too many external factors that can shift the movement in a currency. Part 1 Top 10 Trading Rules Every trade. Although we believe that range trading can also yield good profits. No Excuses. They believe that any trend moves they catch can offset any whipsaw losses made in range-trading markets.
Once you have mastered this skill. Even if you have losing trades. Part 1 Top 10 Trading Rules trading plan. Our boss knew that the first scenario was just a regular part of business. Markets can and will do anything.
In LTCM went bankrupt. In post-debacle interviews. As traders. No excuses. Kline looks up at Goldblum and the later explains. LTCM traders continued to double up on their positions. If you do not understand what is going on in the market.
In a business where you either adapt or die. That way you will not have to come up with excuses for why you blew up your account. It took the Federal Reserve Bank of New York and a series of top-tier investment banks to step in and stem the tide of losses until the portfolio positions could be unwound without further damage.
Instead of accepting the fact that they were wrong. For conservative trade.
Part 2 High Probability Trading Setups 1. The settings for the MACD histogram is the default. These impatient traders are perfect momentum traders because they wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in hopes for an extension move as momentum continues to build.
We lay on two indicators. This strategy waits for a reversal trade but only takes it when momentum supports the reversal move enough to create a larger extension burst. The position is exited in two separate segments. The second half lets us attempt to catch what could become a very large move with no risk since we already moved our stop to breakeven.
The moving average is used to helps us determine the trend. We use the exponential moving average over the simple moving average because it places higher weight on recent movements. Our first target is 1. We exit half of the position and trail the remaining half by the period EMA minus 15 pips. Copyright FXtrek Intellichart. We enter at 1. It gets triggered approximately 2 and a half hours later. We waited for the MACD histogram to cross the zero line and when it did. Although there were a few instances of the price attempting to move above the period EMA between The second half is eventually closed at 1.
The stop is at the EMA minus 20 pips or The second half is eventually closed at Although the profit was not as attractive as the first trade. It gets triggered five minutes later. The MACD turned first.
The math is a bit more complicated on this one. Our first target is entry plus amount risked or The second half is then closed at 0. Our trade is then triggered at 0. So we enter at 0. We see the price cross below the period EMA. The target is hit 2 hours later and the stop on the second half was moved to breakeven. On the short side. We then proceed to trail the second half of the position by the period EMA plus 15 pips. Our stop is the EMA plus 20 pips.
Our first target is the entry price minus the amount risked or 0. However the MACD histogram is still positive. At the time. Coincidently enough. The second half of the position is eventually closed at 1. As you can see. It gets triggered shortly thereafter.
Based upon the rules above. Our first target is the entry price minus the amount risked or 1. In the chart above. The price trades down to a low of 1. In the chart above the price crosses below the period EMA and we wait 20 minutes later for the MACD histogram to move into negative territory. When trading the Five Minute Momo strategy the most important thing to be wary of is trading ranges that are too tight or too wide. It then proceeds to reverse course. In quiet trading hours where the price simply fluctuates around the EMA.
We place our stop at the EMA plus 20 pips or 1. How can we trade breakouts confidently and successfully? The primary focus of CCI is to measure the deviation of the price of the currency pair from its statistical average.
As such. That is why although most traders proclaim their love for trading with the trend. We actually look to download if the currency pair makes a new high above and sell if the currency pair makes a new low below CCI is an extremely good and sensitive measure of momentum and helps us to optimize only the highest probability entries for our setup.
Yet most traders are still reluctant to download breakouts for fear of being the last one to the party before prices reverse with a vengeance. For our purposes. Without resorting to the mathematics of the indicator. The capitulation of these top and bottom pickers in the face of a massive buildup of momentum forces a covering of positions.
Part 2 High Probability Trading Setups 2. The same dynamic occurs in trading. It tells the trader to download or sell when most are averse to doing so.
Sometimes it is much easier and far more profitable to go with the flow. On the daily or the hourly charts place the CCI indicator with standard input of Take a measure of the peak CCI reading and record it.
Measure the low of the candle and use it as your stop. If the position moves in your favor by the amount of your original stop, sell half and move stop to breakeven. Take profit on the rest of the trade when position moves to two times your stop.
Rules for the Short Trade 1. Note the very last time the CCI registered a reading of less than before poking above the zone. If CCI once again trades below the and if its value exceeds the prior low reading, go short at market at the close of the candle. Measure the high of the candle and use it as your stop. If the position moves in your favor by the amount of your original stop, sell half and move the stop on the remainder of the position to breakeven. Not until more than three months later on December 13, , did the CCI produce a value that would exceed this number.
On December 13, , however, CCI hit We exited half the position at 1. Our total reward-to-risk ratio on this trade was 1. Note also that we were able to capture our gains in less than 24 hours as the momentum of the move carried our position to profit very quickly.
It is still infrequent, which is one of the reasons that makes this setup so powerful the common wisdom in trading is: Nevertheless it occurs on the hourly charts far more often than on the dailies. Several days later at 4am on March 28, , the CCI reading reaches a new high of We go long at market on the close of the candle at 1. The low of the candle is 1. The pair consolidates for several hours and then makes a burst to our first target of 1.
We move the stop to breakeven to protect our profits and are stopped out a few hours later, banking 40 pips of profit. As the saying goes, half a loaf is better than none, and it is amazing how they can add up to a whole bakery full of profits if we simply take what the market gives us. Our first exit is hit just two days later at 1. Our stop is the high of that candle at 1.
Our second target is hit on October Total profit on the trade? We stay in the trade with the rest of the position and move the stop to breakeven. Our total risk was only points. The key is high probability. On October Setup 2.
We enter short at market on the close of the candle at 1. A few days later. But we had faith in our strategy and followed the setup. Prices then consolidated a bit and trended lower until 1pm on March Again we moved our stop to breakeven. At 9pm on March This was a very large candle on the hourly charts. The pair proceeded to bottom out and rally. The CCI value reached a low of Here is another example of a short-term trade.
The majority of the traders would have been afraid to enter short at that time. Although we did not achieve our second target overall. Less than 24 hours later we were able to hit our first target. CCI reaches Notice that instead of rallying higher. A few days later at 11am on May 4.
A trader who did not take the point stop as prescribed by the setup would have learned a very expensive lesson indeed as his losses could have been magnified by a factor of three. We note that CCI makes a near-term peak at When the momentum fails to materialize.
The stop is placed at. Part 2 High Probability Trading Setups 3. The actual time period of the SMA depends upon the chart that you use. When looking for trend-trading opportunities. This strategy is called the moving average MACD combo. The main premise of the strategy is that we download or sell only when the price crosses the moving averages in the direction of the trend. This strategy works best on hourly and daily charts. What is the direction of the trend? Should I get in now or wait for a retracement?
When does the trend end? The greatest fear for trend traders is getting into a trend too late. We have developed a strategy that answers all of the questions above while at the same time giving us clear entry and exit levels. Yet despite these difficulties. We use two sets of moving averages for the setup: The 50 SMA is the signal line that triggers our trades. Setup 3. The target gets hit at 11am EST the next day.
Our first target is two times our risk of 28 pips 1. We enter the position and place our initial stop at the five-bar low from entry. The trade sets up on March The second trigger occurs a few hours later at 1. The reason why we have this rule is because we do not want to download when the momentum has already been to the upside for a while and may therefore exhaust itself.