There are some days (and even some weeks) where it is painful to be a forex trader. In in a rapidly moving market like ours, sometimes it is more like watching paint dry, or grass grow, or the sun move. You get the picture. So what do you do when you are counting on your forex trading for your "daily bread"?
Well, first of all, you shouldn't! Trading is risky, and sometimes it's a losing proposition. If you are dependant on it to pay your bills, all I can say is, get out now! There's an old adage that says, "Scared money will always lose."
If the money you put in the market is for your groceries or your mortgage or you car payment, then I guarantee that as soon as the market turns against you, you will start feeling sick. You will get this knot in your stomach. Worst of all, you may get "paralyzed". This is what happens when losing trades really accelerate. the trader just can't believe his eyes and he watches as the market moves rapidly against him, wiping out far more than he/she should have EVER risked on a trade.
So you might be wondering, how do I ever get ahead in this? First off, allow yourself some time. You need time to get used to the market. You need time to find someone to teach you whom you can trust. You need experience, and only time can provide that.
If you will commit to taking 1000.00, and doubling it each year which means you have to make about 8% monthly, in 10 years you will have over $1,000,000.00 dollars. You're going to live the next 10 years anyway (hopefully) why not make them profitable? And, if you stay around this market a long enough time, you'll see how it is possible to make more.
But isn't a million in cash good enough reason to take things slowly? Plus once you reach that level, $8,000 per month is a pretty nice little income. But if you're not quite ready to retire (or if 8K monthly is NOT enough), just put it off a year. Then you'll be on a 2 Million dollar account, averaging 16K monthly. Add that to your pension and the $800 monthly form Social Security (if you liver here in the US), and you'll be set.
Secondly, taking your time means also, using low leverage on your trades. Don't gear it it up to accelerate your earnings unless you're ready to do so. It will only result in bigger and faster losses, and you'll find yourself trying to recover from quite a hole that you will blow in your equity.
I'll say it again and again, leverage is a two edged sword. And it is only good when you are holding firmly onto the handle. So let the slow days come. Enjoy the relaxed pace, or maybe not even trade at all! When you appreciate them as much as the faster days, and you'll find a much better balance in your trading.
Until next time...,
Bill
Thursday, May 13, 2010
Tuesday, May 11, 2010
Forex Trading And Setting Stops Losses, Part II
We left off last time talking about setting short stops on smaller time frames.
So just to recap, a smaller time frame of less than an hour should have a price target of 20-30 pips. That means that my stop loss should only be half that, or 10-15 pips. Once you calculate in the spread, say 3 pips on the euro, or 5 pips on the sterling, you are only allowing yourself a movement against you of 10-12 pips. Frankly, that's pretty slim. You will find yourself getting knocked out a lot if you are not careful. If this is the way you really want to trade, the best advice I can give you is you MUST enter your positions near the swing highs and swing lows. That means you must enter based on fixed predetermined points (usually predicted either by pivot calculations or by Fibonacci grids). If you are not familiar with those, it will be very difficult. Many newbie traders I have known, try using candlestick patterns with these short term trades. That was what they were taught by some heartless FX system seller. However, many candlestick patterns need at least 2 complete candles to be verified as a pattern. So you have your 1st candle which shows reversal, then the next candle makes it complete. By that time you will have often moved 10-15 pips. You must move your stop beyond that swing point, then add in your spread, and suddenly, your trade no longer looks all that attractive. In that case, you have to be a good enough trader, that your skills can lead you to a 65-70% win rate. Anything less and you will consistently lose money.
That leads us to our next option...trading longer term charts with wider stops. It has remained part of my mission to preach this kind of trading to traders. Trading this way will do two things for you (if you're smart). First, it won't set you up for "Failure in 15". That's what I call getting taken out in one 15 minute bar on a small trade. You've entered what looks tempting, but in less than 15 minutes, you're a loser. So many newbie traders will do that 2-4 times a day before throwing in the towel. Then they'll come and do it again the next day. It's suicide. Second, it will force you to "gear down" your leverage. Many newbies come to the market with $5,000 or less. If you have a stop loss that is 100-150 pips, you certainly will not be trading a full size lot (if you know what's good for you). A bad trade can wipe out 30% of your account. And the corollary is this; now you have to make back more than 40% just to break even. Another bad trade may put you down to $2,000. Now you need 60% to break even.
So enlarge your stops. Gear down to where when you look at the stop and calculate its distance from your entry, that you are not risking more than 5% of your total account. Thus, if you are on a $5000 account, 5% is going to be $250. If your stop is 150 pips away, you can set your pip size to $1.50. That will give you the staying power to hold your trade, and not have a gut wrenching loss if it should move all the way against you.
Also, stops should be set, not only according to what you're willing to lose, but in tune with the markets rhythm. If a 150 pip stop is still below the last swing high, then you stop is too close. Stops should be outside of the recent swing highs and lows. It is at that point that traders will be looking to enter positions going in the opposite direction. It is at that point when you would know that your choice of direction is incorrect. A stop loss of 200 pips is not too much if you are on a daily chart. Especially, if you have a profit target that is 300-400 pips or more.
Another means of selecting a stop is by using the Average True Range indicator. The ATR calculates the range of the average bar on your chart for a select amount of periods (the preset on MT4 is 14, but you can set it to any amount of periods that you like). Let's say you are looking to short a market, and it has had a nice run up. Then maybe shows an exhaustion type candle (short body, long upper wick), you can enter a trade when the next candle breaks below the low of the exhaustion candle, use the ATR to calculate an average range, add that to the top of the exhaustion candle, and you have another viable stop loss price. Generally, this calculation results in a shorter stop loss distance, thus a smaller loss for you if the market does not go in your intended direction.
I think that will do it for today.
Happy Trading!
Bill
Drop me a line at bill@thefxtradingmasters.com if you have any questions!
So just to recap, a smaller time frame of less than an hour should have a price target of 20-30 pips. That means that my stop loss should only be half that, or 10-15 pips. Once you calculate in the spread, say 3 pips on the euro, or 5 pips on the sterling, you are only allowing yourself a movement against you of 10-12 pips. Frankly, that's pretty slim. You will find yourself getting knocked out a lot if you are not careful. If this is the way you really want to trade, the best advice I can give you is you MUST enter your positions near the swing highs and swing lows. That means you must enter based on fixed predetermined points (usually predicted either by pivot calculations or by Fibonacci grids). If you are not familiar with those, it will be very difficult. Many newbie traders I have known, try using candlestick patterns with these short term trades. That was what they were taught by some heartless FX system seller. However, many candlestick patterns need at least 2 complete candles to be verified as a pattern. So you have your 1st candle which shows reversal, then the next candle makes it complete. By that time you will have often moved 10-15 pips. You must move your stop beyond that swing point, then add in your spread, and suddenly, your trade no longer looks all that attractive. In that case, you have to be a good enough trader, that your skills can lead you to a 65-70% win rate. Anything less and you will consistently lose money.
That leads us to our next option...trading longer term charts with wider stops. It has remained part of my mission to preach this kind of trading to traders. Trading this way will do two things for you (if you're smart). First, it won't set you up for "Failure in 15". That's what I call getting taken out in one 15 minute bar on a small trade. You've entered what looks tempting, but in less than 15 minutes, you're a loser. So many newbie traders will do that 2-4 times a day before throwing in the towel. Then they'll come and do it again the next day. It's suicide. Second, it will force you to "gear down" your leverage. Many newbies come to the market with $5,000 or less. If you have a stop loss that is 100-150 pips, you certainly will not be trading a full size lot (if you know what's good for you). A bad trade can wipe out 30% of your account. And the corollary is this; now you have to make back more than 40% just to break even. Another bad trade may put you down to $2,000. Now you need 60% to break even.
So enlarge your stops. Gear down to where when you look at the stop and calculate its distance from your entry, that you are not risking more than 5% of your total account. Thus, if you are on a $5000 account, 5% is going to be $250. If your stop is 150 pips away, you can set your pip size to $1.50. That will give you the staying power to hold your trade, and not have a gut wrenching loss if it should move all the way against you.
Also, stops should be set, not only according to what you're willing to lose, but in tune with the markets rhythm. If a 150 pip stop is still below the last swing high, then you stop is too close. Stops should be outside of the recent swing highs and lows. It is at that point that traders will be looking to enter positions going in the opposite direction. It is at that point when you would know that your choice of direction is incorrect. A stop loss of 200 pips is not too much if you are on a daily chart. Especially, if you have a profit target that is 300-400 pips or more.
Another means of selecting a stop is by using the Average True Range indicator. The ATR calculates the range of the average bar on your chart for a select amount of periods (the preset on MT4 is 14, but you can set it to any amount of periods that you like). Let's say you are looking to short a market, and it has had a nice run up. Then maybe shows an exhaustion type candle (short body, long upper wick), you can enter a trade when the next candle breaks below the low of the exhaustion candle, use the ATR to calculate an average range, add that to the top of the exhaustion candle, and you have another viable stop loss price. Generally, this calculation results in a shorter stop loss distance, thus a smaller loss for you if the market does not go in your intended direction.
I think that will do it for today.
Happy Trading!
Bill
Drop me a line at bill@thefxtradingmasters.com if you have any questions!
Monday, May 10, 2010
Forex Trading And Setting Stop Losses
The use of stop losses is an incredibly volatile topic among traders. Some say use them. Some say don't. Some say the brokers hunt stops. Some say that is foolishness. Some say keep them close. Some say put them several levels deep. What do I say? (After all, this is my blog!)
There are two sides to every coin. So I say let's examine the pros and cons of each side and see what we can figure out.
The truth is...both are right. It simply depends on your own trading style.
I have traded without stops before. And before I knew how to do it, it cost me a bundle. Trading without stops means you have to scale your position down to the nearly lowest possible point. For instance, if you have a $5000 account, you should probably stick with 10 cent pips. Then even a 1000 pip move against you is still only taking $100 of your total account. Using smaller pip increments can allow you to build tremendous positions as the price moves against you So if you added a position every time the price moved 100 pips against you, you would end up with 10 positions, and each pip would now be worth $1.00. Your draw down would be $550 on a $5000 account. That is more than many traders would recommend, but you're not trading like most traders. And you can be assured not many currencies travel 1000 pips without a retracement. At this point you only need a retracement of 550 pips to break even. If the currency moved even to its first fibonnacci retracement area, it would fall about 490 pips, and the likely hood that it would stop there would be pretty low. But what you're looking for in this instance is not just a retracement, but a change in direction. Moving to its previous low would net you $450, and any move beyond that would be even more.
Also please note, those kinds of movements usually take months to play out. So even though you're looking at a nice return of 10%, it may take 8 to 12 weeks for such a move to come to completion.
Thus, the key to NOT using stops is gearing down your leverage to the very lowest of levels.
If you are not willing to trade like that, then you must use stops. I think I said once that a man would be a fool not to do so. Other wise, if your leverage is geared up and you have no stop, you will blow out your account in a relatively short matter of time.
So, moving ahead on the assumption that we are using stops, what is the best way to go? Close to my entry or farther away?
Again, it depends on your trading style. Some traders are short termers, and others are longer. When I talk about a short termer, I'm talking about someone who trades on the 15 minute charts or less. If that is your trading arena, you should keep your losses shorter, and closer to your entry. The reason why is this. Short term signals are notoriously less reliable. So you don't want to base a big loss on a faulty signal. Also, short termers should look for smaller profits. It is true that every 200 pip move starts with a signal on the five minute chart at the very beginning. But it is a serious mistake to look for that on every trade. If you're trading 0n 5 or 15 minute charts, be happy with with 10-30 pips. On that short term of a trade, I will move my stop to break even after I profit just 10 pips. But that also means that I have to be shorting near a good swing high or buying near a good swing low. If I am not close, my stop will be too wide to have a good reward risk/ratio. In other words if I am looking for just a 20 or 30 pip profit, I can't be having a 20 or 30 pip stop loss. 5 to 10 would be maximum plus I have to add in the spread. My stop should be less than than my profit target at all times.
So let's wrap this up here, and continue tomorrow.
Happy Trading!
Bill
There are two sides to every coin. So I say let's examine the pros and cons of each side and see what we can figure out.
The truth is...both are right. It simply depends on your own trading style.
I have traded without stops before. And before I knew how to do it, it cost me a bundle. Trading without stops means you have to scale your position down to the nearly lowest possible point. For instance, if you have a $5000 account, you should probably stick with 10 cent pips. Then even a 1000 pip move against you is still only taking $100 of your total account. Using smaller pip increments can allow you to build tremendous positions as the price moves against you So if you added a position every time the price moved 100 pips against you, you would end up with 10 positions, and each pip would now be worth $1.00. Your draw down would be $550 on a $5000 account. That is more than many traders would recommend, but you're not trading like most traders. And you can be assured not many currencies travel 1000 pips without a retracement. At this point you only need a retracement of 550 pips to break even. If the currency moved even to its first fibonnacci retracement area, it would fall about 490 pips, and the likely hood that it would stop there would be pretty low. But what you're looking for in this instance is not just a retracement, but a change in direction. Moving to its previous low would net you $450, and any move beyond that would be even more.
Also please note, those kinds of movements usually take months to play out. So even though you're looking at a nice return of 10%, it may take 8 to 12 weeks for such a move to come to completion.
Thus, the key to NOT using stops is gearing down your leverage to the very lowest of levels.
If you are not willing to trade like that, then you must use stops. I think I said once that a man would be a fool not to do so. Other wise, if your leverage is geared up and you have no stop, you will blow out your account in a relatively short matter of time.
So, moving ahead on the assumption that we are using stops, what is the best way to go? Close to my entry or farther away?
Again, it depends on your trading style. Some traders are short termers, and others are longer. When I talk about a short termer, I'm talking about someone who trades on the 15 minute charts or less. If that is your trading arena, you should keep your losses shorter, and closer to your entry. The reason why is this. Short term signals are notoriously less reliable. So you don't want to base a big loss on a faulty signal. Also, short termers should look for smaller profits. It is true that every 200 pip move starts with a signal on the five minute chart at the very beginning. But it is a serious mistake to look for that on every trade. If you're trading 0n 5 or 15 minute charts, be happy with with 10-30 pips. On that short term of a trade, I will move my stop to break even after I profit just 10 pips. But that also means that I have to be shorting near a good swing high or buying near a good swing low. If I am not close, my stop will be too wide to have a good reward risk/ratio. In other words if I am looking for just a 20 or 30 pip profit, I can't be having a 20 or 30 pip stop loss. 5 to 10 would be maximum plus I have to add in the spread. My stop should be less than than my profit target at all times.
So let's wrap this up here, and continue tomorrow.
Happy Trading!
Bill
Friday, May 7, 2010
Forex and the preservation of Capital
The key to a successful trading career in the Forex, is being around long enough to make it happen. Eventually, all good traders learn this secret. If they don't, they are not good. And if they are not good, they won't be trading for long. At some point, if a trader's forex business does not become profitable on its own, that is to say, if his account is not growing by means of trading, he will stop. he will no longer feed money he has earned somewhere else into a proposition that just keeps sucking it all up.
Therefore, the number one rule in Forex trading is "Preserve Your Capital". If you don't keep your powder dry, you won't have anything with which to fight at all. There are a number of means of doing this, and you should experiment with them to see what best fits your trading psychology.
1. Don't take high risk trades. that seems like common sense, but it is very uncommon. what defines a risky trade (before it becomes a loss)? The reward to risk ratio. If the reward is much smaller than the risk, you will be a loser. You cannot constantly put on trades like that without the majority becoming losers. Make sure that at all times, you reward to risk is 2-to-1. Then, even at only winning 50% of your trades, you will be profitable.
2. Trade Less. I was never profitable until I practiced this rule. There may be some really successful scalpers in this world, but I don't know any of them that are retail traders. I will look forward to meeting one of them one day. But for now, trade off of longer term charts. The 4 hour and daily are fine. You will catch bigger moves, the stops will be so many pips that it will force you to trade with very low leverage (or else risk your entire account at one time), and the technical signals on these charts are far more successful.
3. On a daily basis, never let your biggest loser match your biggest winner. That's another way of saying "Cut your losses short, and let your winners run." I also mean don't just arbitrarily cut a trade loose, just because it is approaching a loss that is the size of your biggest win. Before you ever entered that losing trade, you should be able to assess the possible damage if your stop loss is hit. if it is equal to your last big trade, just let it go by. Exercise some discipline and just walk away.
4. When your trade is in the profit, move your stop to break even. We'll talk more about this next week, and I'll introduce you to a new indicator which I use to help set and manage my stops.
Happy Trading!
Bill
Therefore, the number one rule in Forex trading is "Preserve Your Capital". If you don't keep your powder dry, you won't have anything with which to fight at all. There are a number of means of doing this, and you should experiment with them to see what best fits your trading psychology.
1. Don't take high risk trades. that seems like common sense, but it is very uncommon. what defines a risky trade (before it becomes a loss)? The reward to risk ratio. If the reward is much smaller than the risk, you will be a loser. You cannot constantly put on trades like that without the majority becoming losers. Make sure that at all times, you reward to risk is 2-to-1. Then, even at only winning 50% of your trades, you will be profitable.
2. Trade Less. I was never profitable until I practiced this rule. There may be some really successful scalpers in this world, but I don't know any of them that are retail traders. I will look forward to meeting one of them one day. But for now, trade off of longer term charts. The 4 hour and daily are fine. You will catch bigger moves, the stops will be so many pips that it will force you to trade with very low leverage (or else risk your entire account at one time), and the technical signals on these charts are far more successful.
3. On a daily basis, never let your biggest loser match your biggest winner. That's another way of saying "Cut your losses short, and let your winners run." I also mean don't just arbitrarily cut a trade loose, just because it is approaching a loss that is the size of your biggest win. Before you ever entered that losing trade, you should be able to assess the possible damage if your stop loss is hit. if it is equal to your last big trade, just let it go by. Exercise some discipline and just walk away.
4. When your trade is in the profit, move your stop to break even. We'll talk more about this next week, and I'll introduce you to a new indicator which I use to help set and manage my stops.
Happy Trading!
Bill
Thursday, May 6, 2010
Trading The Forex News, Part 3
As we have previously stressed, it is a serious newbie mistake to attempt to play the news without some really good experience and rationale behind what you are doing. Also you need to have a fixed money management system in place to prevent fear and greed from driving the trade, rather than a strict calculated criteria.
Anyone who has been in this business very long can tell you stories of monster trades that fell into the "emotional" category. I have entered trades that I watched make a boatload of money from the news, only to "hold on too long" and watch my profit dissolve in a reversal, or worse yet, become a loser that eats away at my capital.
I have also had trades where I just watched it lose. Mesmerized by how fast the market was moving, and "knowing" it would turn around just as fast and make me profitable. But then it never did. I ended up stopping the bleeding only to sit there stunned and wonder what I had done to my account.
The trader who does such foolish things is destined for failure, unless he has an endless supply of money, or at least some very deep pockets.
Know in advance what you are prepared to lose, on EVERY trade, then STICK TO IT. No matter how it feels. if you play the Forex with your emotions, You Will Lose. Period.
And this is why trading the news is so dangerous for newbies. It has an emotional appeal. The allure and opportunity to get rich quick. But it usually ends up the other way around.
OK. So I mentioned a couple of posts ago that I use the news differently from most. Here's how. Rather than entering a trade around the news, I will be in a few days, or at least several hours, in advance. By the time the news comes, I am in the profit. Then I simply sit aside dispassionately, and wait for the data. If it is in my favor, I will let the trade run and follow it with a trailing stop. Often news that really moves the market, will move it for hours afterward. So I have to be sure to give it enough room to allow for the immediate volatility, than just watch the profits build up.
If the news moves against me, I 'll just go ahead and exit the trade, (generally before it hits my extra wide stop), because I know that the price action will likely continue against me for the rest of the day...and perhaps even into the next few sessions.
Preservation of Capital...that is the name of the game, and the real Holy Grail of Forex. More on that tomorrow.
Drop me a line and let me know if these "news" lessons were helpful.
bill@thefxtradingmasters.com
Be sure to check out our offer on the website:
www.thefxtradingmasters.com
Until next time...Happy Trading!
Bill
Anyone who has been in this business very long can tell you stories of monster trades that fell into the "emotional" category. I have entered trades that I watched make a boatload of money from the news, only to "hold on too long" and watch my profit dissolve in a reversal, or worse yet, become a loser that eats away at my capital.
I have also had trades where I just watched it lose. Mesmerized by how fast the market was moving, and "knowing" it would turn around just as fast and make me profitable. But then it never did. I ended up stopping the bleeding only to sit there stunned and wonder what I had done to my account.
The trader who does such foolish things is destined for failure, unless he has an endless supply of money, or at least some very deep pockets.
Know in advance what you are prepared to lose, on EVERY trade, then STICK TO IT. No matter how it feels. if you play the Forex with your emotions, You Will Lose. Period.
And this is why trading the news is so dangerous for newbies. It has an emotional appeal. The allure and opportunity to get rich quick. But it usually ends up the other way around.
OK. So I mentioned a couple of posts ago that I use the news differently from most. Here's how. Rather than entering a trade around the news, I will be in a few days, or at least several hours, in advance. By the time the news comes, I am in the profit. Then I simply sit aside dispassionately, and wait for the data. If it is in my favor, I will let the trade run and follow it with a trailing stop. Often news that really moves the market, will move it for hours afterward. So I have to be sure to give it enough room to allow for the immediate volatility, than just watch the profits build up.
If the news moves against me, I 'll just go ahead and exit the trade, (generally before it hits my extra wide stop), because I know that the price action will likely continue against me for the rest of the day...and perhaps even into the next few sessions.
Preservation of Capital...that is the name of the game, and the real Holy Grail of Forex. More on that tomorrow.
Drop me a line and let me know if these "news" lessons were helpful.
bill@thefxtradingmasters.com
Be sure to check out our offer on the website:
www.thefxtradingmasters.com
Until next time...Happy Trading!
Bill
Tuesday, May 4, 2010
Forex and Trading the News, Part 2
Last time we looked at some of the rationale, both good and bad, for trading the news releases. I wrote on how to trade the trends following up to the news release. I should add here, that if you are trading those shorter term movements, generally I want to be out several hours before the news release itself.
But not only is there decent opportunity to trade leading up to the announcements, but following them as well. Especially if the news is a surprise and causes a reversal, or if it is a surprise and continues in the direction of the trend. A news release that offers no surprises, either good or bad, can just be rather boring, and difficult to trade.
Trading Forex price action after a news release, is done just the same way as in the days leading up to it. Make sure you have established the direction of the trend, then trade off of the 5 minute charts. Keep your stops close, just beyond the previous swing high or low, and let your winners run with a trailing stop. See yesterday's entry for more detailed information.
Another means of trading Forex news announcements, and making a profit from entering a trade, is to look at the immediate price action after the announcement, and then just enter a longer term position. So if the market gets a surprise to the upside from a data announcement, watch the price action for 5-15 minutes, to see if there is a discernable direction. If so, you can enter on a pullback, again using a 5-15 minute stochastic, and just trail the move. It will likely last all day unless there is some other news to off-set it.
Tomorrow we will take up part 3 of Trading the Forex News, using news to augment or exit an existing trade. And we will have a very timely example from our Euro trade this week!
Until next time...Happy Trading!
Bill
But not only is there decent opportunity to trade leading up to the announcements, but following them as well. Especially if the news is a surprise and causes a reversal, or if it is a surprise and continues in the direction of the trend. A news release that offers no surprises, either good or bad, can just be rather boring, and difficult to trade.
Trading Forex price action after a news release, is done just the same way as in the days leading up to it. Make sure you have established the direction of the trend, then trade off of the 5 minute charts. Keep your stops close, just beyond the previous swing high or low, and let your winners run with a trailing stop. See yesterday's entry for more detailed information.
Another means of trading Forex news announcements, and making a profit from entering a trade, is to look at the immediate price action after the announcement, and then just enter a longer term position. So if the market gets a surprise to the upside from a data announcement, watch the price action for 5-15 minutes, to see if there is a discernable direction. If so, you can enter on a pullback, again using a 5-15 minute stochastic, and just trail the move. It will likely last all day unless there is some other news to off-set it.
Tomorrow we will take up part 3 of Trading the Forex News, using news to augment or exit an existing trade. And we will have a very timely example from our Euro trade this week!
Until next time...Happy Trading!
Bill
Monday, May 3, 2010
Forex and Trading the News
When one trades the forex, it is always important to look at the news items for the week. "Trading the news" is one mistake that newbies make on a regular basis. There are a great many trading systems and trading programs that are designed around the very principle of trading the volatile jolts that are produced by news items.
This is a fairly popular trading idea, since news comes out on a regular basis, and offers a lot of "opportunity" related to the data. Especially when a figure comes out which is a surprise to the fore casted data, or a big change from the previous month, quarter or year.
However, the big problem with trading the news is that many traders will try to "front-run" the news. That is, they will actually take a position before the news is released, and hope that it is the correct direction once the news is released.
I will be the first to confess, this "can" be an explosive means of profits. But it is a two edged sword. The same movement which gives big, fast profits, will also give big, fast losses. There are reasonable ways to trade the news, we will discuss some of them here. However, what we will recommend is using the news to END a trade, or to augment a trade that is already "on".
You may remember from previous reading that my system is based on doing everything opposite from what nearly everyone else recommends. Thus if everyone is creating systems based on making profits from the news, I am going to use it to take my profits.
But first, let's "go with the flow" for a couple of minutes. How can you make profits from the news? First, if we are expecting a big news announcement, such as GDP, or Non farm Payrolls. or an Interest Rate Change, most news pairs will begin to trend in the 2-3 days before the announcement. Depending on the forecast of news, the trend may be either up or down. The direction doesn't really matter. But since I will be looking at a shorter time frame, what I do is look to the daily chart, and see if the particular day I am trading on is up or down. The multi-day trend is not as important here.
So if the day is up, I will switch to the 5 minute chart, and buy every time the stochastics give me an oversold, and then a buy signal. (Please check the blog entries on stochastics for further information on that particular indicator.)
Since I will only trade with the trend, I will ALWAYS wait for a good over-sold signal and an upturn before entering a long trade on the buy side.
If the day is a "down" day, I will be looking for opportunities to sell short my selected currency. Again, I will wait for an overbought signal with a sell signal from the stochastics "turning down".
Be sure to keep a close stop, (the nearest swing high or swing low on the 5 min chart), and a trailing stop once the trade is profitable, to keep locking in profits on the way up. Remember, in this scenario, unless a reversal is underway, and the up trend is actually changing to become a downtrend, the oversold indicator is pretty reliable. But the over bought is not. Since it is an uptrend, it can remain over bought for a long time. While some traders will exit this trade as soon as the stochastic becomes over bought and crosses above 80, I will stay in longer. By using a trailing stop loss I can stay in a rising trend that may stay overbought for a long time before it pulls back.
That should do it for today, as this post is getting a bit "long in the tooth". Tomorrow we will come back and see how to trade the news after it is released.
This is a fairly popular trading idea, since news comes out on a regular basis, and offers a lot of "opportunity" related to the data. Especially when a figure comes out which is a surprise to the fore casted data, or a big change from the previous month, quarter or year.
However, the big problem with trading the news is that many traders will try to "front-run" the news. That is, they will actually take a position before the news is released, and hope that it is the correct direction once the news is released.
I will be the first to confess, this "can" be an explosive means of profits. But it is a two edged sword. The same movement which gives big, fast profits, will also give big, fast losses. There are reasonable ways to trade the news, we will discuss some of them here. However, what we will recommend is using the news to END a trade, or to augment a trade that is already "on".
You may remember from previous reading that my system is based on doing everything opposite from what nearly everyone else recommends. Thus if everyone is creating systems based on making profits from the news, I am going to use it to take my profits.
But first, let's "go with the flow" for a couple of minutes. How can you make profits from the news? First, if we are expecting a big news announcement, such as GDP, or Non farm Payrolls. or an Interest Rate Change, most news pairs will begin to trend in the 2-3 days before the announcement. Depending on the forecast of news, the trend may be either up or down. The direction doesn't really matter. But since I will be looking at a shorter time frame, what I do is look to the daily chart, and see if the particular day I am trading on is up or down. The multi-day trend is not as important here.
So if the day is up, I will switch to the 5 minute chart, and buy every time the stochastics give me an oversold, and then a buy signal. (Please check the blog entries on stochastics for further information on that particular indicator.)
Since I will only trade with the trend, I will ALWAYS wait for a good over-sold signal and an upturn before entering a long trade on the buy side.
If the day is a "down" day, I will be looking for opportunities to sell short my selected currency. Again, I will wait for an overbought signal with a sell signal from the stochastics "turning down".
Be sure to keep a close stop, (the nearest swing high or swing low on the 5 min chart), and a trailing stop once the trade is profitable, to keep locking in profits on the way up. Remember, in this scenario, unless a reversal is underway, and the up trend is actually changing to become a downtrend, the oversold indicator is pretty reliable. But the over bought is not. Since it is an uptrend, it can remain over bought for a long time. While some traders will exit this trade as soon as the stochastic becomes over bought and crosses above 80, I will stay in longer. By using a trailing stop loss I can stay in a rising trend that may stay overbought for a long time before it pulls back.
That should do it for today, as this post is getting a bit "long in the tooth". Tomorrow we will come back and see how to trade the news after it is released.
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