INGOT'S RAINBOW ... A Position Trading Strategy

[davew]

How do you get the bars on the rainbow at the same time? MT4.

[Ingot54]

Originally Posted by davew

How do you get the bars on the rainbow at the same time? MT4.

Hi Davew

Yes - On the MT4 platform there is a "CHARTS" tab on the top toolbar. The drop-down menu offers "Bar Chart, Candlesticks, Line Chart" representations of price action.

I am off to have a nap now, after night shift - but hopefully will be back in about 12 hours to complete what I began in my earlier post.

I hope some of you have been looking at these because there is great potential at this time, due to so many pairs running counter to the main trends. When they snap back into line with the true trend, the opportunity is there to enjoy some large profits, if we are careful.

[Ingot54]

Those who have been following the thread from the beginning should have a good idea by now how beneficial it can be to trade the longer term TF. Although I have encouraged traders to stick with the DAILY and WEEKLY charts, the current return to volatile conditions is playing havoc with our Stop Loss orders.

Last Wednesday 18th March, the US Treasury announced that they would begin buying their own Bonds. This would occur a couple of times a week over a period of 6 months, and would involve a couple of hundred billion dollars!

It is astonishing to me that we can now converse in billions of dollars just like it was $5!! No one can conceptualise what ONE BILLION DOLLARS really is, and just how incredible an event the world financial collapse is ... happening in out time, in front of ur faces. And these hundreds of billions of dollars are figures tossed around like betting chits at the Melbourne Cup horse race!

The consequences for traders are that we will be experiencing this sort of volatility for time to come yet - particularly since China is reportedly very un-cool about the US debasing its currency in order to pay its foreign debt, and attract investment! Japan I suspect, would share the same attitude towards the USA as China - there are some very big foreign reserves at stake here, and these two Asian empires stand to lose heavily if the USA gets away with this.

My view is that we may see counter moves in other currencies, which will thrust reversals on the foreign exchange markets for some time to come, until one or the other adversaries gives up, and allows water to find its own level.

So - the EURUSD gapped up more than 500 pips in one day when the Bond news was announced by Treasury. Similarly, the AUDUSD gapped up about 250 pips, and the USDJPY crashed from around 99.00 to around 93.50 in just 2 days.

Not too many indicators picked this in advance!!

Clearly, it is not possible to rely on markets to show us reliable trends just yet. Indeed, if you look at the 10 pairs I posted to keep a watch on, only these seem to be unaffected by the Treasury announcement, and are on target to resume their LT trends:

EURCHF
AUDCHF

... and they seem to be struggling to even resume their WEEKLY trends so far.

But the USDSGD (which I do not trade because of spread) appears to have turned and is awaiting confirmation of resuming its trend, as are these:

AUDJPY
GBPCHF
AUDUSD
USDCAD

It is still too early to tell what these will do - but as the trends begin to resume, I suggest you look at the 4Hour Charts, and perhaps get some more reliable pips there, if you want to try it. Personally I am not in the market at all - too risky at the moment. If the regulators don't know what they are doing, how can I have a hope?

The Euro strengthened, then it weakened ... what gives? Of course the question is facetious!

But it illustrates the point. It is simply unsafe to trade these LT strategies just now.

In the next post I will try to address leverage, and explain how I think we should be using it to trade the WEEKLY or DAILY charts.

[Ingot54]

Hi Folks

It has been a long time coming, but I want to discuss the use of leverage in trading. It is so important that we fully understand exactly what the risks are.

So what is the problem with leverage?

Leverage allows you to take on LARGER positions with the same margin, but the distance your Stop Loss can be placed will be shortened with high leverage, or lengthened using lower leverage.

$1000 can control 1,000,000 units of the base currency of the pair, when using 1000:1 leverage, or $100/pip
$1000 can control 100,000 units with 100: 1 leverage, or $10/pip.
$1000 can only control 10,000 units with 10:1 leverage, or $1/pip.

To understand this issue, it is easier to take a look at the extremes.

Imagine you have 1000:1 leverage, trading FULL contracts, not Mini's.

This means you can control 100,000 units of the base currency of the pair, for only $100.
It also means that if the exchange rate rises by 10 pips, and you are "long", then you will be credited with $1000.

Similarly you will be debited $100 for every one-pip move against you, or you will lose $1000 for a detrimental 10-pip move.

Heady stuff indeed.

Clearly you can now see that an account of $10,000 could only sustain a 100-pip loss before wiping out, at 1000:1 leverage.

But this is not the only problem: If you want to trade using a stop, you will have to submit a margin to fund your position - that is mandatory. At 1000:1 a 10-pip stop-loss order will require $1000 margin, and a 50-pip SL will require $5000. That leaves NO ROOM for money management whatsoever - where is your "2% of account per trade" now?

You can not do it using such leverage, unless you have a VERY large account, and the brokers who offer high leverage know this. Traders use it because it is offered, not in any way understanding the implications of the leverage they are using.

In my view, this is criminal, but traders need to take responsibility for their own accounts, and do the hard work - the head work - necessary to fully understand leverage and the judicious use of it in trading forex.

It is my view, that not one in 20 traders understand this anomaly - probably far fewer than 5%.

Currencies move 10-pips before yawning! Unless you are lucky enough to get an initial move in your favour, you are gone. Most 5 minute charts show "noise" of 10 pips in a 15-minute period - in either direction. To confirm what I am saying, have a look at the ATR of a 5 minute chart, or a 15 minute chart!

Scary indeed, unless this is going over your head.

The 14-period ATR of the 5-minute chart of EURUSD is currently 7 pips, and the 15 min ATR is 12 pips!! Currently volatility is low. It can get to 60 pips eaily - (see 5 and 15 min chart of EURUSD on 18th march 2009)

You would need to be exceptionally fast, alert, and have a good Internet connection/software etc to even begin to have a chance to close out a position as it moves into profit or indeed, into loss.

I don't know anyone who could do that.

Now - let's look at another extreme - leverage of 10:1 at the other end of the scale. In fact - I think you would find it very difficult to find a broker who would offer you 10:1 in Retail Forex.

I don't know of any.

It is NOT in THEIR best interests to keep your account in YOUR hands ... and growing.

Using the same scenario as above, with 10:1 leverage controlling 100,000 units of the base currency of the pair, you will need to submit $10,000 margin deposit. The big difference - and it is really huge - is that your pip value is only $1.

Now before you think: "Oh, I'll never make any money at $1/pip" you could well be right ... partly. But considering what your record is now, the news can only get better.

Here's why:

Currency trading is a big boy's game - but since the regulations have opened it up to Retail Trading (or Off-Exchange Trading) it has been a licence to print money for any broker fortunate enough to have gotten established in those days (1996).

Brokers already knew that if they allowed traders the use of high leverage facilities, they would sweep clean any and all accounts, bar the savvy few who refused to indulge in this foolishness.

So why does the use of low leverage offer ANY advantage at all, given that traders can not make as much money as they could using the higher leverage freely offered?

As mentioned, FX trading is a game for big players with deep pockets. Foolishly, Joe Schmoe thinks he can match these bigger players, by artificially boosting his control of a contract, through use of leverage. Trading firms love to promote trading competitions, where their winners have managed to "turn $10,000 into $362,873.55 in only 90 days!".

What they do not tell you is that the winners went for an all-or-nothing gamble, and it happened to pay off. They will NOT publish all results and ALL trades for the same reasons - it exposes the lies and untruths associated with the promotion of their "system".

So, unfortunately, if you have been losing using 100:1 margin, going to 200:1 or 400:1 will only make things worse.

While 10:1 or 20:1 or 50:1 leverage may be slower, it is also streets ahead in safety. And the reason is this: You can place a 200-pip stop-loss order for $200 using 10:1 leverage! But if you are using a 100:1 leveraged account, the same 200-pip SL would cost you $2000. Not many people could afford that - especially if trying to operate on 2% risk of capital per trade.

So many switch to Mini accounts, or opt to put up with the dangers of higher leverage.

There is no quick way to riches in Retail Forex - no matter WHAT the advertisement says. In order to make money in this, you have to have money to begin with. However, the method I am showing readers, is a way out of the dilemma.

I am very sure of it.

Using a good Daily Charts method - such as I think we have in this thread, it is possible to make very good money, but not become wealthy ... at least in the early part of your trading.

But if you are patient and disciplined and have a track record of growing your account, what's wrong with adding any spare cash to your account and compounding returns that way? getting rich slowly is good too.

I have started a thread on another forum discussiong another LT trading method. If you Google " t2w Getting a Life ... Position Trading the higher Time Frame " there is quite a bit to see with a different strategy.

Meanwhile, I have noticed many questions on the way through this thread, and want to answer as many as I can before wrapping it all up.

I also want to summarise the entire approach so as to make the method accessible to people who come in late - it is a tedious task to read through the whole thread.

Below I attach a current screen shot of the account balance of my open trades since 2nd April 2009 - in Demo only!!

And a screen shot taken a little later of the pips made. bear in mind the pip value is 10 times higher than reality because my Demo account is a Mini contract account.

Best wishes

Ingot

[davew]

ingot were these entries off 4hr or daily? can you post real time so we can follow and see why you took it? Are you using pa or just rainbow? I will print out these and go back and look at entries. Dave

[o990l6mh]

Hi Ingot

Actually Oanda offer quite low leverages. The highest they offer is 50:1 and the lowest is 10:1

That is pretty unique huh. I know that almost every broker wants you to kill yourself with leverage.

[mjhipkiss]

Hi All,

Many Thanks to Ingot and all the other contributors for this fascinating thread. Certainly one of the best I have come across! Very very unusual to see NOT ONE negative comment, no-one getting pompous or aggressive, just an atmosphere of collaboration and learning. EXACTLY what it is all about!

I am not experienced enough to offer much in terms of the system, but one thing I can contribute concerns the latest post by Ingot: LEVERAGE.

To avoid confusion, let me say IT DOES NOT MATTER WHAT LEVERAGE THE BROKER OFFERS. In fact, the higher the leverage they offer the better! Why? (and we must always ask why, just like little kids as Ingot says)

Because WE DON"T HAVE TO USE IT! All that matters is TRUE LEVERAGE, i.e. the (position size / account balance). For example I have $1000 in my account, and I open a mini lot position for $10,000, my TRUE LEVERAGE = 10,000/1,000 = 10:1.

This is fairly aggressive leveraging, and I would say somewhere between 3:1 and 5:1 is sensible. Now it is obvious to see how position size, true leverage and % risk are related and intertwined. I urge you to get back to high school algebra, get out the pen and paper and define these relationships yourself, you will have a MUCH better understanding of money management if you do.

Some of you will be wondering about my comment that the higher the leverage the better...... well, if we trade a $10,000 lot at 50:1 account leverage, and a $10,000 lot at 400:1 account leverage what is the difference in terms of margin, risk, money management etc?

THE ONLY difference is that you are required to tie up LESS margin with a higher leverage, THAT IS ALL. Risk is the same, TRUE leverage is the same, $/pip is the same. Therefore the higher the leverage the better because if we decide to use a strategy where we look at pyramiding based on total free equity, you can utilise a % of that extra margin that is not tied up in your open position, therefore compound quicker. It does not mean that the % committed on all open trades has to be any higher, or risk has to be any higher, it just means you can compound faster because you are tying up less of your own money.

If I have got all this completely wrong or if any of the more experienced members see things differently please respond as I am moving forward from here with this understanding and would hate to think I have it "arse-about-face"

Thanks again everyone and good luck. Hope that Ingot gets around to "finishing" this thread to his satisfaction.

PS - the only other thing affected by higher leverage is margin calls. Because you are required to submit less margin to secure a position, for a position the same in all otehr respects, the higher leveraged account can have the position go further against you before getting a margin call. The benefit in this case with lower leverage is that after a margin call you have more margin left over! But hey, we should never be getting margin calls anyhow!

[Blaiserboy]

a good start to the day..

I am attaching my variation of the rainbow chart

[Cdawg]

Nice set-up Blaiser.. Hope it works for you.

I think personaly the strenght of the rainbow technique is the roping stochs not the actual rainbow (while pretty to look at), I have deleted all the EMAs off my screen except the 50 EMA, and use the rope for confirmation.

That is my evaluation after two years of applying this technique.

[Blaiserboy]

I think each of us, through experience, gets a feel....... and then the final chart evolves.....

I haven't been using it for too long........ takes a while to read it.....