Price action goes up and down, entering at the right spot with the right R:R that the market offers is very hard to do, still learning tho.
Key points from yesterday trading:
If the market is not giving me the right R:R for my interpretation of the market, I do not need to trade and just enter a market order.
S/L of 12.5/15 is quite low and my trade idea might need 15-20.
I DONT HAVE TO ALWAYS ENTER THE MARKET.
I made a market order on NZD/USD. The correlation of the AUD and NZD do not match because of the recent bad economic news that came out of NZ, market sentiment and market cycle will have a high probability of a correction to match the AUD and NZD back together.
Mind if I talk a little bit about risk management?
In his book, The New Trading for a Living, Dr Elder uses the analogy of swimming to discuss risk management, saying that there are two kinds of danger the swimmer faces: sharks, and piranhas.
The ‘shark’ is that one big trade that goes wrong, taking a massive bite out of your trading capital in a single shot. For this reason, he recommends never risking more than 2% of your account on a single position. This is fairly easy to understand, and to apply, and is all over the internet. You are clearly aware of this rule, and have been managing your position sizes accordingly, so I won’t say any more about it.
The ‘piranhas’, on the other hand, are the string of individually acceptable losses that nibble away a substantial part of your account, almost without being noticed. For this reason, Dr Elder suggests that if you ever suffer a 6% draw-down that you stop trading for the rest of the calendar month - you are clearly out of sync with the markets and need some time to put yourself right, or let the markets return to normal, as the case may be.
I rarely see anyone reference this rule, but I found the implications staggering. Whereas the first rule requires you to manage risk in reference to your account size, the second rule requires you to manage risk in reference to your account size and your hit rate.
Let me give you an example by comparing two profitable systems. Don’t worry about the R:R ratio, just accept that both are profitable in the long run.
The first system has a 90% hit rate. If a 2% position size is used - the max allowed by rule 1 - then a 6% draw-down - the max allowed by rule 2 - will involve three consecutive losses. The chances of that three loss streak starting with any given trade is 10%x10%x10% = 0.1%. The odds of this happening, and thus being locked out of the market for a couple of weeks, is so low that a 2% position size can be used.
The second system has a hit rate of 25% - it’s all about picking the big winners. If a 2% position size is used the chance that any given trade is going to be the start of a three loss streak that locks you out of the market is 75%x75%x75% = 42%! Using a position size that is perfectly permissible under rule 1 has nearly a 50% chance of locking you out of the market after only three trades under rule 2! Every month!
But suppose that system instead used a 1% position size. Now, a lock-out only occurs after a string of six consecutive losses. The chances of this six loss streak starting with any given trade is only 18%, a far more reasonable number. Still a little high for my tastes, though. What about a 0.5% position size? Well, that requires a 12 loss losing streak, and the chances of that beginning on any given trade are only 3%. Much better!
So, as you can see, the 2% rule is only half the story, with the 6% rule being the other half. I mention this because your last account update is showing a draw-down of 4.8%, and you are talking about increasing your position size when, respectfully, your hit rate rather suggests that you should be reducing it.
Edit:
Obviously, there are ways to hit a max draw-down other than a string of consecutive losses. I’ve tried to keep things simple, though, to illustrate the basic point.
Totally agree, I need to have another view on my risk management strategy. I have not looked at what is the cost of each S/L amount, just whether it matches my R:R which I think is wrong.
What’s causing the biggest issue in my trading is firstly currency correlation, I have decided from today to do 1 US trade, and the other two being Yen and EURO crosses to reduce the likelihood of unusual correlation of my trades. Secondly, Jumping into the market too quickly when it doesn’t match the R:R plus the actually hit rate of my T/P which I am working on ATM.
Thanks for the informative explanation of seeing another side of risk management.
I think analytical wise for trading I am pretty good, however, putting it into practically for profit making is a different story . I believe I am inexperienced as a trader, however, I did not lose as much as last week which is a positive note, so hopefully I turn a profit next week!
The errors I made from this week, considering and aligning my Post 94 to work on.
Key points to improve my forex trading
Question my approach, whether my T/P is in a realistic zone and what is the probability of it hitting. Aiming too high or low is detrimental to my success.
Trade only one or two US currencies, decide on economic events and news, concerning currency correlation. My other trades have to be EURO or YEN crosses.
Consider dividing my capital risk proportion of 1.25% into my open trades. Since I am not a swing trader, as I presume from the past two weeks of experience, my S/L and T/P needs to be aligned with a day trader’s approach.
ATM I have an S/L of 14-17 to T/P 18-24 roughly. IF my Bottom end of my T/P is larger than my S/L top end, I can make some profitable trading.
The biggest problem I had was the randomness of my S/L & T/P and will need to structure it. Also, getting too involved in the market, getting out of the trades too early, well, too much to remember .
However, I am getting better every week, and therefore, will keep improving weekly and hopefully turn a profit next week, but my main priority is just to keep learning, that’s it.
Hi Ben, it may pay to find a Currency Strength Indicator/Meter which gives some insight into which of the pair has the overall strength and the pairs possible future direction.
Below is 4 TF’s of the NZDUSD for the last week and you can see that long term the NZD had the strength and therefore the moves later in the week after the USD strengthened were downward or Shorting situations.
Weekly TF shows the USD as taken over the strength by end of week and this is confirmed by the Daily TF…The 4H and 1H TF’s are fluctuating wildly, possibly due to turbulence from the recent cross higher up the TF.
Edit: As you can see on the W1 Chart the NZDUSD plunged 80+pips on the cross over (now marked on the CSM) at 6.00am 18-01 (GMT+11)
So…next week we can reasonably assume that the pair will move downward…lets see.
I wanted to enter a trade early based on the US government shutting down but the spread increased. The market sentiment and fundamentals will be bearish on the US
I considered my past mistakes and won’t be opening more than 2 trades on the US ever.
I will find EURO or YEN crosses.
My current trade is on CAD/USD since the spread is lower than CHF or EUR at 15 pips previously, I got it for roughly 4 pips. Oil has had positive news of a rebound of $100, so the trade could lead to a good outcome.
My S/L seems like its pretty close but the fundamentals, news on the US, the downtrend of the USD against the CAD and oil prices with news of a possible recovery to $100 makes it a high probability trade.
I got stopped out, however, I kept the same idea of my original plan and short the EUR + CAD against the USD and lowered my units to match my S/L. Will print screen it when I get home.
A reminder to myself, I will not put more than 2 trades on for the US!
Just closed my USD/CAD trade to lower my risk against the US
This is wise
i made a rule for myself as well a while back,
NEVER More than 4 Trades at a time
usually i only have 1 or 2 though, 99% of the time it’s 2
but i also have another rule
that being… When i set lot sizes i do this
let’s say my risk is $10 for the trade (Generically speaking)
so, if i know i’ll probably go to 4 trades, then i’ll put the first trade as a lot size of 0.25lots
that way if i get to 4 trades, the total weight (as i call it) the total of the LOTS does not exceed 1.0 lots
if i know it’ll be 2 trades adn no more i will start on 0.5 lots
and so on…
doing it the other way goes above your risk requirements.
it’s better to make it slow than make it quick with high risk
Have you considered using the ATR to calculate your stop losses? On the H1 chart, an ATR setting of 12 will tell you what the average range of a bar is over the last half day. This gives you a completely objective view of the recent volatility of the currency pair,
You could then use a multiple of the ATR to calculate your stops. So, for example, by using 2xATR(12) you would be saying that you want to be able to weather two average size bars moving against you before being stopped out. If you find that doesn’t work you could try 2.5x, or 3x, and so on, until you find the right fit for your trading style.
Even though I do not open too many trades anymore, I have another new issue concerning trading which is trading too much of my “trading ideas,” leading to “overtrading.”
This is shifting my original trade ideas which are causing me less profitable outcomes. I plan on only trading four trade ideas a day, two for the US and two for the cross-currencies. Also, I need to avoid making quick “trade idea decisions” while I am out.
My trades for the day were:
700 units USD/CAD long = -$1.53
I decided to lower my unit amount to 500 since it seemed like I was making bad decisions based on S/L and T/P. Considering a S/L of 16-20 and T/P of 22-27
500 units EUR/USD short = $1.87
500 units USDCHF short = $1.14
500 units GBP/USD short = -$1.04
500 units USD/CHF short = -$0.85
Since I am going to be home all day, I thought I’ll do a more detailed fundamental analysis for the week and strategise for days I am out and be self-critical about my approach to trading for self-development.
I lost my USD/CAD trade because I emphasize the fundamentals rather than technicals. Hence, when two economic data rebound each other, it’s better to take a technical and sentiment approach in your trading. What I dislike about trading Comdolls is when there is a positive outlook on the economy versus a negative outlook on the commodity, It can go either direction. However, when both the commodity and economic event are in the same direction bullish or bearish, it tends to make a high probability trade.
Loss
-$1.04
If I am going to work or go out, I should lower my S/L & T/P expectations. Sometimes I take a swing trader’s S/L & T/P when I should be lowering it.
Anyways, to the fundamentals, currently gold and oil have optimistic views, USD weakening due to the Senate close down, overall sentiment of the greenbuck bearish and comdolls are gaining strength against the USD because of optimistic views on commodities.
Trade plan for the day.
Only two USD ideas
Only one YEN crosses idea
Only one EUR crosses idea
Consider using ATR as a S/L indicator.
AUDUSD - the sentiment of the AUDUSD is bullish, gold prices are optimistic, MA is showing an uptrend.
Price will sway and consolidate therefore, I will enter at a better price than offered.
I considered using ATR for S/L & T/P and will start using 1.5x first to get an idea of how it works.
I ended up cancelling my NZDJPY trade and wanted to take a higher probability trade on the retracement of the AUD/USD. There have been no changes to the fundamentals of the AU economy, gold or US economy from what I know, and therefore found it a high probability trade. I also, took off my USDCHF as it was betting against my AUD/USD trade.
the BOJ kept their interest rates at -0.1%, which was bearish on the USD, I’ll wait until 3 pm to enter a trade after the effects of interest rates. What I noticed is that every little change in each major economy affects the US and every other major economy. When one major economy moves it has ripple affects on the other economy.
A lot to learn, but gradually I’ll grasp the idea and get better at trading.
I actually took a position based on a 1 to 1 RRR, since the BOJ outlook and monetary policy statement seems good. I waited till it reached a good spot to match my S/L and a decent spot for T/P. I believed it was a high probability trade and the MA is heading downwards also.
I notice YOU ALWAYS only use 1 Chart Window at a time
Have you considered Multiple at a time for Correlation
now it looks like your interfacing through Oanda Webtrader,
so they may not have the ability to do that
have you tried this as an idea
Trade the way you are trading, but have another tool open PURELY FOR ANALYSIS AND MONITORING
the tool i would suggest (that i am not an affiliate of , and that i use myself regularly) and it’s free and there are no catches
you do need to create a free account, but thats it
it’s called NETDANIA NETSTATION
here’s a link
it’s confusing at first
but go in, Create a profile after you’ve logged in
a profile is a tab
then practice adding stuff to it , like calender or charts do that to begin with
later you can get into more technical things
here’s the link
click the button to launch the netstation
it has cool features like c-trader , like detaching charts
but does so much more
now if you like it, be aware at one stage you can download java and let it run from you desktop directly
i recommend give it a try.
i constantly here you saying things like… i don’t what this will do or what that will do
well… maybe if you had more charts open you’ll be more equipped to make that decision
in my own experience, i found when i start working correlating pairs, i took a step up by a few notches… definitely
i reckon check it out and see how it goes
the whole single chart trading thing, will only take you so far.
Thank you Martin, I’ll definitely give it a shot and look at it later tonight. I am starting to understand why you guys go for more a swing trader and technical approach when it comes to trading. Good News usually puts the pips slightly up or down depending on the impact but rarely changes market sentiment or market trend unless it’s a huge impact. I am devising a trade plan while I gain practical experience and it’ll probably be a while before I can fully make it profitable.
It’s more of a hybrid type of trading involving scalping, day trading and swing trading. The later I neeed to incorporate definitely. I think for swing trading a more technical approach is important with some fundamental understandings useful.
ATM my thoughts on how to approach my trading is:
Not to open too many USD trades at once, consider EURO and yen crosses.
Plan my trades around economic events because they do tend to strongly affect my pip value on my S/L and T/P when I am day trading. I usually have S/l of 15-20 to T/P of 18-24.
If I can get in early on an economic event that I know I can profit, I’ll take a scalper approach in my trading, take what you can.
I need to experiment with swing trading, where I’ll use H4 & D1 to approach my decision. I have never swing trade but I assume a S/L of 50-60 and T/P of 80-100 could be a good amount over a 3-5 day period. Also, it will make me take a more technical approach to my trading which I should consider actually.
I definitely need to combine all three approaches to maximise my earning potential. Once I start practicing swing trading, I’ll be able to see on a longer term which will improve my trading.
I have a slight idea on scalping and day trading, however, swing trading makes me uncomfortable and I know it’ll probably be the most beneficial experience, I’ll gain but I am leaving it to last .
I am calling it a day
I lost on my USDJPY trade because i read the news wrong, they’re going to continue using monetary easing even thought there are signs of an economic recovery!
[quote=“Ben1987, post:156, topic:128536”]
I am starting to understand why you guys go for more a swing trader and technical approach when it comes to trading. Good News usually puts the pips slightly up or down depending on the impact but rarely changes market sentiment or market trend unless it’s a huge impact. I am devising a trade plan while I gain practical experience and it’ll probably be a while before I can fully make it profitable. [/quote]
If that is the only thing to take from this past month, it is a month well spent.
This is one of those things that makes sense, but doesn’t actually work out particularly well in real life.
I know that you have already seen my post on this subject, but it might be worth reading again. Building a trading plan takes time, especially when you probably still need to pin down which indicators your plan will be based on. In my experience, at least, it takes months of intensive back-testing, forward-testing and tweaking to build a plan that you’d actually want to go live with.
Spreading your efforts across three separate strategies on three completely different timescales means each plan is going to take that much longer to build, and that much longer to refine. In practice, it is going to take you longer to become profitable, and getting profitable ASAP is the name of the game. Once you have a proven money-maker, then you can take some time building additional plans in your spare time.
Having watched you trade, I’d say you are prone to burst of intensive trading, you like short trades and you like even shorter stops. Take a look at the M5 or the M15 to see if either of those suit you. If they do, see if you can build a plan that focuses on them.
. I believe I am inexperienced as a trader, however, I did not lose as much as last week which is a positive note, so hopefully I turn a profit next week!
.