I am going to share with you two of the greatest secrets that many successful traders may not want you to know. This is so simple and has been consistent for more than 20 years so you should take it seriously.
Always trade in the direction of the higher timeframe
Let your profit run and cut short your loss
I will use just one indicator for this illustration. An oscillator is best for this purpose. Most oscillators would work but I prefer HPO (Higher Probability Oscillator)-
Apart from the use of oscillators to spot over bought and over sold regions, they also indicate possible momentum changes. We will not discuss over bought and over sold regions here, we will focus on MOMENTUM signals. Take a look at the picture attached
At the close of the 8.00am (GMT) GBPUSD H4 candle of 10th Dec. 2013, HPO made a momentum cross suggesting a bearish (downward) momentum movement.
Don’t take a SELL position at that point except the Daily timeframe at the same time is also suggesting a bearish momentum. See the picture below
I have inserted a MULTI-TIMEFRAME of HPO to show the higher timeframe i.e. the daily timeframe of GBPUSD. You will observe in the picture above that at the time of the bearish momentum signal on the H4 timeframe, the Daily timeframe was also suggesting a bearish momentum, so a SELL entry at that point wouldn’t be a bad Idea.
I just explained a logical way to obey the advice “Always trade with the trend because the trend is your friend”. This is more like a momentum trend; well the important thing is that it works so well and it’s so very simple.
So let’s take a look at the other concept; CUT SHORT YOUR LOSS AND LET YOUR PROFIT RUN.
The chance of becoming consistently profitable for a long time is very slim if you trade a risk to reward ratio of 1:1.
Let me explain a scenario to drive my point home. See the picture below
The picture above is a GBPUSD H4 chart of 5th June, 2013. The point labeled entry is a good BUY example. At the time of the bullish momentum signal on the H4 timeframe, the Daily timeframe (shown by the Multi-timeframe HPO oscillator) was also suggesting a bullish momentum. The intersection labeled EXIT is the opposite signal of the earlier BUY signal.
I prefer to set a fixed STOPLOSS of 50 pips (from entry) and a TAKEPROFIT of 400pips. However, if there is an opposite signal before the TAKEPROFIT target is reached, close the open position.
Now let’s consider the last picture above. The distance between the intersection labeled ENTRY and the intersection labeled EXIT is 268pips. The final outcome of this particular scenario makes the risk:reward ratio = 1:5.36 ( we risk 50 pips to gain 268pips).
With a risk reward ratio like this you will last very long in the forex market (and profitably so if you apply the right money management principles: I recommend risking 1% of your account or less per trade). Did you notice that the takeprofit was not reached before the opposite signal occurred? I thought I should point that out.
Note that all trades will not be this profitable (as a matter of fact, all the trades will not be profitable: even if your stoploss is hit 2, 3 or 4 times in a row, in the long run you will still be profitable), however, most of the trades that do not hit your stoploss would be more than 50pips at the time of opposite signal and that’s a very big edge.
profedu2001, would love to see some stats, performance over time, demo or live, and what pairs do you trade? Do you think this will work with TF other than H4?
Thanks for sharing your thoughts and please share more!
I did read it…and I understand it works with other oscillators, in theory at least. However you specifically mentioned this “high probability oscillator” which got my attention.
Can you upload this “high probability oscillator” so we can try it out?
