Simple System: Need help managing trade

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1

Hi,

I have been trading forex for a couple of years on and off, unsuccessfully, mostly due to issues of money management and discipline, which I haven’t developed much of.

I have learned a lot about technical analysis, including Elliott Wave analysis. Recently, I started using a simpler approach. My system is not mechanical. Last night, I got into a trade based on the “guidelines”, and now I am looking for ideas on managing the trade. Lots of systems help you get in, not a lot are good at trade management, in my view.

Here is why I got into this trade:

  1. Elliott Wave pattern set up for possible reversal (3-wave move)
  2. Deep pullback (this case 0.50, usually prefer between 0.618/0.764)
  3. Price on 1 hr chart crossed over 20-period MA
  4. Stop to recent S/R within reason for at least 2 mini lots (< 6% of available margin)

I also look for divergence (normal and hidden), although divergence can sometimes get “run over” for a while.

Anyway, the trade I am in now was opened at 03:20 EDT on 5/10. I shorted GBP/USD at 1.9939, with an initial stop of 1.9969 (30 pips), 2 mini lots, for a total of $60 risk on margin of $1110.02, for a total of 5.4% of margin at risk.

This morning, I woke up with the trade just over 100 pips into profit. Now the trade is hovering around 150 pips in profit. My floating gain is ~$300, or about 27% of margin. I’ve moved my stop to 1.9914, in profit, but well back in order to let the trade breathe. I have attached my chart format (eSignal) where I keep the Day, 240, 60, and 15 visible; and also my FXCM broker station (sans account and ticket numbers).

I have the same problem most of us do: I tend to get out too soon. Over time, that means that my amount of win/loss average is not very good, even though I have winning trades about 50% of the time.

Also, I would like to talk about the method of entering on crosses of the closing price vs. 20 period MA. It looks like most of the time, it would be profitable, if one trails a stop and has the patience to accept being stopped out sometimes. If this is the wrong place for this post, please let me know where I should be instead.

Any suggestions on what I should do now?

Thanks.

2

Attached is my trade plan, sort-of.

It is based on the idea that the price tends to keep going in the same direction for a while after it crosses the 20 MA.

The objective is to find some reasonable filters to say when it would be a good idea to enter the trade. For example, Elliot Wave count, momentum divergence, slow stochastics, etc. I got the idea for looking at the slow stoch from James trade plan (“40 to 100 pips per day” thread).

It is not a mechanical system, or a fixed trade plan yet, but this is the basic idea.

trade plan, sort-of.jpg1024×615 119 KB

3

I chickened out on this trade a bit.

Having reached a Fib Extension target of Wave 3 = 2.618 times Wave 1, with a strong divergence on the 15 min chart, and the time of day getting late, and also with a down trend-line broken to the up-side, I decided to close one lot (1/2 of position) for +141 pips.

I moved the stop on the remaining lot back up just a tad, to +25 if it stops out. So, I can no longer lose on this trade.

Here are the particulars so far: initial risk was 5.4%, and so far have booked a gain of 12.7% of margin, for a reward:risk ratio so far of 2.4:1.

Here is a picture of my charts and trade station. By the way, lol, note on the trade station that I took an accidental loss of -4 pips when trying to close out half of the position. FXCM now allows ‘hedging’; before, to make a partial close, you had to make a new trade entry that would immediately cancel part of the existing position. Now, doing that opens a new position (a hedge). When that happened, I immediately closed it and ate the -4 pips. Duh. Lesson learned.

Any comments are appreciated.

4

Last night before going to bed I moved my stop down to the 20 SMA (60 min chart). Reasons for crowding my stop:

  1. Weekend approaching
  2. Five waves down from the most recent significant top
  3. Momentum divergence on 15 min chart; may develop on 1 hr
  4. 2.618 target reached
  5. Bounce off 0.382 Fib support on Day chart
  6. I could see that the trend channel on 60 min chart was about to break

So, when the most recent low was registered, I moved my stop down and it was struck while I was asleep. Interesting, the stop would have been hit on the first strike, but, while eSignal showed the price had been hit, the broker (FXCM) didn’t deal it, so it stayed alive a few more hours.

Results for this trade:
Risk: 30 pips x 2 mini-lots = $60
Reward: 141 pips x 1 m-lot + 130 pips x 1 m-lot = $271
Ratio: 271/60 = 4.5:1
In % margin terms: 5.4% risk, 25.4% gain

Note that the strategy of buying/selling the 60 min 20 MA would have been successful in this case also. On the most recent crossover up, I could have reversed my position, and with a 30 pip stop, at least broken even, and potentially booked upwards of 30 to 50 pips, which is enough to reward:risk to accumulate margin over time with a 50% winning trade percentage.

Simple strategy:

  1. Look at 60 min chart
  2. Buy when price crosses/closes above 20 SMA
  3. Sell when price crosses/closes below 20 SMA
    subject to:
  4. Use one or two simple indicators to indicate probabilities for a move
  5. Consider an Elliott Wave count, when the count is clear
  6. Consider higher time compressions for “bias”: Day, 4 hr
  7. Put 60 min and 4 hr 20 SMA on 15 min chart to get a little bit better entry (i.e., on 15 min chart, put 20x4 = 80 SMA, and 20x4x4=320 SMA)

Attached are my charts and trade station.

Now of course I have to wonder if I should still be holding my short entry… if anybody has good ideas about exiting, please comment. Thanks.

5

Hey I just read your post here and congrats on the pips. I was leaning the other way on this trade and lost pips. My problem is that I rely too heavily on my preffered elliott wave count and not enough on other indicators. The only problem I have now is that my preffered count on GBP/USD is invalid because wave 4 has now gone into wave 1 territory. See my thread for charts of my preffered count. It is called Elliott Wave and it is in this same forum as your thread. What is your preffered count(daily chart)?

6

Hello Fractal,
I like the MA trade. When do you decide to enter the trade?
When Candle hits the MA line on 15min charts or 1hr charts?
Please let me know.

Thanks.

7

Hey thanks for the post, I have been waiting for someone to join me in here that is also a fan of elliott. I admit I am a bit of a novice and this might be a dumb question that I may know the answer to but what do you mean by a series of 1-2’s?

8

Hi swizzguy,

[U]Guidelines[/U]

[B]1. [/B]I like to see the 15 min candle [I]close[/I] over the 15 min 80 MA (which is the same as the 20 MA on the 60 min chart).

If it is the first 15 min candle past the hour, this is an early entry. If it is the last 15 min candle of the hour, the 15 and 60 will close at the same time.

[B]2. [/B]I like to see the 15 min and 60 min candles in the same direction (same color) at the time of entry.

[U]Other notes[/U]

I’m still working on the setup and entries/exits. These will be guidelines and not a mechanical system of rules.

For example, Elliott Wave theory has 1) Rules and 2) Guidelines. Price crossing the MA is an additional guideline I am developing to help keep me out of trouble, it will not be a rule. In studying my trading record, it became obvious to me that a lot of times, I was entering against the short-term trend, and getting run over a lot. Worse, I was using stops too large, and/or moving them against losing positions. Very bad for the account.

The MA should keep me from trying to trade divergences too early against a strong trend.

I plan to back-test this some more this weekend and will post my study results early next week. My hypothesis is that, most times, if you use a ~30 pip stop, and maybe trail the stop as the price moves, the losses will be relatively small, mixed with some small wins, until catching a significant move.

For example, with my gain this week, I can now risk 5% and have to lose 5 trades in a row before giving back most of this last run. The goal is to use the price crossing the 20 MA to keep me from losing 5 times in a row. We’ll see!

9

The phrase “1-2, 1-2, 1-2” comes from the observation across many markets that a “3rd wave of a 3rd wave” is very powerful, swift, and surprising. People on the right side of a 3rd-of-a-3rd make a large gain very quickly. Since markets trend only 30% of the time on average, they are rare setups.

The “1-2, 1-2, 1-2” refers to the observation under Elliott made that the market is a fractal. A fractal is a repeating pattern that has “self similarity” at different scales. Elliott Wave practitioners use the term “degree [of trend]”. When a market makes a big move, you will see the move first on the smallest scale. Then it will repeat and amplify at larger degrees until it exhausts itself. Then the process starts all over again.

I should really write it as 1-2, i-ii, (i)-(ii). See attached figure.

Wave (iii) is very powerful. This is the “3rd of a 3rd” wave. The waves don’t have to overlap. You will also see this described as “sub-dividing”. Of course, the structure I drew also looks like a double zig-zag, which is why generally you don’t want to identify a sequence as “1-2s” unless the waves 1, i, and (ii) are clear impulses (5 wave sequences, or single clear, sustained moves).

Hope this helps.


10

Ahhh ok, I just never heard it put that way before.