A Simple but Effective Relative Strength Index/Bollinger Bands Strategy “I am adhering to a positive expectancy model and prudent rules of risk management, therefore I have confidence in taking each and every trading signal.” The Relative Strength Index (RSI) – which has many uses - is a popular tool among Forex traders. However, using it in a conventional way mayn’t serve our best interest. If the conventional use were effective, many traders wouldn’t be losing. The conventional use makes us buy when the indicator is oversold and sell when it is overbought. Another indicator in consideration is the Bollinger Bands (BB), which is also popular. Its conventional use makes us buy when the lower Band is tested by the price and sell when the upper Band is tested by the price. Also, many traders fail using this approach. Why? This is because the Forex market tends to move strongly in one direction. When a major bias is assumed, it can go on for weeks, months or years; having transitory corrections along the way. This is especially true of certain crosses and pairs that are often ignored by the mainstream traders. For example, the AUDJPY on 4-hour chart reached a demand zone at 93.00 on May 21, 2014. After this, an upward journey was assumed. The BB had had its lower Band tested and the RSI went into the oversold region and an indication to go long was seen, as it were. Many a trader would’ve gone long. The price then went up by over 120 pips, testing the upper Band of the BB on May 27, 2014. Was that a time to go short? Many a trader would’ve gone short, and of course, gotten kicked in the butt. In contrary to the expectation of a reversal, the price went further upwards by another 160 pips, testing the upper Band of the BB many times along the northward journey, fooling the traders that a reversal would happen (especially when the RSI sauntered into the overbought region). What can be done to avoid this kind of scenario and make our trading more profitable? When a pair or cross is trending seriously in one direction, we’d do well to trade in its favor rather than trading against it. Therefore, we want to do something that goes contrary to the conventional thought, but which would make us experience some positivity. Let’s go back to the example of the AUDJPY on May 27, 2014. The most preferable action to have been done was to go long. On June 24, 2014 (that was the date on which this article was being prepared), the price on the AUDJPY pushed the lower Band of the BB downwards vigorously while the RSI period 14 went below the level 40. What should we do? Sell. Conversely, this means that we want to go long when the price touches the upper Band of the BB vigorously and the RSI goes above the level 60. Using the BB and the RSI in conventional ways invariably result in low hit rates; whereas using it in contrary to the conventional thought would improve the hit rates. The conventional method is not totally useless, but the hit rates are lower. One may use optimal stops and targets, plus the maximum duration of open trades, as befitting a swing trading method. It’s a bad habit to truncate our trade before it hits the stop or the target or before the maximum trading duration expires. The position sizes should limit us to about 0.5% or 1% risk per trade and the use of trailing stop is optional. When trading a mechanical strategy, we want to remain mechanical in our approach. Application of emotional discretion to a mechanical strategy may lead to errors, especially when we’re trying to tweak it for optimization. When we peek at our charts – irrespective of the instruments – we peek at money-making setups. Nevertheless, it’s not every setup we’ll trade. We want to take fewer setups so that our stakes could be limited. We’re interested in harnessing gains, not in making infallible forecasts. If we accept negativity in our career, we’ll later be rewarded with positivity. The quote above is from Richard Weissman. Another quote from him ends this article. “It is more important to be the best risk manager and best position manager than it is to develop the most robust rules for trade entry.” Copyright: Tallinex.com
You are sterile. Are you having trouble with your testicles? Please, take your mathematical rant to the university debating team. You do not understand the game of speculation.
Are looking for a trading opportunity? “Active trading requires increased mental capacity. But your IQ doesn't need to break the bank. You can increase your mental capacity through practice.”– Joe Ross Traders often check the markets to look for trading opportunities. When a discipline trader fails to find a good setup in a market, she/he mayn’t trade or look for trading opportunities in another market. It’s bad to attach ourselves to a single market, trading it when the market is choppy or trendless. When it’s not clear which direction the price may go, we shouldn’t trade, or we should look elsewhere. Yes, there are good trading opportunities elsewhere. It’s good to look for the markets that are easier to trade – the markets that are moving predictably. When we want to trade good setups, we’re not fearful, for we know how to control our risks. “Fear is one of the greatest enemies to success,” says Reginald Mengi. We want to trade in a way that enables us to have average winners that are much bigger than average losers. It’s amazing that strategies with low hit rates can produce good results when winners are allowed to run. Super trades have made fortunes with strategies whose hit rates are low. Why would you be emotionally attached to a market that’s too difficult to trade? Why must you suffer in one market when there are wonderful opportunities in other markets? Our aim is to make money, not to attach ourselves to a market that’s difficult to predict. Attaching ourselves to a market is not sensible if we can’t make money from that market. Those who transact in physical markets like automobile markets or cloth markets mayn’t be able to do this, but online traders can look for any markets where they find interesting opportunities. I laugh when news trading addicts ridicule chart analysts, for they tend to forget that the news releases they worship can’t guarantee what the market will do in the next moment. We’re not concerned with economic figures but we’re concerned with the effect those figures would have on the market. This article is ended with the quote below: “Every time I have lost badly, it was because I violated at least one of my rules.”– David J. Merkel Copyright: Tallinex.com
Traders, Don’t Be Like Mr. Geoffrey! “Anyone who has been involved in the markets has been humbled and respects the fact that this is not an easy game no matter how successful we have already been or how much experience we have.”– Charles E. Kirk About 4 years ago, Mr. Geoffrey* came to me and said he wanted to learn Forex trading. I explained to him that training would take some months because there were crucial aspects of this business that people tended to ignore and we’d need to work on those areas. The training began. Initially, Geoffrey showed interest, but as time went on, he lost patience. He told me that since he knew how to buy, sell, close trades and handle basic operations of trading platforms, he wouldn’t want to waste time with further training. He confessed that he’d just purchased a semi-automated trading software which would make him rich very quickly. He showed me the historical results of the strategy as published by the vendors – 4000% returns in one year! I tried to caution him against greed, but he thought I was a doubting Thomas who wanted to discourage him from speedy attainment of financial freedom. I was too conservative for him. Geoffrey took a high-interest loan of $5,000 and started trading with it, using that semi-automated strategy. He constantly let me know how his trading was. I saw that he was risking 20% per trade and I warned him against that, telling him that 1% risk per trade would be OK instead. “I want to pay my kids’ school fees,” he retorted. He was able to pay the school fees that week. Even he made additional $120,000 within the next 2 months, on that account, and therefore, he was lucky enough to pay back the loan with the interest on it. His plan was to raise the remaining balance to $1,000,000 before he withdrew everything. I was jealous of his achievement, I began to feel like a fool with the so-called trading beliefs I held on to. Without mincing words, Dr. Woody Johnson says there are traders who have good market knowledge, a good plan, and good money management but fail to keep their commitments and follow-through with the plan. I discovered that Geoffrey didn’t use stops; he preferred to run negative trades until they came back to entry prices. The strategy he was using had stop loss recommendations included in it, but he ignored those recommendations. I warned him against his failure to use stops. “Come off it, man. Stops are for chickens.” He rejoined. I ceased giving him advice. One day, he messaged me on Skype, asking me what went wrong with British economy since the Cable was dropping like a stone. I replied that I knew that kind of drop was normal, so I didn’t bother to know what caused it. He said nothing in return. At times, the markets may show sensitivity to fundamental figures and move accordingly; at times, the markets may ignore the fundamentals. After a few days the Cable was still dropping. He messaged me again on Skype, asking me the question below. Should I close the trade? I didn’t know the trade he was talking about, neither did I advised him to open the trade. So, why would I advise him to close the trade? He opened the trade himself and he should be responsible for the outcome of the trade. His position size was suicidal; plus his trade management technique was dangerous. I didn’t respond to his question. Later I began to empathize with Geoffrey. I was aware that something was strong with his trading, so I decided to visit him. I met him yelling at his hen. “You unfortunate hen! You’ve been incubating your eggs for over 40 days without hatching them. Your mates hatch theirs within 21 days, but you’re here showcasing your uselessness. If you want to hatch your eggs, hatch them quickly. If you’re not ready to hatch, get out of my sight!” Geoffrey was extremely bitter as a result of the adverse condition affecting his trading capital and he was talking it out on the poor hen. He chased the hen away. As I entered Geoffrey’s trading room, I saw that his account was down by -$100,000. He’d previously raised it to +$180,000. He became overconfident and began to risk 30% per trade (without stop loss). He’d a few positions that were in favor of the Cable because his semi-automated strategy generated a ‘buy’ signal. The rally that acted as the cause of the ‘buy’ signal was a mere rally that trapped the bulls before the currency pair assumed a significantly long-term downtrend. As I was watching the chart, another fundamental figure affecting the GBP was released. The effect aided the continuation of the downtrend. The market, which had dropped by over 800 pips already, dropped by another 150 pips. Geoffrey suffered. I was unable to say anything – I felt very sorry for him. Eventually, Geoffrey closed his positions. The new available balance was less than $1,500. At least, he was able to avoid a margin call, wasn’t he? I won’t mention the consequences Geoffrey faced as a result of his foolishness. Like some long trades at the time, the bullish gains quickly evaporated. However, while Geoffrey was badly affected, certain traders have learned how to survive that kind of price action; they’ve even learned how to make money from that. This article is ended by this quote: “As dedicated as I became, it was not until I was able to both profit and protect my gains that I considered myself a successful trader.”– Chris Ebert *This is not his real name. Copyright: Tallinex.com
The game is about having a trade plan (Entry/Exit/Stop), following it, managing the gains and losses effectively and doing it with multiple confirmations or probability on your side. Listen to macro economic news, and watch money flow from currencies/commodities/sectors/ to the stocks.
I trade anything that's trending, I made a trade on natural gas the other day because it was continuing a long term trend down,then I trader Eur/nok because it was continuing a long term up trend. I don't use stops but then again I don't over leverage, so i can see a market cut in half before I start to get upset
CHF Pairs Volatility – a Blessing and a Curse “It’s futile to call the trade before it happens. One can never know beforehand if a trade is going to be a day trade, a short term trade of days or weeks or a long term trade of weeks up to months. Every trade develops from the embryonic stage of the smallest form on the smallest time scale.”– Dirk Vandycke How It Started On September 2011, the Swiss National Bank (SNB) made a decision to put a peg at the 1.2000 level on EUR/CHF. They did so because they wanted to stabilize the export industry and the whole economy. It meant that EUR wasn’t allowed to reach parity with CHF, unlike other CHF pairs. That previous support level was referred to as a great floor, and the SNB would keep on purchasing vast amounts of Euros to preclude it from depreciating against Swiss Francs. In the year 2011, EURCHF was below the level 1.2000. In fact, EURCHF plummeted by more than 2800 pips that year, reaching a low of 1.0069. After the peg was effected, the cross jumped upwards above the level 1.2000. In the year 2012, price became very weak, but it was unable to close below the level at 1.2000. Any time price went below the level, it would jump above the level again. In the year 2013, price was able to trade upwards noticeably, owing to the strength in the Euro. Price was able to move upwards by over 500 pips, reaching a high of 1.2648. In the year 2014, price trended downwards in a slow and steady manner until it reached the floor at 1.2000 again at the end of that year. Many saw this as a peerless opportunity to buy EURCHF cross. EURCHF then looked like ‘an unfair’ market in which everybody could make money. It was like a market in which everybody could harness huge gains, and certain lovers of risk might be willing to risk a huge part of their portfolios. Many thought it was stupid go short on EURCHF, since there was a “guarantee” that the cross would eventually go up, just like interest rates in some developed countries, which some thought had nowhere to go expect upwards. Some didn’t even know that interest rate could be made negative. The only thing that could render the scenario useless was when the peg was removed – which the SNB was unwilling to do then. January 15, 2015 – Magnificent Earthquakes in the Markets Nevertheless, it was getting more and more expensive for the SNB to defend the peg. A central bank would need a very deep pocket to keep on doing that for a long time. The SNB reserves increased to a record high and the outlook on Euro was becoming more and more gloomy. It was clear that holding onto that floor was illogical. On January 15, 2015, the SNB suddenly removed the peg and decreased the interest rate further into the negative territory. The trading world was taken by surprise. Some traders made huge profits and losses. Only those who didn’t trade CHF pairs weren’t seriously affected. USDCHF dropped by 2800 pips. EURCHF dropped by 3300 pips GBPCHF dropped by 4300 pips CADCHF dropped by 1500 pips CHFJPY rallied by 6900 pips NZDCHF dropped by 1500 pips AUDCHF dropped by 1500 pips These moves were unprecedented! A daily candle was as long as a human arm! While it is normal for a pair/cross to experience a directional movement of thousands of pips within several days, weeks or months, it’s not normal for a pair/cross to move so much in a single day. The market is like a rubber band, if it moves to far in one direction, you should expect it to snap back in the opposite direction. Thus there were significant corrections on that day alone. Neither the SNB nor the markets can be blamed for this: a central bank has the right to do what they want with their currency. In addition, the markets conditions that brought losses to some are the same conditions that brought profits for some. Good risk managers suffer negligible loss when caught on the wrong side of the market, and they make commendable gains when they’re caught on the right side. Lessons for Gamblers I know someone who made a profit of 7,000,000 Euros in 2 hours. Someone who funded his account with 100 dollars and was using 0.1 lots made 2600% returns in a single day. Someone who funded his account with 1000 dollars and traded with 0.5 lots came home from work and saw an account balance of over 10,000 dollars. Many brokers now need to pay their clients gargantuan amounts of profits. If you made huge profits here, like several hundreds of percentage of profits, it was only a matter of luck; and no trader can experience permanent success based on pure luck. Good traders are those who survive adverse market conditions, not only those who make big money from the markets. On the other hand, many traders received margin calls or lost most part of their portfolios. Imagine someone using 60.0 lots on a 1,000,000 pounds account. Needless to say, the money was lost immediately. Certain brokers were badly affected (though most brokers were unaffected). I deeply empathize with those who were badly affected. I was also affected, for I was holding two long positions on EURCHF and NZDCHF, but I suffered only -1.2% losses in total. My loss should be only 1% on the 2 trades, but you know, slippage. Stops will forever be our life insurance policy. If you follow the advice of those who don’t use stops, your losses can’t be their responsibility. Do you remember the May 6, 2010 Flash Crash? Do you remember the earthquake in Japan, which occurred on March 11, 2011, plus the nuclear disaster that followed? Do you know the effects they had on the markets? Do you know how traders were affected and what happened following massive drops in prices? These should serve as lessons against the Gambler’s Fallacy. Unfortunately, many people seemed not to learn their lesson. Overconfidence is definitely not a good thing. As you can see, whether you trade with fundamental or technical analysis or combine both, you don’t know what the market will do next and you can’t be always right. Even those who prognosticated that the peg would be removed didn’t know when exactly it would be. When things go wrong, only risk control will help you, not your knowledge of technical or fundamental things. It’s better to focus on what we can control – our winners and losers. It’s not the best to sacrifice permanent success for short-term greed. Those who appear stupid by doing the right things would eventually be proven to be prudent. When I recommend the risk of 0.5% per trade, most people ignore me. In fact, you’d hardly see someone using only 0.1 lots on a $20,000 dollars account or 0.5 lots on a $100,000 dollars account. They think it’s too illogical and conservative, playing down my warning that the safety of our portfolios are more important that the profits we want to make. Large losses are extremely difficult to recover and therefore, they should be avoided at all costs. The most guaranteed setup in the world can’t make me risk more than 0.5% on any of my future trade. I’ve been an advocate of permanent success, but it can’t be achieved by those who use large position sizes. Leverage isn’t a problem, but an irrational use of leverage is the problem. Leverage is a boon to risk managers who know how to control their losses and profits. Next Directions on CHF Pairs The SNB might still try to keep the CHF undervalued and they may explore another means of doing so. Opportunities to go long arose when prices decline towards ridiculously abnormal levels. These kinds of movements in a single day are extremely spectacular, and therefore, current CHF pairs’ prices are bound to get corrected in the long run and things would return to normal in a matter of weeks. For instance, when USDCHF dropped like a stone, EURUSD ought to spike skywards, since they are negatively correlated in a normal condition. The latter was not affected, and both pairs cannot remain bearish for a long time (and Greenback is strong in its own right). USDCHF would, therefore, move upwards by at least, 500 pips this month or next month. These kinds of markets offer unique opportunities to assume contrarian positions. At the end of January 15, 2015, I went long on EURCHF, USDCHF, AUDCHF, NZDCHF, GBPCHF and CADCHF (selling short CHFJPY), using a position size of 0.1 lots for each $20,000. I target 500 pips on each trade. I’d hold these long positions for weeks or months – until all the targets are met. I won’t make use of breakeven or trailing stops this time around because I want to create enough leeway for the high volatility in the markets, while I enjoy the free ride. The bearish pair and crosses cannot remain bearish forever. The CHF markets are expected to correct themselves gradually until things become normal. As some bask in the euphoria of windfall and others lick their wound, we shouldn’t forget the lessons we learn from the CHF pairs volatility, which were a blessing and a curse. This piece is ended with the quote below: “If you trade at a size that’s nearly meaningless, there will be very little emotions involved. However, if you are taking on big risks you will make emotional mistakes.”– Dave Landry Copyright: Tallinex.com
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% Great points; great plan.IBD 's well published 50 day 200 day moving average can be a wise addition.NOT a prediction.I read a recent Paul Tudor Jones[book,TonyRobbins] interview; quote ''200 day moving average.. ..''unquote................................................................................................''