Baby steps help with Forex Trading

I tend to stay out of the markets until a few minutes after news breaks so that market has time to tip its hand. Taking a position during the increased volatility at news time is not really conducive to learning how to control risk relative to reward. Even if you correctly guess how the market will respond to a particular piece of news, the volatility can make it very difficult to use stops responsibly. Also, if you guess wrong and don't use stops, you can be in a very unhappy place in just a few seconds.

If you're trading the news when it breaks, to a certain extent you're simply gambling on the market's interpretation. Alternatively, if you wait to see how the market reacts to the news (if at all), take a position with the trend on the first retracement, and set a reasonable stop based on technical criteria, you will be practicing trading skills that you can use with or without news for fuel.

However, that's just my opinion, and you will need to learn what does and does not work for you personally.


Respectfully,

 

Dear 4X Following Friends:
I had a nice “Straddle on News” winner yesterday on the Swiss Franc in my demo account where I am putting Michael Stewart’s recommended procedure to a field test but there were plenty of valuable lessons to be learned from it.

The scheduled “news event” upon which it was predicated was the Swiss Consumer Price Index report for October which was released promptly at 1:45 am Eastern. I had gotten this off the Daily FX Global Economic Calendar, where it was a bolded event.

The ATR was approximately 17 off the hourly chart at that time and I added a generous 7 pips to it for my entry price to be sure I was on a “breakout” if it moved and to try to give me enough leeway to avoid a “headfake” move in the wrong direction that could trigger a leg improvidently. And on this occasion, it worked. Although there was a dip after the 1:45 open, it wasn’t deep enough to trigger my short leg. The open price at 1:45 am Eastern for the USD/CHF was 2789 which gave me an entry of 2813 long and 2765 short. I set 60 pip limits and 30 pip stops and I was ready.

The attachment shows you the result of the play. As is usual with SCHEDULED news events OTHER than the NFP, the movement was rather slow and graceful instead of violent and choppy and immediate, as it sometimes or even usually is with the NFP. Nothing happened for quite a while and then an upward movement began and the long leg of my straddle triggered at 4:59 am Eastern at exactly 2813 which is what my entry order specified and limited out at 10:32 am at 2873 for my 60 pip winner. The floating pip value of the CHF at this time of a measly $7.77 or so resulted in a profit of $466.09 or $4,660.90 on 10 standard lots – which is the level I aspire to trade on routinely. That’s not bad. If I can duplicate Mike Stewart’s results and win 3, 4 or 5 out of 5 of these every week, I will be feeling no pain. We shall see what we shall see.

So what are the big lessons to be learned from this?

First, if you look at the chart, you will see that the ultimate movement that resulted in the win did not begin until exactly 8:30 am, coincident with the release of the U.S. Non-farm Productivity report and the Jobless Claims number, additional bolded events. THIS was the catalyst that won this trade. The CHF report didn’t move the chart worth a fig!

Our own superb Economic Calendar doesn’t even list the CHF CPI report, let alone rank it! I did notice this since I routinely compare what the Daily FX calendar says with what our calendar says. Indeed, that’s why I went looking for this calendar in the first place! But I played the report anyway, just to see what would happen. And the answer is NOTHING. I won this trade from luck because the US report moved the chart in the direction I was in already and moved it enough to limit me out. But it could just as easily have gone in the other direction, stopped out my long, triggered my short and then come back again and stopped that out for a 600 pip combined loss!

So Lesson #1 I take from this is to shy away from the Swiss CPI in the future and possibly to shy away from any bolded event on the Daily FX calendar that is not confirmed by our own calendar.

Lesson #2 is essentially that it is probably wise to add a generous number of pips to the ATR to try to avoid having the wrong leg of the straddle triggered by zig zag movement which is pretty common. However, it must be noted that the higher and lower from the open price you set your straddle, the more likely it is that you won’t reach your 60 pip limit. But if you’re wise enough when you are in profit to realize that the trade has probably reached its peak – and you are monitoring the play instead of just setting and forgetting it – you can always close it with a lesser profit. As my old options guru always used to say, “Nobody ever went broke taking a profit.”

In closing, let me say this. The other day in the thread I started that outlined this play called “Straddles on News,” someone mentioned about “slippage” and the possibility of getting filled on straddles at much different rates than you specified, sometimes as much as 30 pips or so. With all due respect, I would get another broker. I HAVE NEVER HAD AN ENTRY ORDER FILLED AT OTHER THAN THE EXACT PRICE I HAVE SPECIFIED. Granted, my experience is short in this market but I have been paper-trading it since May, 2004 and playing it “live” since February, 2005, and I have set countless entry orders and never, ever had “slippage” of so much as ONE pip, let alone 30! That sort of nonsense is what I expect you to have to put up with in the other markets, not in the 4X! The incredible liquidity of this market should guarantee fills at your exact price at all times. And if you are getting filled 30 pips from where you specified you wanted to be filled, I would have a real serious heart to heart chat with my broker or else get another broker pronto! There’s no need for it and I think no excuse for it.

This is a GREAT market to trade! The money to be made in this market with miniscule investment is so mind-boggling, it practically defies belief.

Get enthusiastic and stay enthusiastic! Energized enthusiasm is the key, I'm certain of it! Avoid negative thoughts and people like the very plague itself! They have nothing to offer us but depression, doubt, devastation and defeat. Don't touch 'em with a 10 foot pole. Surround yourself with positive, supportive people only and think positively always. As one thinketh, so he is. Old wisdom.

Have a great, safe weekend and good trading, all!

Respectfully submitted,

Yr fellow 4X Trader,

 

http://www.hawaii4x.com/tools/straddle_calculator.xls

 

Jango,

Point well taken.... I have to experiment myself. Did you check out the post in Oanda that I mentioned. I would be interested in your opinion. I believe that he has the same approach that you do.

 

Any and all suggestions on take-profit / stop-loss techniques or parameters setting will be much appreciated.

 

I trade similar to Jango with S/R, trendlines, Fibs, etc. I follow only three pairs (EUR/USD, GBP/USD, USD/JPY). I use crosses at times to gauge strength or weakness of these currencies as well, but I don't trade the crosses outright very often.

I believe that currency markets tend to trend really well, when they move. They can sit in a range for quite some time though. 60 min channels work great most of the time when I am trading a trending market. Otherwise, I use a lot of S/R stuff off ranges and Fib #'s. Works for me.

I don't use any indicators, just pure price action. Sometimes futures for volume data.

I don't trade reports at all. Always completely flat, and usually wait for quite some time afterwards to reenter, depending on how crazy it gets. Reports are just gambling based on my past experience.

 

I did take a look, and it looks like a well-reasoned entry. However, the thread author did not mention stop placement until asked, and I think the answer of 25 pips seems a bit arbitrary (what's the technical rationale for that choice?).

Rather than buying on the break, I would first place my stop a little under 1.7550 and then using a 5 or 15 minute chart look for an entry when a retracement reached support at a moving average, pivot point, previous intraday high, etc. If I missed this entry I would wait until I had another good stop location selected and then look for an entry. On a later retracement, it found support in the area of the 4 Jan intraday high (around 1.7625) where it previously found a small bit of resistance (place stop a little under earlier retracement low of 1.7607).

For an exit target, 20-50 pips seems arbitrary. In this case you might consider taking off parts of your position at pre-selected targets based on key resistance levels from longer-term charts, letting the last third or quarter of your long hold out for a home run (it looks to have hit 1.77 later that day). Looking back at the GBP/USD daily chart (I would also look at 30/60 min charts), I think the 6 Jan intraday high (if there was a higher one before 8:30), 5 Jan intraday high, 4 Jan intraday high, or 100 day EMA would be good staged-exit targets (a few pips below each one). The exit is far more important than the entry.

Perhaps someone here with more experience trading breakouts will offer an opinion on entries and stop placement. It's not a method I prefer or have used very often, so my knowledge is pretty limited. Keep in mind that all of the above (both myself and the oanda fellow) is middle-of-the-chart genius. To say that one would have the foresight, patience, and confidence to execute the plan correctly is a another story. Also, search ET archives for "breakout entry" threads; there are probably a ton.

Dan Gramza and IB recently gave a good presentation on some basic trading ideas for Euro futures (same ideas apply for the spot market). It's archived at http://www.interactivebrokers.com/en/general/education/webinars/cme-1-30-2006.html.

Included for reference below is the chart from the oanda thread.


Regards,

 

Jango,

Thanks for the link to the IB prensentation. Quite informative. I got a very good basic understanding of trends and candlestick charting.