Wednesday, June 10, 2009
Small Breakout Strategy
With this Breakout Strategy, I am for only a few pips. Let’s say maybe just 15 to 20. I normally check for consolidation periods where the price is neither trending up or down and is just zig-zagging horizontally. So, we all know that when the market is moving like that, it will break the consolidation and start a trend sooner or later. But we just do not know when.
So use your own analysis to determine which direction the market will move when it breaks out. You can use your indicators to help you. I will not go in detail about this here. Then once you have an idea, place a limit order. For example, if you think the market is going to drop when it breaks, put a limit sell and when it drops, your trade would be entered and after 10-15 pips, you take your profit.
This is one of the basic Breakout trade strategies. I do not use this often though. Identifying the perfect situation for this strategy is a bit tiring unless you know specifically what time of the day you can see a consolidation market that will be breaking out soon…
Bank Opening Breakout Strategy
Trading on Breakouts is a profitable way when done right. When a market goes into consolidation, which means it is neither going up or down, it can breakout at anytime. This means that it can stop consolidation and then move very fast up or down. When that happens, we have a breakout and if we trade in the correct direction, we can achieve a huge profit.
A very good way to minimize risks when trading Breakouts is to trade when the banks open. This strategy is not basic but here’s the concept. When banks open, they will be doing cash transfers and such. During that time, a lot of cash maybe flowing and this will cause a currency’s value to drop or rise without turning back. So, you need to identify the bank opening times. Then wait for that hour and see which direction the market will move. Normally, before the bank opens, there will be a consolidation and when you see a breakout, wait for a while to be sure of the breakout direction. Then trade! There are many more factors to take into account like timing, Stop-Loss, Take Profit and etc and I will not cover them here. I’m just giving the basic concept.
Also, it isn’t everyday that this will happen. Sometimes, when the banks open, there will be not much movement in the price, making you wait for nothing.
Australian Dollar Getting Strong Around June 2009
I have noticed that the Australian Dollar has been getting stronger and stronger. However, a slightly strange behavior of the Australian Dollar was spotted. At different times of the day, the Aussie would show different trends.
At about 7am to 8am Perth/Tokyo/Asian time, the Australian Dollar would seem to rise. This can be seen noticeably when you check out the AUDUSD pair. And it will continue to rise until the end of the day, with the highest movement around 2-3pm when the European and British banks open. And then when the American Banks open at 7pm (7am NY time), the Aussie would fall.
From this, I deduce that the Australian Dollar will move up and fast during the day and will slow down during the night. If not generally, then recently, during the month of June, 2009. This cannot be said for other currencies especially EURO and USD. Although those currencies do slow down during the night, they sometimes still show signs of high volatility.
Monday, June 8, 2009
Bigger Stop Loss or Bigger Take Profit?
This is a question that has generated a considerable amount of debate. Should a trader set a bigger stop loss for a trade or a bigger take profit? Well, these basic scenarios can occur:
1. Bigger Stop Loss, Smaller Take Profit
Winning would be easier because the market will reach the Take Profit faster than it will reach the bigger stop loss and the probability that it will reach the Take Profit would be more, assuming it really does go that way within the time that the trade is open. So you would be winning more than you lose… hopefully.
But, the money lost would be more than the money won in trades. Because when you take small profits, you do not reap in much cash, whereas when you stop bigger losses, you might be wiping out a lot of your capital.
2. Bigger Take Profit, Smaller Stop Loss
Winning would be harder and losing would be easier, the complete opposite of the first scenario. Unless the market really moves in your direction! But when you win, you win a lot more and when you lose, you lose a lot less.
What is the ideal scenario then? It would all depend on your trading strategy. If you are sure that you can win lots of small trades that can cover up for a few big losses, then you can go for the 1st option. If you would rather win less but win big and can cover up for several small losses, then you can go with 2.
But the best is still to make a good analysis, so that you can really be sure that your trade would be a winner, and then go with option 2. But only if that were that easy…
3 Golden Points of Forex Money Management
Once upon a time, I was a reckless Forex trader. This was how I would trade:
1. Make a brief analysis on the market based on charts without indicators.
2. Make a buy/sell decision based on pure animal instinct.
3. Execute a trade without knowing how much I put at stake.
4. Adjust stop loss and take profit freely
And even though at times I won trades more than lost, my balance still went down because mostly my wins were small but my losses were big. I lacked proper Forex Money Management. And that was until I learned the 3 Points. The 3 Golden Points of Forex Money Management. What are the 3 golden points? They are rules to follow whenever you want to open a trade and these rules must be followed in order. And they are:
1. Determine how much of your capital you want to risk losing on the trade - either in cash value or percentage.
2. Determine the stop-loss level.
3. Calculate the lots/units to use to trade based on your stop-loss level, capital and risked size. This is done using a formula that you have created on your own, on a spreadsheet or on a piece of paper.
Then when you have done the above 3, you can open a trade with the number of units from 3 and the stop-loss level from 2. Take Profit isn’t a big issue here. Take Profit can be bigger than stop-loss or smaller, depending on your own trading strategy. As for me, I often skip Take Profit as I like to let the market flow in my direction for as far as it would and I would manually close the trade when I notice a potential reversal.
Since I followed the above 3 points, I’ve had no problem keeping my Forex capital steady and I’ve had no problems with negative cash results that came with positive trade results, aka winning more but capital dropping. The only problems left were from faults in trading strategies.