Trading Risk Management - Tight Stops
newdigital, 2013.10.23 18:52
Average losses (in red) far outpace average wins (in blue) :
The first step to avoiding The Number One Mistake Forex Traders Make is
to set a stop. This allows you to cap the risk on any one trade, so that
if it doesn’t go in your direction, you can stem the bleeding before it
becomes too unbearable.
Below, we’re going to look at two popular, yet different ways of setting
stops. One easy way that is often employed by professional traders for
the sake of simplicity; and another more advanced method that may suit
certain trading styles more adequately.
The Easy Way
First off, just because this is an easier way of setting a stop does not
make it any less valid. This is classified as ‘the easy way’ simply
because most traders can pick this up right now, and begin using it
instantly with a minimum of instruction.
Average True Range is a favorite indicator of many professional
traders, and one of the great things about it is that it’s rather simple
in its design. While many indicators wear multiple hats and try to do a
few different things at once, ATR is just a measure of price movements
over a specific period of time.
If those movements increase in value, ATR goes up. If those movements decrease, ATR goes down (see below).
ATR measures volatility, and this allows traders to set stops based actual market behavior :
There are a few nuances of ATR that traders need to know before
applying. We cover these, in depth in the article Managing Risk with
ATR. The first is the format with which the indicator displays values.
While it looks like an oscillator like RSI, and moves similar to an
indicator like ADX; the real value of ATR is in its value. It will
measure the ‘Average True Range’ of the last x periods, where x is the
input you choose. The default, and most common input for ATR is 14
periods. The value of ATR will read in the price format of the currency
pair being analyzed. So, for instance; if a value of .00760 is shown on
EURUSD, that means 76 pips (4th place to the right of the decimal is a
single pip in the quote).
ATR displays values in the format of the currency pair’s price :
There is a slightly easier option, and for traders that are using
short-term techniques this can be extremely helpful. There is a custom
indicator available for Trading Station desktop that automatically
calculates, and displays ATR on the chart in a very easy-to-read format.
This is completely free, and can be downloaded from the FXCM App Store
at this link (link). As you can see below, not only does it display ATR,
but it even rounds the ‘.6’ fractional pip as appropriate.
The ‘ATR_Pips’ Indicator displays Average True Range in an easy-to-read format :
The Advanced Way
Price Action can have a huge impact on a trader’s performance.
Inclusion of price action into an approach will often take place
regardless of the trader or type of trading being done. Price action can
help traders read trends, find support and resistance, and perhaps most
importantly - manage risks.
Because, after all - if prices are trending higher, and we’re seeing
continuous higher-highs, and higher-lows, wouldn’t it be reasonable to
consider closing the trade if the trend reversed?
Remember, this is the number one mistake traders make, and this is the
reason stops are so important. If the trend reverses, the trader’s best
advice is often to close the trade and look for greener pasture
elsewhere... because if the reversal continues against the trader, one
loss can wipe away a lot of gains.
If traders are trading a trend, they can look to the previous
opposing-side swing for stop placement. So, if an up-trend is being
traded, we should be able to see higher-highs, and higher-lows. If we
are buying to take part in the up-trend, we can look to place our stop
below the prior swing-low (see picture).
During an up-trend, stops can be placed below the previous swing-low :
On the other hand, if we’re selling in a down-trend, we would want to look to place our stop above the prior swing-high.
During down-trend, stops can be placed above the previous swing-high
In How to Analyze and Trade Ranges with Price Action, we look at stop placement in
range-bound markets. If a range is being traded, the ‘peak-high’ and ‘peak-low’ should be identified (see below).Traders can look to place their stop just outside of the peak of the
opposing side of their position. So, if buying, traders would look to
place their stop just below the peak-low; and if selling just above the
peak-high. This way, if the range turns into a breakout against the
trader, the bleeding can be stopped before one loser wipes away the
gains from a lot of winners.
If you’d like to become a better Price Action trader, we’ve put
together the basics into a Brainshark curriculum. The link below will
take you directly to the lesson, and after filling in a few pieces of
information into the guestbook the session will begin.
24. How to trade a flag pattern in Forex Part 1
Video 1 of 2 - In this Forex training video we discuss how to identify a flag. We go through a simple identification process and discuss the flag's main characteristics. It is important that you master the identification process first before you learn how to trade the flag.
Price Bar Reversals (1 of 9) - An Intro to a series discussing short term price bar reversals such as the bearish rejection, the bullish rejection, the open close reversal, the closing price reversal, the hook reversal, the key reversal, the island reversal and the pivot point reversal.
Video 2 of 2 - In this part of the Forex trading course we discuss how to trade a flag. We will guide you through the entry, exit, stop loss and profit target process that will ensure you trade the flag like a pro. The way in which we trade the flag is the simplest way possible making this an absolutely fantastic pattern to trade in the Forex markets.
What are Fractals?
Forum on trading, automated trading systems and testing trading strategies
newdigital, 2013.12.16 11:23
The Fractal Indicator
The fractals are technical indicators, part of the Bill Williams’
indicators. Unlike any other indicators, this one is not a line or
histogram bars; it is just a simple arrow on top of or below the bars of
the price chart. These fractals are formed when five consecutive bars
align in a strict manner. There are two types of fractals:
Bearish fractals: this fractal forms over a bar in the
price chart, only if the high of this bar is higher than the high of the
previous two and next two bars. In real-life trading this fractal
indicates a possible bearish movement.
Bullish fractals: this fractal forms below a bar in the
price chart, if the low of this bar is lower than the low of the
previous two and next two bars. When you see this fractal, you should
expect a bullish movement.
It is important to mention that the Bill Williams’ fractals are
illustrated a bit late on the chart, because you need the fifth bar to
close, in order to determine the highest high or lowest low. The
fractals are trading signals, but they are far too insufficient to count
on them alone: the buy fractal indicates a possible buy order and vice
The fractals point out the strong levels. You can easily draw a line
to connect multiple fractals to form either a resistance or a support
line. These levels work exactly the same as the trend lines. If you take
a look at the image, you will see the resistance line and the buy
signal. We get this signal, because the price breaks the strong
resistance level. However, if you take a close look at the chart before
this moment, you will see a couple of sell signals. This clearly points
out how inconclusive are the fractals alone.
If you have paid attention on the Trend Lines page, you already know
that some traders use the fractals to build their trend line. We really
like this strategy, but it is not something revolutionary.
Bill Williams’ fractals and Alligator indicator. These two indicators
share great synergy and we will take a quick glance in the image. It is
the same as the previous, but we have added the Alligator and this
changes the picture quite a lot. Take a look at the buy signal; do you
see now why we have not opened a sell order before the buy signal? The
price moved above the Alligator and we needed to see a breach of the
indicator’s levels and a couple of sell fractals, but did not see that.
Instead, the price kept on moving above the Alligator and it even broke
the resistance level, which gave us a clear idea of the future movement –
buy and take profit.
26. How to trade a triangle or wedge in Forex Part 1
Triangles and wedges look very similar and are traded in exactly the
same way. In this video we discuss how to define both the triangle and a
wedge in order to make it easy for you to identify them in your charts.
We also discuss profit targets along with other pattern characteristics
you need to keep in mind
Price Action Forex Trading Strategies By Nial Fuller
This video is based on the following article : Pin Bar Forex Trading Strategy – Pin Bar Definition
In this price action forex trading strategies tutorial video, I discuss
how to use price action to trade with the dominant trend using the pin
bar and inside bar fakey reversal setup with confluence to make a high
probability entry on the GBPUSD 4hr chart
Price Bar Reversals (2 of 9) - The Bearish Rejection Pattern
Price Bar Reversals (2 of 9) - The Bearish Rejection Pattern - Part 2 of
a video series discussing short term price bar reversals such as the
bearish rejection, the bullish rejection, the open close reversal, the
closing price reversal, the hook reversal, the key reversal, the island
reversal and the pivot point reversal.
It is important to remember the following guidelines relating to bearish reversal patterns:
Read more about it here
200. Volume and Open Interest in Futures Trading
The next lesson in free online futures video trading course covering open interest and volume in the futures market.
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