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Daily Chart Trading Strategies

August 9, 2013 by Edward Lomax 5 Comments

You should notice a pattern in my evolution as a trader. My manual trading experiences have been moving up the time frames, even though I got into trading because of forex robots. First, I tried scalping on the lower time frames, then day trading on the H1 and H4 time frames. Since I hadn’t really been able to find a way to fit trading into my lifestyle, my next stop was the daily time frames.

Daily Chart Trading

I thought trading the daily time frames was only for big players with large trading accounts. I thought this because on the daily time frame you need to use a larger stop loss than on the lower time frames. I just couldn’t wrap my head around the fact that you can be just as profitable trading the daily charts. Then, when I learned more about money management, I understood how this type of trading can be traded for nice profits on a smaller account.

When you are on the lower time frames you can use a tighter stop. This means that price does not have to go that far in your favor to pick up some nice profits. Price also does not have to move that far for substantial losses as well.

The higher time frame’s price needs to move more to get the same results. While you usually end up placing less trades than you would on the lower time frames, the setups are stronger and can be just as profitable over the long run. You do need to have patience in both waiting for the right setup and letting the trade develop once you get into the market.

Basically, I was drawn to trading strategies where I looked for trade setups once a day, at the close of the daily candle. This made things simple and quick because I only had to make a decision once a day and actually had the time to look at the charts and decide if this was a setup I wanted to trade. On the lower time frames, things happen a lot faster and you have to make a quick decision.

Due to my experiences with day trading, I already had some trading tools built that I could use with the daily chart strategies. I particularly liked using a Trade Management EA to manage the trade after it was placed. I would place the trade, set up the Trade Management EA to move the stop to breakeven, take partial profits or lock in profits, and I was done for the day.

Example Daily Chart Strategies

Here are a couple of examples of systems I use to trade the daily charts. I think you can see the potential here for profits.

EURUSD daily chart

A daily chart for EURUSD.

EURAUD daily chart

EUR/AUD daily chart.

So, was trading the Daily charts the end of my Forex trading journey?

Well, not really. You see, while trading the Daily charts has a lot of what I want in a trading system, I still was not satisfied with it. Quite frankly, it can be a little boring and you still have to be very disciplined to trade this way. You can be in trades for a very long time, going up and down. It can take its toll on you emotionally.

Automating Daily Chart Trading Strategies

In the beginning of this series, I said that my journey began because of forex trading robots, but that robot development should be the the END of the journey, not the beginning. After going through my scalping and day trading phases, I believe making robots to trade on the daily time frame is for me. The daily time frames are more stable than the lower time frames and the setups are stronger. Making an expert advisor to trade the strategies would allow me to set up the accounts and walk away from them completely.

I know it might sound strange to want to automated a daily time frame strategy that is quite simple to trade. But the truth is, watching the big pip swings up and down bothers me. Using a robot would fix this problem and I’m sure some years would be very profitable trading these strategies.

Entry and Exit Rules

Moving Average: Simple – Close Period 3 Shift 3

MA Period 1: 3
MA Mode 1: 1
MA Price 1: 0
MA Period 2: 5
MA Mode 2: 1
MA Price 2: 0
RSI: 14

The rules: Enter when the candle crosses and closes on other side of MA and RSI is already crossed above the 50 line. Exit when the EMAs cross in the opposite direction.

Basically, this is a 3/5 EMA crossover with an RSI filter.

In the mean time, tell me what you think about swing trading or trading off the Daily time frames. Have you thought about automating a Daily time frame strategy before?

Filed Under: How does the forex market work?, Trading strategy ideas

Day Trading Strategies

August 6, 2013 by Edward Lomax Leave a Comment

The problem with scalping was the pace. After sitting in front of the charts waiting for a setup to appear and almost being lulled to sleep, a setup would appear and all hell would break loose. All of a sudden my heart was racing and I was glued to screen with every tick of the market. I knew I would burn out trading this way and had to slow things down.

The higher the time frame that you trade, the slower things become and the more time you have to make decisions. Therefore, I decided to move to the H1 charts. I had been hearing a lot that “price action is king”, so I decided to try a price action day trading strategy. A support-resistance breakout strategy really appealed to me.

Support – Resistance Breakout Strategy

I’m sure you’ve heard how support turns into resistance or how resistance turns into support. So, I started trading a strategy where I looked for breaks of support or resistance, then a RE-TEST of that level. If the level held, this would lead to setting up the trade. Here is a photo showing an example trade…

support resistance breakout

As you can see, there was a breakout of the support level. Then that level was retested from below. The level held, so the trade would be entered at the break of the previous swing low. Stop loss is above the support level (in this case above the previous swing high). The take profit level was 1.5 times the stop loss value.

Truth be told, this is a very good price action strategy. The problem is, I had a very hard time trying to trade it under live market conditions. In order to find at least 1 of these setups during a trading session, I would have to monitor a lot of charts. The whole thing became very time consuming.

Indicator Strategies With Email Alerts

Since I was getting tired of sitting in front of the computer looking for setups, I thought my best option was to look for strategies based on indicators that had email alerts. This way, I could just wait for the alert and go to the computer when there was a setup. Even if the strategy I wanted to trade did not have email alerts, I would send the indicators to a programmer to have email alerts installed.

I went as far as to buy a Blackberry. Unlike the iPhone or Smart Phone, you can set your Blackberry up to notify you when you get an email. This was important because I needed to be notified exactly when the email alert triggered.

I found, or invented, a lot of strategies based on indicators and email alerts. I tried to trade them on the H1 and H4 time frames. But even though most emails triggered at the top of the hour, or every 4 hours, I had a hard time making myself available 24 hours a day to place trades.

Trade Management Robots

Besides having to be near a computer all the time to place the trades when the triggered, I quickly found out that placing the trades was only one of the things I needed to take care of. What about trade management after the trade is placed? Imagine waking up to an email alert a 4 AM, and dragging yourself to the computer to see if you wanted to place the trade. The after the trade was placed, having to sit in the cold and dark while the trade matured so I could Move the stop to breakeven, take partial profits or close the trade.

I have to admit, I had a few Trade Management Robots built, and I love them. This made the trading a lot easier and less stressful. Just place the trade, set the EA up according to my exit rules, and I was done.

However, in the end, I still found trading day trading strategies too time consuming. It was as if trading still consumed my life. And this was even with the tricks of using email alerts and trade management robots.

Here’s the thing. I could make money using day trading strategies. I see a lot of people complaining about strategies who say they don’t work. But in my experience, I could find PLENTY of strategies that worked just fine. The problem was fitting the trading into my life. Too often I feel people complain about the strategy, when really it is their inability to trade the strategy properly that is the problem.

Here is what I want you to take away from all this…

There are plenty of strategies that work out there. Most people think all they need to do is find one of these strategies that works, and they will be profitable. But the truth is, it is more about finding a strategy you can trade properly and fit into your life that matters.

Don’t make the mistake of jumping from one strategy to the next only to find you have the same problem. If the problem is not being able to fit trading into your life, work to fix that problem. Don’t just blame the strategy as switch to another strategy you’ll end up not being able to fit into your life.

If you have a favorite day trading strategy, or found tricks to fit trading into your busy lifestyle, please leave a comment below.

Filed Under: How does the forex market work?

Scalping Trading Strategies

August 2, 2013 by Edward Lomax 2 Comments

I got interested in forex because of the promises made by forex robot vendors. While my experience with robots was hit or miss (at best), the trading bug bit me hard.

I came across a form of trading called “scalping”, as most novice traders do. Scalping is “a trading strategy that attempts to make many profits on small price changes”, according to Investopedia.com.

You want to get into the market, bank some quick profits and get out of the market.

scalping

What Drew Me To Scalping Trading Strategies

Flexibility

Since I would only be going after small profits in the market, I thought I would be able to trade any time of the day or night. I thought I would be able to wake up and make some decent money while I enjoyed my morning coffee. Imagine how nice the rest of the day feels after collecting nice profits in the morning.

I also thought I could just pick any time to get into the markets for some quick profits. If I was bored, or couldn’t find something to watch on TV, I could open my trading platform and make some money. Can’t sleep? Just make a few bucks and hit the bed with a smile on my face and a bigger bank account.

Speed

Nobody likes sitting in front of the computer for hours at a time. With scalping, I thought this was not going to be a problem since I would only be going after small moves. And how long could it take for the market to go 2-5 pips in my favor, right?

Basically, you want to get into the market, bank some quick profits and get out of the market.

Scalable Profits

If I could just jump in the markets any time to bank some profits, I thought the amount of money I could make was up to me. I could scale up my profits just by adding a few minutes or trading sessions. I thought the more I traded, the more money I could make.

My Experience With Scalping Trading Strategies

Scalping is HARD!

I quickly learned that scalping was much more difficult than it seems on the surface. Even though you are only going after small price moves, it can be very hard to get them. And the stress of being in the market going after those moves is very intense. Every tick of the market is important; the fluctuating profit and loss pushes the trader on an emotional roller-coaster. Even when I would win, sometimes I would kick myself for getting out of the market when the move went on for 50 pips or more.

I did not have what it takes to learn scalping on my own. So, I joined a trading room with someone who considered himself an “active” trader. This means they get into the market frequently and look for smaller profits. The trade room hours happened to be at 5 in the morning during the winter. I would get up in the cold darkness and hook up my computer in the living room to not disturb my wife. And then I would try to follow along with the trader.

It was HARD!

The trader would go so fast and watch so many different currency pairs at once, I could not keep up. Sometimes I would win and sometimes not. I learned quickly scalping was an art. You must know what you are doing to make it work. After about a month in the trade room, I was exhausted and with little to show for my efforts. Scalping was just not for me.

My Conclusions About Scalping Trading Strategies

Time Consuming

While you are only looking for small moves in the market, you need a scalping trading strategy that helps you identify the RIGHT time to get into the market. And, as fate would have, most of the time is NOT the right time to get into the market. This means waiting around, staring at the charts looking for the right time to pull the trigger.

The longer you wait for a new setup, the more likely you are invent the right setup. Boredom increases your need for action, so you start inventing entries that are not really there. The poor decisions result in losses, causing you to abandon your scalping strategy.

Extremely Stressful

While in theory you are in the market for only a short time, the time in the market is extremely stressful. Everything is more intense because you only need a few pips to be a winner. But sometimes, it is not that easy to get even that small amount of pips, or it could take a long time.

Imagine this… you have been waiting for over a hour for a setup when finally one comes. You pull the trigger and get into the market. Your heart starts racing.

To make things worse, you used a big lot size because you need to make enough money on only a few pips to make trading worth it. Immediately, price goes against you and you see a lot of money at risk. This scenario is frequent and very hard to accept emotionally.

Expensive

Since you are going after only a few pips of profit, spread becomes a big issue. If you are trading a currency pair with a 3 pips spread and you want 3 pips of profit, the market has to move 6 pips. And even if you win, you are paying half of the move to the broker. This is a very costly way to trade compared to trading on higher time frames where you look for 100, 200, 300 or more pip moves.

Potential For Large Losses

Due to random market moves, you need to place the stop a decent distance from price. Otherwise, any spike in price knocks you out of the trade. Your natural risk to reward ratio is lousy. The take profit is often a tiny fraction of the total risk.

Get stopped out often enough where a spike takes you out and then goes in your original trade direction and you’ll start doing one of two things. You’ll either widen your stop or start trading without a stop. In either case, you are setting yourself up for devastating losses that will negate many previous wins.

In the end, I proved to myself that scalping was not for me. The next logical progression was to move on to intraday trading strategies. Next time I’ll go over my experience with intraday trading strategies, tell you a strategy I like and how creating trade management robots really help.

If you have any experiences with scalping strategies you’d like to share, please leave a comment below.

Filed Under: How does the forex market work?, Trading strategy ideas Tagged With: risk reward, scalping, spread, stop loss

Don’t start with a forex robot

July 30, 2013 by Edward Lomax 2 Comments

I am a profitable trader and I trade real money. The long journey to become a successful trader ended with me achieving my goals. As I understand it, the goal of becoming a profitable trader is one that many people have, but few people achieve.

I moved to Chile with my wife to help with her father who suffered from various strokes. Besides getting used to living in a foreign country, I had to figure out a way to make money. Long story short, I wrote and sold fitness books on the Internet. Eventually, I became interested in other online money making opportunities, which led me to trading Forex. (Since I had to deal with currency exchange in my real life every day calculating what things cost, I often wonder what took me so long to get into Foreign Exchange).

My first experience with Forex trading was with Forex trading robots. I, like many others, fell for the dream of trading on autopilot without having to learn anything. After all, this is what most of the Forex robots promise to deliver and it sounds perfect.

Forex Trading Robots Are NOT A Good Starting Point

Getting a Forex robot pre-programmed with a proven trading strategy sounds like the perfect place to start your trading journey. Using a commercial trading robot should allow you to skip the lengthy learning curve and jump straight to profits. Buy a profitable robot, put it on your account, become an instant Forex trading success and start buying all the expensive cars and houses you’ve always wanted.

I, like many others, fell for the dream of trading on autopilot without having to learn anything

Well, if it was that easy, where are all the Forex trading success stories? Yes, we hear the success story of the person SELLING the robot on the sales page. But where are all the rich, happy people as a result of buying the trading robot?

I think a lot of people fail to make money using a Forex trading robot because they lack the knowledge and experience necessary to evaluate the robot properly. Starting your trading journey with pre-programmed expert advisors is not the way to go. You first need to understand what trading is all about, how hard it is and what to expect in terms of monthly gains and long term rewards.

Forex Robots And The Fall Of Communism

I studied and received my degree in philosophy. There was something about communism that always stood out for me. Communism was a philosophy that doomed Russia to failure from Russia still had a Feudalistic social system, and therefore did not know of the evils of capitalism. Since communism was supposed to evolve out of capitalism and correct the injustices, Russia really wasn’t the right place to put communism into practice. Eventually, it failed.

So, what does this have to do with using Forex robots?

If you don’t already know about trading manually, it is hard to evaluate or appreciate trading on autopilot. Many times the unrealistic expectations of the robot users is the real problem, and not the robot itself. Dreams of instant wealth conflict with the reality of trading, and when those dreams are not met, the robot is abandoned without being given a fair chance.

In short, it is hard to evolve into a successful Forex robot user unless you have previous trading knowledge and experience. When you know how hard it is to have consistent and profitable trading results, you’ll appreciate a robot that puts profits in your account. When you appreciate the robot, you’ll be more likely to use it for the time necessary to reach your long term trading goals.

Building Your Own Forex Robot Should Be The Conclusion Of Your Journey

From my own experience, I can say that using a Forex robot should be at the END of your trading journey. Only after you’ve learned what type of trader you are and what system you want to trade should you consider automating your trading. Only then will you appreciate the trading results you get on autopilot.

So, I think many people are approaching Forex trading from the wrong direction. They are looking for a shortcut to skip the time and effort it takes to learn how to trade. They think they can just get the robot from someone else, and they will be instantly profitable.

But, even if the robot is profitable over time, most people won’t trade it long enough to see the profits they desire. Since they don’t know how hard it is to trade, they are always going to expect more. They want to see profits every day and don’t want to have to deal with losses. Well, that is just not what trading is all about.

The truth is, automated trading is not necessarily better than manual trading. Yes, it might help fit trading into your lifestyle and keep you from missing trading opportunities, but it does not replace a solid trading system, professional money management and patience. Therefore, I find it better to try to evolve into automated trading by first focusing on determining what type of trader you are (scalper, intraday trader, swing trader, end of day trader, etc.), and finding the right trading strategy for your personality.

Luckily, I did not give up after my first experiences with commercial Forex robots. I became a student of trading and stuck with it until I found something that worked for me. In this series I want to go over my experiences with scalping, intraday trading, swing trading and end of day trading. In the end, I want to share with you a trading plan I use to measure my progress on my way to achieve my long term goals.

If you’ve had negative experiences with commercial Forex trading robots that potentially derailed your trading success, please leave a comment below.

Filed Under: How does the forex market work?, Trading strategy ideas Tagged With: expert advisor, forex robot

4 Easy Trading Tricks to Earn More Pips Per Trade

July 26, 2013 by Edward Lomax Leave a Comment

If you are creating a trading system to trade manually or have programmed into an expert advisor, the first thing you need to do is create a solid trading strategy. The logic behind your strategy needs to take into account changing markets, use proper money management and look to gain long term, consistent gains. In essence, you want to be able to trade profitably over the long haul.

But once you have a system that meets these characteristics, is there a way to use trading tricks to tweak your system and get more pips out of every trade?

The Japanese use a term in business and manufacturing called “Kaizen”. Kaizen means “good change”. Basically, this is the ongoing process of making improvements by implementing small changes and tracking their impact over the long run. In terms of trading, small changes to your trading strategy can have a huge impact on your trading results over time.

Kaizen trading tricks

Kaizen is a Japanese business term referring to continuous improvement or good change.

Today I want to go over some of the small changes you can make to your trading strategy that could make a big improvement in your profits. Just think about using trading tricks to squeeze a few more pips out of each of the trades you place. Over time, those extra pips can really add up.

Stop Loss Placement

Adding Pips To Your Stop Level: A lot of trading systems you see out there use price action to determine stop loss levels. If you are placing a buy trade, you could use the last swing low. If you are placing a sell trade, you could use the last swing high. Then they say, “Add 2-3 pips to the level”.

Do these 2-3 pips really matter? Are these 2-3 pips going to keep you from being stopped out if price tests the swing highs or swing lows? Probably not, or least at not that often to make it a big issue. So, why not just use the swing high and swing low levels?

Here is what this small change can do to your trading:

On losing trades, you save 2-3 pips. Over time, these 2-3 pips saved can add up to less losses. And less losses, means more profits.

Tightening Your Stop Loss: If you have been trading your system for a while, it might be a good idea to do a study of your stop loss levels. Look back over previous trades and see if your strategy can be improved by tightening your stop. For example, you might be using a 35 pip stop when you would have gotten the same results with a 28 pip stop.

If you are using money management like Percentage Per Trade, using a slightly tighter stop can result in using a slightly larger lot size per trade. This means more profits on your winning trades. And depending on how much you can safely tighten your stop, this could have a huge impact on your winnings.

Take Profit Targets

I’ve talked about this before. Hitting a target gives you a little emotional boost. In short, it feels good when we hit our price targets. This can lead to placing the take profit tragets a little closer than they need to be to make it easier to be hit.

If you’ve been trading your strategy long enough, you can look back over past trades and see if you are leaving profits on the table. Maybe you are using a 30 pip take profit when you could be getting the same wins with a 35 or 40 pip take profit. Over time, these “extra” pips on winning trades can turn into a lot of “extra” profits in your account.

Pending Entries

Most trading systems use Market Orders to get into the market. When your indicators line up, you pull the trigger and enter the market. The feeling is you want to get into the market immediately because if the trade goes your way, you want to start profiting immediately.

But think about it. How often do you enter the market and price goes immediately in your direction and hits your price target? Very rarely I bet. The truth is, the market does not move in a straight line and there are many pullbacks along the way.

Instead of using Market Orders to enter the trade, consider using Pending Limit Orders a few pips away. For example, if you want to enter a Buy trade, place a Pending Limit Order 3-5 pips BELOW current price. You only get triggered into the trade if price retraces enough to trigger you in.

It is worth checking this Pending Limit Order method with your strategy because you would be getting into the trade at a better price. At least, you would be making up for the spread cost of the trade by gaining a few extra pips per trade. And these small additions to your pip totals can really add up. If you made 400 winning trades a year and added 3 pips to each win… that would be 1,200 MORE pips of profit in your account.

I’m not saying all these small changes are perfect for every strategy. But it is worth looking at the way you trade to see if these small changes can improve your overall results over time. Remember, we are not looking to make HUGE changes to the way you trade, only small tweaks that can lead to long term, impressive improvements to your strategy.

If you use any of these technique, or if something I’ve mentioned strikes a chord with you, please leave a comment below.

Filed Under: Trading strategy ideas

What is the yardstick for successful trading?

July 23, 2013 by Edward Lomax Leave a Comment

Regardless of whether you are trading Forex, stocks, gold or beans, everyone who considers themselves a “trader” wants to be successful. For many, this means fulfilling the goal of replacing their current income with gains made from trading. For others, it might mean reaching levels of wealth and security impossible to reach with their “day job”. In all cases, success means something different to each trader.

So, how can you measure trading success?

I bring this up because there are a lot of unsuccessful traders out there that want to become successful. When they evaluate a mentor, trading system, service or piece of software, they make their determinations based on preconceived notions of success in trading. Too often, the people selling these systems, services or software use these preconceived ideas of success to sell the illusion of success, without any chance of delivering what they promise.

You see, the more contact I have with people trying to learn to be successful traders, the more I feel people are on a journey without end. They have unrealistic goals they think are achievable, but are not. This leads to jumping to the next service, system or software promising huge gains. They’re permanently one step removed (good pun?) from the success they seek.

I thought it would be a good idea to go over some of the most common “measuring sticks” of success in trading, so you can make informed decisions based in reality, and not uninformed decisions based on unrealistic hype. In the end, I want you to figure out how YOU define success. Is this a realistic goal? Is what you propose possible, or only a dream? Only once you have a clear definition of success, can you take steps to achieving your goals.

measure successful trader

Win Rate?

You’ll see a lot of people define success by win rate. When a new system or service becomes available, win rate is often used to show how good it is. You’ll see systems claiming 80%, 90% and even 98% win rate. But does the win rate really mean the system is good and you will be successful trading it?

Even if you can learn a system and get the win rate percentages advertised, this does not necessarily mean you are going to be profitable. Win rate alone is not enough information. You need to know stop loss and take profit levels as well as the money management strategy used to calculate lot size.

What would happen if the system uses a 200 pip stop loss and 2 pip take profit? Think about it. One bad trade would negate 100 winning trades.

Number Of Pips?

Another favorite method for measuring success is number of pips gained in a month. The idea is the higher the number of pips, the better. But again, only knowing the number of pips is not enough information. Here are a couple of things to look out for…

Double Counting Pips: A lot of systems and services use scaling out as part of their exit strategy. For example, they take off half the lot size at 20 pips and the other half at 40 pips. Some people might say this was 60 pips of profit. Where in reality, this is only 30 pips of profit at the original lot size.

High Stop Losses: If you are using a strategy with a high stop loss value, you need to take this into consideration when deciding on the lot size to use. Traditionally, the higher the stop loss, the lower the lot size you should use to not put too much of your account at risk. So, even if the service shows high pip gains, these pips might not mean very much in terms of money earned.

The truth is, the number of pips you need to make to be profitable depends on the system’s characteristics. A lot of people think they need 1000 pips a month in order to be profitable and use this level to define success. But a service making 200 pips a month might be much more profitable when you look at the stop loss size and lot size used.

Money Earned?

A lot of times I see specific dollar amounts being used in promotion. Something like, “X trader made $346,095.00 in six months”. But this does not show how much money YOU would make.

Too many people kid themselves and believe these kinds of gains are achieveable with a starting balance of $500. This is just not the case. It is easy to make $350,000 when you start with a balance of 20 million. So, take these dollar amount statements with a grain of salt.

Percentage Gains?

In my opinion, percentage gains are the best way to measure success in trading. It is just easier to determine what the percentage gains would mean for you, compared to using win rate, pip numbers or money amounts. Here are a couple of things to take into account…

100% monthly gains are not realistic. I know a lot of people who want 100% gains every month. Well, what trader wouldn’t be happy with those numbers? But the truth is, this kind of goal is ridiculous. You might be able to do reach this level once, if you are lucky and use risky money management. But these type of gains are not something you can achieve consistently.

You can create huge wealth with 2% average monthly gains. With compounding and patience, consistent monthly gains can really add up. Throwing away a system or service making 2% monthly gains for the hopes of finding something that gives you 100% monthly gains is a waste of time.

In the end, you need to decide what success looks like. But the best advice I can give is to align your goals with reality. If your trading success goals are outside the possible, you’ll just end up going from one thing to the next, and this is not the way to be successful.

Filed Under: What's happening in the current markets?

More Trailing Stop Thoughts And Trade Exit Approaches

July 19, 2013 by Edward Lomax Leave a Comment

Over the past couple of weeks, I’ve been going over a wide variety of trailing stop strategies and trade exit approaches. These methods help you trail your stop to allow price action to dictate when you get out of the trade. In some cases, using a trailing stop can allow you to take advantage of trending markets and profit on a larger portion of the move. Today I want to go over 2 ways to exit the trade that are not “technically” a trailing stop at all. I’m talking about the Equity Stop and Percentage Stop.

But first, I want to address a couple of comments I got on previous posts…

Programming Trailing Stop Strategies?

I was asked about the ability to program these trailing stops into an EA. This could be an expert advisor specifically used to apply the trailing stop strategy after the trade is live. Or this could be part of the overall trading strategy programmed into a complete auto trading robot. Since the rules are pretty straightforward, this should not be a problem at all.

If you’ve read some of my previous posts, you already know I am a big fan of creating expert advisors to take care of trade management after the trade is live. The hardest part of trading, in my opinion, is managing the trade when real money is on the line. Automating this process with one of the trailing stop approaches I’ve gone over is the easiest way to take the stress out of trading and sticking to your rules.

Linear And Non-Linear Trailing Stops?

If I understand the question correctly, I got a question about stops that follow price in static increments (linear), compared to stops that take volatility into consideration and move the stop up quicker if the speed of price movement increases (non-linear). Here are some thoughts.

None of the trailing stop techniques I’ve described take into account the speed of the candle while it is forming. In truth, this is too complex for me to think about because I describe trailing stop methods you can use manually (or have programmed). I don’t know how I would take into consideration the speed of a candle while watching the charts, so I don’t specifically have a non-linear strategy for when the candle is live.

That being said, there are various trailing stop methods I go over that do take into consideration the volatility of the market on candle close. Most of the trailing stop methods I use are calculated on the close of each candle. Here are some examples…

Bullish Bar – Bearish Bar Trailing Stop:

Using this method, you move the stop the same number of pips between open and close or the candle when price moves in your favor. (Bullish bars for buy trades and Bearish bars for sell trades). This does take market volatility into consideration because the amount you move the stop is not static, but calculated by the size of the previous bars move. Bigger the move, bigger the stop loss move.

ATR Trailing Stop:

Using this system, you use the Average True Range indicator to determine the number of pips to move your stop. This can either be the ATR value itself, or the ATR value multiplied by 1.25, 1.5, 2, etc. Again, market volatility is taken into consideration.

If you look back at the trailing stop strategies I’ve gone over, a lot of them trail price action taking market volatility into consideration. They are not just moving the stop a static number of pips. And remember, using a trailing stop is always going to follow price action and give up a little profits when the trade is closed out. The trick is to follow price to lock in as much profits as possiible, without following too closely and getting stopped out too early.

OK, let’s go over 2 trade exit approaches, that are not really trailing stops….

Equity Stop

This strategy is for traders who have many trades on at any one time. It is really not that useful if you only have one trade on at a time. So, imagine you have a daily profit target of $500 and 5 trades running. You would set the Equity Stop to close all trades once you reach the $500 mark.

Even if you have 3 trades winning and 2 losing at the time you reach $500, all the trades would be closed. This way you guarantee you hit your daily price target. Using the Equity stop, you can set up a daily target and exit all trades when the dollar amount is hit, regardless of the state of the trades at the time.

Percentage Stop

This is similar to the Equity Stop, but using percentages. If you have a trade plan with a percentage goal, you can use a Percentage Stop to exit all trades once this percentage has been reached. Again, all trades are closed when your percentage gain is reached, regardless of the status of the trades.

Some traders maintain the trailing stop as a percentage of the price.

Some traders maintain the trailing stop as a percentage of the price.

For example, if you have a goal of 1.5% per day, you would set the Percentage Stop to exit all trades once your trades reached 1.5% of the balance, regardless of the state of all the trades.

These strategies are really not trailing stop approaches. But I thought this was a good place to put them as you are using something other than price targets to exit the trade. Both strategies should be able to be programmed into an EA.

This pretty much ends the series on trailing stops. If you have something you want me to talk about, or something you think I missed, please leave a comment below.

Filed Under: Stop losing money

Trailing Stop Systems: Bullish Bearish Bar and Round Numbers

July 16, 2013 by Edward Lomax Leave a Comment

Over the past couple of weeks we have been going over different trailing stop systems. Using a trailing stop allows you to let price action dicatate when to get out of the trade. In non trending markets, using a trailing stop can reduce your risk or get you out of the trade with a small gain.

In trending markets, the trailing stop can safely keep you in the trade longer for larger gains.

Today I want to go over two trailing stop systems, the Bullish / Bearish Bar Trailing Stop and the Round Number Trailing Stop.

Bullish / Bearish Bar Trailing Stop

This trailing stop method is interesting because it not only moves the stop in your favor, but uses market volatility to determine how much to move the stop. This is beneficial because when big moves happen in the market, a larger portion of the winnings is locked in. In times of lower volatility, the stop does not move as much, or at all, which possibly keeps you in the trade longer.

For a buy order, the stop loss is only moved if the next bar upon close is a bullish bar. The stop is adjusted the same number of pips as difference between the open and close of the bar. For example, if the difference between the open and close is 32 pips up, you would move the stop loss 32 pips up. If the next bar is bearish, the stop loss is not moved at all.

Here is an example of a buy trade…

Bullish bar trailing stop system

As you can see in the photo, the stop loss was moved 4 times, corresponding to the 4 bullish bars that occured after the trade was placed. Each time the stop was moved, it moved the same number of pips as the number of pips for the bullish bar from open to close. This trade resulted in locking in 95 pips before being stopped out.

For a sell order, the stop loss is only moved if the next bar upon close is a bearish bar. The stop is adjusted the same number of pips as the difference between the open and close of the bar. For example, if the difference between the open and close is 45 pips down, you would move the stop loss 45 pips down. If the next bar is bullish, the stop loss remains in the original position.

Here is an example of a sell trade…

Bearish Bar Trailing Stop system

As you can see in the photo, the stop was moved 4 times. Each time there was a bearish bar, the new stop location was calculated from the bars open to close pip numbers. This trade resulted in locking in 166 pips before being stopped out.

Round Number Trailing Stop

Round numbers are price levels that end in 50 and 00. Remember, price action is determined by the action of traders, which are human beings. Levels that end in 50 or 00 have a strong psychological effect. For this reason, these levels make for strong support and resistance levels. They also make for good triggers to move your stop loss.

There are indicators on the Internet that mark these round number levels. Instead of the grid normally found on the charts, you would see lines at the 50 and 100 levels. These are important psychological levels and you’ll see price react to these levels quite often.

If you are on the lower time frames (anything below H4), I recommend using the 50 levels as your stop loss trigger. If you are trading the H4 or higher, it is probably a better idea to only use the 00 levels. Basically, on the lower time frames you will be trailing your stop by 50 pips, and on the higher time frames by 100 pips.

Here is how the round number trailing stop works…

When a candle crosses a round number level and CLOSES on the other side, move the stop to the previous round number level. Since the round number levels are good support and resistance levels, it is a good idea to move the stop to just below (for a buy trade) or just above (for a sell trade) of the 50 or 00 level.

Here is an example…

Round Number Trailing Stop System

As you can see in the photo, the trailing stop was moved 6 times and placed slightly below the round number line. I used a round number indicator I found on the web for this example. I set the round numbers to 100 to only show levels ending in 00 since this is a daily chart. Each time a candle closed above a 00 line, I moved the stop to slightly below the previous 00 line. This resulted in 545 pips being locked in before being stopped out.

In the next installment, I want to go over two more strategies. These are not really “trailing” stop systems, but two ways to exit trades once triggered that don’t hit the stop loss or take profit levels. In the meantime, leave a comment with your thoughts on my trailing stop ideas.

Filed Under: Stop losing money

Trailing Stop Strategies: Moving Average And Parabolic SAR Trailing Stops

July 12, 2013 by Edward Lomax 3 Comments

Today I want to continue with our discussion of trailing stop strategies. Remember, trailing stops are ways to reduce and eliminate risk once the trade goes in your favor. Instead of giving profits back to the market, you can lock in profits as you look for bigger gains. In this installment, I want to go over the Moving Average and Parabolic SAR trailing stop strategies.

Moving Average Trailing Stop

The moving average is a popular indicator used to show the average value of price over a given time period. Moving averages are generally used to determine trend direction and momentum. For example, if price is above a 50 Moving average you can consider the market in an up trend. If price is below the 50 moving average, you can consider the market in a down trend. Moving averages can also be used as a trailing stop, which is what we are going to take a look at.

There are two ways to use moving averages to exit a trade. The first is by using the moving average location to trail your stop. The second is to use a cross and close of a candle on the other side of the moving average as a signal to exit the trade.

Using Moving Averages As A Trailing Stop

In this scenario, you use the moving average position to determine where to trail your stop. As the trade progresses and the moving average position changes, you trail the stop at each candle close. In this way, the stop loss follows price and the trade is exited when price reverses enough to take out the stop loss.

Here is an example using a Simple Moving Average set to 13.

Trailing stop strategies SMA

As you can see in the picture, the orange line is the moving average. In this sell trade, as the trade progresses, you would move the stop according to where the moving average is at the close of the candle. The higher the moving average value, the more room you give price action. The lower the moving average value, the closer to price action you will be trailing your stop.

Using Moving Averages To Close A Trade

This is a variation of using the moving average to exit the trade. Instead of following price using the moving average after each candle close, you only exit the trade after a candle breaks the moving average line and closes on the opposite side. This can potentially keep you from being stopped out early by random price action which can happen if you are trailing price too closely.

Here is an example using the Simple Moving Average settings of Period 3 and Shift 3. I like this 3/3 moving average for this strategy because it keeps you close to price action, but allows for nice profits since you need a break and close of the candle to exit the trade.

Trailing stop strategies MA exit

As you can see in the photo, price pierced the 3/3 moving average several times in the beginning of the trade. But you would not have exited the trade because price did not cross and CLOSE on the other side of the moving average. At the bottom, when price crosses and closes on the other side of the moving average, you would close the trade.

Parabolic SAR Trailing Stop

The Parabolic SAR (Stop and Reverse) is an indicator that can help find potential reversal points in the market. When price is tending up, the SAR dot is placed below price. When price is trending down, the SAR dot is placed above price. At the close of a candle, the SAR vaule is calculated for the next candle. This makes using the SAR dots good for a trailing stop.

Here is an example using the defaut settings of Step 0.02 and Maximum 0.2.

Parabolic SAR Trailing Stop

As you can see in the photo, there is a buy order. Each time a new Parabolic SAR dot appears below price, the stop loss was moved. This resulted in 15 moves of the stop loss before finally being stopped out with 300 pips profit.

Another way to use the Parabolic SAR indicator to exit trades is to simply exit the trade when you get an opposite Parabolic SAR dot. So, in the example above, you would exit the trade when the dot switched from being below price to being above price.

In the next post, I want to go over another couple of trailing stop strategies. If you have any trailing stop methods that I have not gone over that you want me to comment on, leave a comment below.

Filed Under: Stop losing money

Trailing Stop Techniques: Candle High Candle Low And Average True Range

July 9, 2013 by Edward Lomax 8 Comments

We’ve been having a discussion about trailing stops over the past couple of posts. I wanted to continue that discussion by going over a couple more trailing stop techniques. Today I want to go over the X Candle High / X Candle Low and Average True Range trailing stop techniques.

Trailing stops use price action to determine when to exit the market.

The purpose of moving the stop is to reduce risk, eliminate risk and lock in profits.

Let’s go over the specific techniques.

X Candle High / X Candle Low Trailing Stop Technique

This technique uses a set amount of closed candles in the direction of the trade to determine where to move the stop loss.

A good number of candles for this technique is 2 or 3. The more candles you use, the more room you give the market to move. The lower number of candles you use, the more closely you are following price action. For this example, let’s use 3 candles.

For a BUY trade, you use the lowest low of the past 3 closed candles as the area to move your stop. In a SELL trade, you use the highest high of the past 3 closed candles as the area to move the stop. Whenever a candle closes there is the potential to move the stop. Only move the stop in the direction of the trade.

Here is an example of a BUY trade…

3 candle buy trailing stop

As you can see in the photo, you look at the last 3 closed candles and place your stop at the lowest low. Every time the lowest low of the last 3 candles goes in your favor, you move the stop to lock in more profits. In this example, the stop was moved 11 times before finally being stopped out with 349 pips.

Here is an example of a sell trade..

3 candle highest high for sell trailing stop

As you can see in the photo, you look at the last 3 closed candles and move the stop to the highest high. The stop loss was moved 7 times and locked in 267 pips of profit. Since the stop loss has not been hit yet, you would continue moving the stop in this fashion until the stop is hit.

Average True Range Trailing Stop

The Average True Range (ATR) indicator measures the volatility of the currency pair. If the degree of price volatility is high you will get a higher number. On the other hand, if there is not a large degree of price movement you will get a lower number. Many traders like to use the Average True Range to determine stop loss size, or how close to trail the stop.

The theory is, if you are in a volatile market, you’ll need a larger stop loss to keep from getting stopped out by random price movement. If the market is not volatile, you can get away with using a tighter stop. Traders use the average true range as is, or multiply the average true range by 1.25, 1.5, 2 or some other number.

The Average True Range trailing stop strategy is just like the X Pip strategy I talked about in the previous post. Once price goes in your favor, you move the stop based on the close of the candle. In this case, we use the average true range value, or a number based on the average true range multiplied by 1.25, 1.5, 2 or some other number. Every time another candle closes, there is a potential to move the stop loss if that means moving your stop in your favor.

Here is a photo of the Average True Range…

Trailing stop technique using ATR

The Average True Range indicator is the blue line at the bottom. To find the value, put your cross-hairs on the line and look to the right to find the value. This is the value you use to calculate the trailing stop loss value. Ever time there is a closed candle, find the ATR value and figure out how close you want to trail the stop. If the value moves the stop in your favor, place the stop at that value.

Next time I’ll go over a couple more trailing stop techniques. In the meantime, if you have a favorite trailing stop method, please leave a comment below.

Filed Under: Stop losing money

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