Algorithmic and Mechanical Forex Strategies | OneStepRemoved

When Your Trading Strategy Stops Working

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You had a great strategy, it was working well and it was making you money. The problem? Suddenly, market conditions have changed and your strategy no longer works. Markets are too volatile, too choppy. It’s as though the only thing your strategy can produce is a screen full of red. It seems like your strategy has broken down and is desperately in need of a fixing.

You wonder is it time to ditch your “beloved” strategy, the one that’s always, until now, worked so well. The answer: Not so fast. Your strategy was designed for certain market conditions even if you weren’t aware of them. So what do you do when your strategy gives out? Just like any “doctor” who has to diagnose a sick patient you need to diagnose your ailing strategy. But don’t let the word “diagnostics” scare you; most of the times diagnosing what is not working is simple.

Trading Strategy Failure:  Symptoms and Solutions

The key symptom for a trading strategy that has stopped working is a very sharp fall in the win ratio (i.e. profitable trades). This usually means that either your entry or exit conditions are no longer viable or that your leverage is too high. Of course, both can go wrong, too. So how do you know which is which and what has gone wrong? Here are a few tips.

Focus on these things: duration, win ratio and trade frequency. One of the most common symptoms of a non-working strategy is trade duration, which is the average time a trade takes. The key thing to watch for is when duration begins to deviate from its average. This is an indication that the cycles that your strategy had been counting on have now changed. When combined with a win ratio and trade frequency measurement (how many trades are executed per unit of time) it allows you to adequately diagnose the more common mechanisms that tend to go wrong in a strategy. Those mechanisms include leverage, entry and/or exit.

A Leverage Problem

Let’s assume the duration has fallen alongside the win ratio but the frequency of your trades was unchanged. For example, you execute more or less an average of three trades a day and this has not changed then your frequency hasn’t changed. What should you make of this?  Simply this; the leverage in your trading strategy is too high for the current market volatility. The fix for this problem is to lower your leverage and take a deeper stop loss. This way your risk does not change because you trade at a smaller position and thus you adjust your strategy to a more volatile market.

An Entry Problem

Now, let’s say your duration has fallen alongside your win ratio but the frequency of your trades has jumped. That means your entry is creating a false signal amid the higher volatility and needs to be adjusted to fit a more volatile market. You do this generally by smoothing the indicators you use.

An Exit Problem

Finally, let’s say the duration of your trades has jumped higher alongside a falling win ratio while the frequency has fallen. That means your cue for disengaging or for closing  in your trading strategy is not sensitive enough. Essentially, you leave your trade open for too long until it eventually turns against you. What you need to do is to make your exit trigger more sensitive by running on a shorter period.

Conclusion

Sometimes, as in the cases illustrated above, by simplifying your trading strategy, you can focus on minor tweaks that may go a long way toward stabilizing your returns. As you may have noticed, most of the focus here has been on markets becoming more volatile. Volatility is the main reason that strategies stop working and the reason I focused most of the adjustments and tweaks. But, of course, each case must be to its own merits. If a simple tweak won’t work, then it’s generally prudent to have a strategy in place for each type of market condition.

Why You Trade Irrationally

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Over the years, how many blogs posts have you read that preach, proselytize and lecture you on discipline in trading? I bet if you had a dollar for every one you’d consider early retirement, wouldn’t you? We all realize that discipline is very important in trading; it’s common sense, really. But that doesn’t teach you how to avoid the pitfalls of irrational decision making in trading. For that you must understand what drives you to make an irrational decision when trading. If you dig around for that reason, and all of the trading blogs unanimously concur, that reason is greed. Well, I agree, that that was the way I used to think. But as I will soon explain, the reality is that nothing could be further from truth.

A Moment of Enlightenment

Throughout the many years of my career I have had the opportunity to analyze the performance of at least a thousand traders. Intuitively, I believed that the reason for irrational decisions had to have deeper roots than just greed. The problem was it was hard for me to connect the dots. That is until I stumbled through the works of a Dan Ariely, a professor from Duke University. Ariely, through his numerous books and writings, illustrates time and again how and why we make irrational decisions. Though Ariely doesn’t specifically deal with the trading dilemmas we all face, his insight helped me connect the dots. With a picture now drawn, I hope to enlighten you as to why you do what you do in trading and how you can avoid the pitfalls.

Overly Excited

Ariely concluded that the way we initially feel about a specific matter impacts that particular decision as well as subsequent ones. We can apply his conclusion to trading. Let’s say you’ve just begun to trade and you decide to open your very first trade with high leverage. And, hey! Will you look at that! You’ve gained money! That was exciting and exhilarating, wasn’t it? The problem? It establishes precedence.

Now you’ll expect to be excited and exhilarated every time you trade. As if you’ve got the magic touch; press the buy bottom at just the right second and win a fortune. But in real life? You need an accountant’s state of mind; prudent and suspicious, relying only on data to make a decision. The problem is you’ve already got that blue print in your brain that says trading is exciting. So, almost automatically, you subconsciously push yourself to trade at high risk. Or else you open a trade without good reason, simply because of that imprint of excitement towards trading.

Hack Tip #1: Start with a very small amount (real money, not a demo); enough that you’d only slightly care if you lost it. It should be enough, though, that you’re excited if you profit. That’s the idea behind low leverage. Do that for several months, and you’ll eventually get used to making more rational decisions. That’s because you won’t associate trading with excitement. Although you might lose that sense of “fun,” it’s really the only way to become a rational trader. The bottom line is you’ve become an “adrenaline junkie” trader. You need to give it a few months to wean yourself off of the “excitement.”

X Factor Complex

In the retail trading world we like to believe that every successful trader has something special, a so-called X-factor. That would be some unique character, trait or talent that makes for a great trader. Of course, much as we’d like to believe we all have this X-factor, that’s utter nonsense. Trading is all about statistics and constant analysis. Period.

Often, we (unknowingly) produce stagnant results that could never dispel the notion that we’re really just run-of-the-mill traders. We’ll always be in the game just enough so that when we profit, even a little, it’s because of our “gift.” If we should lose a little, well, that’s really no big deal. Traders may think like that for prolonged periods because it keeps the illusion alive. So long as they’re not out of the game, they’ll stick with it. They’re not willing to try out a new strategy. Sure, it could produce more gains but it might also mean deeper losses. So they’d rather stay stagnant, and maintain the status quo, such as it is.

For many, this is the perfect scenario to feed their ego. If we gain, we’ll throw a BBQ on Sunday and boast (gloat) about it to our friends. But if we lose? Well, no one has to know about that except you and your broker.

Hack Tip #2: Think of your trading as a business. Find a friend who has some financial background and share your performance with him. Even better, share it with your accountant. With someone looking over your shoulder, you’re forced to acknowledge that there’s a down side to losing. That may give you the incentive you need to avoid stagnation. If trading is a business – and it is – you need a different mindset. Every business is in business to make money. Your friend/accountant is sure to tell you that immutable fact if you should ever forget again.

Trade

Never Trust a Trend Line with a Stop Loss

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What can we say about trend line? Is there any trader in the world that hasn’t used them? I seriously doubt it. We’ve been told time and again, “Trust the trend line. The trend line is our friend.” The visual appeal of a trend line is just irresistible… trimming the trend and showing you the easy way into the ride. We all enjoy that warm and cozy feeling of the trend line supporting our trade. It caps the market and “keeps it away” from our stop loss. Yet, that “coziness” could come at a dear price, especially when it comes to placing stop losses on the basis of a trend line.

What Makes a Trend Line?

Unfortunately, the answer is not as simple as a couple of dots with a line between. But maybe that’s the wrong question. The question should be what makes the market move in a linear trend line, much like the nicely drawn one below? Trends come in all shapes and forms, but when the market moves in a linearly it creates a trend line.

Trend line

When does a specific instrument ascend or descend in a linear manner? When buyers/sellers emerge in cycles, and in a timely fashion, and buy or sell dependent upon the trend’s direction. In reality, banks, hedge funds, central banks and other market movers are the creators of that linear movement. That comes once they’ve collectively concluded the market’s direction. Then their periodic buying and selling creates a linear movement in the pair and, hence, a trend line is born.

Never Trust a Trend Line

First of all, let me be clear, I don’t believe “the trend is your friend.” Unless you have friends that regularly stab you in the back, then the trend is not your friend. While following a trend is very important, I always view it with suspicion. Maybe it’s about to surprise me or maybe there’s an indication that something is about to change.

The trend line is all about market movers buying and/or selling in a timely manner. And that means each subsequent time at a higher or lower price (depending on the trend). But here’s the thing; if you rely on the trend line for your stop loss you’re really counting on several different factors. For example, you’re counting on institutions to make timely trades, without abrupt selling or a sudden strategy change. And you’re counting on an absence of sudden volatility that could break the pattern.

Don’t get me wrong, as I’ve said, a trend line is important. But can you really count on the market to be that predictable? Of course, you can’t. While we like to think of trading as some combination of wit, intuition and logic, that’s not the case. In reality, trading without acknowledging the unpredictable is a one way lane towards a losing street.

The sample below illustrates what too often happens; the trend line is abruptly broken. Those who placed their faith in the trend line and placed their stop loss under it were knocked out. Eventually, the bullish trend line continues but you’ve already missed the trend. It’s not just your stop loss that you hit; it’s the loss of potential gain that really hurts. Think about a swing trader who rides trends over several weeks. Being knocked out of a trade could mean that their next opportunity might come only after several weeks or even several months.

Trend Line

 

Source: e-signal

Don’t Despair – There’s a Solution

If placing your stop loss on the basis of a trend line was one of your methodologies, you may be discouraged. After all, what you’ve been relying on may eventually not work. But don’t despair because there is a solution and it’s easier than you think.

In conjunction with the trend line, you need to use indicators that consider volatility and the market’s standard deviation. For example, you could use Bollinger bands on top of a trend line and place your stop loss below it. Or, rather than relying solely on a trend line to determine whether a bullish (or bearish) trend is still intact, use exponential moving average crosses. Then, you’ll know, even if your trend line was broken, that the trend is still up.

There are a number of other tools that help make a good stop loss which take into account market volatility. But that’s a discussion for another day. What’s important to understand is that the trend line, alone, is unreliable for stop losses. Your take away from this article, then, is the realization that you can never trust a trend line by itself. You should always use indicators that capture market volatility and thus “complete” a trend line. While a trend line, in and of itself, is convenient, it simply does not have the ability to capture the changing pace of a trend in the long term.

Prop Trading Plan For Success

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Every successful forex prop trader or other small business owner sets a course with milestones leading to specific objectives. And, when limited account sizes are traded using maximum leverage, the chosen goals must be realistic and well-planned. Most importantly, it’s better to work on eliminating trading mistakes rather than to focus on meeting performance targets alone.

Personal responsibility

As a trader, it’s important to “own” the results of each trade, whether good or bad. Like children, new traders grow and mature by taking personal responsibility for their trades and learning from them, no matter the outcome of any single trade. It’s a journey to build a trading success story.

A trader should rejoice at each winning trade, and plan for further successes by carefully reviewing why that trade was profitable. By doing so, winning becomes a well-planned routine.

Likewise, with each painful loss a trader should learn something, and find a way to do things differently during the next trade. Successful prop traders know each lesson learned is valuable, regardless of whether that trade was a winner or loser.

Passion and planning

For a prop trader, the thrill of trading is just as important as the financial gains. For anyone contemplating a career in prop trading, passion is just as important as planning for success. Yet, passion alone isn’t enough to ensure a trader’s survival.

If a trader is motivated only by the idea of buying exotic sports cars and scantily-clad women, he’s not likely to last over the long run. Good planning is also essential. For traders who are caught up in the excitement and overconfidence of a series of profitable trades, it’s better to focus on what’s already been accomplished, then learn from it and build upon it, instead of overreaching.

Regular, objective reviews of trading performance are the forex prop trader’s best way to improve profits. As mentioned above, when you’re using an already-winning system it’s easy to earn more money simply by identifying and avoiding ever-smaller errors over time. Ask any football coach – Most games are won by whichever team makes the fewest errors.

Maximum leverage requires maximum planning

The power of extreme leverage requires careful planning and quick learning. Losses can occur very suddenly. Have you thought about how you’d handle that situation?

Shaun and other leading prop traders take personal responsibility for their trading outcomes, and they’re quick to learn from their results, both good and bad. Also, they avoid becoming greedy – each month, they pull profits from winning accounts, so accounts stay small.

Use Maximum Leverage To Grow Profits And Reduce Risks

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The gains can accumulate quickly when a prop trader is using a strategy based on maximum leverage with limited account size. In order to preserve and build those gains, it’s important to remove them from the trading account according to a good plan.

As described in previous articles in this series, the high-leverage, low-balance strategies used by leading prop traders can be applied to multiple trading accounts using different systems, with each account capitalized by not more than a couple thousand dollars.

The amount in the account typically ranges between $1,000 to several thousand dollars. That way, there’s no psychological obstacle to using the max leverage on each trade.

Reduce the risks from drawdowns

When you have a winning system, profits pile up. It’s tempting to “let it ride” by using the same system to trade ever-bigger position sizes in the growing account.

However, when the entire capital is available in the trading account, it means that the capital is exposed to the inevitable system “blow up,” which typically causes a steep drawdown. Even if the trader escapes financial catastrophe, he or she may become so risk-averse afterward as to become indecisive and ineffective.

Pull money out each month

The smart way to avoid excessive drawdowns due to trading system “blow ups” is to pull money out of the account at the end of each successful month. That way, when a major drawdown occurs, it won’t take all your money, just the couple thousand dollars that you can afford to lose.

Successful prop traders like Shaun sweep the profits out of each winning trading account monthly and move them into a non-trading account, where they remain safe. So, each month the trading accounts open with their individual capitalization set at a given amount.

Pull out at least enough to cover one “blow up”

Once you’ve launched your forex system, you’ll want to think about earmarking enough money to cover at least one trading system failure. After you’ve secured that amount to be used for a recapitalization of your trading account, every subsequent gain is “free money,” at least in a psychological sense.

The first milestone is to pull enough money out of the trading account to cover at least one catastrophe. If you’ve been enjoying mostly winning months, next you should allocate 50% of your profits for high-risk systems.

You can’t lose what’s not at risk

Keep in mind: When a prop trader is using maximum leverage, the only money that’s safe is the money already pulled out of the trading account. Profits should be pulled from each winning trading account, each month.

When a prop trader wins consistently using high leverage with a limited-size account, the gains from relatively small individual trades may compound quickly. Profits gathered from the overflowing small trading accounts can compound into large sums, and it’s important to manage those profits effectively.

If you’d like to learn more about using maximum leverage to pull profits each month, just contact Shaun.

Using Long Wicked Candles for Stop Placement

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dinner-candles-rainbow

 

Candlestick charts, using the individual candles as well as the patterns that they form, can provide an abundance of information to the trader.  An oftentimes overlooked aspect of these charts is the trading information provided by longer wicked candles – especially when it comes to stop placement.

Many newer traders will decide where to place their stop based on some random number.  That number may be derived from how many pips they are comfortable losing or simply some nice round number like 10 or 50 or 100 or whatever.

The point is that their number is arbitrary and, most likely, bears no relationship whatsoever to the price action that they see on a chart.

 

A more effective way to place a stop is to look for levels of support in a buy or levels of resistance in a sell. 

 

 

When buying the stop would go below a level of support and when selling the stop would go above the level of resistance.

(Needless to say, when placing any stop by any method, it is imperative that the 5% rule of Money Management be followed.)

To fine tune this even more, a better guide for stop placement is to bring long wicks, if they are present on the chart, into the analysis.

The historical 1 hour chart of the GBPJPY below provides an excellent example of long wicks…

 

GBPJPY

 

 

The black rectangles on the chart identify where longer wicks are making an appearance.  You can see that the wicks are extended relative to the length of the other wicks around them on the chart.

Notice that after a long wick(s) makes an appearance, oftentimes price will move in the opposite direction of the long wick for a period of time.

In other words, if the longer wick is below the body of the candle, price has a tendency to move up.  Conversely, if the longer wick is above the body of the candle, price has a tendency to move down.

So why is that you may ask…

An extended wick at the bottom of a candle shows that sellers were able to push the price down significantly.  That is one aspect of what has created the long wick.

However, the selling volume was not great enough to keep the price at that low level.  The buyers were able to push price back up from the low – the bottom of the wick – thereby showing strength.  That is the second aspect of what creates the long wick.

Since buyers triumphed in that sense, the likelihood exists that the strength of the buyers will endure and, if that is the case, the price will rise.

(In the case of the long wick being above the body of the candle, the opposite scenario might play out and the price would fall.)

So how can a trader effectively make use of this in their trading?

As I always point out, a trader must first take note of the direction of the trend on the Daily chart.  If the trend is down, as it is on the pair above, seeing a candle (or several candles for that matter would be even better), with long wicks on their tops, would point toward a strong potential for price to move down…in the direction that the market has already been taking the pair.

So, to continue using an example of a downtrend, if the pair retraces…that is, move against the trend…and stalls at a level of resistance or a Fib level, I am going to be looking for long wicks at the tops of the candles.

There are two reasons for this:

1)  Those long wicks indicate the potential for the pair to trade to the downside back in the direction of the Daily trend as the retracement has stalled.

2)  The top of the extended wicks provide an excellent guide for a trader to place their stop.  The rationale here is that the buyers pushed price to the top of that wick but could not push it beyond that point.  As such, placing the stop just above that wick represents a level that has a much lower likelihood of getting hit.

Bottom Line:  Observing long wicks forming at levels of support or resistance, especially when they signal potential movement in the direction of the daily trend, can create a beneficial “edge” for the trader especially in regard to stop placement.

 

Remember – anytime you try out anything new, be sure to try it out numerous times in a demo account until you achieve a level of comfort and understanding.

 

All the best and good trading,

Richard

 

@RKrivoFX

rkrivofx@gmail.com

How To Pull Profits Like A Pro

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As mentioned in a previous article about managing your forex venture like a “prop trading” business, using maximum leverage can truly minimize your at-risk capital. Successful prop traders leverage their accounts and risk every dime of allocated capital each month.

The idea is that a winning trading system will accrue profits quite rapidly, but if the position sizes are increased along with the expanding account size, eventually a “blow up” will intervene to cause a steep drawdown.

The key is to mechanically limit the amount of capital allowed to accumulate in the trading account during winning periods. Prop traders set a par account size, and at the end of each month they “sweep” the overflow from gains into a separate, non-trading account. The account opens each new trading month at the same par size.

By doing so, gains are preserved intact while serious drawdowns are limited to the account’s monthly highwater mark. Profits from winning months are retained, and are protected from risk.

Setting a limit on capital at risk reduces the risk of a trading system “blow up”

By sweeping excess cash from the account, a prop trader reduces the risk from a catastrophic drawdown. The traditional practice of small, independent traders is to treat the entire account as a single unit which they attempt to grow as large as possible. Yet, this can be dangerous.

At some point, every system suffers a “blow up.” When this happens, everything may be lost if the trader hasn’t stashed away some of the previous profits. Prop traders avoid this catastrophic scenario by limiting the trading account size.

As a trading account grows, the savvy prop trader pulls profits out in order to keep them safe. For example, at the end of a given month, assume that a trading account whose par value has been set at $5,000 may now total $6,00. So, the overflow $2,500 is swept into a separate account not accessible for trading or margin.

The trader then begins the new month with the par $5,000 and once again the account should begin to accrue gains at the same consistent rate, by using the same trading system.

Crazy margin for outsize gains

By trading a winning system while using maximum leverage and limiting the amount of capital at risk, an entrepreneurial prop trader can harvest profits from a wide range of forex markets. And, traders who are supported by prop shops have access to highly sophisticated risk-management tools to help them grow even faster.

Maximimum Leverage To Minimize Risk

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Leverage is the rope with which most forex traders hang themselves. Yet, when this powerful tool is used carefully it greatly improves trading performance. In fact, prop traders can use maximum leverage for the best gains while also minimizing risk; below we’ll describe how Shaun does it.

Legacy risk-management strategies

Most traditional forex risk-management strategies are based on either limiting the amount of loss per trade or per market as a percentage of the account’s equity, or else tightening the parameters of trades going forward based on current losses.

Most traders typically increase or decrease their degree of leverage and position size according to wins or losses over some period of time.

Max leverage for minimum risk

Yet, even though it may seem counter-intuitive, savvy prop traders use maximum leverage to minimize risk. It’s true – Traders like Shaun use leverage to minimize at-risk capital while maximizing the compounding power of a series of winning trades while using a good system.

How? By limiting the amount of money allowed to accumulate in the brokerage account during the monthly trading cycle.

Throughout the month, a successful trading system harvests gains from the marketplace. Most traders allow those gains to accrue and use them to trade ever-larger lot sizes, even while using the original system and risk-management strategy. During a winning streak by any given system, the results can be impressive.

Of course, the trouble is that nearly all trading systems, if operated over a sufficient period of time, will “blow up.” When a system “blows up,” it can lose the majority of the trading account equity very quickly. That is, the system fails to the extent that it either runs out of money or the original trading rules must be significantly modified.

How? By limiting the amount of money allowed to accumulate in the brokerage account during the monthly trading cycle.

Exacerbated by leverage, the occasional system failure is what keeps most traders poor. During a period of deep drawdown, weak traders go out of business because they lack trading capital. They haven’t put anything aside for “seed” funding.

Manage risk by sweeping excess cash from the account each month

To reduce both the technical risks of a trading system failure as well as the psychological pressure of facing drawdowns, Shaun and other prop traders “sweep” excess cash from trading accounts each winning month, so that the months’ beginning equity balances are all the same.

Keep the least amount of money with the broker

That limits the total risk in case of a blow up to a maximum of only a single month’s preset trading account limit. Gains from previous winning months are safely sequestered in a different account, away from the trading account.

“Prop shops” minimize risk under leverage

Proprietary trading firms generally use sophisticated risk-management systems to monitor individual risk management and prevent monthly drawdowns from exceeding threshold levels.

Everyone wants to make sure prop traders manage risks effectively while leveraging their own capital, as well as the firm’s money.

Risk every dime in the account, each month

When a system works well, traders like Shaun leverage their capital to maximize gains and trade the largest practical position size. The profits from a string of successful trades can accumulate exponentially.

And, to ensure gains are protected, each month Shaun “sweeps” any gains from the trading account, reducing it to its predetermined par level. It’s critically important to pull profits on a regular basis, so they won’t be subject to loss.

Whenever a losing month does happen (and it will!), you top up your balance. The idea here is that instead of trading a $50,000 account, all of which is subject to loss, you only put something like $5,000 into an account. That’s money that you’re truly able to lose.

Are you happy if you lose it? Of course not. But as a risk-focused trader, you know that even if you lose the money, your financial situation shouldn’t be severely impacted.

$5,000 probably isn’t the exact number for you. Maybe it’s more. Maybe it’s less. The point is, once you know your max loss number, it’s a lot easier to kiss it goodbye and put it into the account. Then, if you get the performance that you’re expecting from your trading system, the return on investment (ROI) can yield some eye popping numbers.

This chart is the Myfxbook verified performance of my trading account.

If you’d like to learn about pulling profits from your account and other prop trading tips, stay tuned for the next article in this series.

Trailing Stops and Multiple Lots

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Stop signs

 

This article is going to describe two slightly more advanced trading techniques:  how to trail a stop and how to maximize profits by trading multiple lots.

Let’s cover using multiple lots first…

Since as traders we always want to minimize risk as much as possible, I offer the following cautionary note:  each time a trader adds an additional lot to a trade, they take on more risk.  It may still be only one trade, but the size of the trade obviously plays a part.  For example, if a trader opens a single trade with a 100 pip stop, they take on 100 pips of risk.  If they open the same trade but with three positions, they are taking on 300 pips of risk!  It is imperative to be sure that the size of your account can handle the additional risk.

Here’s a quick way to make that determination…

A trader should never place more than 5% of their trading account at risk at any one time.  When trading a 10K lot, one pip, depending on the pair being traded, is worth roughly $1.  So a 300 pip stop would equate to a $300 risk.  If we divide $300 by .05 we get $6000.  That means unless you have a $6000 account you should not be taking on $300 worth of risk.  Possibly the trade can still be taken but with some adjustments to the size of the trade or the size of the account.  Either the size of the trade can be made smaller or the size of the account can be increased.

Moving on to implementing the strategy…

Since a picture, or a chart in this case, is worth a thousand words, let’s take a look at a historical 1 hour chart of the GBPNZD to see how we can employ our trailing stops and multiple lots strategy.

Trimult1

Here’s how we will trail the stop…

Since the pair is in a downtrend, we could enter the trade by selling three 10K positions at the point labeled  “Short Entry”.   Price has broken through support triggering our entry and the stop would be placed at the “Stop 1” level.   As price continues to move in our favor and breaks below the second green support level, we would close one of our three positions and move the stop to the “Stop 2” level.

By doing this we have locked in roughly 110 pips of profit

We also have placed our stop above a new resistance level so that our two open positions are protected.  Moreover, since our stop is now below our entry at this point, if the pair retraced and hit our stop we would show a small profit on the remaining two open positions plus the 110 pips we gained by closing the first position.  At this point, we have removed all risk from this trade.

As price continues to move in our favor, making lower highs and lower lows, when it moves below our next green support level we would close out one more position locking in a gain of about 310 pips on that one and move our stop to “Stop 3”.  As it was in the case above, we have locked in more profit and, by trailing our stop to the next level of resistance, we are protecting our “floating profit” on the remaining third position which is still open.

On the last open position we will simply continue to trail the stop using the same method as above.  When price no longer continues to make lower highs and lower lows, we will be stopped out at some point as the pair retraces.

So as price moves through the next green support level we would advance the stop to “Stop 4”.

We can see that price did not continue to move lower and, as price retraced, we were stopped out at the “Stop 4” level.  Since our third position had been open since the very beginning of our trade, we were stopped out with a gain of 320 pips on the last 10K lot.

 

Overall, the total gain on the three lots was 740 pips

. 88f3bc060c1fef296b51dca3bbb0e734

Had a single lot been placed on the trade the gain would have been 320 pips.  Now, don’t get me wrong, 320 pips is nothing to sneeze at.  However, given the choice, I’ll opt for 740.

From these examples the potential benefits of manually trailing one’s stop and trading multiple lots is quite apparent.

As always, when trying anything for the first time, be sure to test the concept out in a demo account numerous times until you completely understand the process.

 

All the best and good trading,

Richard Krivo

@RKrivoFX – Twitter

rkrivofx@gmail.com

 

 

Trade Like It’s a Business

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Want to trade like a professional? Start thinking like a prop trader. If you’re going to approach trading as a business, the first thing to do is minimize your trading costs and spreads at a safe financial institution.

Trading is a serious business, so you should treat it that way. Before placing any money at risk, you should develop a workable business plan that offers a clear pathway to reach your financial goals, while minimizing risk of loss.

Most importantly, you should carefully calculate the expected drawdowns while using your trading system, then set clear stop-loss rules and adhere to them without exception.

Build a winning team

It’s best to choose a broker who will keep your money secure while offering cutthroat pricing. In fact, your choice of broker is critically important for success. The best brokers offer easy-to-understand pricing and guidelines, and they work with you, not against you.

Market analysis and fancy tools are nice, but they can quickly inflate your costs. And, complexity can make it difficult to identify and correct glitches, especially when your trading business is just starting out.

Pepperstone

Pepperstone is where Shaun trades his personal accounts. They offer highly competitive pricing and have excellent banking relationships. Unlike inconsistent brokers who attract new customers by offering loss-leader promotions, then taking them away, Pepperstone provides consistent service on very low spreads.

Although Pepperstone doesn’t accept U.S. individuals as clients, Irish entities and other foreign corporations are often employed as corporate vehicles for trading. How? Ask and we’ll point you in the right direction.

Price feeds

Traders may see a variety of different price feeds and charts, based on account size and trading behaviors. The chart prices may not match live prices. This can have a dramatic impact on your trading strategy, so it’s important to understand the reasons for any pricing discrepancies before you trade.

Pricing discrepancies may be costly, and they can erode the trader’s confidence in his or her data. It’s hard to trust your trading system when you’re seeing different numbers.

The chart prices may not match live prices.

Also, be aware that some brokers run a “B-book” of price quotes that take on risk against clients with accounts that are at break-even or worse. In other words, the broker wins when you lose, and vice versa.

Yet, the best brokers, such as Pepperstone, run strictly an “A-book” with a single price feed and trading is exclusively based on that single set of prices. So, with a good broker the charts should always match your trading prices. That gives you the confidence in knowing that your trade executions are based on the same data as your signals.

Trade like a professional

For part-time forex traders who are ready to begin trading professionally, there are plenty of tools available. And, by participating in a “prop” trading style you can take advantage of top-quality trading platforms and data feeds to help you squeeze additional margins from the markets.

Next week we’ll be talking about leverage. Most traders use it as the rope to hang themselves with. But when you use a powerful tool carefully, it can be the difference mediocre and outstanding performance.