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Hang Ten Pivot Point Strategy

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Hanging ten usually refers to a surfboarding maneuver, where the rider hangs all 10 toes off the front end of the board. I don’t claim to have any knowledge of surfing, but according to the online encyclopedia of surfing, it’s meant to be pretty tricky.

What I want to show you today is also about balance and pullback forces within a wave, but is so much simpler to pull off!

Quick trades for an easy 10 pips

There’s a lot to be said for riding long term market trends, picking up hundreds of points at a time … but many of us come to trading because we love facing down the markets and spotting opportunities for quick in-out opportunities to put a profit in our pockets.

10 pips a day may not sound like a lot, but there’s a lot of sense in being in and out of the market quickly – the less time your money’s on the table, the better. And this little daily trick takes advantage of the magnet-like pull that pivot points have on prices to pocket a little prize for those in the know.

If you’re not familiar with pivot points, here’s what you need to know …

Pivot points are 5 or 7 (depending on how far you want to take it) lines drawn on a price chart each morning.

They are based on what the prices did the day before, and they give us some great clues about how prices will behave over the coming day – like how far the price is likely to run, where it’s like to hit support or resistance. This kind of knowledge is gold-dust if it’s applied correctly.

Not so long ago, you’d have to calculate the pivot point levels for yourself, and then plot them on the chart (I still have a pivot point calculator you can download on the website – but honestly, this seems a pretty old-fashioned way of doing stuff now.) Instead, you can just click a button on your charting platform, and all the lines will be drawn for you …

hang ten pivot point strategy background

The seven lines are:

  • the central pivot point – the price is often drawn to this key level after the market opens.
  • Resistance 1, 2 & 3: these are key areas of resistance, where the price is likely to hit some congestion.
  • Support 1, 2 & 3: similarly, these are three key areas of support. When the price nears these, we can expect to see congestion.

You can see on the chart above, that the price opened above the central pivot point (this is a bullish sign for the day’s trading). It then quickly moves up to Resistance 1. After a few attempts to push through this level, it eventually breaks through and reaches Resistance 2, bouncing back off this level.

It’s worth remembering that – as with most levels of support and resistance – pivot points aren’t about fixed price points where the market will neatly bounce. These are levels that are littered with the orders of other traders, which means that prices get drawn into them, and often bounce around them, in a generally messy display of behavior, before retracing, or moving on.

So, that’s your pivot point 101 … let’s get onto the nitty gritty of how we’ll make our 10 pips

First off, let’s get our pivot points set up on a chart.

If you’re using Core Spreads, it’s just a couple of clicks.

Here, I’m on a EURUSD chart, and click ‘Studies’, then select ‘Pivot Points’ from the drop-down menu …

hang ten pivot point strategy set up1hang ten pivot point strategy set up2

I want to use ‘Standard’ pivot points, select ‘Shading’ and turn Resistance 3 and Support 3 to white (as I won’t be using these – I find that if the market has moved this far, something stronger than pivot points is driving prices, so they are of little use).

Once these settings are on my chart, I’ll select a 10 minute timeframe, and it’ll look something like this …

hang ten pivot point strategy chart

Something you’ll notice when watching pivot points is that some days the price doesn’t break beyond R1 and S1 – just moving in the narrow bands either side of the central pivot point.

However, when the price does break R1 or S1, it very often pulls back to that line. And this is where we take our crucial 10 pips.

We’ll wait for a 10 pip move beyond R1 or S1, then place our bet that the price will retrace back to R1 or S1.

Like this move from earlier in the week …

hang ten pivot point strategy

The way we do this (without having to watch charts all day) is to set up two orders on your account each morning, which will buy if the price hits 10 pips below S1 or sell if the price hits 10 pips above R1.

In the example above, this would mean two orders:

Buy at 1.0535

and

Sell at 1.0600

The profit target is 10 pips away (back at R1 or S1), and the stop level is tucked out of the way at R2 and S2.

Come the end of the day, if an order hasn’t been triggered, it can just be cancelled.

Here’s how a series of set-ups look over the course of a week …

hang ten pivot point strategy trades

That makes three winners, one no-trade day, and one loser. There would be some sense to adding a couple of points to your stop level, beyond R2 or S2, however this increases the risk profile, and in situations where R2 and S2 are very wide, you may feel this is just too big a risk to take for a 10-pip profit.

You’ll notice that I’m using this on EURUSD – there’s no reason you can’t apply it to other markets, but bear in mind that the average daily ranges vary enormously across different markets, so you may find that 10 pips is too large or too small – but if you start scalping for very small pip numbers, do watch out for the cost of the spread eating into your profits.

So, that’s it – dead simple, set-and-forget, 10-pips trick. Let me know how you get on with it.

 

 

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The single worst trading mistake

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This week, the deputy governor of the Bank of England had to step down. Charlotte Hogg had failed to disclose a conflict of interest. It’s likely that this was a careless oversight, but the main criticism of Ms Hogg is that it was this kind of casual carelessness that comes with a sense of entitlement.

And if there’s one thing the British public are sick of, it’s being told what to do by those who’ve been born into the ‘entitled’ elite.

A sense of entitlement can be a very powerful thing. It’s what enables trust-fund children to walk into high-level job interviews with no doubts that they’ll be able to handle the roll. While the less-entitled of us are often crippled with doubts about whether we’re really up to the task.

For a long time, I naïvely believed that those people who ran the country and big financial institutions were somehow smarter and more capable than the rest of us … but I see now that they’re just like you and me, except for their gargantuan levels of self-confidence.

This kind of confidence is great if you want to convince others (or yourself) of your value … but how useful is it when it comes to trading the markets? The markets don’t give a damn if your dad has a knighthood … or a moat … or a duck house …

While getting a job in a big hedge fund might be easier if your uncle is on the board … ‘privilege’ doesn’t help at all when you’re face to face with trading decisions. In fact, it can have a disastrous effect on your profitability.

The worst trading mistake: check your privilege

Let’s take a look at where traders have gone very badly wrong … I’m talking about Nick Leeson, the London Whale, Kweku Adoboli, Jerome Kerviel …

Yes, these people made a string of errors which led to them being seriously over-leveraged, but there was one fundamental problem behind their behavior …

They believed they would win.

And it’s this kind of confidence that’s the most dangerous thing of all to the trader.

If you genuinely believe that your trade is going to win, then why wouldn’t you over-leverage yourself? If you’re confident that you’re right, then you’ve everything to win and nothing to lose by betting your lot on the outcome!

Just about any trading mistake can be traced back to overconfidence. If you enter a trade with a belief that you’re going to win that trade, you’re in very dangerous territory. The market owes you nothing – it doesn’t give a damn about your carefully formulated trading strategy, your back testing, your great knowledge of technical indicators …

The only way to enter a trade is like you’re going to lose.

How being a loser is the only way to win

It’s the paradox of trading – we need to trust that our strategy will win in the long term, while also entering every individual trade we place with the belief that it will lose. By acting like every trade will lose, we will manage our risk correctly, and also have the attitude needed to quickly cut losses when necessary.

We must be confident in our abilities, but deeply pessimistic that the markets are going to try their very best to chew us up and spit us out.

It’s a tough act to balance.

Most people tend to overestimate their skills – most of us, for example, believe that we’re above-average drivers.

Give yourself a seven?

If you’re asked to judge your own skills, be it driving, work performance, charitable behavior, getting on with other people … most people rate themselves about seven out of ten.

Of course, it’s logically impossible for all of us to be above average, but it’s this superiority bias that we’re up against in our trading. It’s the voice in our ear that tells us others haven’t spotted this great opportunity … we’re smarter than most … we’re ahead of the curve … we have the edge …

This bias shouldn’t be underestimated. A research study back in 2007 studied 215 online broker investors and found that inexperienced investors had no idea of what their performance was – often believing that they’d made good gains, when in fact, they’d lost money.

As someone with an obsession with tracking my performance, the idea that you wouldn’t know how much money you’ve made or lost with a strategy horrifies me. But – it turns out – the majority of novice traders fall into this category.

Characteristics I notice again and again with successful traders is that:

  • they don’t hide from their losses – they are recorded in black and white
  • they don’t get carried away with their successes (because they know that a drawdown is always around the corner)
  • they are always focused on their shortcomings, looking for ways to improve performance.

And the only way to do this is to track your performance diligently. If you’re not already using it, the Trader’s Bulletin journal can be downloaded HERE, or if you’re a Heikin Ashi Mountain member, there’s a journal that’s specially formulated for the strategy on the members’ area HERE (this is for Heikin Ashi members only, so you’ll need your password to view it).

But if you prefer to be a less-successful trader, deluded that you’re making money and that the markets owe you a living … the trick is simple – not keeping any record of your trades is the best way to keep up the charade!
 

 

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Market & Forex Correlation Made Simple

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I’m forever complaining to my kids about the hours they waste online, but I have a confession. In idly looking for an image to put at the top of this email, I discovered a whole genre of videos on Youtube posted by teenage kids smashing up calculators.

And these kids seem really happy to have found a way to vent their hate of school-room maths.

Fear of anything involving some maths can follow us through life, so I know that when I start quoting correlation statistics and risk profiles, a lot of people reach for the hammer.

But hold off … I want to show you an incredibly simple way to get correlation-smart (and I promise it can save you money AND won’t involve any numbers!)

What is stock & forex correlation and why is it damaging your performance?

Global markets like to move in unison.

If the bottom fall out of the Wall St index, you can be sure that the FTSE, the German Dax, and Far Eastern markets will suffer too.

The reason this matters to us traders is that if you have more than one trade on at a time, or you own stocks, or have any kind of index-related investment – you could be doubling-up (or worse) on your risk.

So, what causes these markets to move together? The companies that make up big stock markets tend to be global giants, so their fortunes are intertwined. Plus, because investors know these markets move together – if one looks too pricey compared to the others, they’ll sell that.

In this way, correlations form a feedback loop.

If French car manufacturers look expensive compared to German ones, investors will sell their French stock and move the money into a German one. So, the value of the French market falls into line with the German.

And, when the value of stocks are falling, investors look for other places to store their money – hence money pours in safe havens, like gold and silver, or ‘safe’ currencies like the Japanese Yen or Swiss Franc.

Correlations between stocks and currencies can be more messy. For a lot of time, people viewed a strong US dollar as bad for stocks, while a rising stock market was associated with a falling US dollar. However, central bank policy muddies these waters, and just this week we’ve seen the value of the dollar and stock markets tumble together.

And this is about as far as many of us get … correlations are tricky to evaluate, and get put into the ‘too difficult’ file.

The result is volatile ups and downs in our results, which can wipe our trading accounts out at worst, and damage our long-term profits at best. (If you’re in any doubt about the long-term cost of volatile returns, please read this.)

Trading blind spot

A study written at the end of last year by economists Erik Eyser and Georg Weizsacker showed that we’d rather lose money than tax our brains with thoughts of market correlations.

In their experiments, they found that subjects chose portfolios that were heavily weighted towards a risky asset above ones that were balanced by hedging.

They drew two conclusions: first that people tend to ignore correlations; and second that they prefer to split investments equally rather than balance them based on risk profiles.

It’s the portfolio equivalent of always spreadbetting at £1 a point, irrespective of the risk on each position.

So, what should we do?

Correlation quick-fix

If you try to do some research into market correlations, most of us will quickly feel overwhelmed.

There are plenty of online tools offering to calculate the daily, weekly, hourly, 5 minute correlations between obscure currency pairs.

So, I find out that USDCHF has +61 correlation to USDJPY on a daily chart … what do I do with that information?

The problem with too much data on correlations is that it can be misleading. Market correlations change over time. This is great news if you’re actively looking to profit from the way markets move into and out of correlations (like the Diff Code strategy does), but if you’re just trying to get a balanced risk on your account, it’s too much information.

A better, simpler and more meaningful way to manage your correlations is to do it with a very general light touch.

Consider the possible scenarios … a market crash? An interest rate announcement? A recession? High inflation? What would these do to your investments? Will they all move the same way?

If the answer is yes, then you need to look at a rebalance.

In short, there’s no fancy maths required to have a balanced, diverse portfolio or trading account – just a little awareness of how markets react to big events.

Of course, correlation doesn’t have to JUST be about protection – it can actively make money, too

Yes, a little knowledge about correlations will mean that you’re not over-exposed, and can hedge your trades against big risk factors. But there’s another way to use correlation … by trading how correlations change, while knowing that you’re always hedged against big market sell-offs and major news events.

If you’re interested in using correlations to make a profit, rather than to just protect yourself, Martin Carter’s family of Diff Code strategies is a really smart way to take advantage of little wobbles as markets move into and out of correlation – and best of all, he does all the maths for you!

To give you an idea of the kinds of returns this can offer, Martin’s Diff Code Transatlantic system has earned 205% compounded gains since October 2015, and is 47% up since October last year.

Click here to find out more

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Magic Darvas Boxes that can turn $10k into $2million

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How one half of a popular ballroom dancing act made $2 million on the stock market is without doubt one of the best stories of the investment world.

It’s got it all … an escape from Europe during the Second World War … a fluke encounter … winners … losers … an against-the-odds comeback … and all rounded off with a foxtrot and a sprinkle of sequins.

And what’s more – the custom indicator behind this story is now simple to add to your charts.

What is not to love about the story of Nicolas Darvas?!

Plus, there’s a huge amount to learn from the mistakes Darvas makes along the way, and the canny magic-box trick he developed.

Strictly stock markets

Darvas fled his native Hungary in 1943 on forged papers, and went on to become a popular dance act alongside his half-sister Julia.

His journey in the world of investment began by chance when, in 1952, he was offered payment in stocks rather than cash for performing in a Toronto nightclub. He found himself the owner of 6,000 shares in Brilund, a Canadian mining firm, worth around 50c a share.

He had no idea about stock markets, but was aware that the value of stocks could go up or down. Two months later, he idly glanced at the stock’s price in the paper …

I shot upright in my chair. My 50-cent BRILUND stock was quoted at ¢1.90. I sold it at once and made a profit of close to $8,000.

And so Darvas was hooked.

The path his journey took from here will be a familiar one to many …

He had some wins – this was a roaring bull market, so just about every stock was going up. Deciding he was a ‘natural’ at investing, he began frantically buying and selling stocks (no doubt making a huge amount of money for his broker – there were no cut-price brokers back then).

You can probably guess what happened next … he took a disastrous loss, desperately holding onto a losing stock, refusing to believe that his ‘natural instinct’ had let him down.

But rather than throw in the towel, from each mistake he made, Darvas formulated the rules he must trade by …

  1. All losses must be cut at 6% – no exceptions
  2. Never sell a rising stock
  3. Never listen to tips or stories
  4. Master your emotions

And, of course, using the magic Darvas boxes …

Darvas’s theory was based around the idea of buying stocks on surges of volume, and ruthlessly cutting trades when the price pulled back.

In this way he was able to do four crucial things that make for a good investor:

  • hold onto established trends
  • cut losses fast
  • take profits regularly
  • buy on renewed breakouts

And he did this with the use of ‘boxes’ – these were small areas of consolidation he drew on his charts, moving up stop levels every time the price moved into the next ‘box’.

darvas boxes

In this image, the blue boxes are the genuine Darvas boxes – where the price has shown to consolidate. The green boxes are known as ‘ghost boxes’ – these are a more modern addition to Darvas’s theory (and not always used), allowing stops to be tightened up in between areas of consolidation.

You can add Darvas boxes to your Core Spreads charts by selecting them from the ‘Studies’ drop-down menu. And you can find Darvas’s book ‘How I Made $2 Million in the Stock Market’ online.

But what I really rate about this trading method is the ruthless way that Darvas cuts his losses. He learned to do this the hard way – yet holding onto losses is a mistake that we traders make again and again. Simply because we hate to be wrong.

The story of Nicholas Darvas is a one about all the usual errors that traders make … and how we can learn from them.

 

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When should I stop trading?

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The reason so many traders fail is because they carry on trading when they should stop … and then stop trading when they should carry on.

If you know the right moments to put the brakes on … and when to get back in … you can finally stop losing money to the markets.

How we get stuck in the drawdown cycle

Some guy – let’s call him Bob – tells you about the great trading results he is getting, and how you should use his strategy. Let’s call it the ‘Get Rich with Bob’ system …

You start following the ‘Get Rich with Bob’ system just as its profits top out and it moves into a period of drawdown …

You think: “These aren’t the results I was expecting.” So stop using the method within a few weeks and look out for something better.

Then you read about the ‘Easy Money’ strategy … this seems to be making great profits, so you try this one out. Within a few weeks ‘Easy Money’ also suffers a drawdown – again, you’re left out of pocket.

Meanwhile, Bob’s system seems to have recovered from its drawdown period and is making fresh highs.

If you’d stuck with ‘Get Rich with Bob’, your profit curve would have enjoyed a recovery. But by switching systems, you’ve moved from one drawdown straight into another …

stop trading

I see hundreds of traders follow this path – moving from drawdown to drawdown, and becoming more and more disillusioned with the process (understandably).

So, how do you break this cycle?

You’ll be pleased to hear that the answer does not involve trading remorselessly through losing runs. No one enjoys that!

It’s about knowing when to stop, and when to restart.

But first off, we need to consider the faith you have in the results before you began trading …

Remember ‘Bob’? He said that ‘Get Rich with Bob’ made great money … do we trust Bob?

If you doubt Bob’s results, you’ll need to check his reported profits by running a quick back-check against your charts (of course, you should have done this before you started following his system at all!) If they match up – then all’s good. If not, then Bob has some questions to answer, and you should stop following his methods.

So let’s now assume that Bob is a straight-up guy. But the trading method he’s given you is losing you money right now. You’re starting to worry about the losses you’re taking, and about whether Bob’s system is really robust enough for the current market conditions.

This is the moment to cut back on your trading. Either reduce your stakes, or switch to demo trading – before losses become too painful.

Carry on in this demo or low-stakes mode for a week, or until the start of the next month, always tracking the results. How long you stop for will depend on how often the system trades, and how much ‘pain’ you’ve suffered in the drawdown. But fix the date you’ll restart – and stick to that date.

So, you start trading again …

If the drawdown is over – great, you’ll be back in business to enjoy the profits.

If the drawdown is still going on, then after you’ve taken a few losses, go back into demo/low-stakes mode … and repeat until the drawdown is passed.

What could go wrong?

The good thing about trading this way is that:

  • It accepts that profit curves don’t move in straight lines.
  • It doesn’t force you to grin and bear it through losing runs
  • And it doesn’t try to time the bottoms of profit curves (which would be impossible to do)

But it’s worth remembering that there’s a powerful force that keeps you trading in losing runs … your ego.

In trading, your ego is the devil on your shoulder who tells you, when you’re winning, that it’s down to your great trading technique and strong instincts. And it’s the same devil on your shoulder who tells you, when you’ve taken a few losses, that the market owes you a win, so you should keep going.

Ironically, it’s because of this that so many traders throw in the towel, because they’ve allowed losses to get out of hand.

If you caught my post last week about Nicolas Darvas, he’s a great example of someone who was driven my his ego … made some expensive mistakes … and then managed to overcome that ego to learn some tough lessons and become a huge trading success.

Ego is the thing that makes us carry on blindly, even when we’re doing ourselves some serious damage.

It takes some will power to stop during a losing run – it means accepting those losses. Which is why it’s good to draw up this ‘point of pain’ before you reach it.

Take a look at your trading account … where will losses be painful enough that you’ll want to take a step back? (I don’t mean so painful that you give up completely! We want to go into demo/low-stakes mode before we reach ‘max pain’.)

Write it down …

  • When will you stop trading?
  • Will you reduce stakes? Or go into demo mode?
  • How long will you stop for?

These simple steps will enable you to break out of the drawdown-cycle for good.

 

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Forget Price Action: The Candlewick Method is all you need to know

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If you study candlestick patterns, you could be forgiven for thinking it’s some dark art,
a bit like finding patterns in tea leaves, or reading tarot cards.

And the patterns all have complex names – often in Japanese, just to make the whole
process even more opaque.

But the truth is that you don’t need to know your marubozu from your dragonfly to get the most out of candlestick reading.

Here I want to show you the two things that matter about reading candlestick charts – and you can forget everything else you knew (or thought you had to learn).

Forget everything you knew about price action

I expect you’re familiar with the makeup of a candlestick chart …

candlewick method candlestick chart

But rather than worry about what text-book patterns are cropping up in our charts, I want to look at just one factor …

The Candlewick

The wick of a candlestick tells us everything we need to know from that candle. It contains the story of what’s going on in the traders’ minds … are they bullish or bearish, hopeful or fearful, successful or failing, sitting on losses they want to offload, or accumulating profits they want to cash in ..?

All this information is contained in those thin black lines.

And I’d like to show you how to decipher it at a glance to make lightning-fast trade decisions.

Wick formation

Not all candlesticks have wicks. If the price during that period opened at the low, and closed at the high, then you’ll have a solid green, wick-less candle.

But most have either an upper or lower wick, or both – this tells us that after that period of trading began, the price moved beyond its open and close levels, before pulling back within the range.

For this reason, wicks are associated with a change in market sentiment. As prices are moving up, a change in the views of traders means that they’ve been pushed back down towards the open or close – thus forming an upper wick.

Similiarly, as prices are moving down, a change of market sentiment sees the price pushed back up towards the open or close level – forming a lower wick.

The longer the wick – the greater the change in sentiment.

The Candle-Wick Scale

When it comes to candlestick wicks – the bigger it is, the greater the change in sentiment that traders are experiencing. So, a large wick on a candle is a wake-up call for traders to take notice of.

The next element to take note of is the balance between the upper and lower wicks – i.e. is one longer than the other?candlewick method shooting star

A long upper wick shows a failed attempt to drive prices higher, which suggests that a bullish trend may be coming to an end.

candlewick method hammerLikewise, a long lower wick shows that prices fell, but buying pressure came back into the market, bringing prices back up – this suggests that a support level has been hit and we could see the end of a down trend.

Where the wicks are long on both sides of the candle, again we see a battle taking place between buyers and sellers, but in this instance, there’s no clear winner. These kinds of candles may not hint at which direction the market will move, but do tell us that there is indecision, which often precedes an explosive price breakout.

candlewick method doji breakouts

Of course, the lack of a wick tells a story too. A solid, wick-less candle signals a market that knows where it’s heading, and when we see a string of these candles in a row we see a strong trend establishing. (Those of you using Heikin Ashi candles will know all about the lovely runs of wick-less Heikin Ashi candles that market are big money-spinning trends!)

Hidden CandleWicks

You may be wondering about the hordes of candlestick patterns that your price-action trader loves, which don’t seem to have anything to do with wicks … like piercing patterns, engulfing patterns …

But where we have multi-candle patterns like these, if you switch timeframes, you discover that it’s actually still all about the wick!


 

piercingtodoji


engulfingtodoji


 

By focusing on the wicks, you see that all those complex candlestick patterns that price-action ‘gurus’ try to teach you are nothing more than pretty names. If you see the story of the wicks behind the price action, then you’ll have a much clearer image in your mind of trader sentiment, you’ll have a better idea of where the market could be headed, and you’ll be a more successful trader.

 

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Objectify your profit curve

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There’s no getting away from it … trading is a process that plays havoc with our emotions.

We win money … it feels good.

We lose money … it feels bad.

And come the end of the month or end of the year, we’ve been thrown about by winners and losers that (without checking their records) most traders have no idea whether they’re financially up or down.

I keep meticulous records of my trading, yet come the month-end, I’m often surprised to find that I’ve had a winning month (because I feel like I’ve repeatedly given money back).

For most traders (even the most optimistic), the pain from losses outstrips the joy we get from winners, which is why we often think we’ve done worse than we have. And why it’s so important to keep objective records of our trading results.

What your curves should look like

I’d like to tell you that, once you’ve found a good trading plan and are established on the road to profitability that your profits will steadily grow, week on week. A bit like this chart I found on the internet …

fantasy profit curve

I’m sorry, but the idea that once you get your trading plan in action, you’ll have ‘exponential profits’, let alone a smooth ride into the sunset, is a fabrication.

No matter how fantastic your trading plan, and how brilliant a trader you are – you WILL have losses.

At times, those losses will make you feel irritated … at times frustrated … and at times out-and-out wretched.

By contrast, a winning run will bring emotions like feeling ‘justified in our decisions’, or ‘a sense of security’.

It’s not the greatest emotional balancing act: ‘wretched’ for losses, vs ‘justified’ for winners. And that’s even the case when the winners outweigh the losses.

It’s little wonder that so many traders give up.

Here I’m going to show you a GENUINE profit curve from a trading strategy that I use every day, showing the real ups and downs it’s experienced over the past 15 months …

HAMcombined profit curve Annotated

The one thing you’ll notice that I didn’t do at any point in that maelstrom of emotions was – give up.

As I’ve show in previous posts, there are ways we can actively halt losses during drawdown periods, but what’s vital to long-term trading success is that we don’t give up.

And the only way to keep ‘big picture’ objectivity is by tracking results. That way, when I’ve hit losing run (like I did in January this year), I know that this is just a bump in the road, rather than a bottomless spiral into poverty (which, to be honest, is what a losing run can feel like!)

The trading method I’ve shown above has a specially formatted spreadsheet journal which users can track their results with, including results charts, so you can put those up and down curves into perspective.

Without this kind of record-keeping, even a profitable system can grind us down, because, as we’ve seen, the pain losses bring outweighs the joy that winners bring (even if those winners are bigger than the losses).

I want to make this easy for you

No doubt you’ve noticed that I spend a great deal of time on this website banging on about what you should be doing … but I want to really help Trader’s Bulletin members find the best systems AND stick with them – even when there are downs as well as ups.

And I know that when you’ve forked out money for a trading manual, you already feel like you’re starting from a losing position. Add to that a couple of losing trades, and it can be tough to feel objective about your results.

That’s why I want to make you a very special offer next week – a way to start using my number one system, without having to make a big outlay. Please watch out for my email about this on Tuesday next week.

 

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4 ways you’re sabotaging any chance to make money from trading

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Most traders are liars. We lie about our methods, we lie about our results, and we lie about what we’re trying to achieve.

Confession time?

I’m talking about the lies we tell ourselves …

“Yes, I have clear rules and always stick to them.”

“I won’t count that losing trade, because I probably shouldn’t have taken it anyway, and without it I’d be profitable.”

“I don’t expect to make a fortune overnight.”

I’ve fallen into these traps too … I’ve fudged my rules, I’ve had unrealistic expectations.

In fact, the one thing that really cured my self-deceit was when I began sharing my systems with other traders. If other traders know my rules, they’ll quickly pick me up if I start deviating from them – I’ll always have to keep a clear record of every trade.

And I have to be 100% confident in how robust a system is before I’ll put my money (and my name) to it.

Over the years, I’ve learned that the cardinal sins of trading aren’t things like ‘closing trades too early’ or ‘failing to read price action right’ … they are much more basic than that. And – the good news is – they are much easier to put right.

1. Are you system hopping?

No, I don’t still trade the first method I started out with – my trading methods have changed and evolved over time, I’ve learned more, I have deeper funds, and I have different expectations.

But I don’t consider myself a system-hopper.

A system hopper can NEVER make money long term, because their results will always been filled with drawdowns. A system hopper is looking for the best trading system on the market, so will be drawn to one that’s showing great performance ‘right now’.

However, as we know, profit curves don’t move in straight lines, and even the best systems will be due a drawdown, and a system hopper has a much higher chance of joining a system at those profit peaks … just ahead of drawdown.

Here’s a chart showing what happens if we switch from one system to another, four times, following a drawdown of £500 …

system hoppers can't make money from trading

The results for a method like this will have been closer to a £2,000 drawdown – and that’s from trading 4 different methods ALL OF WHICH ARE ACTUALLY PROFITABLE!

None of us can afford to give money away like this. There are plenty of ways we’ve covered in Trader’s Bulletin to protect your funds during a drawdown – use those rather than having your head turned by the next best thing.

2. What’s your staking strategy?

I know really smart people – people who have traded for a long time – who STILL don’t calculate their stakes properly. Some trades take on two or three-times the risk they should, some trades aren’t making the profits they should – just because they don’t bother to spend 20 seconds calculating the right stake for that trade.

Before you set out, there are three things you need to know …

  1. What’s the size of your trading fund? This isn’t necessarily the amount of money you have in your trading account – if you have a large fund, I’d positively discourage you giving it to your broker for ‘safe keeping’! But consider how much you’re prepared to risk on your trading.
  2. What degree of risk are you prepared to take with that money? Will you risk 1% per trade? 2%?
  3. Are you going to compound your winnings as you go? Or do you want to take your profits off the table and keep your trading fund a fixed size? If you are compounding, how often will you compound? Every trade? Every day? Every month?

Once you have this information, you can calculate the risk you’re prepared to place per trade.

For example, if you have a fund of £2,000, and are prepared to risk 2% per trade, then your risk on a trade will be £40.

If you have a fund of £10,000 and are prepared to risk 1% per trade, then your risk on a trade will be £100.

And the final piece of the jigsaw is to match this to each individual trade.

If your stop distance on a trade is 20 points, and your risk-per-trade is £40, then your stake on that trade should be £2. (I.e. £2 x 20 points = a maximum potential loss of £40.)

This calculation is the work on seconds, so there’s no reason not to be doing this on each trade – it means your risk and rewards will always be in line, and that the power of compounding is working properly for you.

3. How do your records look?

As I said earlier, one of the things that keeps me really disciplined in my record keeping is the knowledge that other traders using my methods expect that of me – and would quickly pull me up if I wasn’t being 100% honest in my results.

I know that I can’t twist my rules or fudge any results – and actively posting results keeps me on track.

Publishing my trading systems has – without doubt – made me a better, more disciplined trader.

Trading as part of a community can have a powerful effect on your profits, so I’d always encourage traders to share their results.

(If you’re not following them already, I do post all my results for strategies I’m using in the comments on the website every week or so, including screenshots of my account.)

(I’ll assume that as a good Trader’s Bulletin member, you’re already using my Trading Journal to track your results.

3. Are you serious about doing this, or just mucking about?

If you find yourself doubting the importance of points 1–3 above, I recommend that you ask yourself if trading is really for you.

If you just want to gamble a bit of money on the markets, without a clear plan – that’s up to you.

But if you really want to build a financial future from the markets, then you must give yourself a chance to make money. And if you’re failing in any of these points, then you’ve sabotaged your success before you’ve even placed your first trade.

 

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What this trader personality test reveals about your chances of success

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I’ll be honest, I’m not usually a big one for personality tests. They either conjure images of Cosmopolitan magazine “Is He Really Boyfriend Material?” quizzes, or dodgy Scientologist recruitment programs.

But over years and years of trying to change my behaviour to suit the processes of trading, I’ve come to learn that I’m better off looking at my strengths and weaknesses, and then working my trading systems around that!

The human psyche has been finely tuned over millennia to be great at keeping us out of danger, finding necessary resources where available, and making rapid risk assessments, while being chased by a wild animal.

As a result, it is out-and-out rubbish when it comes to trading.

All our natural instincts pull us in the wrong the directions, making us jump out of winning trades too early … hold on to losses … take big gambles when we should be sitting on our hands … and fail to take the plunge when the moment is right.

Over the years, I’ve come to accept that I’m not going to change my behavior completely – I’ll always have these foibles that lead me into bad trading decisions, but I can create trading strategies that help me navigate through these weaknesses … so a bit of extra knowledge about our personal traits will help us become better traders.

So, here I’m going to look at some basic Jungian personality types, and – depending on where you fit into them, how your natural characteristics can help you, and hinder you, in your trading.

And – most importantly – what you can do to overcome your weaknesses.

There are four dimensions of personality according to Carl Jung, and in each dimension, we fall into one of two brackets …

  1. Introversion or Extraversion
  2. Sensation or iNtuition
  3. Thinking or Feeling
  4. Judgement or Perception

The result of your test will give you four letters, each relating to one of the categories above (as highlighted in bold).

There are lots of online Myer-Briggs test that you can go through, but I’ve included a pared-down one here …

Powered by INTERACT

 

So, now armed with your four-letter categorization, let’s look at each of those dimensions in turn. And please go down to the foot of these page to see the poll, which will measure how many Bulletin readers fit into each category, and whether that reveals anything about their success as traders …

Introversion vs Extraversion

This is about more than whether you’re the life and soul of the party, or prefer to stay home with a book …

An extraverted trader will focus more on the outer, physical world. While an introverted trader will focus on their inner world and how they produce their results.

Neither is necessarily a better trader, but an introverted individual may find it easier to develop trading systems, follow their methodology, and track performance.

Meanwhile, the extraverted individual may be more aware of external influences on the markets (although could assign too much weight to these).

If you’ve an extravert tendency, look for trading systems that won’t demand too much of you in terms of focusing on your personal methods, and be wary of market-watching and the poor decisions it can lead to.

If you’ve introverted tendencies, avoid getting so bogged down in your methodology that you fail to look at the bigger picture, and be aware that external influences, like coaches and forums, can give useful checks and balances to your performance.

Sensation vs Intuition

The sensation orientation is all about using our senses to understand the world around us – empirically, like a scientist following a practical experiment. By contrast, the intuition orientation is what Jung called ‘perception by the unconscious mind’.

I’d guard against viewing ‘intuition’ as some wishy-washy gut instinct. Instead, it can be as much about viewing a big picture, and filling in the gaps where the information is missing. I sometimes think of trading as like driving at night – our brains are constantly working to make sense of the more limited data that they’re receiving, filling in the blanks – there’s a lot of this in trading, and some people are better at it than others.

Intuition also enables us to see what is possible, rather than just what’s in front of us right now. That’s the kind of tendency that drives people into trading – looking for financial freedom.

But we shouldn’t knock the importance of the cold, hard facts either – those with the intuition orientation can be prone to getting carried away, and need to ground themselves with some ‘sensation’ tendencies.

Thinking vs Feeling

As you’d expect, thinking involves logical processes, evaluating cause and effect. Thinking focused people will tend to weigh up pros and cons in making a decision.

Feeling, by contrast, involves value judgements and emotions.

Whilst traders are always told that we should be less emotional, and almost robotic in our decision making, thinking-dominate traders can fall into the trap of inaction. Thinking and logical can help us to develop great trading methods, but it’s feeling that leads us to actually press the ‘buy’ button on a trade.

Without ‘feeling’, we’re not able to make judgements about what’s important to us, what we value, and what risks we’re prepared to take.

If you’re thinking-dominant, remind yourself why you started trading in the first, what are your goals?

Judgement vs Perception

Those traders with a bias to judgement are people looking for resolution – they want to evaluate information and make a decision. By contrast, perception-focused traders prefer a more open-ended outcome.

There are clear benefits to being a judgement-type in trading – having a clear plan and structure, sticking with things to their outcome. While the perception-type may make trading decisions on the hoof.

However, the perceiving trader can be more adaptable – and the market is always changing, and demanding that we adjust our methods along with it, if we want to stay profitable.

Not an INTJ? Don’t panic!

The stereotypical trading ‘type’ would be the INTJ – introverted enough to be interested in systems, intuitive enough to see the bigger picture, thinking enough to follow logical methods, and judgemental enough to follow through …

But, of course, many of us don’t fit the perfect profiling – I speak as a proud ENFP!

And what a dull world trading would be if we all chose jobs that perfectly aligned with our personalities! All these categories are spectrums, and we’ll find ourselves somewhere on a sliding scale between two extremes.

And if your profile doesn’t match the textbook trader, it just means that you’ll bring a different range of strengths and challenges to the table – all perfectly valid, and all with the different little human foibles that we need to try to overcome.

Don’t forget to enter your details in the poll below …

The post What this trader personality test reveals about your chances of success appeared first on Traders Bulletin | Free Trading Systems.

Why do I keep losing? (4 uncomfortable truths)

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I guess it’s okay to lose money from trading if it’s just a hobby, like playing golf, or hill walking, and you’re enjoying the process, so not too worried about your handicap decreasing, or if you’re reaching ever-higher mountain peaks.

But most of us have turned to trading because we want to be successful at it. Maybe to give us financial freedom … a better lifestyle for ourselves and our families … or just to prove that we CAN do it.

So, even if you’re not carefully tracking your bottom line, you’ll know if your account levels are always heading downward, or how many times you’ve had to ‘top up’ after a losing run …

In which case, you’re likely to be asking yourself, ‘Why do I keep losing?’

1. Why do I keep losing?
“I just haven’t found a profitable system yet”

If your email inbox is anything like mine, I expect you receive frequent offers of fantastic trading systems promising to end any money-woes forever.

It’s inevitable that choosing between these to find ones that really work can be tough. But it’s not impossible.

First off, let’s look at the categories these ‘fantastic’ trading systems can fall into:

  1. absolute rubbish that doesn’t work
  2. works, but with very volatile returns, so there will be lengthy and uncomfortable periods of drawdown
  3. works, with manageable drawdowns
  4. works day in, day out, never taking any losses.

(Just so you know, category 4 doesn’t exist – every trading system will have losses along the way.)

That leaves us with categories 1–3 to filter between.

Category 1: filtering out the absolute rubbish that doesn’t work

The best way to ensure you’re not buying into category 1 is to buy from a reputable source – someone with a good reputation, who’s been around a while. Also, look at the trading results they’re posting – do they look genuine and realistic? Don’t be afraid to ask a few awkward questions. Anyone who’s unwilling to answer your questions (however basic) should be given a wide berth.

I strongly recommend looking at the ‘strategies I’m using’ section of the Trader’s Bulletin website – all of these systems have a solid track record, and if you’d like any advice on which is best for you, please just drop me a line.

Categories 2&3: Finding a volatility that’s right for you

The difference between categories 2 and 3 will depend on your own attitude to risk, how much of a drawdown you can stomach, and what the size of your trading fund is.

The truism about drawdowns is that your biggest drawdown is always to come! Unfortunately, it’s a fact of trading that profits will go down as well as up, and the longer you trade for, the more of these losing periods you’ll have to navigate. What’s vital is that you’re prepared for them, so you don’t lose too much money, or too much of your will to keep trading!

Looking through a track record can’t give you an accurate prediction of what drawdowns are ahead, but it can give you an idea of volatility – the easiest systems to trade have nice, smooth profit curves (even if they aren’t the steepest).

It is possible to affect the volatility of your returns by the way you stake. By risking less per trade, you can reduce the volatility of your profit curve (yes, your profits will be smaller too, but you won’t have those gut-wrenching losing runs to suffer).

Let’s say that you’ve a trading fund of £10k … your first month of trading, you take a 10% loss (that’s – £1,000) … second month of trading, you make an 15% gain, bringing your bank size back up to £10,350 (3.5% profit in 2 months).

But if that £1,000 loss is too uncomfortable, you could trade with a smaller risk. Half your stakes, and your loss in the first month would instead have been £500. Come the second month that would be topped up to £10,213 (over 2% profit in 2 months).

You’ve halved your risk, but you haven’t halved your profits – that’s the great thing about reducing volatility! It’s a win-win.

So, the questions to ask yourself about a trading system are:

  • Do I trust its source?
  • Do I trust the results I’ve been shown?
  • Are those results too volatile for me?
  • Is there a way I can reduce volatility if the ride gets too rough (like cutting stake size)?

Of course, I’ve assumed here that you’re buying a trading system rather than building your own, but the same factors apply when evaluating your own results.

If you aren’t happy with the way your trading system is performing, please be wary of jumping ship. As we saw last week system-hopping is one of the surest ways to lose money on the markets over the long term.

2. Why do I keep losing?
“My system works on paper, but I seem to miss the best trades, and stake too high on the bad trades”

The problem of missing the best trades has two potential causes:

  • Either you need to be more disciplined in your trading
  • Or, the ‘on paper’ results your system is showing are unachievable in the real world (because it’s just not possible to execute trades fast enough, for example)

The heart of the problem is often a combination of the above. Perhaps the trading method you’re trying to follow just doesn’t suit your lifestyle. Does it require you to be up a 6am every day? Or sneaking peeks at charts during the day, hoping that your boss doesn’t notice? There are plenty of systems out there, to suit different lifestyles. There’s no need to be looking through charts for hours out of your day (unless you like that kind of thing) – often the best trading systems are more hands-off, as that means less emotion and less chances of ‘fiddling’ with trades.

Getting stakes wrong … well, there’s no excuse for this. If you’re still doing this – then it’s straight to the naughty corner. It’s dead simple to calculate your stakes per trade, based on your fund size and your risk profile – if you’re in any doubt about it, please download my position-size calculator HERE

3. Why do I keep losing?
“I don’t yet have the confidence, funds, time to get properly started …”

Well, if you’re skeptical, cash-strapped, time-poor … or all three … there’s good news.

As I mentioned above, good trading doesn’t require a lot of your time. Commitment yes, but if you can only manage a few minutes a week (HAV Trading), or month (PIE Trading) – that’s fine. Just decide what time you can spare, and stick with it.

Channel your skepticism into a healthy caution in trading … look critically at trading results, demo trade before you commit any funds, and start with small stakes, building your wealth steadily. Yes, some trading methods require large funds in order to manage long-term trades with wide stop distances – but not all do. There are plenty of “ways in” for very small funds – I recommend looking at Heikin Ashi Mountain and Diff Code Transatlantic, all of which can be set up with small funds. Or, if you want to keep risk levels really small, Rainbow’s End has the best risk-reward profile I know of.

4. Why do I keep losing?
“I just don’t know what I’m doing wrong, but I always seem worse off at the end of the month”

The first step to getting on the right road is to have a plan … and to stick with it.

Anyone who thinks they can ‘wing it’ and do well is deluding themselves – trading goes against all our natural human instincts (to take profits, wait for losses to come good, take bigger risks according to how we feel that day). Which is why all traders need rules.

And the combination of clear rules with a track record allows us to pin-point where things might be going wrong – so we can fix them.

Turning things around

Whatever the reasons behind a lack of success in trading, we can turn things around for a profitable future.

The key component to that is your trading strategy.

If you have your own system, or want to develop one, there’s a stack of information on this website, and across the internet. My advice would be to concentrate on trade management, rather than getting bogged down in ever-more-complex signals and indicators.

If you want a system that’s going to work for you ‘out of the box’ then I can hand-on-heart put my name behind any of the ‘strategies I’m using’ – these are methods I’ve tried and tested for years. Of course, there is plenty more out there – but please look at track records carefully, and consider:

• volatility of return (i.e. how big the drawdowns could be)
• how much capital is required (i.e. can you run this with low stakes if necessary)
• how much time is required (will it fit with your lifestyle)

All those considerations are more important than a juicy big end-of-year profit figure. Of course, the strategy needs to be profitable, but as long as it has the all-important ‘edge’ over the market – you know you can make money with it.

Please use the comments section below to share any specific problems you’ve encountered, or to let me know of issues I haven’t covered above. I’m absolutely determined to make Trader’s Bulletin a hub of highly successful traders – and a place where newbies can come and get off to a really positive start.

I look forward to hearing more of your stories.

 

 

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The Kicker: a candlestick reversal signal that leaves markets quaking

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It’s the most powerful candlestick pattern known to chartists. It may not appear very often, but if it does, it’s enough to send traders into an instant buying or selling frenzy. If you don’t know how to spot this, you could find yourself on the wrong end of a sell-off.

The kicker signal crops up on charts showing an extreme change of sentiment. If it appears in an up trend – you can be sure of a sell-off. If it appears in a down trend, then brace yourself for some heavy buying activity.

It looks relatively innocuous …

kicker candle

 

In a bullish kicker, we have an up candle opening at the same opening price as the previous (down) candle. This means that the price has jumped from the close of the red candle, to the open of the green candle.

Conversely, in the bearish kicker, the red, down candle opens at the same price that the previous day opened at, so the green candle closed the previous day, and then gapped down to where the red candle opened.

The longer the candles are in a kicker, the more dramatic the reversal is, and the formation of a gap between the first day’s open and the second day’s open just makes the signal even stronger.

So, here’s what appeared on the Dow this week …

kicker candle dow jones

A text-book kicker candle will be have no or very small wicks, so it could certainly be argued that this isn’t a ‘true’ kicker, with the very small candle on Tuesday, and the already-weakening up trend. However, there’s still a clear colour change in the candles, and a gap down between the opening prices on two consecutive days.

Following that gap down on Tuesday night, the sell-off has been relentless, with no pullbacks into the realm of the gap – this feature really consolidates the kicker, and implies that the new trend is here to stay for a while.

Generally, a kicker occurs where some dramatic news has come out overnight, or while markets are closed, which turns investor sentiment around in its tracks. In this case, speculation about the impeachment of Donald Trump.

So, how do we trade a kicker?

Acting on a kicker takes some confidence – markets are generally moving fast, and it’s too easy to get bumped in conditions like these.

If you want to take advantage of the strong moves a kicker pattern offers, then the safest method is to look for a consolidation pattern, and then get in as the strong move resumes.

Consolidations – the safe way into a kicker

Consolidations are ‘breather’ periods – when prices shoot off upwards or downwards, they don’t just move in straight lines (well, not indefinitely). Instead, they move upwards, then they’ll consolidate – this could be a period or sideways movement or a pullback – then they resume their move.

Consolidation patterns are the safe spots in a trend for traders to jump in. They come in various guises: rectangles, pennants, flags, triangles … but the basic thing we’re looking for is the price bouncing between two tight lines (the lines are either parallel or moving closer together) …

read candlestick charts patterns

If the kicker move is very strong, these ‘holding’ patterns may be quite subtle, but we’re looking for a consolidation to form, and then a break out of it to make our move.

All in all, kickers are consider the most powerful candlestick pattern you can find … for that reason, it’s vital that you can spot them when they crop up, and also that you treat them with some caution if you’re in the market. They inevitably come with volatility, so watch your stops if you want to enjoy the ride!

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Don’t place a trade until you can answer these 6 questions

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Here’s the scenario … you’ve got a set-up … or a tip … and you’re about to place a trade.

Your mouse is hovering over the ‘buy’ or ‘sell’ button … that little voice in your head is questioning whether it’s really a good idea …

What should you do?

Here’s a simple way to test if your trade is a good idea, or not. Do you know the answer to these 6 questions?

What are the criteria I’m following to enter this trade?

I’m going to take for granted here that you’re following a strategy with systematic trading rules.

So, the question is – are you following those rules?

Are you’re ‘adapting’ your rules to fit with what the market is doing?

This isn’t necessarily a crime (market conditions, like most things in life, rarely match the text books), but if it’s not already part of your strategy, it needs to be worked into it, so you consistently deal with situations. And if you’re making changes – they need to be tested out before you risk your money on it.

If you don’t have a trading plan, and are struggling to know where to start, take a look at these three simple plans: Click here.

What are my plans for exiting this trade, both as a winner or a loss?

Too often, our plans focus on what we’ll do when things go according to plan. But what will you do if they don’t?

Yes, have your clear take profit level, but what will you do if the price is hovering around your stop level? Will you cut and run, or wait for the trade to come good.

Will you use trailing stops? Or take partial profits?

Do you have a timescale after which you’ll close the trade, whether it’s in profit or not? Remember, the longer your trade is open, the longer your money is at risk in the markets.

What is my risk?

It’s so fundamental that we should NEVER enter a trade without a clear idea of what the risks are.

Day traders shouldn’t risk more than 1 or 2% of their trading fund (this will vary, depending on the risk profile of the strategy) … and your total risk for a spread bet is calculated as your distance to stop multiplied by your stake.

Yet, again and again I see trading accounts and records showing arbitrary stakes of £1 or £5 … irrespective of the stop distance.

There’s no excuse for straying from these rules … If you’re not doing it already, please download my stake calculator so you can include this in your routine before you place ANY trade.

What is the overall trend?

If we trade in the direction of the trend, it’s going to be easier to make money. If we trade in the opposite direction, making a profit is like trying to walk backwards up an escalator – yes, it’s possible, but it’ll take you longer to get there, requires more effort, and makes you look a bit daft.

But the problem is that when we’re day trading, it’s easy to lose sight of the over-arching trend in the market – we get so bogged down in the small ups and downs of the day.

The chart below shows 5minute candles over a 3 day period, where the market is clearly in a downtrend. While day trading, it would be easy to miss this unless you pull out to look at the bigger picture.

Are there any key levels blocking my success?

We’ve all done it (well, I know I have) – mechanically setting my stop loss and profit target according to the rules of my strategy … only to realise too late that to win, the price would have had to move through a significant key level. Or that the stops loss is on a round number, where the price is likely to be driven like a magnet.

On the chart below, we get a signal to sell into this downtrend …

However, when we look at the same moment on a daily chart, we see that we’re selling just as the price hits a significant support level …

The way to avoid making this mistake is – again – to pull back and look at the bigger picture. It’s useful to draw a few key levels on your chart, so they’re still there to remind you, when you’re head-down day trading on a smaller timeframe.

Are there any major news items coming up?

You don’t need a degree in economics to trade the financial markets – you just need to know when a piece of impending news could derail your trade.

While we can’t predict what bankers will announce, or what effect that will have on the market (it’s often the opposite of what we might expect), we can make ourselves aware of scheduled announcements.

Forexfactory.com lists all the economic announcements happening each week, and the markets they are likely to effect. The main events to watch out for are Non-Farm Payrolls on the first Friday of every month.

If you’re concerned about an upcoming announcement of news event, it’s notoriously difficult to predict how markets will react, plus the added volatility can make a mockery of our usual stop levels. My advice is to sit out of any event you’re concerned about – there will always be other opportunities to trade (as long as you keep your fund nice and safe).

Got the green light?

So, if you can satisfactorily answer the six questions above, then you can be confident that you’re trading your plan.

trade checklistI wish I could tell you that this’ll guarantee the success of this trade … but it won’t.

Even the best-planned, meticulously executed trades can be losers.

But I can guarantee that if you’re unable to answer these questions, you’ll not have any chance of long-term success in the markets. Yes, you might get lucky for a while … but to generate real wealth, you need to be methodical. It’s not a long check list … just six key facts to know.

I recommend scribbling them down on a post-it note to remind yourself each time you’re about to hit that button …

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A cast-iron trick to identify a trend

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I expect you’ve heard the news … that the trend is your friend?

That’s all well and good … but what does it mean in practical terms, and how do we actually apply that in our trading?

If you Google ‘What’s a market trend?’, I expect you’ll come across some definitions along the lines of … ‘a series of higher highs and higher lows’ for an uptrend … and ‘a series of lower lows and lower highs’ for a downtrend.

And, maybe a picture like this …

That’s all well and good … but in the real world, price charts are never so tidy.

It’s estimated that markets trend only 30% of the time … which means that the rest of the time they are hovering sideways, and generally keeping us on our toes. When a trend hits … it can be half over before traders have woken up to its existence.

Don’t let yourself fall behind that curve.

Why does trend matter?

Looking at those up and down trend diagrams above, it’s clear to see that – even if you’d timed your entries to perfection – you’d make more money buying in an uptrend than you would selling. And you’d make more money selling in a downtrend than you would buying.

Yet, many, many traders use trend-following systems, and follow the same rules and targets when the market is in a long-term up trend … as they do if it’s in a long-term down trend.

Just think how much easier it would be to make money, if we only took buy trades in an uptrend, and only took sell trades in a downtrend.

It’s swimming with the current, rather than against it.

So, what we’re after is an extra filter we can add to our trading method that’ll tell us whether now is the time to be listening for ‘buy’ signals … or ‘sell’ signals …

Stepping back

The easiest way to spot a trend, is after its happened.

Here’s a view of the S&P over the last year …

A clear up trend – there’s nothing ambiguous about that … right?

Surely we all bought in early and made a killing … right?

But, in reality, all we need to do is zoom in on that curve, and it evaporates.

Here I’ve zoomed in on March/April this year …

The closer you look, the less you see …

Of course, the markets aren’t a magician trying to pull the wool over your eyes. But sometimes it can feel that way. No matter how hard we stare at the candles, it’s impossible to fathom what they’re telling us.

And that’s where some tools of the trade come in handy. And we realise that traders didn’t invent technical indicators just because they like drawing lines on their charts!

We don’t need anything really fancy – sometimes the simplest indicators have the most powerful effect on our charts.

And a great place to start is with a 200-period moving average.

Here’s what our S&P chart looks like with the 200MA drawn in …

The 200 moving average is nothing more than the average price over the last 200 periods plotted as a line.

As an indicator, it’s a blunt, but highly effective tool.

It tells us the general direction of the market – which is great if we’re trading long term – but it’s slow to pick up on trend changes, so for shorter-term trades, it’s just not reactive enough.

It we really want to filter out buy trades when the trend just isn’t strong enough – the 200MA isn’t going to do it (alone).

So, I’m going to add another couple of moving averages …

Now I’ve got a 15-period moving average (in dark blue) and 30-period moving average (light blue). For confirmation of our uptrend, we want the dark-blue line to be above the light-blue line.

So, here’s our filter for a buy trade …

  • price must be above 200MA
  • 15MA must be above 30MA

And our filter for a sell trade …

  • price must be below 200MA
  • 15MA must be below 30MA

Moving averages are lagging indicators, and – like all indicators – they’re very fallible. However, adding this simple filter to your trading strategy can mean that you’re automatically trading in the direction of the current, which means our trades can go further, faster.

 

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How to use Donchian channel to trade

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Back in the 1980s, commodities speculator, Richard Dennis ran his famous ‘Turtle Traders’ experiment – a kind of real-life Trading Places …

The idea behind the Turtle traders experiment was that ‘anyone’ (from the carefully hand-selected group that Dennis chose) can be a successful trader, and that’s it all comes down to rules and discipline.

And it worked … rules and discipline won out for the Turtle Traders …

… so what were those rules, and why were they so effective.

One of the key instruments that Dennis got his traders to use was the Donchian channel. It’s an indicator that’s so ridiculously simple, you probably wouldn’t normally give it the time of day … yet it’s a fantastic lesson in how simple rules about letting trends run and cutting losses fast will always come through over the medium- to long-term.

Here’s how it works …

The Donchian channel measures the highest high and the lowest low over the last 20 periods (or whatever number of periods you’ve set it for).

Yes, that’s it – it really is that simple.

donchian channel 20

The Turtle traders would look to buy into the market when prices broke above the 20-day high – i.e. when the upper Donchian channel was breached.

It’s so mind-numbingly simple that it makes a mockery of all our carefully crafted, overly complicated indicators.

The Turtle trader then uses a tighter Donchian channel (the 10-period channel) as a trailing stop.

So, it’ll look like this …

donchian channel 10 20

The green arrows on the chart above show where the buy signals are, and the red arrows show where these trades would have stopped out, hitting the 10-period Donchian trailing stop.

In the sample shown above (just looking at buy trades) we see one big winning trade, and two small losing trades – the kind of result that’s the meat-and-potatoes of the trend trader.

Adding an overarching trend indicator (like we looked at in my last post) would also help to filter out trades that go against the trend.

So, if building a successful trading method is this simple, why do so many traders fail?

The most difficult part of the Turtle method is sticking to those exits. Waiting for a 10-day low to be hit can be torturous – as you’re watching your profits evaporate. There’s a strong tendency to want to jump out earlier.

I use trailing stops in my Heikin Ashi Mountain method, and it’s been a tough learning curve for me. To really succeed at trend trading, you’ve got to learn to master the exit, and the truth is that it involves lots of small losing trades … watching profits dwindle on open positions … safe in the knowledge that when the big winners come, you’ll clean up.

One of the aims of my Heikin Ashi method was to make this process as painless as possible – because I’m all too aware of my human frailties when it comes to exiting trades!

What I hope the Donchian channel shows (whether you use it or not) is that indicators can be as simple as you like – real success comes from discipline rather than filling your charts with indicators.

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When is the RIGHT time to invest in a new opportunity?

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As we know, most investments have good weeks … and bad weeks … good months … and bad months.

So, how do you pick the right time to invest?

And what other factors do you need to consider when thinking of jumping into a new investment opportunity?

The single thing that will have the largest effect on your long-term profits

There’s one crucial variable that will have a meteoric effect on your long-term profits.

You might be investing in a method that brings you 50% gains …10% gains … or 2% gains … yet this variable will be the difference between a little extra cash in your pocket, and serious wealth.

It’s time.

And too much time is wasted by investors worrying about whether now is the “right time” or the “wrong time” to get in.

If you’re concerned about buying a stock and its value falling in the near-term, then scale in … buying 25% chunks over the course of a few months. The same can be done with any investment method, buy starting with a small fund and building that steadily.

But there can still be obstacles that prevent us from “jumping in” immediately …

Do you have the time to devote to it right now?

It would be a mistake to embark on a brand-new investment program that’ll take up a lot of your time, when you’re really busy. If you can’t devote the time it demands, you’re dooming yourself to failure from the outset.

However this doesn’t mean that you have to sit on the sidelines. There are plenty of methods that take up minimal time … whether it’s just 10 minutes a day, or half-an-hour once a month … And you shouldn’t view these methods for the time-poor as inferior investments. In fact, hands-off investing is often the most successful form (the methods that have us sat in front of or screens for hours a day leave a lot of scope for us to make errors!)

Is it the wrong time of year?

Of course, warm weather, summer holidays rolling in … aren’t you meant to “sell in May and go away?”

The “sell in May” advice is for investors looking to hold shares over a period of months (summer months tend to make less money than winter months). Yes, the summer does have lower volumes than the rest of the year, but that’s not necessarily a bad thing for strategies that rely on a bit of volatility.

Are you about to go on holiday? Does that matter?

There are methods that won’t cope well with us disappearing to a Greek island with no internet connection for 2 weeks! But that doesn’t mean the holiday season can’t be a profitable one.

Many trading methods can be simply closed down and put on hold while we’re on holiday – ready to pick up as soon as you get back.

Do you have the money to invest?

Of course, it’s impossible to invest money if you have none to invest. But how much do you really need to get started?

Some investment methods aren’t worth considering unless you have several thousand to put aside, but there are other ways to get on board. For example, the method I’m launching just next week enables you to start out risking just £3!

And, even if you do have a large fund, I’d always recommend that you start out small, building slowly.

Are you being distracted by noise?

Noise takes the form of those little wobbles on our charts – the ups and downs within an overall trend. And there are two types of noise that can cause us to hesitate … the ups and downs of the market, and the ups and downs in the performance of a strategy.

The ideal is to get on board just as profits head up …

Of course, no one knows exactly where these turning points will be, so we have to rely on following trends. Look for what’s doing well right now … consider what kind of ups and downs it’s been through … and prepare yourself for similar bumps in the road.

What about upcoming news events and current market conditions?

You could be forgiven for taking one look at the rolling news and deciding that the planet is just in too much upheaval to even consider risking money on the markets!

When I first started trading, I can remember waiting for “things to settle down” … for “markets to get back to normal” …

And a couple of decades later, I’m still waiting!

There is no “normal”. Markets just keep churning on, from one crisis to the next; and they are relentlessly optimistic … until they aren’t, and suddenly spiral into a panic. Uptrends are littered with the warnings of pundits and “gurus” that we’re hitting the top of a bubble, so – inevitably – a handful of them will be right when the market turns, and will claim some superior insight.

I read a nice comment from Ben Carlson at Ritholtz this week …

If I was named Financial Market Czar one of the first rules I’d institute would be to give every pundit a punch card. You would only get 5 opportunities to call a top or bottom in the markets and every time you made a wrong prediction you’d get a punch. Once all your punches are used up, no more making extreme predictions again.”

The truth is that we don’t know what the markets will do in the coming weeks … nor do we know how our methods will perform in the coming weeks …

There is no “right time” or “wrong time” … just now.

And what we do know is that the sooner you start, the better your chances of long-term success, because only time will enable compound investing to build huge funds from tiny beginnings.

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Are you an optimist or pessimist trader? (Take the test)

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Bad news gets a lot more press than good news.

Hearing that the world is going to hell is, apparently, a lot more interesting than predicting that things are on the up. Optimists are dismissed as naïve at best, and selling a lie at worst. While the pessimist looks worldly by comparison, with sharp critical thinking skills.

It’s how shock-jock conspiracy theorists get taken seriously.

How many emails hit your inbox warning you of impending doom in the financial markets, and warning you to take action … or else …?

Both optimism and pessimism can draw on facts, but the pessimist can add a healthy dose of fear to the story, which encourages us to prick up our ears and listen … then we dwell on those fears for longer than we will over good news … passing those fears on to others …

Let’s look at the state of the world right now …

There’s war, famine, terrorism, political upheaval, global warming … it’s not a pretty picture.

You’d have good reason to feel pessimistic, right? But that’s not the full story.

If we look at global child mortality – the survival rate for the first 5 years of life for a child has risen since 1960 from 81.5% to 95.6%.

Countries as poor and troubled as Haiti, Burma and the Congo have infant mortality rates today that are lower than those that any country in the world achieved in 1900.

World population growth, which was an unsustainable 2 per cent a year in the 1960s, has been falling steadily and is about to drop below 1 per cent a year. This is good news for the planet.

In western Europe we’re currently enjoying the longest period of peace since Roman times.

In the past few years, conflicts have ended in Chad, Peru, India, Sri Lanka, Angola, Columbia.

Those seem like plenty of things to be cheerful about. And how do you get that shift from pessimism to optimism?

It’s as simple as taking a step back and looking at a longer timeframe.

And the same thing works with investments …

The FTSE has had a bad month … but it’s grown since the beginning of the year.

The stock I’m holding has fallen for the past year … but it’s made good gains over the last decade.

My trading strategy has lost for 2 months on the trot … but it’s made 100% profit in the past year.

The difference between optimism and pessimism really can be as simple as what timeframe you’re looking at. Of course, the long view won’t always be relevant. The decade-long performance of stock is irrelevant if you’re day trading it! But what matters is to match your ‘view’ to your objectives.

So, what’s the RIGHT view for trading? Optimist or pessimist?

The pessimist trader will be expecting the worst. That’s not necessarily a bad thing, because we should be prepared for losses – too many traders blindly assume that a losing run would never hit them.

But, if you’re always expecting the worst, chances are that you won’t even place a trade. Why would you, if it’s going to lose?!

And a pessimistic trader (assuming they have opened a position) will only trade AFTER the move has happened and he’ll cut his winners short.

The optimistic trader, on the other hand, has his own set of problems. He’ll probably have unrealistic expectations of how fast he can make money … he’ll stake too high … he’ll leave losing trades open, even adding to them … and he’ll allow his confirmation bias to justify breaking the rules.

The optimist and the pessimist are as bad as each other! But each can help the other …

… because what need to strive to be is a long-term optimist and a short-term pessimist.

We should enter every trade prepared to lose it … that way we won’t over-trade or stake too high. Instead we’ll manage our risk carefully, always ready for the next losing run.

However, we’ll not be thrown by short-term losses, because we have an eye on the long-term performance of our strategy, which (as long as you’re using the right one!) should give you plenty of reasons to be optimistic!
 

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How to draw support and resistance levels

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Imagine if you could add a few lines to your price charts, which will
clearly – and reliably – show you where trades should be entered
or closed, where stops should be set, and profits taken?

That would make your life a lot simpler, wouldn’t it?

The lines I’m talking about are support and resistance levels. And here
I want to show you a foolproof 3-step way to mark them onto your chart,
and 5 simple tricks to use them for profits.

What are Support and Resistance lines, and why should I use them?

Resistance is an area where the price of an instrument has reached a ‘top’ – the price has gone up to this level, and traders have sold, viewing it as ‘too expensive’. Conversely, support is an area where a price has hit a ‘bottom’ – here, buyers have come in, viewing it as a bargain.

The result is that on a price chart, we see prices bouncing down from resistance levels, and up off support levels …

draw support and resistance

By knowing where these key levels are, you have an incredible insight into where the price of a market will hit its ‘crunch points’. And if you don’t know this – you’re at a huge disadvantage, because these are the moments where we should be looking for signals, whether they are in the form of price action, or simple buy and sell triggers.

But aren’t support and resistance lines subjective?

A lot of novice trades don’t like to draw support and resistance levels, because they worry that they may draw them wrong. In fact, you’ll find internet forums devoted to the correct way to join up the dots on a price chart, and berating novices for their ‘wrong’ levels.

This is the kind of approach that makes me fume. Yes, you’ll get better, and quicker, at drawing support and resistance levels with practice, and yes, there is an element of subjectivity about them. It’s unlikely that your S&R levels will be exactly the same as the next traders, but a poorly drawn level is a million times better than no level!

So, please, get drawing …

Here I’ll run through the text-book method to draw support and resistance lines, and then I’ll tear those up, so you can get drawing genuinely useful lines for yourself.

The rules

Here’s what the text books tell us about how to draw support and resistance lines …

  1. The market needs to get rejected at least twice for it to count as support/resistance.
  2. The more often your level is tested, the more valid it becomes.
  3. The more recently a level has been tested, the stronger its support or resistance.
  4. If support is broken, that level becomes resistance. Likewise, is resistance is broken, that level becomes support.

And here’s a simple 3-step guide to adding USEFUL lines to any price chart.

Step A)

Switch to a longer timeframe than the timeframe you’re trading. So, if you’re trading hourly charts, look at 4 hourly. If you’re trading daily charts, switch to weekly.

Here’s a recent daily chart for AUDUSD …

draw support and resistance AUDUSD daily

When I switch to a weekly chart, instantly a clear channel becomes visible, and I can see how prices have been bouncing between these levels since March 2016 …

draw support and resistances AUDUSD weekly

Mark this channel onto your chart, and any other major S&R levels that jump out at you.

Step B)

Now go back to the timeframe you’re trading and look for levels that could be useful to you. If your stop distances are usually 40 pips away, then you don’t need to worry about a support level that’s 200 pips away. You don’t want to clutter up your chart with unnecessary information, so look for what’s relevant.

draw support and resistances AUDUSD short term levels

Step C)

With these lines drawn on your chart, you can now get on with your normal trading, but with these factors in mind:

  • Always look out for signals around these key levels (these are the places where market moves happen)
  • Avoid buying as prices approach resistance.
  • Avoid selling as prices approach support
  • Don’t place targets just beyond S&R levels, making them harder to hit.
  • Don’t place stops just within S&R levels (nor too close to them), as this makes them easy pray for stop-loss hunters.

But there are some really powerful techniques to apply at these levels – ensuring you’re using them to maximize your profits, and minimize any risks you’re taking in the market.

Top tips and dangerous traps to note when you draw support and resistance lines

  • One-hit wonders

The ‘wisdom’ that a level should be hit multiple times to count as support or resistance is probably the most dangerous myth surrounding these lines. Some of the most powerful support or resistance levels will get the most fleeting touch by prices, before rebounding. And watch particularly for levels that the price bounces off very quickly – this shows the strongest action by traders, jumping in to push the price in the opposite direction.

  • Do support and resistance lines join wicks or bodies?

This is a question often asked by traders who are learning to draw these lines, and there are plenty of people out there who’ll argue one case or the other. The truth is that it can be either.

Consider what’s often going on at a key level … stops are being hit, orders are being filled – there are likely to be thousands of orders pinging away, as the price bounces untidily about. This is why we often see what’s called ‘consolidation’ around this point – which just means an outright mess!

Wicks can often be momentary spikes through a key level, quickly corrected, so it’s not unreasonable to ignore them when drawing our lines. However, it’s worth remembering that the price did actually make this spike, and hit that level – so, if you’re placing a stop, beware that gap between the body and wick.

Take a look at this chart, where the wicks at A and B represent areas that the price has touched and powered away from – and we see the affect that hitting these prices again has on future prices.

technical trading trick 1

  • Because S&R levels are inherently messy …

… it’s best to think of them as price ‘areas’ rather than fixed points. So, if one trader is telling you that the key level is 0.8494, and your line is drawn in at 0.8484 … neither is wrong, because both can be in the support ‘area’.

  • Really struggling to see the support and resistance levels?

A quick trick is to switch from candlestick to line charts. By removing the ‘clutter’ of the candle bodies and wicks, it’s much simpler to see the price turning points.

Of course, these levels won’t be identical to those you’d draw on a candlestick chart, but they’ll be plenty close enough to guide you.

  • Two levels very close to each other – which should I pick?

In this scenario, many traders may worry about which is the right one to pick, but in truth, two nearby support/resistance levels can give us access to a great trade set-up, where we stack key levels, one behind the other …

This trade technique really thinks about where buyers or sellers are in the market – and uses them to give us the security of a nice tight stop, and a confident trade entry …

technical trading trick 3

And one of the best things to watch for at these key levels are price-action triggers – these are the little patterns in the candlesticks that warn us whether they S&R level is going to be bounced off, or broken. For more information on reading candles, check out the Trader’s Bulletin guide HERE

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Day Trading VS Night Trading

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Remember when everyone was day trading?

More and more short-term traders are rejecting day trading in favour of night trading.

But why?

Many of us were first drawn to the markets by the thrill of day trading.

Day trading is a million miles away from the traditional ‘value investor’, who buys and holds shares. Day traders are in and out of their positions in a matter of hours, making large profits on tiny price moves, and closing up at the end of the day, ready to go again when the markets reopen.

This kind of short-term approach to investments has its benefits and its problems. The less time your money is in the market, the less time it’s at risk of crashes, or bad news stories. But day trades have to be ruthless – there’s little time for that natural ebb and flow of profits, of waiting for a position to come good. Either it’s hit its target, or it’s a loss.

Day traders tend to hunt down the high-volatility markets, looking for spikes of activity when they can make their biggest profits.

But, over the last few years, day traders have been waking up to a different type of trading. It’s hard to avoid the stats about how many day traders are failing to make a profit at all … and heads have been turned by a different breed of traders, who are doing a lot better …

The night traders.

Again and again, statistics are showing us that overnight traders are significantly more profitable than day traders.

And, with more and more automation, night trading is becoming a real possibility to those of us who can’t keep our eyes open much after 10pm!

Let’s look at some of the stats behind this. Here are charts put out by a major broker, showing the profitability of their traders according to the time of day they are trading, and which Forex pairs they’re following …

night trading profits

night trading profits 2

While there are some discrepancies between the stats, there is a clear sign of people making more money while both the European and US markets are asleep.

Isn’t Forex 24/7?

The Forex markets are often touted as the market that never sleeps – there’s always something going on, so you can nip and make profits at any time that suits you.

But what the results show is that individual Forex sessions – the New York session … the London session … the Asian session – behave in very different ways. AND product different levels of profitability.

When asked the question: “When’s the best time to trade Forex?”

The standard reply is that you should look for peak activity … like when the Asian and European sessions overlap, or when New York comes online, around lunchtime in London …

This chart shows the opening times of the markets, based on current British summer time, clearly showing those overlaps …

night trading forex sessions

Compare these times to the periods when most traders are losing money, and it’s clear that peak activity does not equal peak profits.

In fact, the opposite is closer to the truth.

So, why are people making more money in overnight sessions?

What is it about the overnight trading sessions, when most US and European Forex traders are in their beds, that’s proving more profitable?

The things that attract many of us to the forex markets – the volatility and the liquidity – can also be our downfall. Just because volatility and liquidity are good things – doesn’t mean that we can’t have too much of them.

While longer term traders are often looking to ride trends, or pick up swings within those trends, the short-term trader is more likely to be trading ranges. And high volatility, along with bottomless liquidity, aren’t likely to help.

Overnight markets tend to have smaller ranges, and be more predictable, with minor spikes of activity as Asian and Australian markets come online. If you want a price that’s likely to stick within your carefully drawn support and resistance lines – then an overnight market is what you’re looking for.

What works in overnight markets …

So, overnight markets are more likely to be range-bound.

And the indicators that love range-bound markets are: oscillators.

Short-term overbought and oversold signals are significantly more likely to be accurate in overnight trading.

Here are results for trading a simple RSI overbought/oversold strategy. The light blue line opens trades at any time of day. The dark blue line will only open a trade after 7pm, and before 11am London time.

night trading rsi strategy

This doesn’t work neatly with all currency pairs, and the one to be most wary of is the Japanese Yen, which is the most volatile over the Asian session – and at the mercy of the Bank of Japan, so I’d watch for any overnight announcements from the BoJ.

How to profit from night trading, without missing any sleep.

For those of us who prefer to spend our nights asleep … there’s no reason that we can’t take advantage of overnight trading conditions, where prices can be more predictable and rewards higher, by using automated stops and targets.

I’m currently working on a piece of software that will actively manage clever little overnight trades for you (sometimes running on through the next day, too). Results so far are very positive, but there’s still some work to do on getting the automation running perfectly.

I hope to bring you more information very soon.

 

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How to perfectly time a niche investment, just as prices soar

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Buying Apple shares in the 1980s, just as its value goes stratospheric, scooping up a fortune.

It’s the investors dream. Right?

But how do you know which of the investment opportunities are the ones that are genuinely about to take off, and which are the investment equivalent of an email from a West African prince looking to transfer $2m into your bank account?

So, when’s the perfect time to buy?

I like to read the papers, I follow financial news, announcements from central banks, etc …

… and I’ll admit that I have an opinion on which way currencies will move … whether markets are about turn … and which niche markets might actually turn out to be something …

The longer I’m in this game, the more I like to think that I know what I’m doing, and that my opinions could turn out to be right.

In a moment, I’ll show you exactly where that thinking is leading.

First, let’s look at those Bitcoins … it’s tough to see where the inherent value in a cryptocurrency lies.

Bitcoin is a payment system, like a credit-card system, or a cheque book (now I’m showing my age), but it doesn’t charge transaction fees, so no value to be found there.

It’s a currency (ish). In which case its value could be driven by trade flows, or interest rates. No value there, either.

And they have no exclusive ownership of the blockchain technology, which is why rival cryptocurrencies are trying to muscle in.

But human beings have a long history of investing in things with no inherent value. Arguably gold also has no inherent value (although it is very shiny). And a lack of long-term inherent value doesn’t mean that there isn’t cash to be made from the ups and downs that Bitcoin is experiencing right now.

But is now the right moment?

How can you tell?

Making judgement calls

As I confessed earlier in this post, I do have opinions about markets and investments. And, having visited pubs, had a haircut, sat in the dentist’s chair … I’m aware that other people have opinions about these things too. When people know what I do for a living, they like to share their opinions with me.

Very often my opinions about what markets will do come into direct conflict with what my trading strategy tells me to do.

Let’s say my trading rules tell me to buy the GBPUSD, but I know that within a few hours, Mark Carney will be making a speech, and I suspect he’s going to be less hawkish than he’s been in the past. Wouldn’t I be better of waiting, or sitting out of this trade?

Surely this is a situation where years of experience in following this kind of data can stand me in good stead?

So, what do I do?

Sometimes I bow down to my ‘superior knowledge’, and I’ll ignore my trading rules, because I think I know better.

Almost invariably, I’m wrong.

Forex markets and indices are too big and too liquid to be predicted by knowing about the news or having an ‘inside track’. If we think we ‘know’ something … chances are that other (bigger) money ‘knows’ too.

There is no superior knowledge that will tell you which way markets will move.

Trying to find the perfect way in to a niche, highly volatile market will, more likely than not, leave you out of pocket.

Sure, the odd person will time it right.

Let’s face it, I’m sure there are people out there who’ve made a killing from Nigerian mining companies – but that’s cold comfort to Boris Becker.

So, what’s the solution?

If Boris Becker had put his $10m into a boring index fund instead of a Nigerian mining company, he’d have plenty of money to provide for his loved ones and his old age.

You may think that sounds very dull, but it’s advice straight from the desk of Warren Buffett.

A few years back, in a letter, Buffett advises his wife, in the event of his death, to put 10 per cent of their fortune into short-term government bonds, and 90 per cent into a low-cost S&P index fund.

I’m not suggesting that you give up trading altogether. But I am saying that you should give up trying to outsmart the market.

The real money is made by people looking for steady, solid returns from a strictly rule-based method.

No “Get in now while it’s cheap” …

No “I read an article about this, and I just know it’s about to go stellar …”

It’s about finding a solid method, and sticking to the rules of that method.

The simpler those rules are, the easier it’ll be to stick to them.

But there is one exception …

There is one situation in which listening to my own opinion genuinely does make me more profitable. It’s a situation which crops up now and then, and – when it does – I’ll happily throw out my trading rules.

These are major market-moving news events and economic announcements – the kinds that could easily bump the stop levels on my shorter-term trades. I’m talking about a general election or a referendum – the big stuff.

I will generally close down short- and medium-term positions over this kind of news event. I’ve compared my results to what would have happened had I kept trading, and – on average – this has saved me a great deal of money (as well as a lot of stress).

In these situations, I’m not trying to predict what’ll happen – I’ve no idea (I do have an opinion, for what that’s worth!). But I suspect there’ll be high volatility, and don’t want to leave vulnerable trades sitting in the market.

So please, don’t attempt to time markets or predict what’ll happen. We can’t ‘think’ our way to trading success. Instead, we need rules-based systems we can rely on.

And, if you’re short of those, check out the phenomenal results that Heikin Ashi Mountain and Hav Trading are producing this year – and please watch out for a special offer coming up next week.

 

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The post How to perfectly time a niche investment, just as prices soar appeared first on Traders Bulletin | Free Trading Systems.

Hard facts & fat tails – why science says this trading method CAN’T lose

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Statistical data shows that this trading method will ALWAYS win.

So, why don’t ALL traders use it?

And why aren’t ALL traders making money with it?

It’s an old truism that ‘the trend is your friend’, but I want to show you that this isn’t some vague advice – I’ll show you hard scientific data that shows how trend-following can’t lose.

And I’ll show you why it works, and how you can harness these facts and turn them into concrete profits!

So, what’s a fat tail?

Imagine a trading strategy that opened a trade at random (buying or selling) in the market, with no stop level or profit target, and closed it a day later, and kept doing this over the course of a year. (Not a great trading strategy, I’ll admit – and I’m not recommending this!)

We might expect the distribution of our profits to look something like this …

fat tail - normal distribution

You may have heard investors talking about ‘tail risk’, which is the risk of extreme outcomes. These ‘tails’ are the ends of our bell-curve chart, where the probability of these outcomes is low.

But market returns tend not to show these ‘normal’ distributions. Instead, extreme outcomes are more likely than most investors realise. These curves have what are called ‘fat tails’.

fat tail distribution

A fat tail means that there is a relatively high probability of the extremes being hit. I.e. you’re more likely to get big winners and big losers.

Many investors don’t appreciate how ‘fat’ these tail risks are – and it can often be their downfall, when unexpected big losses happen again, and again …

But, the smart investor recognizes these fat tails, and can use them to his or her advantage.

So, how can a fat tail help us?

Now that we know about these ‘fat tails’, how can we use them to our advantage?

Going back to our not-very-good trading strategy, which bought or sold the market at random once a day. If we adapted this strategy so that it had a stop loss, but no profit target, we could instantly cut off the negative fat tail, and start to profit from the positive fat tail.

Bingo!

We’ve made a profitable trading strategy, without even looking at technical analysis!

So why isn’t everyone making money with this simple statistical method?

The problem with our neatly symmetrical ‘fat-tailed’ bell curve, is that it only gets that tidy when it’s made up of thousands of trades. So, you’d have to suffer through a huge number of losers before you hit those big winners (even with a fat tail).

And, of course, the financial markets are a lot more liquid than our trading accounts, so most of us just don’t have pockets that deep. Plus, those thousands of trades will each have brokerage costs on them, which will eat into any profits we see.

The solution?

The answer to the problem of capturing profits from a fat-tailed distribution curve is … trend-following.

The trend-following trader cuts losses fast, and lets profits run – this way they can take advantage of the fat-tail up-side, while removing the extreme losses.

The tricky part is finding the right balance between holding out for big profits, and not having to suffer long runs of losses. As we’ve seen, this method can’t fail – but you’ve got to be able to hold on long enough. Many traders run out of capital, or faith, or both, before they’ve given their trend-following method a chance to work.

And that’s the balancing act that I want to show you …

Both HAV Trading and Heikin Ashi Mountain use exactly these techniques to cut losses and let profits run and run.

With my Heikin Ashi Mountain system, I’ve developed three subtly different ways to trade, depending on the kind of ups and downs you’re comfortable with. The most aggressive method has the most volatile returns, but the biggest profits in the end. The least aggressive method gives a smoother, but flatter profit curve … and (my preferred method) falls in the middle.

All three use the infallible statistics of trend following and fat tails, ensuring profitability. And it’s up to you to choose the comfort level that suits you best.

 

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The post Hard facts & fat tails – why science says this trading method CAN’T lose appeared first on Traders Bulletin | Free Trading Systems.

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