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What this means is that you need to make more on your winning trades than you do on your losing trades and you need more winning trades than losing trades. Or if the number of your losing trades is higher than winning trades the average profit on winning trades has to be significantly higher than the average loss.
Many new traders do not have a grasp of how difficult it is to overcome a loss. Most traders who lose money never ever recover their losses and ultimately are forced to stop trading. Protecting your capital is the absolute MOST important job you have. Avoiding losses by skipping risky trades or getting out when you know you are wrong with a small loss rather than letting it hit your stop are all things that professional traders must do to protect their capital and reduce losses. Sometimes all a losing trader needs to do to become profitable is eliminate just a few losing trades per week and lose less money on each losing trade. This can be done through learning low risk entry methods and usually be self discipline and having the patience to WAIT for the low risk, high probability trades to appear. The hardest part of trading for most new traders is having the patience and self discipline to do nothing when that is the smart thing to do. Boredom trading is very common and something you need to be aware of and fight those urges. Most boredom trades results in losses. Below you will see a table with percentage loss on the left and the return you will need to achieve just to get back to even. As you can see from this table the more you lose the more difficult it is to just get back to even. A 25% loss requires 33.33% to get even, a 50% loss takes 100%, and a75% loss requires 300% return. To Recap - A trader has to PROTECT his/her trading capital at all costs!
Position sizing is one of the most complicated aspects to trading and one in which the majority of beginning traders COMPLETELY IGNORE. It is the major cause of most people losing money and failing at trading. Position sizing is determining how many shares, contracts, or in Forex how much currency to buy or sell. Position sizing is one of the MOST important aspects of trading and least talked about. It partially determines how big your profit or loss is. If you trade $100,000 of currency, a normal sized lot you make or lose $10 for every pip the currency moves up or down. If you trade $500,000 then you make or lose $50 per pip. There are some rules of thumb for position sizing in stocks but little has been written about how to determine how much SIZE to trade in Foreign Currencies. First we will discuss this concept using stocks and then move over to Foreign Currency. In stocks a general rule of thumb is to never lose more than 2% of your account on any given trade. This allows you to make up losses easier, maintain a positive mental attitude, and if you have a string of losing trades the loss in your account will not be so much that it becomes impossible to recover. So with stocks, if you are risking 2% and have a $25,000 account then you can risk $500 maximum per trade. This means that if you are taking a stock trade and your stop loss, the place you exit the trade if it goes against you, is 50 cents away that you can trade 1,000 shares. If you find a low risk entry point on the chart and feel the stock shouldn't move more than 20 cents against you, you can then take the trade with 5,000 shares. In both cases if your stop gets hit you will lose the $500 that was determined to be the maximum risk. By learning low risk entry methods you can trade larger size and when right make a lot more money. Please Note: Many professional traders will exit their trades BEFORE their stop loss gets hit if the reasons for taking the trade become invalid or they see heavy trade in the opposite direction. Reducing the amount of losses is one of the MOST important aspects of trading. It is often far cheaper to get out of a losing trade with a super small loss and reenter a few minutes or hours later when there is a higher chance of the trade working. This protects and saves your capital and leaves you with a clear head to make better trading decisions. No matter who you are, having a losing trade is somewhat to very stressful and it impairs clear thought. The larger the loss the more damage it will cause to your ability to remain calm, relaxed, and focused. Trading is about probabilities and holding a loss more than your risk parameters allow will almost always ruin your chances of becoming a successful trader.
As you can see from the rules above their is a DELICATE BALANCE between having a stop far enough away that the market's noise doesn't cause you an unnecessary loss before it goes in the direction you had predicted. Also the better you can predict the market's direction and time your entries the larger you can trade and have tighter stops! Many of the tools in TopGun Software are designed to help you pinpoint razor like entries so that if wrong you lose the least amount possible. Once you become a profitable trader all you need to do to make more money is trade larger sizes as your account grows or preferably trade more currencies at the same time to diversify your risk a little. To Recap : Many new currency traders fund their accounts with $1,000 to $5,000. The less money you have the harder it will be for you to become a successful and profitable trader and the smaller you will need to trade. If trading the full size contract you will need to have at least 10 pip stops to avoid market noise from stopping you out with a loss. This means that every time you are wrong you will lose $100. It is not uncommon for a new trader before they gain experience and especially not having the tools that our TopGun users have to lose 4 times in a row. This means that they are down $400 and if their account was less than $1,400 they need to put more money in the account to continue to trade. This makes trading discouraging for the new trader and sets up their emotions to be fearful of all new trades, reducing their ability to spot good trades and enter at the right time. If your account is less than $1,500 you should trade mini sized contracts. We also HIGHLY recommend all new traders practice on the simulator to get practice entering orders, setting stops, taking profits and losses and learning to spot low risk, high probability trades. There is a LOT to learn in order to successfully trade Foreign Currencies and it will require education through both reading and studying live markets and learning how to spot the highest probability trades and having the PATIENCE to wait for these lower risk trades. Sometimes you may need to do absolutely nothing, take no trades for 3 or more hours. Many times of the day there is no clear direction and taking a trade is pure gambling! Determining What Kind of Trader You AreThere are many profitable Forex trading strategies but not all strategies can be traded profitably by every person. Knowing yourself, who you are and your level of patience and discipline is very important. If you are an impatient person, short term scalping strategies may be more for you because there are more opportunities during the day and once in a position the average hold time is far less. If you are a very disciplined and patient person who would have no problem waiting 8 hours to a few days to find a low risk trade, put it on and then hold it until the trend ends which could be a few hours to a few days or weeks than a scalping strategy would not be for you. There are pros and cons for every strategy and what is more important than the amount of money any particular strategy makes when traded by an experienced trader is whether YOU have the emotional and discipline skills to follow that system. Many of the strategies and tools we will discuss work on different time frames, ie Daily and Weekly charts but also Hourly charts, and even 30, 15, and 5 min charts. There are obviously more trades on a 5 min chart than show up on a Daily or Weekly chart. The amount you risk and make are smaller on intraday charts than they are on Daily or Weekly charts but there are a LOT more trades to be had and the laws of statistics work in your favor. If you have a strategy that is 60% winning and you trade it on a Daily chart there may be as many as 5 trades over a month period. Based on the laws of statistics you could have 3 or 4 losing trades even though over many years it wins 60% of the time. The more trades you do, the more your results will approach how a strategy should perform. This is because while it is possible to have 4 losing trades out of 5 with a 60% winning system it is impossible for a 60% system to have 800 losing trades out of 1,000. It is for this reason that most of our traders choose to trade using multiple time frames but use the 5 min chart as their main timing tool. There are usually 5 to 10 low risk, high probability trades each day in most currencies. This puts the law of averages in your favor. Also by trading off of a smaller time frame chart, you risk less per trade and have a smaller chance of blowing out your account. Beginning traders should trade small size and have small losses while they are learning. Once profitable it is easy to double, triple and quadruple your trading profits by trading larger size. For example, if you are making $500 a week trading 100k lots, this is just 10 pips net per day you can make $2,000 a week by trading 400k lots. Also as you scale up your trading size, more advanced entry and exit strategies become available to you such as scaling into and out of positions. It's possible for example to be right about the market making a particular move but to get in a little early and have a loss as your stop gets hit. By scaling in you can more easily time turning points and also catch larger moves by scaling out and locking in profits of part of your position and holding the rest for a larger gain. Determining the Trend and Trading With the Trend The first step in successfully trading the Currency markets is determining the trend. Most professional traders use higher time frames in order to determine which direction to trade on the smaller time frame. For instance if your primary time frame is the 5 min chart, a trader may look at the hourly chart for direction and then only take trades on the 5 min chart in that direction. Reasons to Trade in the Direction of the Daily Trend
Currencies can go up or down days in a row and can trend in the same direction for weeks and months at a time. Thus beginning traders should only trade in the direction of the daily trend. Trying to pick bottoms in downtrends or tops in uptrends is financial suicide. The following chart of the Euro is a perfect example of this. As you can see it fell from March 9 to July 7, 2005.
Here is an example of a strong Daily uptrend in the Swiss Franc. Imagine this is what you saw before you started trading today.
In the chart below you will see how taking Long trades (buying) was the safest, most profitable, and easiest way to make money. There was the potential of over 100 pips profit by buying on this day.
Exceptions to the Daily Trend Rule Exception 1) Be careful after 4 or more days up or down in a row. We recommend not trading currencies at all until at least one day in the opposite direction of the daily trend. Trading with the trend is the safest and most profitable way for most beginners to trade. While we do not recommend trading against the Daily trend, there are certain situations in which the new trader should simply not trade at all. Below you will find an intraday chart in the Swiss Franc on January 30, 2006. This is a day following 4 straight up days in a row. You can see while it was possible to make money by buying, most up moves quickly died and it would have been easy to get caught with a losing trade.
If you continue to trade in the Daily direction after a Trend Reversal signal you will often lose money. The trend has exhausted itself and is due for a few days or week pullback.
Be aware of Weekly and Monthly Pivot Levels.
As you can see on this hourly chart the weekly upper resistance level
stalled the rally and the weekly support level stalled the selloff.
If you were unaware of these levels and tried to buy at resistance or
sell at support you would have likely lost money. Be Aware !
Whenever the market makes a swing move up or down and then goes in the opposite direction, draw Fibonacci lines from the low to the high. This will show you low risk entries and also Fibonacci Profit Targets. As you can see in the example below it found the perfect buy signal and the market exploded up EXACTLY to the Fibonacci Profit Target that was predicted 16 trading days in advance! I know to many new traders this must seem amazing but it is a tool that the largest traders in the world use to find low risk entries and exits and they trade large positions at these levels. If you do not know know these levels you are at a severe disadvantage to the Pro's who do.
Trading Tools That Give You an Edge Balance Point The balance point is is one of the most useful tools for trading foreign currencies. It shows the price where the most traders hold their positions. It also shows you where traders from the previous day have the most positions. It lets you know which traders are losing money now, those who have bought the market or those who have sold. To Keep the Descriptions shorter BPL = Balance Point Line Important Balance Point Concepts
Example 1) As per the rules above when the market is above Yesterday's BPL and today's BPL the market has a much higher tendency to go up and you should buy. The balance point line is where the most traders have a position. Those who have sold the market expecting it to go down are losing money and the first time the market comes back down to the balance point line it is usually a safe place to buy. As you can see the market stalled exactly at the BPL and went up 80 pips!
Example 2) As this day started out the market was above yesterday's BPL. This means that traders who came into today short are losing money. As you can see the market couldn't go much above yesterday's BPL and traders who were short had little to panic about, once the market went down below yesterday's BPL traders that were long from the previous day are now the ones losing money. In order to exit their trades they had to come in and sell and that added selling pressure drove the market down 50 pips. When the market makes the first big move of the day, it is usually a safe trade to get in at the first time the market returns to the balance point line. In this case around 8:40 it was a safe sell. As you can see the market went a few pips higher then the BPL but not much. We typically recommend using 10 pip stops to avoid getting stopped out and also minimizing loss in case the trade doesn't work. In this case the market falls about 20 pips. It returns to slightly under the balance point line but can not make a lower low. Usually the balance point line gives one or two low risk trades in the direction of the trend. The more times it touches the less likely the next time will provide support/resistance. This tool works because it is where most traders have a position and when they are wrong and having watched their trade go far against them, it is human nature to want to get out at even if the market provides them the opportunity. That is the beauty behind this indicator and why it works so often. As you can see below the market made a higher low and this is a sign that the downtrend may be over. You must be careful shorting after 1 or 2 touches, especially if there are signs that the market is not as weak as it was before. The third time back to the balance point line the market explodes up about 30 pips. Buying breakouts above the balance point line after the market has spend hours beneath it is a low risk trade as everyone who is short is now losing money and must buy to exit the trade. The first time back to the balance point line is a low risk entry point and this provided a nice 15+ pip move.
Example 3) As you can see from this example the market began the day under Yesterday's closing BPL. This means that traders who held long positions overnight were losing money and the market has a higher chance of going down. That is exactly what happened. Knowing where traders positions are and when they are wrong can give low risk trades because when traders are losing money they exit and that adds fuel to the move. In this case the market fell 45 pips and then came up and touched the balance point line. You want to short on the first and sometimes second touch of the balance point line. In this example the market came within a few pips of the balance point line and then fell almost 70 pips. It came back and you can get short again where the second Sell is. In this case the market fell 37 pips but was not able to make a lower low. Always watch the charts for swing points. A strong downtrend has lower lows and lower high swing points. If the market makes a low but is not able to get back down to that level and makes a series of higher lows than the downtrend is very likely to be coming to an end. In this case the market consolidates in a narrow wedge pattern. Breakouts out of consolidating and reduced volatility wedge patterns tend to give low risk trades. Since we suspect that the down trend is over and the market is ABOVE the balance point line and most short traders are now losing money and must buy to cover we buy and the market goes up almost 50 pips. Traders who have held their positions from the previous day (Their avg position is at yesterday's closing BPL) now have the chance to get out at even. You will often see selling at yesterday's closing BPL and that is exactly what happens on this day. It is a low risk trade to enter here, risking only 10 pips on the trade the market falls back to the balance point line and makes you up to 40 pips.
Example 4) This day starts off with the market above yesterday's closing BPL. This means that those entering today short are losing money. They clearly did not panic and buy as the market was not able to go up to the previous swing high. Once the market falls below yesterday's BPL, given the first move did not seem very strong, you should short with a 10 pip stop right above the balance point line. It is far enough away to avoid random market noise stopping you out. The market falls about 40 pips and comes right back to the balance point line. This is another safe area to sell with your stop right above the balance point line. The second move down falls over 80 pips.
Example 5) Not every day is as perfect as the above examples. Let's look at a much harder day to trade and see how using the balance point line and other charting concepts can improve your trading. The market opens significantly above the previous day's balance point line which means traders entering today short are losing money. They will have to buy to exit their trades. The market drifts down but as traders who are short cover by buying it finds support. Buying breakouts is often a risky trade but in this case we know that as the market breaks out all the short traders are likely to buy to exit their trades and cause a nice up move. That's exactly what happened. The market goes up 15 pips. Whenever the market makes a move where the high is higher than the previous high we have to assume an uptrend is developing so we would buy the first time back to the balance point line. For these examples we are always using a 10 pips stop right above/below the balance point line. The market does not hit our stops but also does not go up more than a few pips. When you see this you want to move your stop up to underneath the lowest low since putting on the trade. The market falls down and stops us out with a loss, but a tiny loss of 5 or 6 pips. Whenever the market opens 10 or more pips above the previous day's closing balance point line, it is often a low risk buy at this level. As you can see in the chart the market finds support as traders who went into this day short exit at breakeven. At this point in the day its unclear which direction the market will go as earlier the market made a higher high but then fell and made a lower low but found support at the previous day's closing balance point line. Since a lower low was made you can exit your buy and go short at the balance point line. If there was a clear downtrend the market would not go this much above the balance point line. It doesn't initially go enough to stop us out but enough that we should look to get out at even or only make a few pips on this trade. When you spot something that is wrong or abnormal then use caution and get out with a small loss, breakeven, or a small profit. The market falls but is unable to make a lower low. This is a clear sign that the market isn't going to go lower. Then over the next hour and a half the market tries to go higher and can't. At this point you should just sit and wait. When volatility decreases and the market starts to consolidate into a smaller trading range you can buy or sell the breakout. In this case the market breaks down and all traders who were long from yesterday and today exit causing a nice 30 pip down move. The first time the market comes back to the balance point line after having made a lower low is a safe place to sell. We sell here and the market immediately falls 25 pips. The balance point line of today and yesterday help us to understand which side is in control and who is losing money. In this example initially the buyers were in control but they ran out of steam and all ran for the door at the same time at around 1030am EST. From this point on selling every rally proved the safest and most profitable way to trade.
Range Projection The Range Projection tool shows you the statistical average trading range of any time period. For example you can trade off of 5 min charts but see how far the currency normally trades this hour. We plot the statistical hourly high in the example below in orange and the statistical hourly low in blue. The settings we have found to work the best in Forex is 30 min, 60 min, and 240 min. Range Projection Shows You
Example 1) Below is a 5 min chart showing the statistical 240 min range. The statistical 4 hour high is orange and low is blue. This gives you an idea of how far the Swiss Franc normally moves every 4 hours. It's amazing at how frequently it bounces off of the high and lows. In the example below we sell the statistical high and it quickly falls 25 pips. We buy the statistical hourly low but it stalls out and we exit at breakeven or with a small 5 pip loss. Since it failed to bounce off the statistical 240 min low we now know the most likely direction to be down so you could flip your earlier buy and sell or wait for further signs of weakness as in the chart below and sell the next breakdown. After going down for hours the CHF finds support at the next 240 min statistical low and goes up about 25 pips. Waiting to see consolidation and no additional signs of strength we sell the next breakdown and the Swiss Franc falls 50 pips! After such a FAST fall it is dangerous to buy the statistical
Example 2) Below the Euro is in a downtrend, has just made a big move down and has come up to the statistical average high. You can see this short was the high and the rest of the day was down. Hours later the market moves up and hits the statistical average high. This is another low risk short and the Euro falls 30 pips in an hour. There is another bounce up to the statistical average high and another low risk short, falling 20+ pips in an hour. The trend is your friend however be aware that the more a market moves the more likely it is to reverse. The risk of shorting this trend increases the farther down it falls. Our advice to new traders to reduce risk only short two swings down.
Example 3) Below the Canadian Dollar's trend is up, it is above the previous day's high (Green line) and pulls back to the balance point line with the statistical average low just underneath. This statistical level can be used for low risk entries or when its close to other entry methods as a great place to put your stop. It is unlikely to get hit yet is close enough to prevent huge losses. The CAD bounced off of the balance point line and rallied 20+ pips. A sure sign of an uptrend is a series of higher highs and higher lows. The CAD again pulls back to the balance point line and slightly below the statistical average low. You can either buy at the balance point line and use a 10 to 15 pip stop or wait for the move back up and then buy. The market pulled back once more to the statistical average low and again a very low risk, high probability trade that caught up to 50 pips.
Example 4) The GBP exploded up, broke the high of the previous day (green line) and then pulled back to the statistical hourly low. This is a low risk, high probability buy area with the stop just underneath. The pound rallied up 25+ pips and then retraced back down. Using the previous day's high and statistical hourly low as support another good buy area and the GBP rallied up 100+ pips.
Chandelier Trailing Stop The Chandelier Trailing Stop is one of the best trailing stops available for catching the majority of trends. It works so well because it uses each trading instruments own volatility to determine how far the stop should be. The more volatile the currency the farther it trails the stop to make sure random market noise doesn't stop you out.
Squat Bar The Squat Bar is a reversal indicator which measures high probability reversal areas in the market.
Trend Reversal The Trend Reversal Indicator shows you very likely market turning points. There are two signals that show up, normal market reversals show up as round dots and when the market is extremely likely to reverse triangles. This tool works on all time frames from 1 minute, 5 minute, 15, 30, hourly, daily, weekly and monthly.
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