[Simple Trading System] Trendline Break (The Only System You Need)
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Stop and Think:
Stop and Sit Back.
Stop and Sit Back.
This is the one time when you need to sit back and take the time to ensure that the move to a live account, or time to up the ante, is sensible. Depending on how much time has passed, you may not have discovered yet that all the weaknesses have been revealed. Your weaknesses, or the system's.
If youve been trading an MA crossover method during a great trending period, youre unaware of all the bear-traps hiding ahead of you when things move into range-trading mode. All of a sudden, things are going wrong. Instead of lots of winning trades, youre getting more losers than youd come to expect. What happens to most of us is we immediately head off into The Indicator Trap.
If youve been trading an MA crossover method during a great trending period, youre unaware of all the bear-traps hiding ahead of you when things move into range-trading mode. All of a sudden, things are going wrong. Instead of lots of winning trades, youre getting more losers than youd come to expect. What happens to most of us is we immediately head off into The Indicator Trap.
7. Indicators:
Indicators:
Indicators:
As a newbie, I believed that all I had to do was to learn to recognize the RIGHT signal, at the RIGHT time. Not only that, but if I could get 3 or 4 of these indicators' signals ALL lining up at the RIGHT time, I would have cracked it. It seemed so easy. I'd stay out of red news days, not trade Mondays or Fridays, and wait until the London Session opened. I studied all the Trading Systems threads, trying this one, trying that one, never quite getting to grips with any of them. Maybe if I'd stuck with one I might have done better, but I just couldn't find a method that suited me. Obviously the guys that designed them knew how they worked, but after a while I got tired of endless posts trying to modify the methods, or adding another indicator. All in an effort to prevent losing trades. I now know that this is not possible.
Why do I call it the Indicator Trap?
Simple really. Indicators, for most newbies, are a crutch that you end up thinking you need to make a trading decision. The rules for entry can be so complex that you spend your time watching the indicators, and forget about watching the markets, as reflected in your charts. I also believe, rightly or wrongly, that they were designed to work in a completely different market place - Equity Trading. Having had an interest in stocks and shares in a previous life, I understood that decisions on buying, or selling, shares were premised on something different to FX. There is a longer-term view taken when considering buying shares, because apart from capital growth in the shares themselves, there was the additional benefit of dividend income. Buy and hold is not an attitude you meet very often in your early introduction to FX trading, and certainly has no relevance to a 5-min chart on GBP/USD, not in my mind anyway.
So there we all are, applying Slow Stochastics to fast moving FX charts, where, on any given day, a currency pair can move 100 pips or more. No wonder some of these indicators are always behind the action. The next thing we do is alter the settings, taking them down to even shorter timescales, expecting them to still perform the way the author designed, and optimised, them to work. I've had Stochs down to 5,5,3 just because it seemed to match what I wanted to see on the chart. If I still couldn't make the right call, I'd apply RSI, and adjust its settings until it seemed to match what I needed to see, or maybe CCI, or ADX, something, anything that would give me that magic signal.
Even the simplest indicator, the Moving Average (MA), is not the answer. Not in the way we think it is when we first apply it to a chart. I've tried all combinations of MA cross systems, and all have a weakness that I couldn't quite come to terms with. I didn't know why at the time, even though I knew I was dealing with something that dealt in averages.
The warning bells still weren't ringing. The answer is that these MAs lag. Obvious now, but, believe it or not, that simple fact didn't register. Too often, by the time I'd hit the order button, price was on a different path, adding a new position to its sequence of averages, and generally that path was against my trade.
Now I know that there are folk around who make these MA cross systems work for them, and I wish them well, but I'm sure they are bringing other skills to the table that enable them to refine (maybe subconsciously) how they use these methods.
I would love to tell you newcomers to clear all the indicators off your screens, but I know it would be a waste of time. Like any addiction, (I speak as a smoker) old habits die hard. At this stage we don't understand the markets well enough to simply trade the charts without some help. Even I have a couple of EMAs (Exponential Moving Average) on my screen, but I use them differently to how I did when I started. How I use them I will explain in due course, but I am starting to see that I really could get by without them (but I might have to demo first - not sure I can go cold turkey yet).
So, this is the first message. Start clearing your screens - watch price and then check if Stochs, RSI etc are confirming. Remember that you should be using these tools as Points of Interest, areas where a trading decision could be made. Learn to read your charts and don't just blindly follow what you think may be a signal. Try and learn the patterns that occur around these Points of Interest. For example, if you trade a MA cross method, does price ever pullback to the faster MA before taking off again? Maybe if you seem to get into a trade a bit late, and your stops are getting taken out too early, then why not wait for a pullback, if that pattern happens often enough, and go in as price bounces off the MA.
Indicators, of themselves, aren't bad things. The problem is we, in our development stage, don't understand how they work. Nor do we apply them to our trading in a logical way.
A classic here are the Overbought/Oversold signals give by certain indicators. Have a really good look, and see how long, and how often, Stochastic have been screaming Overbought on GBP/USD. I've been in most of this uptrend, on and off, for weeks, and I've always been Long.
I can promise you don't need them. Try and lose them, or at least commit to only using one as an indicator (pun intended) of what MIGHT be happening.
Why do I call it the Indicator Trap?
Simple really. Indicators, for most newbies, are a crutch that you end up thinking you need to make a trading decision. The rules for entry can be so complex that you spend your time watching the indicators, and forget about watching the markets, as reflected in your charts. I also believe, rightly or wrongly, that they were designed to work in a completely different market place - Equity Trading. Having had an interest in stocks and shares in a previous life, I understood that decisions on buying, or selling, shares were premised on something different to FX. There is a longer-term view taken when considering buying shares, because apart from capital growth in the shares themselves, there was the additional benefit of dividend income. Buy and hold is not an attitude you meet very often in your early introduction to FX trading, and certainly has no relevance to a 5-min chart on GBP/USD, not in my mind anyway.
So there we all are, applying Slow Stochastics to fast moving FX charts, where, on any given day, a currency pair can move 100 pips or more. No wonder some of these indicators are always behind the action. The next thing we do is alter the settings, taking them down to even shorter timescales, expecting them to still perform the way the author designed, and optimised, them to work. I've had Stochs down to 5,5,3 just because it seemed to match what I wanted to see on the chart. If I still couldn't make the right call, I'd apply RSI, and adjust its settings until it seemed to match what I needed to see, or maybe CCI, or ADX, something, anything that would give me that magic signal.
Even the simplest indicator, the Moving Average (MA), is not the answer. Not in the way we think it is when we first apply it to a chart. I've tried all combinations of MA cross systems, and all have a weakness that I couldn't quite come to terms with. I didn't know why at the time, even though I knew I was dealing with something that dealt in averages.
The warning bells still weren't ringing. The answer is that these MAs lag. Obvious now, but, believe it or not, that simple fact didn't register. Too often, by the time I'd hit the order button, price was on a different path, adding a new position to its sequence of averages, and generally that path was against my trade.
Now I know that there are folk around who make these MA cross systems work for them, and I wish them well, but I'm sure they are bringing other skills to the table that enable them to refine (maybe subconsciously) how they use these methods.
I would love to tell you newcomers to clear all the indicators off your screens, but I know it would be a waste of time. Like any addiction, (I speak as a smoker) old habits die hard. At this stage we don't understand the markets well enough to simply trade the charts without some help. Even I have a couple of EMAs (Exponential Moving Average) on my screen, but I use them differently to how I did when I started. How I use them I will explain in due course, but I am starting to see that I really could get by without them (but I might have to demo first - not sure I can go cold turkey yet).
So, this is the first message. Start clearing your screens - watch price and then check if Stochs, RSI etc are confirming. Remember that you should be using these tools as Points of Interest, areas where a trading decision could be made. Learn to read your charts and don't just blindly follow what you think may be a signal. Try and learn the patterns that occur around these Points of Interest. For example, if you trade a MA cross method, does price ever pullback to the faster MA before taking off again? Maybe if you seem to get into a trade a bit late, and your stops are getting taken out too early, then why not wait for a pullback, if that pattern happens often enough, and go in as price bounces off the MA.
Indicators, of themselves, aren't bad things. The problem is we, in our development stage, don't understand how they work. Nor do we apply them to our trading in a logical way.
A classic here are the Overbought/Oversold signals give by certain indicators. Have a really good look, and see how long, and how often, Stochastic have been screaming Overbought on GBP/USD. I've been in most of this uptrend, on and off, for weeks, and I've always been Long.
I can promise you don't need them. Try and lose them, or at least commit to only using one as an indicator (pun intended) of what MIGHT be happening.
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Account size and leverage (Part 1)
Account size and leverage:
Please note: In earlier posts I use the term micro-lots for the basic 0.01 (1 cent) lot size I use on InterbankFX, as that is how they are named by them. This relates to a position size of $100.
However, a normal micro-lot, as determined by most brokers, is 0.10 (10 cents), and relates to a position size of $1000. Therefore, to avoid confusion, from now on Ill refer to my trading unit of 0.01 as a nano-lot.
Ive already mentioned that for the purposes of learning a new system, or understanding Money Management, a broker that offers 400:1 Account Leverage is the one to use. I would prefer you demo first, but this may require you set a higher initial practice account size than my example will show. Nevertheless, the math is the same. As a matter of interest I use InterbankFX, as mentioned before, but you use whichever broker you think might suit, as long as they offer 0.01 (or lower) as their basic lot size. Oanda does offer these lower lot sizes, and many traders around here use them, but I have no experience with them so cannot comment.
Now I often hear the comment that high leverage like this is a BAD thing, and newcomers should stay away as its the quickest way to lose money.
This is true if you dont understand the difference between Account Leverage (also known as Broker Leverage) and True Leverage. Ill try and explain the difference as I go along. By the way, Ive run this section past a very experienced trader to verify the points Im making, so you can relax as you read this.
You may, or may not, be aware that the Standard Trade size in the real trading world is $100,000.00 (one hundred thousand dollars). Not many of us have access to sums like that, so the folk who give us the opportunity to trade allow us to leverage whatever money we do have spare. Therefore, instead of having to stump up $100K we can trade on leverage and only put up a percentage of that figure.
Typically a leveraged trade only requires us to put up $1000 for every $100,000 of currency we wanted to buy or sell. This equals Account Leverage of 100:1. Now if you only have an Account size of $5000, and you put $1000 of it on a trade, youre dealing with True Leverage of 20:1. This would be fine if a couple of things always happened.
You never had a bad trade. EVER!
You didnt have to pay the spread. EVER!
Now the problem with trading, and the fact that youre reading this tells me youve already discovered this, is that you will have bad trades. In addition, you will have to pay the spread.
Using True Leverage as high as 20:1 is a recipe for disaster for guys like us, whether its thousands, hundreds, or even tens of dollars, we are using, depending on the size of our account.
Let me do this exercise on an account size we can all relate to - $300.00. Ill do this in nano-lots as well; as thats the way I trade. If your demo shows $3000 as the minimum size of your new account, keep your lot size to 0.01. Ill repeat the exercise to show how to arrive at the same risk per trade using a larger account size.
For the sake of simplicity (for me) Ill stick with GBP/USD as my pair to trade, the dollar value is always equal to 1 (i.e. 100 pips profit = $1), whereas the crosses can vary, typically .8 (i.e. 100 pips profit = $0.80 cents).
One simple thing that escaped me in the early days was this; if I traded GBP/USD I was essentially either selling dollars (long GBP) or buying dollars (short GBP). Stupid, I know, but its often simple things that make the difference. My trading account is dollar denominated so it was important for me to understand this, and I didnt. The same rule applies in relation to any pair youre trading; its just the actual currencies that are different. I can remember saying Ooh look the Yens going down when in fact it was the dollar diving south. How dumb can you be?
All you need to remember when looking at a chart is that, with any currency pair in a rising chart, the first named currency is strengthening in value against the second named currency. The reverse is true in a falling market, i.e. the first named currency is weakening in value against the second named currency.
Exercise 1 ($300 Account):
Right, Ill break this down as far as I can. Our $300 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
The next thing we have to establish is our risk profile. Even when youre trading in pennies, you need to think Money Management, and now is a good time to get into good habits. All the serious traders Ive ever listened to say 2% of your account is a good figure to base your maximum risk on. Its even better to go with 1%, so well start there.
1% of $300 is $3 (300 cents), so thats as much as we want to risk on each trade. We know we can expect losing trades, so now we have to work out where we think we should place our stops in order to take us out of this trade if things go wrong. Maybe the system youve been working with has a fixed stop loss. Lets assume its 50 pips above/below entry. Therefore, we now have 300 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 6 (0.06) nano-lots.
Were risking $3, but youre effectively buying 600 dollars (if youre short GBP) or selling 600 dollars (if youre long GBP). Your account, when you start, is $300 so your True Leverage is only 2:1
$600 position size traded on a $300 account equals True Leverage of 2:1
Exercise 2 ($3000 Account):
Our $3000 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
Well stay with 1% as our risk profile.
1% of $3000 is $30 (3000 cents), and our stop is 50 pips. Therefore, now we have 3000 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 60 (0.60) nano-lots.
Were risking $30, but youre effectively buying $6000 (if youre short GBP) or selling $6000 (if youre long GBP). Your account, when you start, is $3000 so your True Leverage is only 2:1
$6000 position size traded on a $3000 account equals True Leverage of 2:1
_
However, a normal micro-lot, as determined by most brokers, is 0.10 (10 cents), and relates to a position size of $1000. Therefore, to avoid confusion, from now on Ill refer to my trading unit of 0.01 as a nano-lot.
Ive already mentioned that for the purposes of learning a new system, or understanding Money Management, a broker that offers 400:1 Account Leverage is the one to use. I would prefer you demo first, but this may require you set a higher initial practice account size than my example will show. Nevertheless, the math is the same. As a matter of interest I use InterbankFX, as mentioned before, but you use whichever broker you think might suit, as long as they offer 0.01 (or lower) as their basic lot size. Oanda does offer these lower lot sizes, and many traders around here use them, but I have no experience with them so cannot comment.
Now I often hear the comment that high leverage like this is a BAD thing, and newcomers should stay away as its the quickest way to lose money.
This is true if you dont understand the difference between Account Leverage (also known as Broker Leverage) and True Leverage. Ill try and explain the difference as I go along. By the way, Ive run this section past a very experienced trader to verify the points Im making, so you can relax as you read this.
You may, or may not, be aware that the Standard Trade size in the real trading world is $100,000.00 (one hundred thousand dollars). Not many of us have access to sums like that, so the folk who give us the opportunity to trade allow us to leverage whatever money we do have spare. Therefore, instead of having to stump up $100K we can trade on leverage and only put up a percentage of that figure.
Typically a leveraged trade only requires us to put up $1000 for every $100,000 of currency we wanted to buy or sell. This equals Account Leverage of 100:1. Now if you only have an Account size of $5000, and you put $1000 of it on a trade, youre dealing with True Leverage of 20:1. This would be fine if a couple of things always happened.
You never had a bad trade. EVER!
You didnt have to pay the spread. EVER!
Now the problem with trading, and the fact that youre reading this tells me youve already discovered this, is that you will have bad trades. In addition, you will have to pay the spread.
Using True Leverage as high as 20:1 is a recipe for disaster for guys like us, whether its thousands, hundreds, or even tens of dollars, we are using, depending on the size of our account.
Let me do this exercise on an account size we can all relate to - $300.00. Ill do this in nano-lots as well; as thats the way I trade. If your demo shows $3000 as the minimum size of your new account, keep your lot size to 0.01. Ill repeat the exercise to show how to arrive at the same risk per trade using a larger account size.
For the sake of simplicity (for me) Ill stick with GBP/USD as my pair to trade, the dollar value is always equal to 1 (i.e. 100 pips profit = $1), whereas the crosses can vary, typically .8 (i.e. 100 pips profit = $0.80 cents).
One simple thing that escaped me in the early days was this; if I traded GBP/USD I was essentially either selling dollars (long GBP) or buying dollars (short GBP). Stupid, I know, but its often simple things that make the difference. My trading account is dollar denominated so it was important for me to understand this, and I didnt. The same rule applies in relation to any pair youre trading; its just the actual currencies that are different. I can remember saying Ooh look the Yens going down when in fact it was the dollar diving south. How dumb can you be?
All you need to remember when looking at a chart is that, with any currency pair in a rising chart, the first named currency is strengthening in value against the second named currency. The reverse is true in a falling market, i.e. the first named currency is weakening in value against the second named currency.
Exercise 1 ($300 Account):
Right, Ill break this down as far as I can. Our $300 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
The next thing we have to establish is our risk profile. Even when youre trading in pennies, you need to think Money Management, and now is a good time to get into good habits. All the serious traders Ive ever listened to say 2% of your account is a good figure to base your maximum risk on. Its even better to go with 1%, so well start there.
1% of $300 is $3 (300 cents), so thats as much as we want to risk on each trade. We know we can expect losing trades, so now we have to work out where we think we should place our stops in order to take us out of this trade if things go wrong. Maybe the system youve been working with has a fixed stop loss. Lets assume its 50 pips above/below entry. Therefore, we now have 300 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 6 (0.06) nano-lots.
Were risking $3, but youre effectively buying 600 dollars (if youre short GBP) or selling 600 dollars (if youre long GBP). Your account, when you start, is $300 so your True Leverage is only 2:1
$600 position size traded on a $300 account equals True Leverage of 2:1
Exercise 2 ($3000 Account):
Our $3000 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
Well stay with 1% as our risk profile.
1% of $3000 is $30 (3000 cents), and our stop is 50 pips. Therefore, now we have 3000 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 60 (0.60) nano-lots.
Were risking $30, but youre effectively buying $6000 (if youre short GBP) or selling $6000 (if youre long GBP). Your account, when you start, is $3000 so your True Leverage is only 2:1
$6000 position size traded on a $3000 account equals True Leverage of 2:1
_
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Account size and leverage (Part 2)
Account size and leverage:
One question that occurred to me the other day is why would brokers give us unlimited time to demo trade their platforms, and why they set the minimums at say $3000? They must incur costs supplying data feeds, updates etc. Maybe Im being cynical but heres my take on it.
Most newcomers dont understand the difference between Account Leverage and True Leverage, and the brokers rely on the greed motive to sucker people into false expectations. If someone has opened a demo account, and has been trading risky amounts per trade, theres a 50/50 chance they just got lucky during a big trending period. Their instinct will be that there is easy money to be made here, and theyll fund a live account with at least the same amount as their demo. After all, $3000 isnt a great deal of money for some people. Moreover, who has read the Risk Warnings attached to all the brokers websites and actually decided not to try trading because of them?
If many of the posts on the forum are typical, a fair proportion of those new traders will be dead in the water within months. Many will tuck their tails between their legs and never be seen again. Some will stick another lump of money into their accounts and try again, and all this time the brokers are gaining their spread income, to say nothing of all the other little tricks that they are (allegedly) accused of.
Im not sure Ive ever seen a broker advise a new trader to only trade single lots whilst learning how to trade. They may mention controlling risk, but its not until you find somewhere like Forex forums that this will be spelt out in ways that you can understand.
So, back to my original thought. Ive no idea how many new traders enter the FX market every week, but if the stats are anywhere near accurate, it means that 90%, or more, of these new traders donate substantial amounts of money to brokers bottom lines.
This is why playing them at their own game, taking advantage of the huge leverage they offer, can, if you learn patience, bring you out on the right side.
Most newcomers dont understand the difference between Account Leverage and True Leverage, and the brokers rely on the greed motive to sucker people into false expectations. If someone has opened a demo account, and has been trading risky amounts per trade, theres a 50/50 chance they just got lucky during a big trending period. Their instinct will be that there is easy money to be made here, and theyll fund a live account with at least the same amount as their demo. After all, $3000 isnt a great deal of money for some people. Moreover, who has read the Risk Warnings attached to all the brokers websites and actually decided not to try trading because of them?
If many of the posts on the forum are typical, a fair proportion of those new traders will be dead in the water within months. Many will tuck their tails between their legs and never be seen again. Some will stick another lump of money into their accounts and try again, and all this time the brokers are gaining their spread income, to say nothing of all the other little tricks that they are (allegedly) accused of.
Im not sure Ive ever seen a broker advise a new trader to only trade single lots whilst learning how to trade. They may mention controlling risk, but its not until you find somewhere like Forex forums that this will be spelt out in ways that you can understand.
So, back to my original thought. Ive no idea how many new traders enter the FX market every week, but if the stats are anywhere near accurate, it means that 90%, or more, of these new traders donate substantial amounts of money to brokers bottom lines.
This is why playing them at their own game, taking advantage of the huge leverage they offer, can, if you learn patience, bring you out on the right side.
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Account size and leverage (Part 3):
Account size and leverage:
Another reason for sticking with nano lots (0.01) is the flexibility it gives you in controlling your risk, and compounding your account over time. Ill cover this in more depth in the Money Management section, but I need to justify my argument here.
Lets assume youve decided to put up $500 to fund your trading account. Youve been demo trading for a few months, and been reasonably happy with your progress. Youve listened to all the advice about trading with scared money, and youre happy to lose this amount, if things dont work out. It wont affect you, or your family, and youre treating it as training funds. If it disappears, youll stick some more in while youre learning. You dont want to lose it if you can avoid it, but you KNOW that demo trading isnt real trading, so you are keen to see if you can handle the emotional issues that will come trading with proper money.
Remember, your account is $500 and youve decided on 1% as your risk. For all intents and purposes, a mini account is out of the reckoning. With only $500 to play with you may need to risk between 5% - 10% of your account on any single trade simply to place 1 lot, depending on the size of your stop.
Therefore, this leaves us with Micro and Nano Accounts. The next set of examples will use a 65-pip stop loss, and, I hope, will show the extra flexibility of starting with nano-lots. Please note that Im still dealing with GBPUSD as my pair.
(A) Nano Account (0.01 = $100 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 65 pips
Pip Value: 0.01 (1 cent)
Pip Value risked: 65 * 0.01 = 65 cents
Position Size: $5/0.65 = 7.69 nano lots (0.07 rounded down)
(B) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 50 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 50 * 0.10 = $5
Position Size: $5/$5 = 1 micro lots
(C) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1.5%
Amount Risked: $7.5 (per trade)
Stop Size: 65 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 65 * 0.10 = $6.5
Position Size: $7.5/$6.5 = 1.15 micro lots (1 rounded down)
As you can see it will be necessary to either reduce your Stop (example B), or increase your risk (example C), in order to place your trade.
These smaller lot sizes give you enormous advantages in trade size flexibility. For example, if I had $25k in my nano account (I can hope, cant I?), and I still worked to 1% risk (assuming a 65-pip stop loss), I could trade 384 nano contracts. In a mini account, with the same $25k, I could only trade the equivalent of 300 (3 mini lots @ 1.00). Its only 84 contracts, but think how much this would be worth over a series of trades, assuming theyre all winners, of course?
As for granularity, the smaller the better, but the importance of this decreases with an increase in account balance. A micro lot is preferred over a mini lot at all times, but the advantage of increased profits resulting from the finer granularity diminishes as ones account approaches about $35,000. The larger ones account, the less important the granularity provided by micro lots becomes. For really huge accounts, even the granularity of a mini lot becomes unimportant.
As your trades run their normal course, and your account balance fluctuates, this flexibility ensures that you can easily keep your trade size equal to your risk profile without having to round your positions up or down to suit the larger minimum lot size offered with a mini account.
Lets assume youve decided to put up $500 to fund your trading account. Youve been demo trading for a few months, and been reasonably happy with your progress. Youve listened to all the advice about trading with scared money, and youre happy to lose this amount, if things dont work out. It wont affect you, or your family, and youre treating it as training funds. If it disappears, youll stick some more in while youre learning. You dont want to lose it if you can avoid it, but you KNOW that demo trading isnt real trading, so you are keen to see if you can handle the emotional issues that will come trading with proper money.
Remember, your account is $500 and youve decided on 1% as your risk. For all intents and purposes, a mini account is out of the reckoning. With only $500 to play with you may need to risk between 5% - 10% of your account on any single trade simply to place 1 lot, depending on the size of your stop.
Therefore, this leaves us with Micro and Nano Accounts. The next set of examples will use a 65-pip stop loss, and, I hope, will show the extra flexibility of starting with nano-lots. Please note that Im still dealing with GBPUSD as my pair.
(A) Nano Account (0.01 = $100 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 65 pips
Pip Value: 0.01 (1 cent)
Pip Value risked: 65 * 0.01 = 65 cents
Position Size: $5/0.65 = 7.69 nano lots (0.07 rounded down)
(B) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 50 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 50 * 0.10 = $5
Position Size: $5/$5 = 1 micro lots
(C) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1.5%
Amount Risked: $7.5 (per trade)
Stop Size: 65 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 65 * 0.10 = $6.5
Position Size: $7.5/$6.5 = 1.15 micro lots (1 rounded down)
As you can see it will be necessary to either reduce your Stop (example B), or increase your risk (example C), in order to place your trade.
These smaller lot sizes give you enormous advantages in trade size flexibility. For example, if I had $25k in my nano account (I can hope, cant I?), and I still worked to 1% risk (assuming a 65-pip stop loss), I could trade 384 nano contracts. In a mini account, with the same $25k, I could only trade the equivalent of 300 (3 mini lots @ 1.00). Its only 84 contracts, but think how much this would be worth over a series of trades, assuming theyre all winners, of course?
As for granularity, the smaller the better, but the importance of this decreases with an increase in account balance. A micro lot is preferred over a mini lot at all times, but the advantage of increased profits resulting from the finer granularity diminishes as ones account approaches about $35,000. The larger ones account, the less important the granularity provided by micro lots becomes. For really huge accounts, even the granularity of a mini lot becomes unimportant.
As your trades run their normal course, and your account balance fluctuates, this flexibility ensures that you can easily keep your trade size equal to your risk profile without having to round your positions up or down to suit the larger minimum lot size offered with a mini account.
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Account size and leverage (Part 4):
Account size and leverage
There is one more important element in trading a nano account, again relating to Money Management, and that is the flexibility of stop loss positioning. One reason that many of us run up large series of losing trades, in the early days, is the fear of loss itself.
Because we dont know any better, we set our stops for illogical reasons, one of which is the repeated warning: Cut your losing trades short, let your winning trades run!
How can we judge, as newbies, which is which? Weve all had the experience of trades going bad, getting stopped out, and then heading off into vast (potentially) profitable runs with us on the sidelines cursing and swearing. In many cases, even without any great technical knowledge, an extra 10 20 pips breathing space on our stops would have kept us in to reap our reward.
With a nano account, you have this extra flexibility; you can try new methods of setting stops (trendlines, Support & Resistance zones etc) without increasing your risk profile. All you need to do is re-calculate your position size to suit the larger stop.
Because we dont know any better, we set our stops for illogical reasons, one of which is the repeated warning: Cut your losing trades short, let your winning trades run!
How can we judge, as newbies, which is which? Weve all had the experience of trades going bad, getting stopped out, and then heading off into vast (potentially) profitable runs with us on the sidelines cursing and swearing. In many cases, even without any great technical knowledge, an extra 10 20 pips breathing space on our stops would have kept us in to reap our reward.
With a nano account, you have this extra flexibility; you can try new methods of setting stops (trendlines, Support & Resistance zones etc) without increasing your risk profile. All you need to do is re-calculate your position size to suit the larger stop.
Time Frames (Overview)
Time Frames (Overview)
Time Frames (Overview)
I am expecting a load of grief as I start this section, but I re-iterate this is my take on how newcomers should approach trading.
Theres nothing inherently wrong in trading short time frames Im talking anything less than 1 hour in my book but it requires skills that many newbies lack, especially in the areas of Money Management and the Psychology of trading. If you dont know how to control your risk, coupled with the tendency to panic as soon as trade goes 20 or 30-pips into the red, what hope have you got?
It took me quite a while to edge my way up to the Daily charts, despite all the good advice, I still have a tendency to drop down to see whats going on, but the difference is I dont try and PLAY these short-term charts. I simply use them as entry points and possible stop positions for running trades.
If you can make the move, and working in a nano account helps, there are several things that soon become apparent. The concept of trading with the trend suddenly becomes easier to understand. Watching any of the Daily charts over the last few months, it should be apparent that, in virtually every instance, trades against the main trend would have carried greater risk than with it.
There is a valid argument that every time frame has its own trend, and, yes, you can make money trading any time frame if:
1. You know what youre doing
2. You have solid Money Management rules, and
3. Your mental approach to trading is completely neutral
However, when I was new to trading I had none of these things and paid the price. Focusing on short-term charts stops you seeing the big picture, and keeps you in the vicious circle of trying to make small profitable trades (10 pips here 10 pips there). 10 pips are fine if youre trading big money, it might represent several thousand dollars in one trade. Making 10 pips on a small account causes us to take risks with leverage, in a vain attempt to grow our accounts faster, which is a bad thing.
Short-term charts also cause you to worry too much about every item of news that is listed on the Forums calendar, and this fear can take you out of good trades, or get you into gambling mode as you try and trade the news. Trading the news is a skill that is beyond me, relying as it does on extensive research in order to estimate the possible outcomes of each announcement. Anyway, why bother to try and gain a few pips in a few minutes when you can try for 100s on a Daily trend?
As you move up the time-scale, fewer of these news releases have an impact on your trades. The fundamental factors driving currency movements dont alter, but these factors need to be borne in mind at certain times (Interest Rates, GDP, NFP etc), in case the figures cause a more profound alteration in a particular pair's relationship. However, I only use these announcements as a warning to consider where, and when, to set my orders, or maybe tighten stops on open trades.
Theres nothing inherently wrong in trading short time frames Im talking anything less than 1 hour in my book but it requires skills that many newbies lack, especially in the areas of Money Management and the Psychology of trading. If you dont know how to control your risk, coupled with the tendency to panic as soon as trade goes 20 or 30-pips into the red, what hope have you got?
It took me quite a while to edge my way up to the Daily charts, despite all the good advice, I still have a tendency to drop down to see whats going on, but the difference is I dont try and PLAY these short-term charts. I simply use them as entry points and possible stop positions for running trades.
If you can make the move, and working in a nano account helps, there are several things that soon become apparent. The concept of trading with the trend suddenly becomes easier to understand. Watching any of the Daily charts over the last few months, it should be apparent that, in virtually every instance, trades against the main trend would have carried greater risk than with it.
There is a valid argument that every time frame has its own trend, and, yes, you can make money trading any time frame if:
1. You know what youre doing
2. You have solid Money Management rules, and
3. Your mental approach to trading is completely neutral
However, when I was new to trading I had none of these things and paid the price. Focusing on short-term charts stops you seeing the big picture, and keeps you in the vicious circle of trying to make small profitable trades (10 pips here 10 pips there). 10 pips are fine if youre trading big money, it might represent several thousand dollars in one trade. Making 10 pips on a small account causes us to take risks with leverage, in a vain attempt to grow our accounts faster, which is a bad thing.
Short-term charts also cause you to worry too much about every item of news that is listed on the Forums calendar, and this fear can take you out of good trades, or get you into gambling mode as you try and trade the news. Trading the news is a skill that is beyond me, relying as it does on extensive research in order to estimate the possible outcomes of each announcement. Anyway, why bother to try and gain a few pips in a few minutes when you can try for 100s on a Daily trend?
As you move up the time-scale, fewer of these news releases have an impact on your trades. The fundamental factors driving currency movements dont alter, but these factors need to be borne in mind at certain times (Interest Rates, GDP, NFP etc), in case the figures cause a more profound alteration in a particular pair's relationship. However, I only use these announcements as a warning to consider where, and when, to set my orders, or maybe tighten stops on open trades.
Time Frames (Not sure how to pick a trend?):-
Time Frames (Not sure how to pick a trend?)
Then try this example. It’s the AUD/USD Daily for the last year. There are the usual ups and downs, but see whether you’d have been better off shorting AUD, or buying AUD. I know where I feel the biggest gains were to be made.
All I’ve added is a 200 period Simple Moving Average, more as a visual prop for this example, as it shows the clear overall long-term trend.
Did I need it? No, not really, but even I still need a little something on my screen.
Apart from which it gives me a quick visual reference when estimating the possible extent of a pullback. If the SMA, or a visual check, shows no discernible trend, then move on to another pair. Most brokers offer around a dozen or more, so there will nearly always be one currency pair you can trade.
All I’ve added is a 200 period Simple Moving Average, more as a visual prop for this example, as it shows the clear overall long-term trend.
Did I need it? No, not really, but even I still need a little something on my screen.
Apart from which it gives me a quick visual reference when estimating the possible extent of a pullback. If the SMA, or a visual check, shows no discernible trend, then move on to another pair. Most brokers offer around a dozen or more, so there will nearly always be one currency pair you can trade.
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