[Simple Trading System] Trendline Break (The Only System You Need)

[desifxtrader]

Time Frames (1 hour chart):

Time Frames (1 hour chart)​

Much more noise; more spread costs and more risk for each trade.

Wouldnt it have been easier, and less worrisome, to wait for the trend to re-establish itself, and then place a smaller position on the 4-hour, or Daily chart, sit back, and let market forces take control?

Dont forget that you will normally have to increase your stops as you move up the charts, so do the math, and reduce your position size.

It may seem contrary to reduce your potential profit by reducing position size, but trust me, the amount of pips gained on winning trades, plus the lower amount of spread costs on fewer actual trades, makes it all work out in the end.

Needless to say, even this simple approach to trading has its drawbacks. I read posts that advise traders that currency pairs can experience longer periods of range-bound movement than trending periods.

Another aspect of trading that has to be developed is the ability to sit on the sidelines now and again.

Time Frames (Some further thoughts)

One of the hardest parts of trading the daily, or weekly, charts is having the patience to wait for a trade opportunity to develop. When many of us were introduced to FX it was via the shorter time-frames (5/15 minute charts).

Because of the constant activity one sees in these charts, it is easy to fall into the trap of constantly chasing trades. You see price move up, you try a long trade; price goes back a few pips so you panic, close it out and try a short. You find yourself unable to walk away from the computer, just in case another opportunity appears. Alternatively, you have a trade running and youre hoping it keeps going your way, or youre wondering if things are going to get worse. It all becomes hypnotic.

Trading long-term charts removes some of these immediate worries. Not all of them I must admit, but at least you get time to go and make a cup of coffee and a sandwich now and again! Therefore, you learn the art of patience. By scrolling out you get to see major areas of Support and Resistance much more easily. Many of the other standard tools (Fibonacci, trend lines etc) seem, to me, easier to apply and read.

The need to learn the correct Money Management required, coping with the larger stop-loss positions you will require on these charts, would also cause you to step back and THINK about what you expect from any trade.

If you find it hard, at first, to move to a daily chart for all your trading, at least learn to check them before placing a trade. Try moving up to 1-hour charts for a start; assess the current trend, as shown on the daily, and look for areas where a trade has a chance of responding to the dominant trend.

Let me show you briefly what I mean. Ill develop these ideas in more depth later on, but for now Ill keep it simple. This isnt meant to be offensive, just a quick way of getting you to look at these charts in a simple way. Trading, in any time-frame, is hard; by keeping things as simple as you can you allow yourself the opportunity to avoid panic trading.

 

[desifxtrader]

Time Frames (1-hour chart):-

Heres a 1-hour chart; lets stick in some obvious Support/Resistance areas.

Once youve learned to recognize the importance of S/R areas, you can apply these to any systems that you are demo trading. Even without looking at the daily chart, its clear that the market is undecided on the overall direction for this pair.

If you look at this image carefully, youll notice that the up moves are less powerful than the down moves. Generally when price has tried to rise, it has met several intermediate resistance points. The down moves are much more positive.

The clue here is in the Daily chart, shown on the next page.

 

[desifxtrader]

Time Frames (Daily Chart)

Time Frames (Daily Chart)​

The long-term trend has been an upward one. However, for any number of reasons, there has been a change of sentiment, and price has taken a sharp reverse against this trend. It’s quite possible that any long trade you’d been in would have been closed at a loss on the hourly chart. A check on the daily might have kept you out of that trade, maybe not. The problem now is what do you do. You’ve taken some idiot’s advice to only trade the trend. Which trend? The long-term? Which means you should be looking for NZD longs? On the other hand, should I short the NZD as it’s been going down for a few days? How on earth can I make money on this sort of chart?

What you do is WAIT. Never forget, account preservation is your prime concern. If you can’t decide what to do, stay out and think about your next strategy. Take time to find out why there has been such a sudden, and violent, change. There are several good sources of fundamental information on many forums (such as Forex Factory), and these may help you understand what might be happening, not just at this moment, but also over the next few days.

Nevertheless, there are around 100+ pips available in each of the movements between the Support and Resistance areas, as shown on the 1-hour chart. If you see the value of S/R then you may consider the short trades to have a better risk profile. Wait till price hits that Resistance area again, judge if it’s holding and trade short. You could place your stop-loss above the Resistance area, and you would have a good Risk/Reward Ratio. Just remember, nothing is guaranteed in Forex, but the more you make yourself aware of all the possibilities the better the chance of staying in the game.

I hope that you can now see that taking a long-term view can help you even if you prefer to trade on a short-term chart.

 

[desifxtrader]

Reminiscences of a Complacent FX Trader:

Reminiscences of a Complacent FX Trader​

With apologies to Jesse Livermore​

Complacency is word we do not often come across in FX trading. Fear, greed, hope, revenge, and panic are the usual ones. These emotions are commonly attributed to newcomers (newbies, or noobs, as they are called in the jargon).

So, how do we spot a Complacent Trader (CT). It’s simple; just look for these signs:

1. He will have been trading for a while, and, until recently, has had mixed success
2. At last, normally under very favorable conditions, he thinks he has found his own ‘Holy Grail’
3. Lulled into a false sense of security he becomes careless about his Money Management, even to the point of dispensing with setting Stop Losses on his trades

4. He compounds this basic, and most stupid, of newbie errors by taking any remotely positive signal his system, or method, offers, thereby increasing his exposure through over-trading

5. There may even be an element of greed appearing in his trading. His recent 'startling' success leads him to increase his trade size, irrespective of the potential quality of the trade. He's had a signal, that's good enough! No time to analyse it, just put the trade on, we don't want to miss all those pips do we?
Why should someone like this be classed as a CT?

Again it’s simple. He doesn’t need to listen to, or take, any of the advice he's read (and maybe offered) over the last few months. His Holy Grail will see him through. His extra months of trading have given him the edge.

It’s possible that he has survived at least one serious draw down, because the trend came to his rescue. He’s so sure his method has that vital edge; it will always get him out of trouble, and, anyway, he’ll pick up some rollover pips while waiting for the trend to re-assert itself, won’t he?

He rarely uses hard stops; the trend is always working for him isn’t it?

Of course the CT hasn’t realized yet that 18 months trading doesn’t give him the right to be successful. Therefore, the CT needs an event to shake him out of his complacency. Such an event took place over the last week or so. A seemingly minor problem (to him) in a small section of the American mortgage market spread out, like a virulent virus, to engulf every sector of the financial industry, including FX.

He sat, and watched (rabbits and headlights spring to mind), as all his smart, clever, carefully planned, trades turned and waved goodbye as they disappeared in completely the wrong direction.

No worries our CT thought. ‘Here’s the good old 150 EMA on the Daily chart. I’ll stick in a Support Zone, and trade the bounce. OK there we go, didn’t risk much but made some nice pips on that bounce. Panic over. Oh bugger, what’s going on? Still, I’ll hold till it hits the 365 EMA on the Daily chart, and play the bounce off that, as well. Seems like a strong Support area, too. WTF! What IS going on? The trend has never let me down before; it’s bound to turn soon, isn’t it?'

Well, the short (pun) side of a long (another pun) story is, it didn’t. Our CT’s long-held beliefs (all 6 months of them) meant as much, in the mayhem that followed, as Icarus’s faith in his waxen wings as he approached the Sun.

So, are there any lessons our CT should have learned from the recent events? I would hope that the main lessons he’ll take from this disaster are these:

1. Always trade with a hard stop loss. Even a ‘disaster stop’ would have saved most of his account

2. Don’t over-trade. Multiple positions on multiple pairs was a good thing when the trend was with him, but it’s a recipe for disaster for the ill-disciplined and over-confident trader

3. The Trend is your friend as long as it’s going your way

4. What has worked before may not work again. So be prepared for the worst

5. If he hasn’t the courage to change his method in order to trade against the long-term trend, as he sees it, then stay out of the market, re-assess things when the dust has settled, and watch what the market is telling him NOW
No doubt there are more lessons our CT can take from this period. I’m sure there are many here who could offer some further insights.

Maybe he should start re-reading this thread again, and listen to his own advice!

 

[desifxtrader]

Psychology (Overview)

Psychology​

Its appropriate that the previous article should precede this chapter, as the psychology of trading is, for most of us, the hardest, and least studied, factor in our early forays in trading.

We want to know that this FX thing is easy. All the web sites weve seen promise us its easy. Were told that all we have to do is wait for a signal and thousands of dollars will fall into our laps. Unless weve been very lucky (and I rarely see signs that many of us have) within a short space of time reality has set in.

Its not unusual to read that the major emotions, that also govern many of our lives, are writ large on the psyche of the average retail trader. Its common to see reports of the same emotions affecting serious commercial traders, as well.

Im no psychologist, so all Ill try to outline here are the emotions Ive been through, during my early development as a trader. There are many I still havent fully come to terms with; most have yet to fully tested as my account goes from nano-lots to more serious amounts of money. I would hope (bad emotion?) that as my trading career evolves these emotions would gradually be mastered. If not, Ive realized that there is no future for me in FX trading. Thats how seriously I take this subject. No trading method in the world, or Money Management rule, will save you from disaster if your head is not in the right place.

To get some expert advice, try reading some of the posts by well-known trading psychologists books.

 

[desifxtrader]

Psychology (Greed)

Psychology (Greed) ​

Most of us start trading for the simple reason that we want, or need, more money than we have now. Those of us without a profession, or trade, that provides income stability now and in the future, see FX as a means to supplement our current wage, or provide a steady flow of funds to prop up an ailing pension in our sunset years.

Therefore greed, to a greater or lesser extent, is the key driving force in our approach to trading. Some of us are greedy, simply because that’s the way we are. Others are looking for small, steady, and regular increases in their bank accounts; they have no great wish to become millionaires, but their greed (whilst not voracious) will still temper their approach to trading.

Greed makes us break our Money Management rules. If you’ve just had a couple of home runs, you’ll maybe just up the risk to 5% for this next trade. You’ll justify this by saying to yourself – ‘the trend still looks strong, nothing seems to have changed, I might as well let this move add another decent gain into my account and then I’ll go back to my 1% rule’. Trust me, this is the moment when the market teaches you the BIG lesson. It never seems to happen when you’re going along, making steady gains. It ALWAYS happens at exactly that moment you let greed cloud your judgment.

Greed makes you change your Take Profit (TP) target, or remove it altogether, in the hope of making more pips. It also makes you stay in a trade when you’re within a few pips of the original TP just to squeeze a little more out of that trade.

Whatever your dreams, whether it’s a top-of-the-range Ferrari or a new mid-range family car, the only thing that FX must deliver, for you, is money. For trading to deliver money you HAVE to win more than you lose. Therefore, along with greed, the other mind-killer is fear.

 

[desifxtrader]

Psychology (Fear)

Psychology (Fear)​

FEAR is the emotion that makes you jump into a trade, despite the fact that your system hasnt quite delivered a signal yet. Youre afraid of missing out on all those extra pips that an early entry will give you. You stay in bad trades for fear that if you get out now, the trade will turn out right in the end. Fear of loss makes you move your stops further away while a trade is going bad. Fear of giving pips back to the market makes you get out of winning trades too early. Fear of missing out causes you to take every signal on every pair just in case this is the big one. Fear then stops you actually taking all that the market is offering because you close too early, again.

Once you start to lose the fear of loss, you will start to lose the fear of not maximising your gains. Youll learn to accept that you cannot be on the right side of every trade. The losses, while still a disappointment, become a part of your trading day. If your method has positive expectancy (i.e. you expect, from an historical perspective, to have more winning trades than losers) youll know that the next trade has an equal chance of being a winner. Mastering fear allows that trade to reach its full potential, either at your designated TP, or where the market indicates that the move has run its course. You can close the trade and ignore the pips that may come afterwards.

Fear can only be overcome if you have faith in your method or system. If trades are being entered in a random manner there will be no pattern to guide you as to the likely success, or failure, of any particular trade. Youll be on an endless wave of emotion joy at a winner, despair at a loser. Eventually, youll find it increasing hard to press the trade button; fear of yet another loser will over-ride all other considerations. Even the very best signals will cause you to stop and fear the worst. When the trade starts to turn into a likely winner, fear of missing out can cause you to jump on the move, just to try and grab some pips. By which time, of course, it may be too late. And so the cycle continues.

Accept your losers. Its the first step to overcoming fear.​

_

 

[desifxtrader]

Psychology (Ego)

ego .​

dealing with your ego is the last factor i’ll cover in the psychology section, simply because i’m not a qualified practitioner, therefore all i can hope to do is point out some of the pitfalls awaiting you.

All the trading articles i’ve ever read contain the quote – ‘leave your ego at the trading room door’ – or something very similar. The reason for this is simple. If we cannot accept the fact that we are capable of making mistakes, it will be practically impossible to practice the other regularly quoted piece of advice – ‘cut losers short, let winners run’.

There’s a subtle but important difference between

1. A bad trade placed outside your trading rules that’s turning into a loser
2. A good trade placed in accordance with your trading rules that’s turning into a loser.

In the case of trade (1) we’ve made a value judgment about where we think the market is going. Deep down we think we are going to steal a march on everyone else. Our decision isn’t based on any core logic supplied by our system, it’s based on what we know is going to happen. This one feels right. We can jump the gun here and let the market catch us up later. The problem here, of course, is we now have too high a level of emotional attachment to this trade. We called it, so it’s our sense of worth that’s on the line, not the system’s.

Some of these trades will work out, and your ego is given an unwarranted boost. Worst-case scenario is that you’ll continue down this route until you hit the inevitable roadblock, and the market proves you wrong. This is the moment when your ego won’t let you admit you’re wrong. This is the time when you start to move your stops further away, in order to give the trade time to prove you were right.

No-one truly likes to admit that they’ve made a mistake, and we all try to justify our errors by hiding the truth behind all manner of excuses. In the world of trading you cannot hide your mistakes; your account tells the truth about your decisions.

With trade (2) at least you can blame the system (assuming you’ve trading strictly to the rules) and this is another point at which ego can get in the way. In the learning stages of trading the tendency is to think – ‘i knew that i should have gone long there, this system doesn’t work’. This all comes down to the hardest part of trading, accepting that you cannot win every trade. There is no guaranteed method that will ensure 100% successful trades. If there is, rest assured you’ll never hear about it, or, if you do, it will be so expensive as to be virtually unattainable for most people.

So, accept that you, and your system, will be wrong as often as you are right. Look to reduce that percentage by careful analysis of your trading style. Find out what your weaknesses are and eliminate them before the market eliminates your account.

Read the articles and threads i’ve mentioned in my earlier post in this section and as a final word of advice, i would suggest you invest in a book written by marl douglas. Its title is ‘trading in the zone’.

It will be the first step in helping you understand what you need to know in order to master the psychological aspects of trading.

 

[desifxtrader]

Money Management

Money Management (MM)
​

In this section I plan to cover aspects of trading above and beyond the basics of Money Management that have been touched on previously.

The mechanics of MM are very simple at the beginning. Follow the rules as I showed you earlier. If youre trading a non-USD pair remember the pip value is slightly less than normal so you could, if you wish, increase your position size to allow you to utilize the maximum number of lots permissible within your risk percentage. In the early days, particularly with penny trades, its neither here nor there. Later on you will want to bring this into the equation, and there are several position calculators around the forum that will work out exactly what size position you should be trading for any account size, and any specific pair.

Always remember to work out your stop loss first. You have to know what you are prepared to lose before you place the trade.

What Im going to talk about in this section is a combination of things that include some of the Psychological aspects previously discussed, and also how the market, as I understand it, works. It has taken me a long time to adjust my way of thinking even to start to comprehend what Im up against here. Unless you get to understand some of the games going on you will be fighting a constant battle with the big boys.

Im not referring to all the so-called broker tricks that people complain about; some complaints may have validity, many do not. Its just the way the market works, so accept that this is the league youve chosen to play in, and adjust your tactics in order to level the playing field as best you can.

 

[desifxtrader]

Understanding the Retail FX Market

Understanding the Retail FX Market​

First, lets get it clear that any trade you make at this stage will have NO effect on the market in any way, shape or form. There will be many days when you get the feeling that as soon as your trade is triggered everyone in the FX world has decided to play against you. Youll be saying why do they keep doing this to me? It starts to get personal, and this is a fatal attitude. Revenge rears its ugly head. Dont take anything personally, apart from accepting that you made the decision to trade at that point. Only you can take the credit, or otherwise, for this trade. The market doesnt even know you exist. Nevertheless, there are plenty of professionals who do.

They dont know you by name, of course. However, theyve got a pretty good idea that you, and 100s, maybe 1000s, of small-time traders just like you are about to pull the trigger to go long. Theyll have a pretty good idea where your stops are set. They need to get long as well so theyll go looking for your Sell Order (your stop loss) and Buy it from you. Bingo, theres another bad trade, you think. Shortly after away goes price on its merry journey to the next point of resistance 150 pips away, and youre left sitting on the sidelines. Hard not to get upset when this seems to happen more often than not.

So lets try and gain a basic idea of how all this works, and how it differs from your normal retail experience. Understanding even this simplistic view of whats at stake should help you develop a feel for the markets mechanics.

OK, in the normal retail situation, you walk into a shop, see something you like, and pay the man. After youve walked out of the shop Mr Jones, the shopkeeper, couldnt care less what you do with your purchase. Hes made his profit, and hes got rid of a bit more inventory, so Mr Jones, and his accountant, and his bank manager will all be happy.

If you sell it at a later date, the only person whos lost money is you, assuming its an everyday item rather than a work of art.