Wide stop trend trading part two

Approach

Our first job is to decide on our trading approach:

  • What to trade
  • Which strategy to use
  • A timeline that works for us

For the higher timeframes trades, several major currency pairings, gold and US 500. We have chosen these because of their margin, spread, price movement and average bar size.

Our strategy is a GLEM 2 with ‘fat boy’ and ‘pull back’ entries. An uncluttered screen with context, ‘always in’ and price action as our guide and a 20 EMA as our only indicator. Our timeline is intraday.

Aim

We aim to enter trades that can achieve breakeven or better within two bars.

Everything else

In his book ‘Creative’, Ed Catmull describes how Pixar illustrators drew ‘everything else’. For example, if they were to illustrate a chair they would scetch everything but the chair; they would let the chair materialise as its bulk blocked the continuity of what was behind. Moreover, if the illustrators were to draw a familiar shape, then they would draw the scene upside down or from an unusual angle.

The human mind fills in what it expects, and not necessarily what is the subject. The techniques above were a way of throwing out the familiar so that the brain would not so easily automatically fill in the blanks.

Our mind will project a chart as it expects to see it and not on what is occurring. Our automatic predictive dominates over our ‘at the moment’ reactive view.

To overcome this, we could consider studying the chart instead of left to right but from top to bottom. Or some other unusual screen positioning angle. However, measuring stop positions, targets, entry positions and exit criteria is complicated enough, and such an approach to fool our automatic predictive may also provide many trade management mistakes.

Maybe better to be aware and to always consider both sides of a trade to try to determine probability.

We consider that we are dealing with human psychology when we are trading technically. That is true to the extent that computers are programmed by humans (as AI is more widely introduced this might not be the case). However, we are predominantly up against automated workstations. Such devices do not worry that they have missed an earlier entry (for example) and therefore become emotionally reluctant to enter a follow-on trade. To win we have to remove emotion and mainly ego and trade technically as an algorithm highly tuned.

Edge

From New Market Wizards, ‘if we don’t know what our edge is, we don’t have one’. Our advantage is gained only after lots and lots and lots of practice reading charts and measuring with our GLEM 2. Once we have sorted out our trader’s market vehicle, strategy and timeline we have only one mantra: backtest, backtest, backtest. Our edge is an almost assured breakeven opportunity when a bar after our entry bar necessitates an exit.

For every trade entered, we expect a breakeven result. A small, medium or full loss represents the particular incremental lesson on how to improve our entry read. A win is a bonus, nothing more.

Having a trading process that gives results time after time provides confidence, and that is an edge too. To that end, we avoid backtesting when we are or become tired or distracted as poor backtest results that are just down to us not functioning at our best affect confidence, and that won’t do.

Split entry

When measuring an entry bar, we might have a couple of excellent stop positions available. A more distant stop position reduces risk and reduces the probability. Conversely, a closer stop position increases risk and improves likelihood.

At the close of bar 2 our entry bar below we decide to place a short trade. Stop-1 and stop-2 are both acceptable. As each stop has the same target position to achieve a ‘traders equation’ our entry positions are different; in this instance, the entry for stop-2 is at a higher price than the entry position for stop-1.

If our overall trade amount per pip for the trade is £6 per pip, we place £3 per pip for both the stop-1 and stop-2 trades. In this example, only the trade entry associated with stop-1 activated.

Two possible entries short

To continue the trade example from above, the chart below shows the trades progression to target. Only entry-1 activated. However, our overall risk remained consistent, and the split entry provided a solution to gaining the best from the trade while maintaining a traders equation.

The lower entry was successful

Split entry continued

The chart below shows a live trade from a split entry. Our overall risk was £6 per pip. As we have split our trade entry, we have placed £3 per each entry. The entry bar was bar 1. The target for both entries is the same at 19.9 pips. (Any PB before entry improves the number of winning pips but reduces the probability of entering the trade). 

When setting up a split entry, it is easier to place the stop and target positions of the first trade before placing the limit order of the second trade.

Split entry example live

First trade of the day

In the earlier hours and up to 8 am price movement in our watchlist currency pairings are usually small, particularly on a Monday.

However, opportunities still present themselves. Take the chart below; bar 3 is our early-entry bar. Bar 3 has not formed a new high of the day, wicks to the left are of a similar height. However, bar 3 is a trend bar as it has closed above its midpoint and is gapped above the bar immediately to its left.

The problem being that bar 3 is only 9.5 pips. Therefore we need a PB to provide fair trade. We get this from our stop position. Our stop can be below bar 1, or below the wick of bar 2, or below the bear bar 3 bars to the left of bar 3. Each is viable.  However, the first and second choice is more robust.

The stop position dictates our PB entry.

Bar 4 below closes as a bull. However, during the hour bar-4 had pulled back to a new low of the day. Only the lower stop positions would have worked. The best stop, and therefore a pullback entry position, was a stop below bar 1.

A near stop would not have worked.

Multiple markets, but an accumulated risk

If we trade numerous markets where one of the currency pairings is the same, as in the example below, we have to consider overall risk. In this instance, an adverse move against us in one market is highly probable to occur in both pairings.

From our ‘pre-set’ amount per pip method, we consider trading at not more than half value on any one trade. For example, if we are trading at £600 risk, we divide 600 by the pip distance to a measured-stop position. Our risk, however, to our considered stop position is about half of our measured-risk; this allows flexibility to add additional trades but only if those trades don’t exceed our total measured-risk at any one time.

USD/CAD short taken at a similar time to the trade below.
USD/CHF short, ‘considered’ risk does not exceed ‘measured’ risk.

A clear trading plan

We need to exit our trades when we have a good reason. However, leaping from one trade to another when any trade does not immediately go our way is asking for losses.

From the trade below we went long based on context and the last bull bar. However, as we view the development of the trade we see a bear inclination, but one that does not necessitate an exit; this tempts us to get out of the trade at the first opportunity. That would have been fearful and a mistake.

No broken rule, then hold the trade.

The next chart shows the trade a few hours after entry and at the target.

Persistence, patience and a willingness to take risks are required. What is not needed is a lack of confidence, fear of loss and poor execution; the difference is a clear trading plan at work.

The bear-bar after entry did not break premise.

Ignore the wick

When selecting a stop position, which in turn provides a trade entry point, we mostly ignore extended ‘wicks’. From the example below, we see that our target was selected by a mirrored rule measurement of the next to last bear bar – our entry bar.

With our GLEM 2, we measure from the target back to a favoured stop position. If we had selected the high of the wick, third bar (a doji) right to left, our entry would have remained flat. However, by selecting a stop one pip above the entry bar, we entered and went straight to target.

Which wicks do we disregard as stop locations? Practice and backtesting tell us.

Extended wicks often ignored when selecting a stop position.

Which stop position?

In the chart below we had two stop positions that were possible. Therefore a split trade may have been the answer. However, we have to be careful that we are not selecting more distant stop positions due to fear or predominately the closer stop position due to over-exuberance.

The stop position that has worked so far for this trade is the red column. The red arrow has a stop one pip below the low of the previous bar. Our entry bar is a new-high trend bar which also supports the entry generated by the red arrow stop position.

The stop position often controls the trade.

Another example of ‘which stop to use’ is below. Our stop for column B (blue) taken from the bear spick 17 bars to the left and column A (red) taken from the low of 71 bars to the left. Column B was successful. However, allowance for an accurate spread would have been necessary as the PB to the column B entry was exact. The computers may have ignored column A’s entry position as the stop used for the measure in this instance was too distant.

Avoid stop positions based on distant lows or highs.

Both were wrong in the final analysis: the measurement that would have worked being close to open, a standard measure. Moreover, the stop position was one pip below the entry bar. Sometimes we can be too smart!

A standard measurement was required.

We entered Bar 1 in the chart below for a scalp short; this was successful with bar 2. Bar 2 closed as a weak trend bar. However, bar 2 had closed slightly below the breakout bull bar to the left, 6 bars prior.

We take another short from bar 2. Bar 3, although a bull bar, was engulfed by bar 2. Our short remains good. Bar 3 still enclosed but this time a bear. Bar 4 is a measured move low-two. We expect a high-two PB but hold the short and set-up an additional trade based on the close of bar 4.

The thought process for this trade is all about system and price action, no emotion.

Price action controls our choices.

Leg measurement

Most trades ought to measure legs. Within the blue box below, using a 15-minute bar chart, we have a combination of bars. (Only when we have sufficient bars to the right are we sure our measurement represented a ‘leg’). Column A measures the leg and provides a target. Column B measures from the target back to a suitable stop position. The midpoint of column B provides the entry point.

Notice in this instance that entry was only after the doji as marked by the blue entry arrow.

Most trades ought to measure legs rather than individual bars.

Fat Boy and Pullback

For GLEM 2 measurements we have ‘Fat Boy’ and ‘Pullback’.

Fat Boy

Fat Boy measurement is quick, assertive and full. In the example below the ‘Fat Boy’ considers the stop position first. We measure from the stop (less one pip) and place the midpoint on the entry. The 100% mark provides our target.

Advantages: Quick to measure. Provides immediate entry, so no missed entries waiting for a PB that does not happen.

Disadvantages: If the trade goes against us our loss is full. Breakeven attempts are tricky as we have entered at the full extent of the signal bar(s). If an appropriate stop is distant than our target is correspondingly distant.

Pullback

Pullback measurement is specific, considerate and tight. In the example below ‘Pullback’ measures the signal bar(s) first; this provides the target. From the target, we back-measure to the stop (less one pip), the midpoint of which provides our ‘Pullback’ entry point.

Advantages: If the trade goes against us our loss is reduced. Breakeven probability is reasonable. Relatively, targets can be close, and stops can be distant.

Disadvantages: Measurement is timely but considerably slower than ‘Fat Boy’. Often requires a delayed entry which can result in a missed trade.

Which to use?

Whether to use the ‘Fat Boy’ or the ‘Pullback’ system or both are down to personal preference qualified through experience and rigorous backtesting. But we offer some considerations.

  • As ‘Fat Boy’ is less forgiving it may be that we use this system only when we have attained a certain level of price action proficiency.
  • It might be best not to mix the two systems until a trader is proficient at recognising the market cycle (MC).
  • An exception being, if trading multiple markets which have a standard part (such as EUR/USD and GBP/USD) we might enter one market on ‘Fat Boy’ (for example) and the other market on the ‘Pullback’ system.
  • As for MC, maybe ‘Fat Boy’ is prefered when in a trend and ‘Pullback’ when in a TR.
  • Or, ‘Fat Boy’ with the trend and ‘Pullback’ if against the trend but qualified as ‘always in’.
  • Or, we may take a ‘pullback’ entry against three consecutive trend bars, where often a pullback is more likely.
Or use only ‘fat boy’ or only ‘pullback’ for all entries.

‘Pullback’ and ‘fat boy’ entries.

Below we have a ‘pullback’ against the trend entry short followed by a ‘fat boy’ trend (leg) entry short followed by a ‘pullback’ TR entry long. The three trades combined provided 123 pips of profit. ‘Fat boy’ entries fill more often than ‘pullback’ entries; however, if the trades had gone differently, we might not have achieved our entries from the ‘pullbacks’, but on the other hand, any potential loss would have been minimal.

A ‘pullback’ entry short, a ‘fat boy’ short and a ‘pullback’ long.

‘Fat boy’ only entries.

Below we have ‘fat boy’ only entries. We have used the ‘fat boy’ entry for what at the time seemed like an against trend short followed by a now with trend short and, finally, a possible TR long. The three trades combined provided 137 pips of profit. If the trades had gone differently, we would still most likely have achieved our entries, but with a maximum potential loss.

‘Fat boy’ on-limit entries, two short then one long.

Entry type

‘Pullback’ ought to be for on-limit entries only. ‘Fat Boy’ can be from a limit, market or stop order; however, the more entry options we have, the more complicated our strategy becomes. Any advantages and disadvantages of multiple entry techniques must be considered and backtested for viability.

Exit early

Within a clear strategy, we need to know when to exit a trade. The longer we hold a trade, the more we rely on hope. Our procedure with ‘fat boy’ entries is that the follow through bar has to be good. If the next bar is ‘not good’ then we immediately set a breakeven. The exception being a doji bar, in this instance we hold for the next bar.  Choosing what is and what is not a suitable doji bar comes from experience and lots of backtesting.

If using a ‘pull back’ entry then our exit criteria follow that described fully in ‘Probability trading, GLEM 1 for beginners’.

Context, ‘Always in’, Market cycle, Price action (CAMP)

Context, ‘always in’, market cycle and price action (CAMP) is a useful way to review each trade before entry. Many aspects of context, ‘always in’, market cycle and price action are described in ‘Probability trading, GLEM 1 for beginners’. The market cycle is a consideration if using more than one entry technique. In other words, if using both ‘fat boy’ and ‘pull back’ entries.

Context, ‘Always in’, Price action (CAP)

If only one entry technique is employed (either ‘fat boy’ or ‘pull back’) then the pre-entry considerations are context, ‘always in’ and price action (CAP).

A week on one screen

Below we see a week of EUR/USD on one screen. A quiet week (mid-August) until Thursday when a trend leg developed. Friday not shown as no trades.

The week provided 144 pips in profit; this comprised four short trades, shown by the red arrows, and one long trade, demonstrated by the green arrow.

Moreover, we had four breakeven long trades, marked by the green circles, and two breakeven short trades marked by the red arrows.

An emotional issue for traders is to create trade entries where they do not exist. Often such entries will lead to losses. We need to be patient when necessary and continue to read the chart without emotional input.

A weeks worth of trades on one chart.

Trade one

Our first trade on Monday came at 2 pm. Notice that bar 1 was a temptation at 9 am. However, as bar 1 was the third push short (a wedge) the probability of a profitable trade was low. Bar 2 was the entry bar. We took a ‘fat boy’ entry with a stop at the high of the previous bar. If we had made a stop from the open to the close of the entry bar, we would have reached the target at 6 pm, but a closer stop reduces the probability. We held through the night with the target achieved at 5 am the following morning.

The first trade was short at 2 pm.

Trade two

Our next successful trade, 2 pm on Wednesday (Tuesday provided breakeven trades only which we’ll cover later).

Below is a trade that in hindsight is easy but required a reactive rather than a predictive approach. Bar 1 provided an excellent price action short. Moreover, bar 1 was probably the third push of a wedge. We took a ‘fat boy’ measurement, and as the price action was so good, we measured the whole bar, including the wicks.

Context and price action played a vital role in this trade.

Trade three

In our third trade below, bar 2 (our entry bar) closed above bar 1. We entered long with the target being an equal measure from the base of the pin, indicated by the stop, and the entry. However, a measure from the open of bar 2 would also have been acceptable, but with different scenarios of risk and probability.

Where to put the stop?

What do we mean by different scenarios of risk and probability? Take the example below. The red a, b, c arrows mark possible stop positions, and therefore measure positions, using bar one as the entry bar. Our decision to use which position alters the risk that we will be stopped out but also changes the probability of achieving a measured target.

a,b,c represents the different measure and, therefore, stop positions.

We see below the target measurements generated from each of their corresponding stop positions.

The green a,b,c represent measured target positions.

Bar 2 below provided an excellent entry bar. However, in doing so, its pullback would have activated the higher stop, (red arrow ‘a’ from two charts above).

Bar 2, an excellent entry bar but would have activated the prior higher stop.

Bar 3 below activated all three target positions.

Trade four

The next trade below (short) used a strong stop position above bar 1.

A stop position at the open on bar 2, the entry bar, would have been high risk. We, therefore, selected a stop above the wick of bar 1. From the eventual result, it would seem that most computers did the same.

Bar 3 did not necessitate a breakeven as it was a ‘suitable’ doji.

Bar 3 is a doji, so we hold.

The final trade of the week came at 1 pm on Thursday. Note that our trade from the chart above is still open. Bar 4 below represents an excellent entry bar. Note also that from the chart above a weaker stop position would have been activated by the pullback wick of bar 4 below.

Bar 4 is an excellent entry bar to scale-in.

Breakeven

We have more breakeven or small loss trades than we do full trades, either to target or to stop. Therefore, breakeven is an essential tactic within our strategy.

Breakeven 1

Below is a very early trade, not a deal we would typically be available for but on this occasion we were. We would have traded below our normal risk as it was the first trade of the day – like an athlete we need time to warm up.

A reasonable short as the trade satisfied each aspect CAP.

The trade satisfied each aspect of CAP.

After our entry bar 1, we get a pullback engulfed bull bar, bar 2 (see below). As bar 2 was overwhelmed the CAP still applied in support of the short. However, our procedure at the time necessitated that a pullback bar immediately following the entry bar, other than a suitable doji, required breakeven to be set.

Bar 3 provided our breakeven and closed substantially below the entry bar. So why did we set breakeven when the short was still valid? Look at bar 3 again. Notice that even though bar 3 made an adjusted target – that is, adjusted for the bar 2 pullback – it did not make our objective.

Rather than breakeven, ought we have adjusted our target to match the pullback of bar 2? Maybe, but only after a substantial amount of backtesting will we determine if that is a valid tactic. Moreover, in such a procedure we would have less than 1R. That is a reduced planned reward/risk over time. We do know, however, that if we had not taken a breakeven (our current method), then bar 4 would have made our stop.

Bar 4 would have made our stop.

Breakeven 2

Because we were ‘flat’ (no trades active) at the close of bar 4, we entered long.  If we had held the previous trade then taking an opposite trade, immediately following a loss, is emotionally challenging.

Bar 4 satisfied CAP, however, bar 5 was a pullback bear bar against bar 4, our new entry bar. The close of bar 5 did not counter the probability of the long continuing, but it did break our current rule, hence breakeven set.

Of interest, on this occasion the follow through bull bars after bar 5 did not reach even an adjusted target position.

Entry was long at the close of bar 4.

Breakeven 3

Bar 6 is a high-two but also a valid entry short. Bar 7 represented weak follow through for the bears. The uncertainty over the high-two maybe being a factor. Bar 8 cemented the doubt and justified a breakeven. Indeed, by bars 9 or 10 a breakeven ought to have been set and achieved with bar 11.

Bar 6, a high-two but also a valid short entry.

Breakeven 4

Bar 12 provided an acceptable entry long. However, bar 13 necessitated a breakeven achieved at bar 14.

In hindsight, the stop position for this trade was weak being above the bear wicks to the left; this is often a clue as to the probability of the deal.

An untidy stop position is often a clue.

Breakeven 5

The close of bar 15 provided a reasonable entry long. Context and ‘always in’ favoured the long with a close at a new high albeit a double top with the previous bull entry bar, 14. We considered bar 16 not to be a doji, therefore, selected breakeven which happened at bar 17. If bar 16 had been a doji (more example to come), we might have held the trade.

Bar 16 is not a doji, therefore, breakeven.

Doji

A tactic within our strategy is to set breakeven with a pullback close after entry. The exception can be a pullback doji, single or multiple.

Singel doji

Our entry bar is at the close of bar 1 below. Preceded by a weak follow through, bar 2. However, unlike the examples above bar 2, we considered, was a doji. Therefore, we held the trade.

What is and what isn’t a doji in this regard comes from an awareness of the doji effect and lots and lots of doji practice.

What is and what isn’t a doji.

The chart below of a single doji at bar 2 provides an example of a maximum body to wick proportion. However, we would also judge a doji in context with the prior or previous bars.

Bar 1 below is our entry bar. A doji, bar 2, follows and we hold the trade. Bar 3 provides a trend bar long. Notice that the final bar to target and the prior two provided a reasonable pullback before closing as a bull; this would have made a trader without a method uncomfortable more often resulting in an on market exit before the target and before planned 1R.

The doji at bar 2 provides an example of a maximum body to wick proportion.

Multiple doji

After our entry at bar 1 below the follow through was reasonable at bar 2. However, bar 3 provided a pullback doji which we held. Bars 4 and 5 were also doji, and we stayed with the long. At bar 6 we seemed to maintain the bull which resulted next in a sturdy target bar.

Tip. A doji needs to be clear. If in doubt about a doji set breakeven.

Multiple doji.

The spread rule

Our beginner’s ebook discusses spread in more detail. Our concern in this section is our spread rule about the setting of an intraday target, stop and entry.

  • Set target is 1/2 minimum spread towards the trade entrance from the measured target.
  • The stop is a whole minimum spread away from entry.
  • Entry is 1/2 minimum spread (at least) inside an entry bar.

Target spread rule

The GLEM provides a target that is, as it turns out on many occasions, to within a fraction of a pip. Therefore, if we did not allow for the spread, we would often miss our automatic target conversion. In consequence, a regular miss in making our target by the smallest of margins would make us reluctant to hold future trades which would regularly bring us short of achieving a 1R.

To alleviate this, we adjust our target a half minimum spread closer to entry than the GLEM measurement. Spread alters when the market becomes volatile (i.e. immediately before significant news or events or the like). Notwithstanding this, we use the minimum spread as the basis for our calculation.

Lower intraday bars benefit from this adjustment. Higher intraday and other timeframes not so much.

Stop spread rule

The identification of a valid stop is an integral part of our GLEM procedure. Our actual stop is set a whole minimum spread distance further from entry. Considerations mentioned above in target spread rules also apply to stop spread rules.

Entry spread rules

Our entry can be either on-limit, on-stop or on-market but always without paying spread. We will take the example of entry long on the close of a bull bar:

  • limit order entry we place the limit order entry line (if using on-chart entry software) at the close price plus a half spread, or as close to that position as we can while maintaining the limit order direction of entry. (It is relatively easy at this point to set our entry in the opposite direction to that to which we intend. A reversal of our entry will occur if we place a limit entry within the gap between the visual bar and its associated spread. Such mistakes are costly.) Once we have arranged our limit order entry price, a pullback (in our bull example) of a full spread would engage our trade.
  • market order entry we ensure we have a pullback of at least a full spread before engaging the market order entry.
  • A stop order entry needs to be sufficiently within a 1R midpoint to allow for a full minimum spread price. That is a half spread to prevent a trade prematurely, and an additional half spread to allow for the engagement.

Limit order box example

The example below shows a box that represents the half spread measurement on USD/CHF. We aim to set our limit order at a half spread above the close of the entry bar as this will assist a breakeven chance if the price action of the trade (in this example) turns bullish.

The box is pre-measured and able to move into position swiftly on the close of the entry bar.

A half spread box helps for the appropriate setting of our limit order.

Market Timeline with the spread

Such a half-spread limit order box (or full spread box if a market order) is only necessary depending on chosen timeframe and market. For example, allowance for an average half spread on EUR/USD on a timescale of 60 minutes or above would hardly be measurable.

We ought not to underestimate the power of the spread; this is where brokers and many institutions make all their money. It is the equivalent of the profit (generally at 4%) gained by a casino. It is that small percentage that is relentless. We need to work hard to minimise our disadvantage to the spread.

To do so, we observe the entry spread rule already mentioned above, but also we trade at a market timeline that brings a minimum spread into tradable perspective. The example above is of USD/CHF on a 30-minute chart. The light grey box to the immediate right of the entry arrow represents the half spread. The spread indicated is overly great for the 30-minute chart. We ought to try a higher timeline for USD/CHF maybe the 4-hour or even daily chart. We do this ‘grey box’ spread check on each market we trade to ensure that the usual spread is in proportion to the market we are trading. The grey spread box gives us an immediate visual clue as to the ratio of spread compared to market size; this is difficult to do if judging spread on a number.

Trading different timelines

If trading different timeframes due to spread or any other reason it is best to trade not more than two. Moreover, we suggest you keep whichever markets are traded within different timelines separated if possible within different accounts or at least within a different trade list.

If we keep all timelines within the same account or list then the lower timeframe tends to dominate; this increases the difficulty of holding a higher timeline trade to its proper conclusion.

Measured stop

We cover this in our beginner’s ebook as ‘considered’ and ‘measured’ stop positions. Our GLEM baseline is the considered stop set at a specific level or price action point; from which we add the appropriate full spread to determine our actual stop.

Our concern here is how we find our measured stop and, therefore, our known amount to trade per pip before the close of our entry bar? We consider three examples: firstly, the TR chart; secondly, the next significant level; and, thirdly, the reversal.

TR chart

A TR will come in all shapes and sizes. However, they are relatively easy to spot. If in doubt as to whether we have a reversal or a TR assume a TR. Our measurement of our amount per pip calculation is from the entire width of the TR. We do not trade a tight TR.

The TR chart requires the measurement of the width of the whole TR.

Significant level

The significant level measurement can provide multiple choices. As in our example below, level A (in red) is our stop position but do we choose level B or C as our measurement of the amount per pip calculation?

If we have a doubt, we take the more distant level for our measurement.

Sometimes obvious, sometimes not.

Reversal

Reversal entries that are entering against the trend but with CAP is a difficult thing to do. Junior expert traders ought to avoid reversals. From our example below, Bar 1 engulfs the previous three bars, the high achieved a measured move long and bar-1 breaks the trendline long. Therefore, probably making the close of bar 1 ‘always in’ short.

Bar 1 shows its intent early, but before bar 1 closes we take a measure from the bottom of its wick to its high. We double that measurement to use in our amount per pip calculation. (A more straightforward way is to use the actual size and halve the resulting amount per pip, same result).

Double the measurements for reversals.

How many bars?

How many bars do we have on our screen? There are so many variables that this becomes a personal decision. Variables could include type, resolution and size of a monitor; the chosen market and timeframe are factors too. However, it is the trading method employed that genuinely dictates this number.

As we are a ‘probability’ method, we require only a few bars. Too many and we may be distracted by considerations that affect a higher timeframe to that which we are trading. Also, too few bars and we do not have the whole picture relevant to our window of trade opportunity. Each is as misguiding. To that end for the markets we trade and intraday we find that 50 bars on screen are sufficient in most instances. Scale down to 25 bars if necessary to determine an accurate GLEM and then back to 50 bars.

Amount per pip

Risk levels multiple markets

Our beginner’s ebook covers risk levels in some detail. For our chosen markets, we have selected several risk levels. These are in sterling but could be in euros or dollars:

  • 300
  • 600
  • 900
  • 1,200
  • 1,500

Let’s take the example of a significant level as described above under the ‘measured stop’. If our measurement level is 60 pips distant and our risk level is 600 we divide 600 by 60 = 10. We set our trade in this example as 10 per pip.

Our actual risk to stop might be 20 pips or 200 (20 x 10 = 200).

We can scale-in or set trades on other markets up to but not exceeding our overall risk of 600. Therefore, in this example, we’d have 400 remaining to trade.

Account size needs to be sufficient to comfortably cater for margin requirements if trading at our highest risk level. (For example, to trade the EUR/USD at a margin of 3.33% a retail account would need to be in the region of 5,000 at our lower risk and 20,000 at our higher risk. Ideally, 7,500 and 25,000 would be preferable for those examples. An account of 15,000 would allow comfortable trading at the mid-range of our risk levels if trading at 5% margin then an appropriate account adjustment will be required).

Take a loss

A significant difference between a beginner and an expert trader is taking a loss. When a bar closes that puts the trade in doubt, for any adverse CAP reason, an expert trader will exit the bet. A beginner will hold in the hope of a better exit price.

An expert has predefined trade automated exit principles. Such exits may result in a small loss or higher but taken with sureness. Having been in a deal for a long time (and in the money, too) a pullback that supports an exit signal is difficult to accept for the beginner. An expert takes such a scenario without emotion as part of the trade game. Be an expert!

But what about the stop? The stop is a full loss and is there to guard the trade from worse than a 1R. (The stop is also an intrinsic part of the trades calculation. In our strategy, if no suitable stop position, no trade).

Being ruthlessly efficient in the management of trading losses – without emotion – is the path to being an expert trader and, therefore, a successful one.

Out of sequence with the market

It is not unusual even for the most expert of traders to get out of sorts or series with the market. If we take three consecutive losses, we trade at an inconsequential level until we feel that we are back on market track.

Immediate feedback

Without immediate feedback on our trades, it is easy to think we are trading well when we are not – or vice-versa.

To that end, we have developed a recording spreadsheet to classify and proportion each trade we make. This spreadsheet will be available as a page on Slow Trader.

On one axis we have:

  • Target
  • Breakeven
  • Small loss
  • 1/2 loss
  • Stop loss

On the other axis we have:

  • Running 4-weeks
  • Previous 4-weeks
  • Running 12-weeks
  • Running year
  • All time

When we complete a trade, and at the first opportunity, we add the trade to the running 4-weeks. Thereby creating the number of trades that achieved the target, breakeven, a small loss (regarding pips relative to trade), a loss that is at or close to a halve, or a full loss.

As we build our trade profile from our trade entries into the spreadsheet, we can immediately see our recent, near-term and overall accomplishment as a percentage relative to trade win, breakeven and loss.

From the pattern the spreadsheet provides, we will be better able to judge results relative to strategy and tactics. We will also gain an insight into our chart reading capabilities, our emotional strengths and (over time) seasonal results variations if any.

Time

A trader’s all is not exciting. If excitement is the goal take up skydiving. A traders day comprises of sitting on our hands interspersed with the occasional measurement, calculation and mouse click. Don’t try to make it more than it needs to be.

As we are intraday we need to be watchful and, therefore, we feel we need to justify our time and commit to a trade.  It is true, we are traders so trade – but only when there is a trade to take. Trading for ‘times’ sake is a recipe for a loss. If not a full loss then a distraction from the real trade when it comes – and the result is the same. When a deal materialises, enter without hesitation. But not before. Until then enjoy the time, calm the mind, do meaningful movement and drink quality black coffee (up to 2 pm) and tea. We recommend Dave Asprey’s book ‘Head Strong’.

Counter signals from other markets

If using the lower intraday timeframe bar charts, we might find ourselves sensibly limited to a single market. However, if trading an increased timeframe, we can proportionally add additional markets to our list. Our other markets might cross-reference. For example, EUR/USD and GBP/USD will quite often react similarly to the common denominator (USD) and as the USD strengthens or weakens.

From the example above, if we enter both markets concurrently and the market adjusts adversely then, it is highly likely that we have doubled our risk. Therefore, a concurrent trade set in multiple markets must not exceed our overall planned risk at any moment in time.

Another consideration is a market crossover. If we have an active trade long in USD/CHF and the currency pairing EUR/USD makes a significant price move long (we would expect these currencies to favour price movements that are in opposition) do we look to exit our USD/CHF trade?

There is no hard rule in this regard. From our backtests and live trade observations, such markets maintain general unison of opposition price movement.  However, price action for one pairing is occasionally inconclusive or contradictory for the other. We recommend trading a currency pair without reference or conformity with any other market indications. Indeed, to do so will lead to mistakes, confusion and missed opportunities. If, however, a pairing provided a significant (by which we mean several times greater than an average on-screen bar) movement in contradiction to another ‘major’ USD currency pair we would look for an exit opportunity.

Diversification, on the other hand, is not a consideration. If we are trading currency pairings at a high enough intraday timeframe to participate in several markets, then we are from time to time going to observe unusual price moves between the shared currencies.

Recommendations for further price action study

Any work by Al Brooks, particularly his latest videos on FOREX trading. Bob Volman’s books.