Wide stop trend trading part one

Introduction

When day trading, our emotional ‘us’ and our intellectual ‘us’, often work against each other. To help in this matter, what follows are four distinct parts to be read either independently or as a connected whole. The areas are built around our principles for day trading the forex markets.

Our trading strategy

“We take HIGH PROBABILITY trades mostly from entry bars but selected signal bars too that fit market cycle, context and the economic calendar; we manage our trades procedurally, and a measured loss is acceptable”.

Part 1

The human mind was made to create patterns. It will see patterns in random data. “We see more on a chart then is there”. We look at our ‘day trading emotional self’ and explain what we mean by strategy, the idea of continuous improvement and the value of mistakes. A simple diagram highlights what is and is not our responsibility. We also explain why we believe awareness of ego is essential, and how it is crucial for getting what we want out of our Forex trades.

Part 2

Explains our fundamental principles of ‘price action day trading’. We provide, as examples, what we believe are some of the best price action considerations and day trading signals. What we think are the most common traps that day traders fall into that prevent them from consistently making profitable trades, and how to avoid these pitfalls. Written so that others can better understand our shared price action concepts, though there is no need to read this part to understand our tactics.

Part 3

Our Forex ‘day trading tactics’, the detail of the day trade. The profitability of our trades depends on the quality of the decisions we make. We are not born with this ability, we learn it. Procedures guide and define our choices. A robust day trading method and the identification of sound day trading procedures are a vital step for us to produce right decisions.

Part 4

Provides ‘the leap’, our ‘hints and tips’ for day trading the currency markets. Our money management. The UK spread betting account is the emphasis, but our ideas apply to any financial trade account.

Part 1, Day trading emotional self

This part is important. Many would move through this section directly to price action and not linger to consider what essentially is an area that, without due consideration, is primarily responsible for our sustained profitability – no matter how good our system.

Tactics

In his book ‘Principles’, Ray Dalio says that principles are concepts that can be applied over and over again in similar circumstances. Every game has principles that successful players master to achieve winning results. Our day trading method encompasses our principles which we translate to be tactics. We are confident that whatever success we have had day trading has resulted from our operating within these guidelines. As Dalio says, ‘like getting fit, virtually anyone can do it if they are willing to do what it takes.’ Provided here is our understanding of tactics and what it takes to become a profitable financial day trader.

When we say that these are our day trading tactics we don’t suggest that in a possessive or egotistical way. We mean that they are rules and explanations of what we think. And while we are confident that these work well because we have worked hard for them, won and lost many times by them, re-thought and adjusted them, they have, nevertheless, in their purest essence, worked well for us for some time.

Not to be blindly followed

We also believe that nothing is sure, and the best we can hope for is something close to ‘highly probable’. But by putting our day trading tactics out there, and backtesting them day in and day out, the chance of their being right will increase. We provide these beliefs for consideration and study, and not for others to blindly follow. Our tactics should be considered and hopefully evolved by others to become their procedures.

Sample size

To ‘think like a day trader’ is an important realisation and a result of training our brain to think in probabilities. Moreover, we believe in sample size rather than trade by trade profit or loss. Sample size could be the last 20, 200 or 2,000 trades and considered regarding reward relative to risk.

Each trade we make is only one of the many trades that we will make throughout our day trading career. If we keep this in mind, and equally proportion our risk on each trade, then we remain in perspective the one or two losing trades, or even a string of losing trades, that may occur.

Trading in the Zone

Taken from “Trading in the Zone” by the late Mark Douglas, below are his five fundamental truths of trading and his seven principles of consistency:

The five fundamental truths of trading:

  1. Anything can happen.
  2. (We) don’t need to know what is going to happen next to make money.
  3. There is a random distribution between wins and losses for any given set of variables that define an edge.
  4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
  5. Every moment in the market is unique.

The seven principles of consistency:

  1. Objectively identify (our) edge.
  2. Predefine the risk of every trade.
  3. Completely accept the risk of the trade.
  4. Act on (our) edge without reservation or hesitation.
  5. Pay (ourselves) as the market makes money available to us.
  6. Continually monitor (our) susceptibility for making errors.
  7. (We) understand the absolute necessity of these principles of consistent success and, therefore, we never violate them.

Kaizen

Total Immersion

The secret, Terry Laughlin put forward, in his book on swimming, Total Immersion, was the Kaizen principles at the heart of Japanese manufacturing: continuous incremental improvement “through cleverness, patience and diligence”. We feel the same applies to the financial day trader.

Constantly improved

If we follow the principles of Kaizen, then we are committed to the philosophy of continuous improvement. This view assumes according to Imai that ‘our way of life – be it our working life, our social life or our home life – deserves to be constantly improved’.

Kaizen is the meaning of the Japanese words ‘Kai’ and ‘Zen’. These words translate roughly into ‘to break apart and investigate’ and ‘to improve upon the existing situation’. Together this is Kaizen. Or, the job of improvement ‘is never finished’, and the status quo ‘is always challenged’.

Unconscious competence

The starting point, Laughlin explains, is unconscious incompetence—when a swimmer does not even realise what is amiss. Next comes conscious incompetence, when you spot what is wrong and try to stop doing it. Then comes conscious competence, when you do the right thing but only with effort, and finally unconscious competence: the mental equivalent of automatic pilot. A bonus of this stage is that the brain switches from the energy-thirsty cerebral cortex to the much thriftier cerebellum.

Learning from mistakes

To be successful as a financial day trader, we have to know when to bet with and against the consensus and be right. What goes along with that is that we have to be prepared to make a lot of painful mistakes.

From Ray Dalio’s Principles: “My painful mistakes shifted me from having a perspective of ‘I know I’m right’ to having one of ‘How do I know I’m right?”

Day trading mistakes

They are valuable if they are understood and transferred algorithmically. If not a computer algorithm then a virtual algorithm that we can manage manually with emotional neutrality.

Mistakes, we suggest, are good things because we believe that most learning comes via making mistakes and reflecting on them. However, typically defensive, emotional reactions— ego barriers—stand in the way of this progress.

Success

Achieving success, on the other hand, is a matter of recognising and successfully dealing with all our realities. We believe that successful day traders become profitable by looking at their mistakes and weaknesses and figuring out how to get around them.

Stoicism and responsibility

responsibility, mine and other people's. How responsibility might apply to day trading.
My responsibility

In day trading terms our responsibility includes our entries,  our exits, our trade management, our chosen strategy and our mistakes.

On the other hand, in traders terms, these are not our responsibility: other people’s beliefs, other people’s words, other people’s ideas, other people’s mistakes.

Ego

As Ray Dalio puts it, ‘the biggest threat to good decision making is harmful emotions.’

When we are aware of something toxic, weak or ‘off’, and we listen to it, this is a ‘gut feel’ or intuition; the result can be something centred and ego-free.

Ego refers to vanity and pride but also complaining, inferiority, and self-hatred. To quote Eckhart Tolle, “the ego has us in its grip, and we don’t have thoughts, thoughts have us”. Ego gives us irritation, anger, and perhaps sadness. Awareness is the simple counter to ego; awareness and being present in the moment.

From Eckhart Tolle: “The ego loves to strengthen itself by complaining—either in thoughts or words—about the situation we find ourselves in, something that is happening right now but shouldn’t be. For example, when we’re in a long line at the supermarket, our mind might start complaining how slow the checkout person is, how he should be doing this or doing that”

The ego solution

To observe our minds and the negative, dysfunctional and unnecessary emotions they produce. Let’s go back to the supermarket line with Eckhart. “As we wait, we aren’t irritated because it’s taking a long time to get through to the checkout, which is the situation. We are irritated by what our mind is telling us about the situation—which is that all this waiting is bad and a waste of our time. But we could be enjoying that moment if we say: this is what is, there’s nothing we can do about it, so why not breathe in deeply and look around and enjoy the world around us?”

The minimisation of ego through our awareness of ego may seem incidental to our task of ‘how to make a living from trading the financial markets’; however, any consistently profitable trader, accomplished tennis player, golfer, musician, chess master or the like will tell us differently.

Emotional attachment

When we trade from a chart, we may wait hours for a signal. Or, we were previously hesitant and watched while a trade that we ‘called’, but did not enter, reach our desired target. Moreover, when we eventually open a bet we feel emotionally attached, we think that we deserve the desired positive outcome. But alas, that is a deal made from ego.

Ego is to be recognised and gently removed from the thought process of the trader: we trade within a trusted strategy; we accept losses and learn the valuable lessons from any failures. Eventually, our day trading is a flexible strategic ‘blueprint’, with a high level of knowledge and pattern recognition, managed by stratagem and our awareness of ego.

Selective attention

At a financial traders seminar in London that we attended, several years ago, Daniel Simons introduced his ‘invisible gorilla’ video, ‘a test of selective attention’. We had to count how many times the players wearing white passed the basketball. Most of us (150, or thereabouts) got the passes correct, but we did not realise that someone, dressed in a gorilla suit, had walked into the middle of the set, larger than life, did a chest beat, and walked off.

Simons provided a counterintuitive message that our minds don’t work the way we think they do. Simons says, “we think we see ourselves and the world as they are, but we’re missing a whole lot”. Selective attention can block our awareness; we do not take in the full consequence of what we are witnessing.

Broad perspective

However, selective attention is necessary for us to attend consciously to sensory stimuli in such a way that we will not experience sensory overload. Initially, we day trade as if viewing our chart through a straw. We focus on a ‘trade pattern’, feeling that we know the future development of the pattern when all along we are blind to the evident and alternative correct model; a right design that, although apparently at inception, only becomes clear to us too late.

Trade small

Experience and trading proficiency broadens our selective attention. For example, as a ‘warm-up’ of our focused attention, we trade more modest for the first part of the day or backtest first after a few days away. To operate well, we need to be current. Moreover, if we tend to get distracted, which in turn narrows our selective attention ability, we need to practice intentionally holding our focus where we want it to be, we need to practise observing the chart in the now moment.

This practice of being in the moment can be done in everyday life, as we take a walk or watch something in nature. We make being in the moment a regular habit, and notice our trade proficiency increase.

Pattern recognition

In chess, De Groot showed the importance of knowledge and pattern recognition in expert performance. Similarly from Christopher Chabris and Daniel Simons blog: ‘Chase and Simon recorded an expert chess player performing a chess reconstruction task and found that he placed the pieces on the board in spatially contiguous chunks, with pauses of a couple of seconds after he reproduced each fragment.

This finding has become part of the canon of cognitive psychology. People can increase their working memory capacity by grouping together otherwise discrete pieces of items to form a larger unit in memory.  In that way, we can encode more information into the same limited number of memory slots.’

Illusion of attention

As explained further by Chabris and Simons: ‘one of the most common sorts of motorcycle accidents involves a failure of attention: The driver of a car turns left in front of an oncoming motorcycle, failing to yield the right of way. In many cases, both the rider and driver report that the driver looked right at the motorcycle before turning—they looked without seeing. Such accidents could well be an example of the illusion of attention, our tendency to assume that we will notice anything important that happens right in front of our eyes’.

The non-strategy day trader

For example, how faulty intuitions often get us into trouble. These screenshots appear different but are the same with an adjusted ‘y’ axis. They present a different trading picture to the novice or ‘non-strategy day trader’, both visually and emotionally. However, to a ‘probability day trader’, with a strategy, the trade solutions are identical.

The X,Y axis changes the perceived meaning of the charts price action
The X, Y-axis changes the perceived meaning of the charts price action
The X,Y axis changes the perception of a chart in price action day trading.
X, Y-axis and perception

A ‘non-probability day trader’, without a clear strategy or set of rules, may trade a higher amount per point in the second screenshot and may place a stop much closer in the first than in the second screenshot.

Part 2, Price Action

What follows are a series of examples taken from our ‘live day trades’. The purpose is not a definitive on price action day trading, as to do so would make many more pages than we have proportioned to this section. However, we hope that through these examples a grasp of our price action methodology can be gained.

Do not take any of our tools or measurements shown as ‘the way we trade’. Our strategies are open to constant adjustment. We view our price action charts as part of our optimisation which in turn refers to testing many variations of a system from our back-tests and then selecting the best-performing version for actual trading.

Our examples are a price action introduction to various scenarios; the detail of which is explained more fully in part 3. At this stage, we are focused on what the final bar, or bars, tell us in context with the previous bars on the screen.

An early trend

Bar 1

Our first chart below developed a trend. At bar 1 the direction is ‘always in short’ if only for a measured-move. Bar 1 was a breakout bar short, provided a new low and was a measurement bar either for a scalp or a swing entry short. We will show later how we measure a scalp and a swing.

Bar2

The close of bar 2 provided another probable entry short. The swing target for bar 1 and the scalp target for bar 2 were both at the bottom of the pin at bar 3. Profit taking and buyback of the shorts may have resulted in bar 3 becoming a pin. Computer algorithms may have seen this as three pushes down and may also have taken profits at the base of what became a bull pin.

Bar 3

A pin, as in bar 3, often provides good price action in the direction of the close of the pin. However, bar 3, a pin, is embedded within a tight trading range, that is the 8 bars to the left of bar 3, which reduces the pins potency. Moreover, three pushes down often triggers a reversal. However, context is the key. In this example, price action to the left of bar 3 is too intense, and the bar following bar 3 continues the gathering bear trend.

Bar 4/5

The close of bar 4 provides another entry, but, due to the pushes down already, more than four is unusual. Bar 5 was a final flag and a possible double bottom. Double bottoms or tops do not need to be at the same level.

Identification of an early trend, a day trading example.
An early trend, bar by bar

Dominant news, or event

The next sequence of charts shows an opportunity following an announcement of a ‘non-farm payroll’. We can see the immediate reaction the report has caused with the giant bear-bar. Prior price action does not indicate that this is going to happen, other than an awareness of the news or economic calendar. We measure the bar with our GLEM, more of this later, which also provides a measure of the Fibonacci (fib) 61.8% and 38.2% pull-back (PB) which we will subsequently refer to as the first and second fib relative to the direction of trade.

First bar

Bar 1 is an active bear signal bar short. However, the PB exceeded the second fib which suggests that we stay flat.

Day trading the news example, bar 1
Day trading the news example, bar 1

Second bar

That was the correct call, as bar 2 reacts with a bull bar but does not close above the previous high (the high of the last three bars), so again, we stay flat.

Day trading the news example, bar 2
Day trading the news example, bar 2

If we had mistakenly entered at the close of bar 1, we might have taken the loss at the end of bar 2 or, if confident in our price action read, hold for the PB short and a break-even exit.

Day trading the news example, bar 2 continued
Day trading the news example, bar 2 continued

Third bar

The following chart and bar 3 provides our correct entry. The price action at bar 3 is suitable for an entry long and for a scalp target that is the measured move of about 45 pips (being the measurement of the previous leg).

Day trading the news example, bar 3
Day trading the news example, bar 3

Success, the target was achieved as shown in the next chart.

Day trading the news example, bar 3 continued
Day trading the news example, bar 3 continued

Swing, then a scalp scale-in

In the chart below we traded a swing long followed by a scalp long, both with similar target positions. As the trades were open at the same time and therefore increased risk, we consider this a ‘scale-in’ trade.

Day trading a swing followed by a scalp scale-in.
Swing and scalp scale-in

PB, followed by a breakout entry

From the chart below a PB entry against the previous bear bar was a suitable probability trade; a sturdy bar short that closed lower than the last bar bull but not a new low, therefore, a PB entry was likely.

2nd entry short was a new level and although the bar before entry was not a transparent trend bar (closed a bear but above the bars mid-level) a measured move down without PB was probable. We consider this a breakout entry.

3rd entry was long. A measured-movement of the two bull bars and a PB entry provided consideration for a scalp against the trend. A close, however, a few pips below the PB entry would have required an immediate exit so a wait for a short would be better if unsure.

A day trading dream, a PB entry followed by a breakout scale-in.
A day trading dream, a PB entry followed by a breakout scale-in

Double entry

The first chart below shows concurrent PB entries short, a double gate. However, the second entry has to qualify in its own right. That is: provide probability; an independent measure with the entry; and a feasible stop and target.

The second chart below shows the targets achieved.

Day trading concurrent PB entries short
Concurrent PB entries short
Day trading concurrent PB entries short, target achieved.
parallel PB entries short, target achieved

PB entry short after a sharp reversal long

In the next chart, we have three distinct pushes short followed by a steady reversal long and finally three bear bars. The first of those bears engulfed the prior bar but at this point had not closed below the high to the left. Therefore a short was possible but only with reduced probability. Below shows a PB entry.

The day trading PB entry short on this occasion had reduced probability for success.
PB entry short, but with reduced probability

Scaling into a losing trade

Below is a PB entry short. Notice that the stop is broad, slightly above the high of the day. In other words, the amount per pip traded is low to maintain a consistent risk.

Day trading a PB entry short in a bear trend.
PB entry short in a bear trend

Scale-in short

The next chart shows a steady reversal of the same trade above, with a missed opportunity on our part to exit near breakeven from the lower wick of the fourth bull bar. We, therefore ‘scaled-in’ short at the first opportunity.

Missed early out opportunity. Day trading provides little time for decisions.
Scale-in increased the probability

The exit from both trades was when the gain equalled the loss, or in this instance, the increase was slightly higher than the loss. (This is not a profitable move, but merely a get out of ‘dodge’ strategy). The subsequent increase in risk makes this an advanced trade technique. The alternative, and for the beginner day trader, is an exit with a loss at the close of the 4th bull bar which closes above the adjacent minor high.

Exit trade when day trading when profit and loss are equal or better.
Exit trade when profit and loss are equal or better

Before entry think market cycle, probability and context

Merely looking for PBs is not a profitable strategy. The PBs have to agree with the market cycle, setting and probability of the trade. The example below is an unlikely trade long but shows why we ought not to take all PBs.

A TR of sorts or an expanding triangle. A PB from the bottom of the bar 3 for a ‘short’ would have resulted in a loss. On closer inspection, we notice that we have three pushes down. Therefore the probability is for the expanding triangle (a type of TR) to continue. If we are sharp, we will get the reversal as indicated by the yellow arrow for a-long with a target near the top of the triangle.

Before entry think day trading market cycle, probability and context.
Before entry think market cycle, probability and context

Exhaustion bar

An exhaustion bar(s) is a failed breakout. Key pointers to an exhaustion or climax reversal bar(s) are:

  1. a bar that is much larger than the previous price action, and ideally the most extensive bar in the move
  2. it occurs at or near vital support or resistance level, or after the break of an essential support or resistance level
  3. it happens after several bars have been trending impulsively in one direction

Whenever we get the most prominent bar, after many smaller trend bars, and particularly after three or four identifiable pushes, we refer to this as an exhaustive, end of the trend, bar. Such bars will usually be a breakout from a channel. On the chart below the channel is not drawn.

In the chart below, after the exhaustion bar, or exhaustion sell climax, future bars can reverse or go sideways for a period. Below the bars did eventually change.

The day trading exhaustion bar is a reliable indicator of future price.
What identifies an exhaustion bar?

First trade of the day

First trades of the day can often test our resolve. Bar 1 below was our early trade this morning (12th February 2018). The London market is starting, and this can introduce volatility. Moreover, we don’t feel we settled into the chart, we have a possible wedge that could take the price long and as the day has no news to mention we could be in for a TR day.

Bars 1 – 3 short

We place our limit order short at the close of bar 1 and the midpoint of the same bar. The next bar, a pin bar down but not a new low, is not the follow through we wanted. We exit on-market for a break even. Bar 2 and bar 3, on the other hand, confirm a reasonable probability of at least a scalp short so we take a limit order short at the close of each. Our initial trade (from bar 1) if we’d held it would have provided 27 pips of profit. Bar 2 and bar 3 entries combined provided 17 pips of profit.

Bar 4 short

Some traders would have taken the first bull bar long after bar 3, however changing trade direction that quickly is difficult. Bar 4 was our next opportunity. By now we were in the groove and entered at the close of bar 4 and its midpoint. The subsequent scalp provided over 28 pips of profit.

The first or early day trading opportunity of the day is often problematic.
The first or early trade of the day

Context example

The chart below shows AUD/USD hourly bars. Bar 4 is a definite trend bar short and an excellent bar to take. Why did it not work?

A single bar is secondary to context. All the bars to the left. To take advantage of this, we need to understand the market cycle as this changes how we trade.

In our example, bars 1 and 2, not apparent at the time, are a breakout.  It is after we get all the bars between bar 2 and bar 3 can we see a channel; a channel that measures the same price difference as the combination of the breakout bars.

Bar 4

What has this got to do with bar 4? We know that more often than not on the achievement of a measured move of a channel price regresses to the end of the breakout point. From there it usually develops into a trading range.

Therefore the probability at the close of bar 4, even though it is a trend bar, is not for a continuation of the trend but a pullback to the top of the channel and a possible trading range.

Market cycle

The problem with not taking market cycle, the context or the bars to the left into consideration, is that a mistake here would have resulted in a hefty loss.

Most stops would have been positioned slightly above bar 3, and the market provided no pullback breakeven opportunity.

Context is king.
Context overrules price action

Another example below this time shows the US 500 ‘SPTRD’. Again we have the breakout bars followed by a channel that extends to a similar distance to the sum of the breakout bars.

As before we have a dramatic pullback to the start of the channel. The pullback will put many traders in short. But those traders that read the context will know that the probability is for the price to reverse and form a trading range.

In this case, the development of the trading range was interrupted by the weekend.

A context example of breakout, channel and pullback.
A context for US 500, ‘SPTRD.’

Signal bar entry

Our trading philosophy is solid, but our tactics, outside of an actual trade, are flexible. We are always practising and the results of which tweak, pinch and adjust our plan as we go.

For example, the chart below shows an unusual entry procedure that we developed and one which has been successful so far. The signal bar is a small but well-defined pin-bar nestled in a cluster of dominant TR bars. However, we have a prior higher high and, with the pin-bar, a probable higher low. Context fits a long at this point.

Our entry is at a measured 50% point of the pin-bar. We select a stop position that is one pip below an acceptable low. A measured-move from our stop to the top of the pin-bar provides our target.

Pin-bar signal bar measurement to target.
Even signal bars can be measured.

The tactic was applied again at 7 am the next morning after a micro three-wedge short which favoured the long.

Same strategy different context.
Same tactic and price action, different context.

Part 3, Forex trading strategy, the detail

When directional trading we need to determine our:

  • Trading vehicle
  • Strategy
  • Time horizon

Trading vehicle

For us, this is directional trading of ‘major’ currency markets, gold and US 500 ‘SPTRD’. We have chosen these because of margin, and that price movement ‘shockers’ are rare.

Strategy

Every market has a rhythm, and it is our job as traders to get in sync with that rhythm. If we are not in sync then the best entries, targets and money management will be to no avail. The only thing in this case that will work for sure is our stops.

Time horizon

Trading in a way that suits our personalities is right of both our chosen trading vehicle and strategy. However, it is probably more significant when considering our chosen time horizon. A time horizon in directional, technical trading can be anything from a 5-minute chart up to a weekly chart and anything in between.

Approach

We feel very set in our plan, any change here would need a considerable amount of work and proof. However, aspects of our technique (our tactics) within our overall trading strategy are flexible. In this regard, we encourage change through in-depth consideration and backtesting. In short, tactics change with the market. For example, we may take an entry only when the price reaches the first PB Fibonacci (fib) of the entry bar. Alternatively, we may enter the same trade from a breakout bar immediately on close and also, double entry, at the midpoint of the breakout entry bar. That is the flexibility of tactics within a strategy.

Virtual algorithm

Clarification: probability, ‘always in’, trend, market cycle (MC), context, setup, price action, R and ‘green line entry measure’ (GLEM)

    • Probability: is the belief in an alternative outcome, it is not about the odds. It goes hand in hand with ‘always in’ and is an attempt at defining magnitude. We try not to mistake possibilities for probabilities. (Knowing when not to trade is as important as knowing what trades are probably worth making.)
    • ‘Always in’ defines market direction at that moment in time. It is not a trend. It is the context and price action that defines market direction but not magnitude.
    • Trend refers to consistent higher highs with higher lows (long) or consistent lower lows with lower highs (short) within our chosen time horizon. (A hundred bars of our time frame on our screen).
    • Market cycle (MC) is broadly the recognition of a trend or trading range (TR).
    • Context is the picture the accumulation of 100 or so bars on the screen provides.
    • Setup: such as a second entry, a wedge and many more.
    • Price action: the indication of shape and length of a single bar, a few or a group of bars, provides. Reactive, rather than predictive, day trading.
    • R referred to reward/risk (actual R can be many times in our favour, but not worse than planned R, minus the spread).
  • Green line entry measure (GLEM) is from the configuration of our Fibonacci retracement tool. A GLEM measurmant is always in the probable direction. Our GLEM is a measuring tool for a target, stop and trade entry positions: but like all tools, its successful use depends on the options we take – basically, which bar(s), closes or wicks, we decide to measure.

Clarification continued: swing, scalp, breakeven, spread, retail traders, pull back (PB), Fibonacci (fib), base position, trend bar and traders equation

    • Swing is at least 2R.
    • The scalp is less than 2R.
    • Breakeven is zero loss.
    • Spread: is the difference between the sell and buy price (bid-ask or bid-offer).
  • Retail traders, in our view, are those that pay a spread. (So-called professional trader definitions abound but they still pay a spread. Proprietary (prop)traders, on the other hand, trade stocks, bonds, currencies, commodities, derivatives, or other financial instruments with an institution’s own money and with minimal or no spread.) 
  • Pull back (PB) is a reversal but not a reversal of ‘always in’ direction.
  • Fibonacci (fib) refers to the ratios of 38.2% and 61.8% (we see these as first or second fib depending on the direction of trade).
  • Base position is the zero% fib line from the GLEM
  • Trend bar is a bar that closes in the direction of the trend and beyond its midpoint, measured from end to end of the bar wick included
  • Traders equation: where a reward is at least as substantial as the risk and the chance of success is at least 60%.

Premise

In the chart below our assumption short at the close of the bear bar (red circle) is reasonable.

The premise is short, close is below the lows to the left.

However, three bars later the bar closes above our measured bear bar (green circle) which suggests that our previous premise is wrong.

The premise changes to long as the bar closes above the significant bear 3 bars prior.

Spread

Spread is the difference between the sell and the buy price (also known as the bid/ask price). GBP/JPY example, the difference between the 14,610.0 (”sell’ price) and 14,612.5 (‘buy’ price) is 2.5.

Forex or currency pairs, the spread is usually provided as indicated by the yellow arrow. In times of high volatility the spread price increases on many brokerage sites. In this example, the 0.7 spread may jump to, say, 1.5.

Awareness of ‘half spread’ is necessary for the lower time frame trades. In the snip below half spread would be 0.35 (0.7/2 = 0.35) this is then rounded up to 0.4 for ease of measurement.

Currency spread changes throughout the day trading session.
Spread awareness

GLEM

There are times when the directional probability can give us an edge. Indeed, there are situations when the directional likelihood of an equidistant move or more is 60% or higher. Then there are times, when the probability is 60% or higher, that the market will go, say, 30 or more pips in one direction before going  15 pips in the opposite direction. When traders learn to spot these entry setups with an appropriate stop and target, they have a tremendous mathematical edge and a profitable trader’s equation.

Firstly let us understand what we mean by a first and second fib. Observe the chart below where we have drawn a GLEM 1 short and long (a configuration within our Fibonacci retracement tool). Notice that the ‘fib’ marks either side of the 50% mark are 38.2% and 61.8% fib marks. Or, for simplicity, we use first or second fib in orientation to the direction of our trade. We explain later how these can be used to assist entry or exit decisions.

GLEM is a day trading indicator.
GLEM short and long example

GLEM configuration

Most advanced charts allow a specific configuration of the Fibonacci retracement tool. The GLEM as a measuring tool is adaptable depending on our chosen market, risk and profit criteria and the probability of our entry.

GLEM 1

‘GLEM 1’ is a configure of the Fibonacci retracement tool. It shows the zero% and 100% lines and +ve and -ve marks at equal intervals. We also show the 38.2% and the 61.8% fib marks; also referred to as first and second fib depending on trade direction. The midpoint or the 50%, equidistant between the zero% and 100% mark. Each is a decision position for entry and exit. We use green lines (positive numbers) as target positions and red lines (negative numbers) as stop locations.

GLEM 1 measures the entry bar or bars; this provides a midpoint of measurement and the first and second fib points for consideration. Above and below the entry bar or bars we have spaced markers to assist with a target and stop selection with either a scalp, mid or swing target position.

GLEM 1 might be prefered by beginners as it encourages the consideration of swing targets.

Fibonacci configuration for GLEM, for day trading and all trades.
GLEM 1, Fibonacci configuration
GLEM 2

‘GLEM 2’  is also a configure of the Fibonacci retracement tool. It shows zero%, 50% and 100% lines only.  With GLEM 2 our chosen target and stop position determines our entry point.

GLEM 2 provides a variable entry position but one that accurately measures R. Simple in design but requires a pre-measurement with either mirrored rule or better still the GLEM 2 itself. Measures legs (a sequence of bars of the same context) as well as individual bars. Suitable for the more experienced trader.

  1. The chosen leg or bar(s) measurement.
  2. Start the measurement from the desired target position.
  3. Measure target to a considered stop position.
  4. Set entry at the 50% mark of the GLEM.
GLEM 2, Fibonacci configuration

The more we develop and work with either of these tools the more we learn to rely on their accuracy.

Measured and considered stops

Set stops at one pip above or below a:

  • significant bar
  • prior high/low
  • probable second entry position

Stops are placed at least half a standard spread distance beyond.

GLEM 1 stop selection

The next chart uses GLEM 1 and shows a PB entry at the first fib. The red circle indicates the measured stop position for the calculation of the amount traded per pip. The red circle is 30.5 pips. We show in part 4 how to calculate the amount purchased per pip.

Notice that the stop loss position has a more considerable amount than the target position. That is £184 versus £156; this does not make a traders equation. The ‘considered’ stop position satisfies the trader’s equation, represented by the centre of the green circle. That is, a close near 13,282 or a push above this level ought to trigger a stop (an automatic or manual exit).

We suggest that only the most experienced traders that are observing the chart every moment use the measured position as an automatic stop placement.

The red circle represents the stop for measurement of risk or amount per pip traded, and the green circle represents the considered stop.

A live day trading example of how to determine a measured and considered stop position.
More on measured and considered stop positions

Rely on stop, but read the chart

The chart below shows the same trade 15 bars later. Due to price action when it looked probable that we would have a third push up, we took a break even on the first deal and re-entered short at the third drive and near the 55 EMA.  We can see that we were still some six pips from our considered stop position.

Readers will notice that we have maintained our stop at the ‘measured’ stop position, a position that does not make the traders equation; this works if we scale-in to the trade.

Unemotional judgement

There is no hard and fast rule here. However, a trader ought to be profitable before graduating to placing the stop at the measured position and relying on unemotional judgment to exit or scale-in.

Measured and considered stop position, more detail when day trading.
Measured and considered stop position, more detail

To complete this sequence of charts the next chart shows the trade rushing to achieve the target.

The day trading win, early correct entry in an exhaustion bar.
An exhaustion bar rushes to target

We see once again from the chart below our measured stop position (red circle) and the considered stop position (blue circle). An experienced trader might leave a stop at the measured-position. Such a trader might (1) exit the trade manually if a close is between the previous (minor) high and the centre of the blue circle, or (2) manage the trade if price pushed up towards the stop.

More on measured and considered stops, day trading interaction.
More on measured and considered stops

As the trade progresses, we wonder if we are on a trend or within a developing TR. However, we stay with our criteria of no close above the second fib, and the trade progresses to target.

Often it's difficult to hold, rely on our day trading strategy.
Often it’s difficult to hold, rely on strategy.

Amount per pip

Next is an entry long. We have a (considered) stop position at 19 pips below our measured bar position (actual stop distance is less as we have chosen a PB entry position). Our amount traded per pip is, however, taken from the stronger (measured)  stop position at 31.8 pips below. In this example, we have decided to buy with the amount we would trade at the measured stop distance of 31.8 pips which, at this time is £5 per pip; however, the weaker considered stop position is, in most cases, our actual safety net position.

Amount per pip when day trading invariably is based on the measured stop position.
Amount per pip invariably is based on the measured stop position

To continue from above, notice that we have entered the trade long from a PB entry. We set our target at the intermediate swing position (see target examples below). However the observant will notice that this is the third push for a possible wedge and therefore a scalp target would be more appropriate. And that is where this trade went with us initiating a manual exit at about the scalp target on the realisation of our error.

In day trading we exit early if we notice an error in our price action analysis.
Exit early if we notice an error in our price action analysis

Target examples:

Below we have a diagram of each of the potential targets: scalp, intermediate swing and swing.

A day trading target can be a scalp or a swing, what defines them?
What defines a scalp and a swing target?

Choosing which target comes with the experience of reading price action but more importantly the context of the bars in conjunction with support and resistance areas. We can see from the chart above that we may have chosen a scalp target as it arguably was the third move long. However, as proved to be the case, the movement was so intense that a full swing was entirely probable.

From the example below the nested triangle (also a wedge or three pushes long) indicated that an intermediate swing target was our best option.

Choosing which target comes with day trading experience.
Choosing which target comes with day trading experience


Developing a sequence, or a check-list will go along way to the elimination of silly mistakes.

GLEM 2 stop selection

Using GLEM 2 our first job is to measure with our rule how many pips to a significant level (more on this latter). With this information, we pre-set our amount per-pip.

With a mirror rule or the GLEM 2, we measure the leg, entry bar or bars; this, in turn, provides a target position.

Our GLEM 2 measures from the target to our chosen stop position. In the chart below we decided on a stop position one pip below the wicks to the left marked by the red circle. The midpoint defines our entry point and satisfies the trader’s equation.

Support and Resistance

Notice below what we mean by support and resistance, a key term when talking about technical day trading and price action.

What is support and resistance? Day trading essential knowledge.
What are the support and resistance?

Adjusted Entry

An adjusted entry usually is reserved for more extended time frame chart entries. In the examples below we show the weekly chart. (With a shorter time frame chart, such as a 5-minute chart, little time is often available to adjust our entry).

We notice below that if we take our original measure then our initial stop from this test is weak, that is it is not below a suitable ‘support’ level. To enter from our initial-measure would not provide a trade that satisfies the requirements necessary to make a traders equation.

We can see from this example that we entered the trade at our (desired traders equation) adjusted entry point and were rewarded six bars after entry with an exit at our target position.

The adjusted-entry, a lower timeframe technique. Not usually a day trading strategy due to time available.
The adjusted-entry, a more extended timeframe technique

The next example is also from a weekly chart and shows an adjusted entry short. In this instance, the first measure (shown on the right) provides a stop at the start of the entry bar but below the resistance level provided by the wick of the prior bar. By maintaining our target but adjusting our entry to give a suitable stop position and a traders equation, presents us with an adjusted-entry position at about the first fib level of our GLEM 1 measurement. (note that a GLEM 2 measurement is already an adjusted-entry)

An adjusted entry strategy, short example. Not normally a day trading strategy due to time available on the higher time frame charts.
An adjusted entry strategy, short example

Day trading routine

  • Plan (MC (Trend or TR) Economic calendar)
  • Brief (‘Always in’, Probability)
  • Execution (Valid Entry, Trade Management, Exit)
  • Debrief (Each Entry, Exit, and Opportunity)

Plan

MC

We start with a look at a higher timeframe chart; this provides an overview of the market. From a daily chart, we may see that the market has been in a steady trend, suggesting the possibility of a trend day on our day trading chart. If alternatively, we find multiple doji bars we may consider a TR day.

However, what we do not do is allow the higher timeframe chart to override what we see as price action or context on our (actual) trading chart, this is more difficult to master than it first seems. What we are trying to determine within the MC is the context. (See Trend or TR below for more)

The dictionary says: “Context is the circumstances that form the setting for an event, and which it can be understood fully.”

In our words, if we see a snapshot of our rugby team moving forward and leaving the opposition in their wake, and near the opposition’s try line, we get a specific context and level of probability for that moment of play.

Within the MC of the chart in front of us (i.e. the bars that we choose to show on our screen), we have a context and pattern that is relevant. To continually zoom out to view a higher MC or to frequently change our timeframe to a lower scale for the smaller MC will result in confusion, procrastination and error.

Trend

Trade with the trend is a mantra of any trading book. However, most traders see the reversal and trade that instead. The money is in trading trends and holding for swings. As the market spends some 80% of the time in a TR, this conditions us to expect the reversal. Moreover, most TR breakouts fail.

On paper, (1) higher highs and higher lows for a bull trend and (2) lower lows and lower highs for a bear trend seems obvious. More often than not this is far from the case until the trend is at an end. To read a higher timeframe chart to determine the ‘bigger picture’ trend can be useful but can also condition us to expect one thing when, in our time frame, something completely different occurs.

It is human nature that when we see the trend late (and this is nearly always the case) our ego provides disappointment at a missed opportunity and we stay flat or worse trade non-existant reversals.

TR
Economic calendar

Continuing with the rugby theme from above: this is not to say that a moment later the opposition intercept a pass, run the length of the pitch and score a try. On the rugby pitch, the context before the interception was decisive for us and held a certain probability of a successful outcome. However we stayed too long, ‘we held as a major news announcement came out’….when it comes to major news announcements on lower time frame charts, beware, our opponents could be the All Blacks! (As an aside, for many years the All Blacks have adopted the principles of Kaizen)

All Black rugby team follow Kaizen principles. In day trading financial news rules.
Kaizen principles

In the lower time frame charts, 5-minutes for example, in price action trading, awareness, rather than details, of the news, is all that is required. Trading one currency pair regularly makes us very familiar with which news events change the price, and to what possible extent. Dominating news events can transform a chart and in contradiction to price action; moreover, spread tends to increase substantially at such times. Use our Slow Trader economic calendar and review it regularly.

Brief

‘Always in.’

By ‘always in’, we are conditioning our minds and with good reason to look for trades in a certain direction. We are reminding ourselves of the need for a review of the bars to the left for set-ups, context, price action and support and resistance to determine, at that moment, the trade direction for at least the price distance representative of a scalp. ‘Always in’ is a vital area to consider leading up to and in the moments before a trade entry.

Probability

Probability goes hand-in-hand with ‘always in’ and is a combination of context, price action, and price measurement. We call our trade technique ‘Probability Day Trading’ because the concept and rationale behind the word ‘probability,’ once grasped, is all-encompassing and is the principle behind whether we enter a trade and exit profitably.

An agreement of ‘always in’ then needs probability on its side.

Execution GLEM 1

This section refers to GLEM 1 entries only. (GLEM 2 pre-defines which entry we take). However, these principles apply to both measuring systems.
Entry

Three independent entry methods are part of our day trading probability strategy: PB, breakout and price action. (More detailed examples of each entry method later).

PB entry

Reduced risk and probability, increased reward. How do we determine which PB point to use? Backtests, and lots of them. For example, as a limit-order at the first fib, the 50% mark, the second fib or even (but not recommended) the zero% measurement mark. Moreover, adjustment for half the spread is a consideration. We may also change our PB point depending on whether we consider that the market is in a TR or a trend; experienced traders only.

PB example

In the example below, we show three PB entries at the 50% point. Backtesting on another market might reflect a PB entry at the first or even second fib is statistically more advantages. In the example below entry is at the 50% point but a close above the second fid is a notice to set breakeven. A close above the zero% point might require us to place our exit limit at the second fib or even an immediate manual exit, and maybe this depends on whether we are in a TR or a trend. Each of these decisions needs to be determined before we trade and regularly tested through backtesting.

The PB entry example-a dependable day trading entry technique.
PB entry example
Breakout entry

The market will be in a TR for 80% of the time and will trend for the remainder. Moreover, a breakout from a TR will fail some 80% of the time. We can see therefore that breakout entries from a TR are infrequent and often false. However, any bar that closes clear of an identifiable support or resistance level is a possible breakout bar. Our reward comes when we learn how to identify and enter a breakout bar.

not always a break of support or resistance

We can see from the chart below that a breakout entry is not necessarily a break of an explicit support or resistance level.

Breakout example 1

We notice that the previous sequence of bull bars may be three pushes up, but might be only two pushes? Therefore the pull-back from the high might provide a PB entry for a final drive long. The market considered this possibility by the small doji, the bar above the blue circle. However, the market made a sudden break and closed below the support area, highlighted by the yellow box; this subsequently provided a GLEM measurement for a breakout entry. A timely entry needed, therefore a plan, in the event of a breakout close, would have had to be made beforehand.

Day trading is reactive, but anticipation was necessary here.
Day trading is reactive, but the anticipation was necessary here
Breakout example 2

Below is another example of a breakout entry. We can see that the lower green arrow shows a bull channel followed by a tight TR. As the market breaks out of the TR long, the close of which is within the blue circle, we have a breakout entry opportunity with a target as indicated. The likelihood is that the market will provide a measured move, upper green arrow, to match the lower green arrow.

A strong breakout above the TR with trend has an excellent probability of success.
TR breakout

A possible breakout entry short is shown below, except for the support level as indicated by the blue line. Question: does this provide an entry that has a 60% probability of being successful? If not then we stay flat.

Possible day trading breakout entry short, but support to the left-stay flat.
Possible breakout entry short, but support to the left – we stay flat

The chart below shows the continuation from above. The yellow box indicates another breakout entry possibility. But as previously we have support to the left which places a question mark over the entry. We remain ‘always-in long’. The yellow box area is also at the 21 EMA which, with a support area, provides confluence against a breakout entry short at this point. The probable direction is long until we have a close below the red box level. The market answered with a tight TR for a few hours.

Support at the red box and the yellow box negate a breakout short on this day trading chart.
Breakout fails against a support
Price action entry

Consider this method of entry as ‘context’ day trading that often includes price action; and where price action is secondary. However, as the context is also primary in PB and breakout entries too, we have therefore named this as ‘price action’. This approach may provide an early entry opportunity for a reversal. It is for experienced traders only.

The following chart provides an example of a price action trade short. The price action itself, in this case, is subtle. Two small pin bars with the second being a bear pin. The real indicator is context; three pushes long.

Day trading, more than lower timeframe charts, price action requires the support of context.
Price action entry, but the context is key

Below is a possible price action pin long. Indicated by the green line, the close of the pin is above the support level; this provides a probable entry long to at least the prior high, which it achieved.

Context is the support level in this day trading chart, price action is the bull pin bar
Context is the support level; price action is the bull pin bar
Price action measurement GLEM 2

Within our definition of price action entries, we can measure the entry bar or bars using GLEM 2 from:

  • close to open – standard
  • close to tail – sturdy bar(s), but close at or not beyond the prior
  • head to open – sturdy bar(s), but close beyond the previous
Close to tail

From the chart below we see an example of a close to tail entry. Bar 2 is our measured bar. (contextually this entry often looks weak). Bar 2 has closed at or not beyond the prior. We, therefore, measure from close to tail which provides our target. With GLEM 2 we always estimate from the target back to the stop.

The stop, in this instance, is one pip above the close of bar 1. We chose bar 1 as it is a probable second entry short position; thus providing additional strength to the stop. The 50% mark between target and stop offers our entry.

Close to tail measurements rarely look ideal, contextually.

Below is another ‘close to tail’ example, this time from a live trade. Notice the stop position below the previous low which in turn provides the entry point.

Close to tail example, traded live – this trade went against us, hit stop and became ‘always-in short’.
Head to open

Below is an example of a head-to-open. From context, the wick (or head of the bar) went below the prior low which may or may not have put the context into ‘always in short’. If we decide that we are always in short, and on this occasion we did, then the measurement from the open of bar 2 to the head of bar 3 fits our head-to-open criteria.

A 40.6 pip target is our goal. With GLEM 2 we measure from the target to one pip above the high of bar 1 which provides our stop position. The 50% between these two points is our entry.

Head to open measurement which tells us our entry, target and stop positions.

The next chart shows a ‘head to open’ measurement but this time of a single bar. We have taken a single bar measurement as contextually it is the second of probably three bars. In other words, the single bar measurement gives us the scalp target we require from this trade.

Notice that the close of our measured bar is beyond the prior bar; this creates a gap and is suitable for a head to open measurement. About the other bars to the left of our measurement our planned target and stop seem contextually fitting. Therefore, we are happy with the required entry position.

Head to open measurement of a single bar.
Second entry (part of a price action entry)

Bar 1 below was our entry bar. We looked for standard measurement of bar 1 to determine our target. From target, we measure back to assess our stop position, and in turn, the 50% mark between target and stop provides our entry position.

Notice how bar 2 pulls back to provide a second entry opportunity precisely at our original entry point; this gives another go at entering the trade or, for the experienced trader, a scale-in possibility. The second entry is an integral part of our price action entry knowledge.

Second entry as part of price action entries

Debrief

The most overlooked of our ‘day trading routines’ but the most important. Loses will occur, they are a part of any trading strategy. A loss can be financial or mental. Both of which provide an opportunity to learn.

Not dwell on our failures but more to clear the air of any doubt that the fault may instil in us. At the first chance (end of a sequence, a session or period) we go over the trade, remeasure, we’re honest with ourselves, and we find out what we could, if anything, have done differently. Even better if we have a trading partner to do this for us. Ego has no part to play in debrief.

Trend or TR

The market is always in a trend (either a breakout or channel) or a TR; this is true for day trading timeframe charts and all other charts. If we are day trading the 5-minute bars, for example, then we are only concerned about the market cycle that is evident in our observed 5-minute screen of bars; this will often be in contradiction to the market cycle of a higher timeframe. Not that we ignore the above timeline, but we need to be clear which period our trading screen is showing, and then trade with the appropriate strategy for that cycle.

Trend

We can see from the screenshot below that the market started with a bear trend until about 11 am where it reversed to provide a bull trend for over an hour. These are 3-minute bars.

The inexperienced trader is fearful that a trend will reverse at any moment. Such traders are always (incorrectly mostly) trading on the reversal. We see from the screenshot the many entry positions, stops positions and targets that the day provided.

Beginners, incorrectly, look to trade reversals in trends. Here is a day trading chart with several trend entries.
Beginners, incorrectly, look to trade reversals in trends

TR

TR example 1

A TR can be horizontal or slightly bullish or bearish. The market will spend most of its time in some form of TR. We do not trade a tight TR. The screenshot below is a bearish TR. We notice that our entries are not judgements of reversal tops or bottoms but PB entries that still meet our TR phrase of “buy low, sell high and scalp”.

Buy low, sell high and scalp is a TR day trading saying.
buy low, sell high and scalp
TR example 2

The day trading example below provides a 30 pip TR before significant news at 9.30am. The close of bar 1 gives us our first opportunity short. At this stage, we are not sure of a trend or TR therefore as there is doubt we take the scalp. On reaching the scalp target, we have three pushes down and hence probably a reversal to establish the TR. The fourth entry at the close of bar 4 did not reach the target. We exited on-market in this instance at the close of the third bull bar after entry. Bar 5 short was interesting. An acceptable signal and as the bar was small, we took the measurement, unusually, from top to bottom including the wicks. However, the institutions (computers) also liked this signal as the price, although showing a small PB, raced down and we did not get our entry.

Our TR day trading strategy makes for profitable trades.
More TR trades and scalp targets
TR example 3

A trend that has developed into a bear TR and possible wedge with a potential bull breakout. At the blue arrow below we would not enter long from here as we have a measured move long of the previous leg after bar 3. Moreover, we have a resistance level above the red trend arrow. However, our mindset at this point changes to ‘always-in long’.

Consider probability, trend and context in all our day trading trades.
Breakout long from a TR and ‘always-in long’ but the probability is weak.

We have a possible wedge indicated by bars 1,2 and 3. But also the final leg short to bar 3 contains a possible micro wedge. If the context shows two pushes within our observed trend (meaning what we can see on our screen and, usually, without zooming out), then we might take a scalp on the third push – short in this instance – thinking that the third push will be the last before a reversal of the trend.

GLEM 1 examples

The predicted price accuracy gained from GLEM 1, if we measure the right bars, is often phenomenal.

A configure of the Fibonacci retracement tool which we call GLEM.
A configure of the Fibonacci retracement tool – GLEM 1

GLEM 1 example 1

The chart below shows a compelling way that the GLEM 1 can be used to determine a target based on an acceptable stop position. The bear trend bar, with goal and stop indicated by the yellow arrows, is a breakout bar. The entry is an on-limit sell at the close of the breakout bar. We have not, in this instance, measured the bar with our GLEM but from the base of the bar (or the zero% fib) we measure back to an acceptable stop position. In turn, this provides risk, and therefore amount per pip, and a target.

How GLEM provides a day trading solution to measure target and amount per pip.
GLEM 1, stop and target

GLEM 1 example 2

In the case below, we have a relatively small market meaning that few if any of the GBP/USD bars are ten pips, our minimum scalp distance. The bear-bar within the blue box is a credible entry short for a scalp. However, the bar is only 3.3 pips. To provide a measure, and therefore a target, we measure from the close of the bar (a potential breakout entry bar although it became a PB bar) and encompass the whole leg in our measure. A ten pip target with acceptable probability.

If the market is small, measure the prior leg with our day trading GLEM.
Market small, measure the prior leg

GLEM 1 example 3

Often, when PB’s are extended (as in the case below), a copy of the original ‘leg’ from the start of the PB provides a future target. In this example within the green box, the GLEM was copied over to give the goal from the base of each PB.

GLEM measurement of the prior leg provides the target.
GLEM 1 measurement of the prior leg provides the target

GLEM 1 example 4

To measure incorrectly can mean missing a goal by the smallest of margins. The example below demonstrates: The chart below shows a GLEM 1 measurement of the entry bar (the first bull bar). When we draw our GLEM and nominate the measured distance below – 15 pips in this instance – we mirror a target from a breakout entry to be 15 pips long. We missed by one pip.

Our GLEM needs to mirror what the computers are measuring.
Ask, what are the computers measuring?

GLEM 1 example 4 continued

To follow on from above: what we have to remember is finding what the ‘institution computers’ will measure. In this example, the same chart below as above but a bar further on, the correct measurement was from the close of the same entry bar (the first bull bar) and a measure down to the tip of the lower wick of the bear bar. Institutions that can move the market do not have the consideration, as we do, of spread. To trigger a trade exit we set our goal half of the usual spread before our target. (half spread adjustment works only if the spread is steady)

Computers measured from the end of the final bear wick, in day trading there is little time to analyse.
Computers measured from the end of the final bear wick

Minimum scalp distance

Minimum day trading scalp distance is from entry to exit: for EUR/USD this may be ten pips and USD/JPY slightly less. However, we’re not incumbent to a strict minimum distance rule but more to the understanding that our trade, regarding entry/exit distance, is not restrictively influenced, regarding cost, by the spread.

Scalp example

The chart below is a PB entry for a scalp target. In this case, the scalp was an adjusted-entry; this was done to achieve an acceptable trade distance and to make the trade more favourable regarding reward and risk, reaching at least a 1R. In day trading, as time is short, an adjusted-entry can be a PB entry at the first fib, midpoint or second fib depending on a traders strategy.

A 1R measurement from the GLEM 1 is a scalp. In the example below, we achieved more than 1R, but it is still a scalp. With the adjusted-entry, the stop could have been repositioned above the previous high to make a 1R and provide a less vulnerable stop position.

A day trading PB entry for a scalp target.
A PB entry for a scalp target

Measurement and the higher timeframe bar

Below is an example of a possible third ascending push, therefore a scalp (rather than a swing) was measured. Bars 1,2 and 3 are 5-minute bars and represent the open and close of a complete 15-minute bar; this can afford a better measurement depending on context. Entry could have been at any point, but not above the close of bar 3, to provide an acceptable traders equation of not less than 1R. The GLEM, in this example, determines merely a target.

Higher timeframe, in this case 15 minute bar, is represented by day trading bars 1,2, and 3.
Bars 1,2 & 3 represent a complete 15 minute bar

Swing example

A swing can, and often does, include a PB. However, in the chart below, and on these 5-minute bars, the swing went to target without a PB. Measurement, rather than a PB, determines swing criteria.

A swing is a distance to a target in relation to entry point and risk.
A swing is a distance to a target and usually a minimum of 2R

Next, we show an example of a scalp followed by three swing entries. These were actual trades taken. The first entry (in blue) was as a scalp as we considered we had the probable direction but not the prevailing trend. The next entries (in green) were with the trend and held as swing trades. The second entry would have been better, with hindsight, if taken after the close of the third bull trend bar.

Swing with trend day trading entries, context allowing.
Swing with trend entries, context allowing

The detail

In any of ‘the detail’ sections that follow, we provide a level of preciseness that we might go into to find, almost algorithmically, our trade entry, hold and exit criteria; regularly updated through backtesting and experience and, therefore, are a guide only as all traders need to develop their trade references.

GLEM – scalp and swing – (the detail)

  • GLEM of 5-minute bars can include:
    • a PB bar if represented within one 15-minute bar
    • bars from more than one 15-minute bar as long as no PB 5-minute bars are within the measurement
  • GLEM can be re-measured after entry to include a subsequent bar if all the bars are within one 15 minute bar. (After that, a PB entry is with the revised analysis)
  • Entries are either for less than 2R (scalp) or 2R or more (swing) from a single GLEM
  • From a further, but independent, GLEM in the same direction, we can enter another trade while the earlier entry is still open
    • Not more than two open positions at any one time
  • With two trades are open, and one is set to break even, then the other entry can be left to:
    • Run
    • Set to break even
    • Or, used to equal reward and risk between two concurrent entries

A scalp trade – (the detail)

A scalp-only is allowed when:

    • In a TR
    • We trade a PB against the trend
    • A late entry in a trend
    • A swing or scalp is already open
  • Before any critical news, where insufficient time to run a swing

A Swing trade – (the detail)

A swing-only is allowed when:

    • A TR is not apparent, and context allows
  • Not more than one swing is open at any one time

Early-entry:

We prefer early entries that, through context, have a 60% probability or more of success. However, the majority of early-entries have a 40% probability of success. We are patient with early-entries and avoid the lower percentage takes.

  • An early scalp or swing: to be taken from a signal bar (rather than an entry bar) from a set-up, but before the establishment of the probable direction
  • Measure risk to one pip beyond a change of premise
  • An expected GLEM 1 is drawn to determine the estimated target (or a mirrored rule if GLEM 2)
  • Once an entry bar(s) forms we remeasure R
  • We do not take early entries on double tops/bottoms that are 20 bars or more apart; we wait for an entry bar
Day trading encourages early entries, but we wait for an early entry that has a 60% or better probability of success.
Early entry on a signal bar that has at least a 60% probability of success

An early-bird entry without a GLEM is also an entry on price action or a signal bar, rather than an entry bar: note:

  • Such entries have a lower probability than entries with GLEM but a closer stop position and lower risk
  • The GLEM above was correct for a scalp rather than a swing as on zoom out, or a look at a higher time frame chart, shows that this is the third measured bull-push, so a reversal is probable 

In the chart below an early entry achieves a successful exit without a GLEM. Our signal bar entry is low probability. Our signal bar entry has not engulfed the prior bar. However, it is a trend bar that has closed below support shown by the yellow ellipse. The risk is 12 pips with an achieved target of 20 pips. The exit on-market before the PB looked fortuitous but was more comfortable to judge live than it appears.

Early entry and exit without a GLEM.
Early entry and exit

Spread on the entry

Spread is where a broker makes money. To our mind, it is like the casino taking a small percentage (say 4%) from lots of customers. We reduce our spread cost at entry by entering a trade a half-spread (half-spread because we use mid-bid-ask spread position) beyond our desired position and thus achieve an entry at, or near to, our desired location – a neutral entry. However, we adjust target and stop so we pay the half-spread.

PB entry and spread

Measure the entry bar(s) with the GLEM and place an on-limit entry at either the first fib, midpoint or second fib. Choosing which depends on our strategy and market conditions. No allowance for the spread.

Breakout entry and spread

Place an on-limit entry at market price the moment the breakout bar closes. For entry, a half spread PB is needed to activate the trade. (note: entry on the unintended side of the trade is possible if we’re not watchful)

The example below shows a PB entry at the first fib mark long. The second bear bar closed lower but not below the second fib mark, so we hold the trade; this was a scalp only due to the confluence of a channel line, not shown.

Adjust for half the spread at target and stop but not at entry.
Adjust for half the spread at target and stop but not at entry

Note: It is acceptable to enter before the current bar closes. However, this can lead to a very unfavourable entry. If we’re happy with context then we may enter before the close of a bar, but consider:

  • Within one-minute to go, ‘probability’ established, and with the trend
  • Early in a breakout bar
  • But, never a breakout bar from a TR

Breakout bar

The stop is at the start of the breakout bar (in the example below we included the small bar before the breakout bar as it closed slightly above the previous high), adjusted beyond by at least one pip and half spread. For the breakout bar to be valid, the GLEM has to provide a suitable (validation only) stop from the zero% measurement.

Breakout bar or exhaustion bar? The clue is in the preceding bars
Breakout bar or exhaustion bar? The clue is in the preceding bars

A breakout bar is not defined by size but by context. A breakout bar establishes the probability. Many breakout bars fail to follow through.

Entry examples, a snapshot

The screenshot below from GBP/USD 3-minute bars shows the various entries that are possible during any trading period. Below are probable day trading trades:

Probable day trading trades.
Likely day trading trades

Bar by bar of the above chart

Breakout trend bars short
  • (1) PB entry short. Only the second push so reasonable to assume another drive down to at least the previous low
  • (2) Breakout bar entry short. Due to the price action urgency entry is on close for a swing short
Reversal price action
  • (3) Price action entry long. The difference between this price action pin long, over the pin-long four bars earlier, was that it showed on the 5-minute bars and the earlier pin did not
Major TR
  • (4) PB entry long. The close slightly higher than the previous three bars was the clue for a probable scalp long
  • (5) PB entry long. Late in the game as a long entry; Seen as three pushes long already, and a reversal of a TR is a possibility. However, the entry long in this instance remains valid. The long did not reach the target, and a subsequent PB below the zero entry fib necessitated a break even exit
News
  • (6) On the exit of entry five long, we have a PB entry short. However, this trade is exited at a small profit early due to the upcoming news at 9.30 am
Probability long
  • (7) This bar closed above the prior high and although it did not close above the wick(s) immediately prior the expectation was a further one or two legs long. Entry long was an on-limit entry at or near the close
  • (8) An engulfing trend bar long, third push on-limit entry for a scalp long
  • (9) This entry could be taken as a PB entry short based on the three active bear bars prior. However, the chart remains ‘always-in long’, as bar 9 is a robust engulfing bar

The reality

What we have below is the alternative (wrong) way to trade and in comparison to the chart above; this brings out much of what we have discussed so far. The philosophy of allowing the y-axis of the chart to fool us, miss reading the price action and not trading to a strategy.

The alternative reality, day trading can easily go wrong.
Day trading can quickly go wrong

Fear

  • (A) Without the bars to the right, this bar looks enormous when it closes; fooled by the y-axis of the chart. We see the close and think ‘unacceptable risk’. We feel that the bar has already gone too far. Because compared to the bars to the left it has, but they are small bars, and the reality is the close of A is only a reasonable sized bar. We stay flat out of fear.

Greed

  • (B) By the close of bar B, we feel that this is silly, we are missing out on possibly the most significant bear trend in history. (Even though it’s only 30 pips!). We don’t want to miss any more of this lovely profit. We take the plunge and enter short.
  • (C) At this point, we see three or so pushes long with an extended bar up to the midpoint of the prior combined bear bars to the left. We scale-in (short) feeling very pleased with our analysis. However, we are blind to the weak follow-through short after bar C, we exit much later for the loss of the initial entry at B, and the scaled-in entry.
  • (D) As our emotions know best, we decide to ignore our day trading amount strategy and increase our bet to make up quickly for lost ground. Great idea. At D we’ll show the market who’s boss. We know the market is in short and a TR because of the giant bear bars to the far left. (And near the top where we last exited with a double loss – dammit!) At the three small bull pullback bars to the midpoint of the prior bear bar, we load up with a short entry. In our ‘big picture analysis,’ we fail to notice that those important last few bars closed above the very recent low at 6.
  • (E) We know that to scale-in is for experts, but we’ve been day trading for months now. We enter short adding to our losing trade (again) at E thinking this is smart we have a double top and a continuation of our made-up TR.

Other people

Such day trading experiences are not exclusive to ‘other people’. We have all been there and continue to be there whenever we relax our rules and attention. Probability is the belief in an alternative outcome. Therefore, at each trade, we look continually at the alternative and impartially access its likelihood.

EMA

The EMAs’ drawn are 21, 55 and 200. These are drawn to provide confluence but can also be used to help determine a trend. Depending on the timeframe of the chart, other EMA’s may be considered, such as the 100. We do not trade with an EMA in isolation and often trade with no moving averages on the chart.

Day trading the EMA 21 and 55 can provide confluence.
EMA 21 and 55 confluence
Confluence at the 200 EMA.
EMA 200 confluence

Chart entry

We have looked at price action about individual bars or groups of bars. In this part, we will consider chart entry in detail. That is we take as many bars on a chart as necessary to find channel lines and principle support and resistance lines of TRs.

Linear regression tool

Not essential, but some software provide a ‘linear regression’ tool; this is an efficient way of finding a central line (linear regression line) between two points on a chart. Once we establish our line, we can easily parallel that line above and below to find the upper and lower channel (or trend) lines.

Three touches

Ideally, we want three contacts of the line by bars that have pushed up and down along the way as the channel or TR formes. The more, the better, but two touches are the minimum and on any time frame. Whether we use the extent of the wicks of the bars or the close of the bars is not finite but comes with lots of practice as to the better judgement of which to use for each measure.

Chart price action

The next two charts below are live trades short. Notice that we do not necessarily look for bar price action to judge our entry. We believe that the probability is reasonable that the channel or TR will continue. We commit to the trade despite the bar price action. We rely on ‘chart price action’ for this strategy. That is the context of all the bars that form the channel.

Stop

Of course, at some point, we are going to be wrong. But often a price will extend significantly beyond our considered channel or TR line only to fail and pull back into the channel/TR. Therefore, we need to have a distant stop, and trade with an appropriate size. A stop ought to be a minimum of the whole width of the channel/TR or be above a reasonable premise point.

Scale-in

An experienced trader may scale-into the trade if the price goes against them. However, we only scale-into a losing trade if the entry is preplanned and overall risk remains consistent. Any scale-in ought to be with reason. Either ‘bar price action’ or another channel or TR line presents itself as the bars build from ‘chart price action’. A scale-in done correctly can provide aggregate breakeven opportunities if an early exit is required. Traders of this strategy ought to expect to be out-of-the-money for significant durations relative to their chosen timeframe.

TR entry short from the upper level of the TR.
TR entry short from the upper level of the TR.
Channel line entry short from the upper level of the channel.
Channel line entry short from the upper level of the channel.

Day trading detail

Most people come up with opinions, and there’s no cost to them. Not so in the market; this is why we have learned to manage our trades in strict accordance with our agreed rules. No matter how well we read a (live) chart, we can only be 60% correct on most trades. Where our strategy often seems prudent, it is done that way for a reason, but still retains the opportunity for flexibility.

The following are therefore guidance only. If we are happy with the context, we can say, “thanks for the rule, but I’m applying a bit of flexibility right now in favour of what the chart shows”. That is the unconscious competence or trading with intuition. However, if we are uncertain, or the chart is not clear, then these management rules help minimise our number one objective to ‘protect the account’.

Day trading focus

  • Practise like the devil
  • Admit mistakes
  • Take loses quickly

Exit (the detail)

(out of the money) when to exit at breakeven, midpoint or on-market

Each trade is to have a stop and limit order set. We enter the chart with a set stop and a limit order. Once we’ve started the trade, we can adjust the stop and limit positions to our exact requirements. Exits detailed below give us a measured loss, which we accept as part of the trading experience, or a break-even opportunity:

Criteria

  • PB negatively closes beyond the open of the entry bar, having first closed positively beyond the close of the entry bar, then set: 
    • break even, or
    • if an (out of the money) PB continues exit on-market at the first-close that goes against an (in-the-money) PB attempt at breakeven
  • If the close of the first PB bar is beyond the midpoint (or 50% mark):
    • exit at the midpoint or breakeven depending on context
    • beyond a change of premise, then exit on-market
  • If a PB bar, other than the first PB bar, closes at or beyond the second fib, then set breakeven.

Again, the above criterion is an example only. We ought to work out our rules for exit based on the market traded and our testing of that market.

Below are two models based on the exit criteria mentioned.

The example below is an entry short. However, bar 2 closed above the second fib. We set breakeven and achieve this in bar 3.

Exit breakeven, PB at or above the second fib.
Exit breakeven, PB at or above the second fib

This time, in the example below, the PB closes below the midpoint; therefore, we hold the trade and successfully hit our target. The PB bar ascended above the bear entry bar as shown by the wick of the PB bar; this would have got weak ‘bears’ to exit there trades as the bar climbed above the entry bar. However, if our criteria remain, then we ought to (to take a line from Gladiator) ‘hold the line’.

PB, extended wick but a close below the midpoint.
PB, extended wick but a close below the midpoint

Exit rules – break them if in a trend

The example below has an explicit context; we might delay our usual practice. Gold on a one hour chart. We measured bar 1 for an entry long. However, the first PB closed below the midpoint of our entry bar (bar 1). Our rule is to set breakeven if we are confident about the trend or look for the best exit if we are not.

The bars to the left (yellow box) provide, contextually, a premise point where a close below would require an exit with a loss. Because of the context, we broke our rule on this occasion and held the long to target. Examples can always be found where the setting is almost but not as defined. If in doubt the expert trades by their rules. We need regulations to prevent significant losses. (If we ignore a law as in the example below we place an interim condition such as an exit if we have a close below the open of the entry bar.)

Rules can be broken if we have clear context to justify
Rules ‘is’ rules, but with a clear context break em!

(In the money) when to exit or set the breakeven

  • Strive to exit on-limit, at the target, less half-spread
  • Exit on-market when:
    • we consider a move to the target as ‘close is close enough.’
    • price action indicates a change in probability

The (live) trade below is a screenshot a moment before an on-market exit. We can see that the last bear bar missed the target by the smallest of margins. After a rapid movement in price and a bounce close to the mark suggests a reversal.

Hold until target, but sometimes it is clear that the target will probably not be hit.
Exit on-market when ‘close is close enough’.

Faltering early-entry and when to exit:

Early-entry is from a signal bar only. In other words, no entry bar or measuring bar. Such an entry is low risk and has a low probability of success. In our experience, the risk is often higher than is anticipated. At a 40% probability of success, such entries need to be held to achieve sufficient reward to offset previous early-entry losses.

Criteria

  • Exit at break even on an early entry if close is negatively beyond the open of the signal bar but not beyond a current change of premise
  • Exit on-market on an early-entry if the close is negatively beyond the open of the signal bar and a current change of assumption

The above criterion is an example only. We ought to work out our principles for exit based on the market traded and our testing of that market.

Considerations

Scalp

A 60% success rate is required for these considerations to be profitable:

  • A scalp is a minimum of 1R
  • Enter TR scalps from the first third of the TR
  • Do not move scalp stop to breakeven
  • Allow PB’s and assess them when the PB bar has closed
  • As a trade progresses, a new GLEM can be added and traded independently
  • An adjusted-entry is allowed (not for beginners) to achieve a minimum price distance
  • If we notice a mistake with our entry, hidden wedge, for example, we look for our best out
  • If 21 bars since the entry (at the close of the 21st bar not including the measured bar), we set to break even

Swing

A 40% success rate is required for this strategy to be profitable:

  • A swing is a minimum of 2R
  • Move swing stop to breakeven after a premise level is formed between break even and target
  • New premise points, and therefore a possible change in the probability, are continually generated as a trade progresses – we take breakeven, or best out available if probability changes
  • As a trade progresses, a new independent GLEM can develop. The rules for the new GLEM  (a scalp as we have a swing already open) apply to the open swing
  • As new bars generate, we measure with the GLEM and adjust (albeit rarely and reluctantly) swing target and stop – adjustment of stop being in the direction of trade only
  • If we notice a mistake with our entry, for example, a hidden wedge, we look for our best out
  • Concerned about an upcoming significant news event, set to break even or look for a revised exit
  • If 21 bars since the entry, at the close of the 21st bar not including the measured bar, we set to break even

Scaling into a winning trade

We scale-in to a winning trade when:

  1. The entry makes no more than a total of two open-entries at any one time
  2. The scaled-in entry stands on its own merits, independent of the already open entry concerning:
    • Plan (MC (Trend or TR) Economic calendar)
    • Brief (‘Always in’, Probability)
    • Execution (Valid Entry)
In day trading we scale-in to a winning trade but do not exceed our normal risk.
Scale-in to a winning trade

Scaling into a losing trade

Usually not taken. However, the following scenario is a consideration: we’re in a swing that, contextually, we get wrong. The trade has gone against us, and we’re looking for an out. A scalp, that in itself is good contextually, and that can be entered to minimise the probable loss of the swing. To scale-in to a losing trade increases probability but also increases risk. We can only scale-into a trade (losing or winning) when our total risk does not exceed our maximum risk at any one time. 

Scalp or swing that is the question

We set a swing target when we trade a trend and a scalp at every other time. However, as simple as that explanation sounds, the implementation is far from easy. The following technique applies a bar by bar analysis and provides a sense of decisiveness to our trades; and, a likelihood that we will gain more pips from any series of trades that we might otherwise achieve. But keep an open mind, when we backtest our market we may find that moving the target directly to the swing mark from the scalp mark works best.

  • From each trade, we set a scalp target
  • If the progress from the measuring point contains three or fewer trend bars, we move the target to the intermediate swing position
  • Similarly, if the progress to the intermediate swing target from the measuring point contains three of fewer trend bars we move the target to the swing position

Take a look at the example and explanations below:

  • Bar 1, we entered short at the close of the bar. We exit at the scalp target as each subsequent bar was not a trend bar
  • Bar 2, we enter long at the close of the bar. The following bar is a trend-bar. We, therefore, extend the target to the intermediate swing position
  • Bar 3, we again enter short at the close of the bar.
  • Bar 4, we enter short at the midpoint of the measure of bar 4 and the two prior bars. At the close of the second bar after bar 4 we move the target to the intermediate swing position
  • Bar 5, we enter short at the close of the bar. We exit on the following bar at the scalp position

Part 4, The Leap

How to calculate the amount traded per pip

A constant amount, variable risk

For simplicity, some traders like to trade a fixed amount per point, therefore variable risk, for every trade, regardless of distance. A 10-pip trade risk, usually a minimum, would represent the same per pip as a 30 pip trade risk: say, £10 per point in each case making the risk, in this example, £100 and £300 respectively.

Other traders realise that a variable risk is too, well, variable. They trade a constant risk amount per trade. They, therefore, vary the amount traded to control risk.

Consistent risk

A consistent risk requires the risk decided to be divided by the trade distance. For example, a trade risk of £120, and a stop position of 20 pips from entry would require a trade of £6 per pip. (6 x 20 = 120).

A constant risk basic layout that we might keep at our day trading desk for quick reference:

A variable amount, consistent risk
Consistent risk

This example provides a £300 risk, and as it is for the lower timeframe market, we’ve only offered four broad ranges of pip stop positions; as decision time can be short. We alter the amount per pip to suit our risk. The first few trades may be traded at a lower risk than usual to allow us to warm into the charts, particularly after a short break away. However, do not arbitrarily increase the trade amount say in the afternoon session because we are brimming with confidence from a successful morning session.

Bell curve

The ‘bell curve’ reduces the amount traded, and therefore risk, for both the smaller and larger trade distances and provides maximum amount traded for the most favourable median distance.

bell curve math

Most favourable varies for each market. GBP/JPY, for example, may have a most favourable trade distance of 25 pips. Therefore, we use a bell curve ‘cost rule’ of 50 (25 x 2 = 50). Trading low for a 25 point risk the calculation is: (50-25)/4=6.25 in this example we would trade with £6.25. The same case but the trading medium is (50-25)/2=12.5. And, finally, the same model but trading high is (50-25)/1=25 (or use any divisible number that suits our risk requirements).

most favourable

To determine ‘most favourable’ determine what the maximum trade distance is, that distance halved is our most favourable. Maximum distance is relative to ‘time in the trade’. Maximum distance, for example, would be very different on a 4-hour chart compared to a 3-minute chart as ‘time in the trade’ would be relative to each time frame.

The critical point is that risk reduces on a logarithmic scale down to zero either side of the median.

The bell curve provides a day trading amount per pip solution.
Example of a bell curve

Pre-set

As its name implies, a pre-set amount per pip provides the advantage of speed. If we have to measure targets, stops and determine the most suitable entry point – all after we estimate our amount per pip  – we quite often have missed the trade!

However, we cannot disregard the importance of accuracy over speed. To satisfy both requirements, we use a ‘pre-set’ amount per pip method. For example, if we use £600 we divide 600 by the considered real risk distance; if that distance is 60 pips, our amount per pip would, in this example, be £6 per pip. We round to the nearest whole number. This method not only allows us to pre-set our amount per pip but provides a remarkable consistency of risk across all markets.

As a potential entry (or signal) bar is nearing its close, we measure from the estimated close back to a second stage level. A second stage level can be: a significant high or low, depending on trade direction; a significant second entry point; or, a hight above a TR equal to the width of the TR or twice the hight above a new high.

Major high: the top of bar 1 represents our major high on our time frame. Bar 2 is our actual stop position and bar 3 is our measured entry bar (our trade entry was unsuccessful in this example). Our amount per pip for the desired entry was our risk level (say, £600) divided by the pip distance of the yellow arrow.

The significant point is part of our amount per pip calculation.

Our preference for calculating amount per pip:

  1. ‘Pre-set’ method for our middle timeframe bars, for example, a one-hour chart.
  2. ‘Consistent Risk’ calculation for our trades for the lower timeframes, for example, 5-minute chart.
  3. ‘Bell curve’ for our trades from the higher timeframe charts, for example, 4-hour chart.

Moreover, we usually use a lower trade calculation for the first few hours of the day. A sort of warm-up period.

Money Management

In The New Market Wizards, published in 1992, ‘good money management with a poor system only means we lose money more slowly’.

The book highlights even more that without sound money management, we will not remain traders for long – no matter how good our system.

Using our prefered ‘pre-set’ method for the calculation of our amount per pip these are some of our money management techniques:

  • Select a series of measurement amounts appropriate for our market vehicle. For FOREX we use £300,£600,£900, £1,200, £1,500
  • Let’s say we are using £600. We take our measure from the estimated close of our entry bar back to a selected major level and divide 600 by that distance.
  • The answer represents our amount per pip. However, our actual risk, from entry to stop is not more than 50% of our measured-risk, in this case, 600/2 = £300.

How do we select which amount between £300 and £1,500 to use? We assume that an account is large enough to take the most significant risk of £750 on any one day trade (1,500/2). 

We judge where we are in the market, our trading currency, confidence and if we are in sync with the market cycle. If we are trading at a measurement amount of £900 (that’s a £450 overall risk) and we lose the trade, our next trade will be at the following lower measured amount.

Each time we lose we sequentially lower the measured amount. Three losses in a row and we paper trade only. When do we come back to money trading? The answer is when we are back in sync with the market. Beginners, in contrast, tend to increase their trade amount when they lose in an attempt to get their money back quickly; this is the ego trading.

Which account?

On opening a trade account with a chosen broker, we need to familiarise ourselves with the broker’s trade process. They are all very similar. If trading the lower timeframe charts, say 5-minutes, we suggest a trading system that can enter a trade directly from a chart. Our primary trade entry method is from an on-limit entry directly on the chart with a pre-set stop and target. After entry, adjust the stop and target to exact requirements.

We should never get lazy with the above procedure. To enter a trade, and then to immediately find that the trading system has locked, or just not allowing adjustment, is uncomfortable, significantly more so if we do not have a pre-set stop-limit. As our account grows, and we trade at a higher amount, to not enter with some pre-set stop would represent an unacceptable risk. If locked out of the chart, we may also be locked out on the broker’s home page. Have the broker’s trade number on speed dial for this unlikely event.

Ego and demo accounts

Next, we will consider a leveraged traders account, such as a UK financial spread betting account.

A demo account is a way to start, but only to get familiar with a brokers software and the nuances of trading that are particular to that broker. A few weeks at the most. To continue to ‘demo-account’ trade does not get us much further as we do not get past the emotional aspect. With a demo account, we could trade at £30,000 a time but it will have no effect on us emotionally and therefore is meaningless.

A real account is necessary as this is a different ’emotional’ beast altogether, but we will lose this, and probably several after that. The cost of trade graduation. So we keep this account small. How small? Well, if we are trading the major currency pairings, then most brokers will have a minimum per point. If we take a 5-minute market that has an average stop distance of 25 pips, and we want a low margin and equity percentage per trade, then our starter account size needs to be several hundred pounds.

Beginner attraction to the lower time frame

Financial spread betting attracts the smaller time frame traders. Why? When trading through a leveraged account, it is essential to monitor margin and equity percentage. If we trade a higher time frame chart, say a daily chart, our stop distance will be in the region of 100 pips. In this instance, we are already committing a significant portion of our starter account on one trade. Therefore we need a more substantial account. And this is the catch. Price action is more comfortable on the higher time frame charts, we have more time to construct our trade and each bar has more gravitas; by which, it is easier to read a daily chart than a lower time frame chart by degree as we view each lower time-frame. But to trade the higher time frame, we need a more significant account. And we will lose it, but probably more slowly!

The UK spread betting

A point to note if trading via the UK spread betting account. It is paramount when trading currency pairs that our chart is linked directly to the broker. Particularly in the case of day trading lower time frame charts. Currencies, unlike shares, have no central arbitrator of the price. Institutions set the price in (major) Forex. If different institutions feed our broker and chart, we will have a price discrepancy, albeit small.

Lower timeframe bets

In the lower time frame entries, say a 5-minute chart, we are dealing in 0.1 of a price movement of difference. For example, if we are trading USD/JPY, we may have a sell-price of 10933.3 and a buy price of 10934.0 (also called the: bid-ask or bid-offer). The spread, in this case, being 0.7, our on-limit entry might be 10933.7 (as close to half of the spread that we can get). This accuracy is nonsense if a broker’s price and chart price have a difference of a few points.

Higher timeframe bets

If trading daily charts a consideration for the UK financial spread bet trader is finding a spread bet broker linked to charts that show ‘New York close’ bars. As a price action trader, a daily bar with a UK close is to take a chart read without an accurate picture. To-date, we have not found the UK spread bet broker that provides ‘New York close’ bars.

Which charts?

Our final point on brokers and charts, and mainly if we are day trading the lower time frame, is that web-based charts don’t seem to have the precision necessary. Designed primarily with a mobile device in mind. Downloadable charts are prefered often described as ‘advanced’ charts in the broker’s information.

Alternatively, most brokers offer MT4, an excellent chart for currency trading. It comes down to personal preference. Having tried ‘advanced’ charts with several brokers and MT4, we have settled on a particularly advanced chart. However, if MT4, consider the spread payment per trade, as many brokers that offer MT4 also have an increased spread.

How many markets?

There are no hard and fast rules as to how many markets to trade. However, a trader will need to think long and hard about this aspect of their strategy. As guidance, a trader in the very low timeframe, the 5-minute charts, might find that a single chart is all they can manage. That was indeed our own experience. As the timeline increases, say to the one-hour chart we might be able to view several charts but only trade one at any one time.

These are questions that each trader needs to decide for themselves. When doing so, however, keep in mind the overall risk. For example, if we are trading the one-hour charts and included in our market list is GBP/USD and EUR/USD we will often find that an adverse move in one will result in an unwanted movement in both.

Congruent loss

If a congruent loss does not exceed our planned loss for any single trade, then beautiful (as we must count the combined trade as one). If not, then we are breaking the primary rule of any successful trader which is ‘control the losses’. Yes, when we win, we will probably win twice (as we are in two markets that react similarly over the short-term). But when we experience a losing streak, as every trader does to a greater or lesser degree, then those DOUBLE losses will have a longer lasting effect than the potential double wins.

Pay ourselves first

We must acknowledge any gains or loses as real. There is a temptation to consider a trading account as something separate from real life. To do so encourages us to treat wins frivolously and accept losses as consequences.

Accountability

We, therefore, have to make ourselves accountable for every penny and pay ourselves first. As a day trader, for example, we pay ourselves daily. We hold a set amount in our Broker’s trade account that meets our trade requirements for margin and equity percentage per trade. That amount is locked. Transfer to the bank any amount over at the end of the day trading session. We suggest a bank transfer rather than to a card even though this takes a few days longer. Once the credit arrives in our bank it again should be transferred to a trade holding account; nothing too sophisticated, a straightforward e-savings account called ‘Trade Account’ will do.

Focus

Thereby at the open of every trading day, we start from a definite, known amount. This simple system does wonders for our trade focus and ultimately our profit. Conversely, if we have taken a loss at the end of the day, our goal the following day is to make back the loss. This simple management system of ‘pay yourself first’, and the management of profit and loss, has the bonus of stabilising our trades. (We like to hold our trading account at least one full trade loss above; for example, if a £15,000 trade account we will keep it at about £15,450 which gives that buffer above the whole number).

The ‘pay yourself first’ system fits a chosen trade duration. A day trader pays daily and a weekly trader weekly.

To get caught up in day-to-day tasks will prevent us from achieving our goals in trading. Equally, exhausting ourselves by staying too long on the trade screen will have the same effect. Plan weekly and get the balance right.

What is our trading goal?

To trade without a goal in mind is asking for a losing account. No matter how accomplished a trader we are if we do not work through this question first we will flounder.

Almost all day trading newbies (ourselves included) start with a simple aim of ‘let’s see what we can make’. With this broad objective, we may trade well in the morning only to find it all gone in the afternoon. After a while, this broad trading objective will affect our trading confidence. The once prosperous morning trades become tentative and ultimately compound our decreasing daily account. We may then compensate in the afternoon with a more significant than usual bet, and we can see where this is going.

New approach

Instead, let’s try a different approach. One that requires discipline on our behalf but one that provides a profit. Again, this is more difficult to do than it first seems. Most traders, even after reading this and agreeing with the principle will go ahead and do their own thing anyway. Only to find, after several years, that their account is negative and they have to start again. If indeed they continue at all. So let’s be different and start as we mean to finish.

By a trading goal, we mean the amount of money we want to make each trading period. As day traders, we set a daily money goal. Trades held overnight, as with Intraday, set a weekly money goal. For trades that carry over the weekend, a monthly money goal might be appropriate.

Minimum trade amount

Our money goal for our trading period has to be small in the beginning and grow with our (measured) success. Let’s look at the day trader example. To find a minimum trade amount we look at our chosen trading instrument (this, for example, maybe the GBP/USD in the Forex market) and determine the maximum stop distance that will allow us to trade this instrument under most conditions. Say it is 60 pips on a chart using 5-minute bars for our chosen Forex, or 60 ticks if we have selected the equity market.

Our maximum risk here at £1 per pip is £60. However, experienced traders can scale-in to a trade.  That doubles our risk in this example to 2 x £60 = £120. Therefore we conclude that in this case our trading is based on a £120 bet at any one time.

Set a money goal for each trading session

Our trading session risk becomes our session money goal. In our day trade, 5-minute bar, £120 per trade session risk example above, our daily money goal is also £120.

At first, this may seem puny, we have a risk of £120, and we want to achieve £120. Yes, that is exactly right. Our money goal in this instance is £120 for the day. We plan to trade 200 days in the year, so that is £120 x 200 = £24,000 per year.

If our day trading starts at 7 am then from time to time, we will have reached our trading goal by 8.30 am! On other days we might be late in the afternoon before we hit our money in the bank target. The advantage provided by an exact money goal is, however, extraordinary.

Paper trade

We ought not to use the ‘live market’ as a training vehicle and particularly to train without a money goal. The financial market is a ‘zero-sum game’, so where one loses the other gains and the financial market attracts the brightest.

Instead, paper trade until we are confident that we can follow our chosen trading system, on our chosen time-frame, and regularly achieve our money goal time after time. Once we enter the live trade stage, we can remain objective and achieve our money goal relatively quickly in each session.

In our example of reaching our money goal by 8.30am, what do we do for the rest of the day? Do other things, walk, exercise, read, indulge in a hobby or interest.

We also follow the market through (paper trade) for the whole of our session. But this can be done quickly and at set times as we are not waiting for the bars to close.

We ought not to move from this cycle too quickly. Depending on if we’re a full-time or part-time trader and our other commitments. It may be appropriate to trade this period of things for a year or two before upgrading.

The same amount per pip, increase profit per session

We have achieved our £24,000 per year for an appropriate time; we are ready for the next stage. Our trade amount stays the same, and we look to achieve £240 for the chosen trade session. That’s 200 x £240 = £48,000 per year. We follow the same routine as outlined above.

Only when we are comfortable achieving our £240 per day with our £120 risk of two consecutive trades at any one moment, do we increase the risk per trade.

Increase amount per pip

Only at this point ought we increase our amount per day trading pip from a risk per trade of £120 to say £180. With the increase in the amount per trade, we go back to a single money goal which is now £180. We now have an annual income of 200 x £180 = £36,000.

Appreciate that the amount per year has now decreased, however, we ought not to underestimate the step up in risk per trade. If this feels uncomfortable, or we find that we are not holding successful trades or exiting too early on perceived loses then we are to revert to our previous trade amount.

The same amount per pip, increase profit per session

Our trade amount stays the same, and we are looking to achieve a money goal of £360 per day and (200 x £360) £72,000 per year. This cycle continues as our account grows, and our emotional control and our skills improve; this does not, however, take months but years.

Stay with the plan

Profit made early in the day trading session will often be lost later through mistakes and overconfidence. Such trades move us away from our strategy and into the realm of the hopeful.

When markets change their cycle, we can lose our rhythm of the markets.  When this happens, usually indicated by three consecutive losses, it is a reasonable idea to paper trade. We paper trade until we feel that we have gained the momentum again.

Fun

Our final word is that we ought to have fun with our day trading. A considered strategy allows us to enjoy our trading and profits. We vary our risk depending on our confidence level.

Delayed gratification

As traders, we need to be able to live with delayed gratification. That is, other than a mortgage and at a fixed interest rate, we cannot buy stuff with debt. A vital part of keeping the trading fun. There is an aspect to trading in that if we trade for money that we vitally need then the funds will elude us.

Increase and decrease amounts traded like an expert

We trade like a computer programme, but we are human. Therefore, there are going to be times when we will be distracted, tired or down. At such times it is best to recognise the symptoms early and scale back our normal entry amount.

Moreover, when our eye is in, and we see the market cycle clearly, and the market is cooperating then we can take advantage and move up a notch or two in our exposure. In other words, when we are in a good run of trades – we trade bigger, but never beyond our calculated maximum. Such changes, however, are planned and practised. We are therefore staying with the plan, we are consistent in this and not increasing or decreasing due to fear or greed. Have fun with it, but for the right reasons.

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