Forex Analysis For Week Of 1 August 2010

Forex Weekly Forecast for the week of 1 August 2010

Forex market analysis published on 12 June 2010. SPs are are SWING POINTS. These are prices at which I am looking for trade setups.

EURUSD (3/19/2010 – 6/15/2010) Making the Case for Large Stops

Look over your EURUSD  trade journal for this year.  Between 19 March, 2010 and 15 June 2010, how many losses did you have?  How many of those losses were on short trades?  I lost a few, to be certain.  Every one of them that cost me money  had a small stop loss.  How much did your tight stops cost you last year?

I opened a short position on EURUSD on 3/19/2010 and held that position until 6/15/2010.  It never even came close to the stop loss.  I pulled 1.272 pips from that trade.  You can see this trade, and the rest of my verified live results at MyFXBook.com.  The stop loss on the trade was pretty wide by most folks standards, but pretty small by mine.  This trade is not exactly “typical” of my trend following trades, but it is about an 8 point buck in hunting standards.  I’ve pulled 1,700+ pip trades, and even a 4,000+ pip trade on the GBPUSD with my trend following systems.  The 100% honest, and absolutely verifiable (by paying subscribers) results for the entire portfolio can be seen in my results page.

My point is that plush stop loss orders reduce the risk of your trade stopping out.  I use modest leverage (usually 1:1 – 3:1)  so that if I do stop out, I haven’t lost much.  I seldom ever see a stop out.  My trend following systems generate buy and sell signals to get me out of trades way before that happens.  The stop loss does play an important role when market weirdness occurs though.  I’m not talking about news releases.  Those never come close t one of my stop losses.  I’m talking about those massive world-events like unexpected wars or the second coming.  You know, those once in a lifetime events.

Small stop loss trading has its place.  I do my fair share of trading with razor thin stops.  But it’s much more busy than I care to be on a daily basis.

Trend Following History

Richard Donchian, Jesse Livermoore, Ed Seykota, John W. Henry, Richard Dennis, etc.  The list goes on and on.  None of these names will be “new” to you if you’ve been trading for any time at all.  What do all of these traders have in common?  They are, or were, all trend followers.

When you see names like Donchian and Livermoore on board with a style of trading, you really have to give it some serious consideration.  Trend following is nothing new.  In Remiscences of a Stock Operator, Larry Livingston (Jesse Livermoore) often eluded to the fact that when he sold his longs, he automatically got short.  Once his directional opinion changed, he just got back into the market in the opposite direction.  This is one of the defining features of a trend follower.  It’s also the reason that trend following works.  Trend following systems have beat the market for decades now.

My personal income over the last few years has been directly related to my trading performance.  My intraday trading has taken a lot of my time, while my trend following systems have taken almost no time at all.  At the end of each year, my trend following accounts have equaled or beaten my other systems.  When I look at a line chart of the performance, the trend following systems poduce a much smoother line than anything else I do.

Which would you prefer?

Four Types of Trades

There are basically four types of trades:

• Good Trades
• Bad Trades
• Winning Trades
• Losing Trades

Not all good trades win and not all bad trades lose.  It’s important to know the difference.  We’ve all placed bad trades that took profit.  How many times have you had a trade in that was obviously a mistake end up taking profit because of a news event or a market change-over anomaly?  Likewise, how many times have you placed a perfect trade, one of those one in a million opportunities with every type of confluence available, only to see it blow your stop loss in an illiquid market?

I’m going to ignore the difference between winning and losing trades.  You all know that difference pretty well.  I want to focus on the difference between a good trade and a bad trade.

Good trades are those trades that meet all of the criteria of your trading system.  It passes all of the filters, meets all of the positive criteria, and offers an attractive risk to reward ratio.  Taking these trades is a no-brainer.  Some of these trades will end up losing money.  If your system has a positive edge, the losses won’t matter.

Bad trades are those trades that you take and later (or even at the time of entering) realize that they do not meet your criteria, or that one or more of your filters was violated.  We’ve all done this from time to time.  Very few traders can tell me with a straight face that they’ve never tried to catch a falling knife or got impatient when waiting for a solid 1-2-3 to complete.  It happens.  Get over it.

The key to surviving the bad trades is to suck it up, take the hit, and exit the trade.  Don’t wait for break-even, and don’t even think about adding to your position.  Get out of the trade the second you realize that you’ve made a mistake.  Trust me.  I’ve seen this dozens of times.  A client, mentee, or good friend comes to me looking for advice.  The guy’s into a bad trade in a big way and it’s 1,000+ pips against him.  Every time it looks like a turn-around, the guy added to the position.  The problem with this scenario is that the turn-around is usually imagined.

The key to entering good trades is simple.  Follow your rules 100%, only trade a system with a positive edge and enter every trade that meets the criteria and fits the filters.  Once you are in these trades, you stay in them until your trade meets the system’s guidelines for an exit.

Knowing the difference between good and bad trades is a key skill to master for any trader.  Your actions in both of these trading situations will determine yuour success as a trader.

Trend Following and Forex Money Management

Money management, when  trend following, in the forex markets is handled a little different from what you may be used to.  If we use the traditional method in which we tie a percentage of our available equity to the stop loss, we may find it difficult to make much money at all.  The stop losses are usually much larger than many are used to.  But trust me.  The stop loss orders are almost NEVER HIT! The stop loss orders in my trend following system are there for a catastrophic failure in the early stages of a trade.  I exit losing trades and enter in the opposite direction long before the stop loss is hit.

My trend following system uses a leverage based model for money management.  The current state of the market determines what that leverage is when the trade is placed.  I’ve had trades with leverage as low as .5:1 (that’s 1/2 to 1).  I’ve also had leverage as high as 5:1.  It just depends on the trade.  I typically stick with 1:1 – 3:1 leverage.

To explain this, I’ll use a $1,000.00 account balance.  If I have a $1,000.00 account balance and I want to place a 3:1 leverage trade , I open an order for 3,000 units of the currency that I wish to trade.  You may be thinking that this is far too small.  That’s about 30 cents per pip.  You need to trade small if you want to win big, guys and girls.  You have to remember that if you can win a lot of money really fast, you can also lose money really fast.  Your market maker depends on it.  That’s why they give you 100:1 leverage.

Many of you want to trade 100,000 units for every $10,000.00 in your account.  Of course you do.  It’s fun to watch your account balance move up by $10.00 for every pip.  You can admit it.  We’ve all been there.  Trading at this level of leverage is absolute account suicide.

Now, when we decide what amount of money to base our leverage on, we have to first deduct any open risk.  That means that if I currently have a $10,000.00 balance and have trades open which have a $1,000.00 risk exposure (you could lose $1,000.00 in the worst case scenario), your leverage on the next position must be based on $9,000.00.  You must assume that the money is spent.  I like to think of open risk like a “check outstanding.”  it’s money that’s spent,  but has not yet shown up on my account.  Just because the equity is there does not mean that I can spend it, but that’s a blog post for another day.

Now, some notes -

Remember folks.  Manage your leverage.  If you don’t it will certainly manage you.  Few things feel worse than being in a trade, even a good trade, that turns against you when you are over-leveraged.  It is PAINFUL!  There is no other way to put it.

Also remember that 100:1 leverage is great, but you must know how to manage your own leverage.  You CANNOT trade 100:1 leverage unless your goal is a margin call.  Think of the 100:1 leverage as an open line of credit.  For every $1.00 you have on deposit, your broker will loan you $100.00.  Just because the bank will give me a 100:1 loan does not mean that I am willing to assume that risk.  Nor should you.  Trading is a business.  Run it like one.

Watch for more information on leverage management, risk management, and money management in the up-coming weeks.

Forex Tip – Position Size

Establishing the correct position size is difficult for most traders.  Even experienced traders screw this up all the time and it’s so simple.  Brokerages, forex trading system designers, and a number of “gurus” will tell you to risk “only 2%” per trade.  The question becomes, 2% of what?  2% of my open equity?  2% of my total account equity?  What about accounting for current risk?  All of these questions must be answered in the fixed percentage scenario.  I apply a much more advanced money management plan to intraday trading, but it doesn’t have to be that hard.

In my trend following trades, I ALWAYS figure that I’m probably wrong when I enter the trade.  That’s right.  I always think I am wrong, every time I enter a trade.  This forces me to use sound leverage.  In my trend following systems, I typically use 1:1 leverage.  That means that for every 1,000.00 in my account, I will trade 1,000 units.  To save you some figuring, that’s about a dime a pip on the majors for every thousand dollars I have in available equity.  That doesn’t sounds like a lot, does it?  What that means, however, is that for every 100 pips I earn, I increase my equity by 1%.  That becomes HUGE over the course of a year in a trend following system.  Take a serious look at my actual trading results before you make up your mind.  I think that when you do, you’ll see that 1:1 leverage is more than adequate to build serious wealth.

I’ll talk more about the mindset in a later post.  For now, just review your past performance and apply a 1:1 leverage to each trade.  How did you do?  Look at my performance and apply the 1:1 leverage.  How did I do in 2009?  Did I beat your fund manager, 401K, IRA?  Keep in mind that one of those pairs, a big one, was traded at 5:1 leverage!  I almost never trade at 5:1 leverage, but the stop loss was so small on the first trade that I was willing to take a chance.  I still thought I was wrong, but it made financial sense to increase the leverage.

If you’re ready to sign up and receive my trades, please sign up today!

Good Luck!

Tim

Trend Following and Forex Money Management

Short Term Strategy (10 July 2010)

These are some of the trades I’ll be looking for early in the trading week.  I’ll cover some of these in the trading room.

Weekly Forex Forecast (For the Week of 20 June 2010)

EURUSD: For the week I’d expect to see trading between 1.2516 and 1.2115.  The current bullish correction should run up to at least 1.2656.  With summer trading well underway, we could watch the Euro go into a tight range between 1.2115 and 1.2516 for a month or so.  Only time will tell.  Early in the week, I’ll be looking for longs in the 1.2318 – 1.2292 zone.  Targets will be near 1.2450.

More to come later this weekend.

Tonight’s Forex Setups (for 18 June 2010)

USDJPY: Looking for selling opportunities at

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