Forex Patterns – Shooting Star
The Shooting Star Pattern
The Shooting Star is formed when the open, low and close are in a very tight range, while the high has created a long upper shadow. This candle forms when buying failed, and selling took over during the session that created the candle.
This single candle pattern is helpful to traders because it gives an indication of where supply overcomes demand. This point could also be called “resistance.” It’s great to be able to identify this candle, but trading it is another thing altogether. I love price action trading. But to trade a reversal candle like the shooting star you must actually be in an established trend. Otherwise, there’s nothing to reverse. I’ve coached dozens of traders. Many of these traders try to trade every spiky candle that they see! Let me help you out here.
I only trade a Shooting Star when it follows at least three bullish candles. This is my rule, and I never deviate from it. As a result, I have a high percentage of winning trades using this pattern.
Entry: I place a Sell Stop order a few pips below the low of the shooting star. There’s just no point in placing a market order on this pattern. Doing so is too risky! Remember that a single bank order could have caused this formation, and when the market returns to normal, buying will overcome selling again. Accept the larger stop loss and place the stop order.
Stop loss orders go a few pips above the high of the Shooting Star. It’s that simple.
Targets should be at least 1:1 to your stop loss size. Look for areas of support, defining points of trendlines, etc. If you’re not trading into clear space, don’t place the order. It’s not worth the risk, and there are plenty of trading opportunities for the price action trader!
Forex Trendline Trading – How Many Touches?
Whenever I talk to traders about trading trendline bounces or trendline breakouts, the question of touches comes up. Traders need to know how many touches it takes to actually call the pattern a trendline.
Trendlines show a pattern of ascending or descending support and resistance, respectively. I like to see at least three touches before I consider a trendline valid. My reasoning is simple. Two points don’t tell you anything except that there are two higher lows or two lower highs. The third touch tells you that the trendline is valid and actionable. If you want to trade a trendline bounce, you can watch price action around the trendline and place a trade on a confirmed pinbar, engulfing pattern, inside bar, or piercing pattern/DCC. Just remember that if you are looking for a trnedline breakout, you really need to have at least three touches before you should consider the trendline valid. The problem is one of market interest. If the forces driving price movement are not looking at hte same trendline that you are, they may be looking at a different trendline that is slightly higher or lower than your analysis shows.
So, how many touches do we need to see before trading? You can trade the third touch on a bounce, or the fourth touch on a breakout. Either way, make sure that you are careful with your risk taking around trendlines. There are many ways of reducing your risk. I like to see a confluence of events before I place a trade. Price action, trendline, key S/R, a valid fib, etc. The more you have at a particular price, the better your odds of a winning trade.
Tim
Forex Trading Systems – 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 your success as a trader.
Forex Money Management – 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 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.
Good Luck!
Tim