Previously I had been discussing short-term trading, specifically off the 5-minute chart. This is good if you are just after a few pips a day and are prepared to sit at the computer for a few hours, with total concentration and focus. It is also a good way to trade if you don't want to be in open trades whilst you are away from your computer, like when you are in bed and so on.Now I want to talk about long term trading, where you can be in the same trade for days or even weeks. When I say long term, I am normally referring to trading off the daily chart. Some traders may look to the weekly chart or even the monthly chart, but that's not for me.
With the daily charts, I normally check my trades at least once a day, possibly twice. My daily charts tick over to a new day at 8am local, so I check them when I get up first thing in the morning, and even though the new candle has not yet opened, I will have a fair idea of what is happening as it is after the close of the US, and Asia hasn't really kicked in. A bit of a dead zone really, which suits me just fine. Then maybe in the evening sometime, just to make sure there has been no dramatic changes. That will do me.
Trading off the daily charts allows you plenty more free time to do the other things in life, like go to the beach, walk the dogs, play chess or whatever blows your hair back. Because you have much more time and your trading decisions aren't rushed, you can afford to follow several pairs at the same time. No need to limit yourself to the one pair here. Also spreads are not such an issue, because of the big moves involved where even a biggish spread will be well and truly absorbed in the action.
But please be warned, you cannot take the same position size in your trades. Couple of reasons for this. One is that it will be highly unlikely you will use the same tight stops as you would use on a day trading (5 min) method. You may, but I doubt it. Keep in mind your risk per trade. I have discussed risking 2% on each trade, and if you were to use this figure, then that 2% must be maintained on these types of trades also. So it only makes sense that if you used a 15 pip stop on a 5 min chart trade and were using a 150 pip stop on a daily chart, your position size on the daily chart is going to be a lot smaller.
And secondly, as you are more than likely trading several pairs at once, your overall risk will be higher, especially if the pairs with open trades are highly correlated like the EUR/USD and the USD/CHF. Again it is a risk issue, but more of an overall risk. If you were to risk 2% on a long EUR trade and also 2% on a short CHF trade, because of their very high correlation, your actual risk is more like 4%, because if one goes wrong, then more than likely, so will the other. Just be aware of your overall risk when you combine all your open trades. It may be a good idea to look for the least correlated pairs to trade when several good signals appear on your radar. A bit of common sense required here.
Now you must keep in mind that you are trading off the daily charts, so you may experience some huge moves against you, and a lot of traders may not be that comfortable being a couple of hundred pips or so down in a move against them. Just doesn't sit well with them as it is playing with their mind. Remember some of these majors move on average 100+ pips a day. You just have to look at the big picture, because as soon as you nail the start of a good move, your profit can be in the many hundreds or even thousand plus pips. These are the moves you want to catch, and trust me, there are plenty of them.
Trading several pairs may also help with an overall result (as long as you are not wrong on every trade). You do have to look at the big picture and not just judge your results on a daily or weekly basis. I would suggest you look to the month to month results, as this will give you a much better overall indication of how your daily chart trading is performing. You have to give it some time to prove itself or otherwise.
That's it for now. In the future I'll discuss some simple methods of trading off the daily charts. It is a pretty laid back way of trading and may suit the traders that may have a job or family duties that prevent them from becoming a zombie and sitting at your computer for hours on end. Everyone to their own I guess.
Article by Jim Brown
A lot more information on Forex Trading can be found at http://www.forexmt4tradingrobots.com or if trading stocks is more your thing, then please check out http://www.accuratestocktrading.com.
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Forex Trading - My Day Trading Thoughts
I will cover the short term trading first up. Most would call this Day Trading. The following is just my set up and thoughts on how I trade. So please don't take this as gospel. Have a look at the set up if you wish, and see if you can use it or even modify it to suit your needs. You may take one look at it and think it is rubbish. Fair enough also.
Okay if I am day trading, that means I want to be in and out of the market sooner than later. I would prefer not be sitting at my computer for hours on end if I can help it. You have probably gathered by now that I have a specific target for the day, and this is normally around 20 pips profit. I have been through the maths and the power of compounding, so you know my thoughts on this already.
With the day trading, I stick to trading just the one pair, that being the EUR/USD. It is by far the most popular pair to trade and it consistently has the lowest spread. On Oanda, which is my day trading platform, the spread is normally 0.9 pip. If you were trading a pair that had a spread of 5 pips, then as soon as you enter, the market has to move at least 5 pips just to get you to break even. Trading the one pair also allows you to concentrate all your efforts into that pair.
I will look at starting my trading any time after 2pm local. This is the tail end of the Asian session, which is then followed by the London (European) session, and if I am not done by then, it is into the US session.
As previously stated, I will check with Forex Factory before I start to see what major news releases are due out that may affect the EUR or the USD. I need to be aware of these so I can be prepared around those times. Very important.
I have my set up on my GoTrader MT4 platform, but I am looking at a slightly varied version on the VT platform. More on this later if I go down that path. For now it is all done on the MT4 platform. A very popular platform that is readily available, with very good charts.
There are two charts on the screen. They are placed side by side (tiled vertically). The two charts being the 5 minute and 60 minute EUR/USD. The 60 min chart takes up about 1/3 of my screen space and the 5 min 2/3 of the screen space.
Both charts are candlesticks, which I have coloured red for bear candles and green for bull candles. This is just a visual thing for me as I like to see at a glance if the market is heading up or down. Also on the 60 min chart, I will look out for certain candle patterns that I am comfortable with. More for confirmation than actually trading off them. There are 4 or 5 pretty basic candle patterns that seem to work more times than not. These include Spikes (eg hanging man, hammer), Engulfing, One Up One Down pattern, Dark Cloud Cover/Piercing Pattern, or exceptionally small or large candles. If you Googled them and just checked them out, you will get a fair idea of what I am talking about. Mainly used just to give me a heads up or confirmation of a trend change on the 60 min chart.
The 60 min chart also has the Daily Pivot Lines attached. This is a custom indicator that is freely available from many MT4 support type sites or forums. There are normally pretty simple instructions on how to load indicators onto your particular platform that are easily found just by doing a few searches. If anyone needs some help, just drop me a line and I'll help you out. Also on the 60 min chart, I have a Stochastic Oscillator with the settings of 10,6,3 and Linear Weighted. I have 2 horizontals levels at 80 and 20 on the stoch also.
The 60 min chart is just to give me an idea of where the market is going, and can normally give me a better idea of which side of the market I should be trading off the 5 min charts. One quick look at the 60 min chart, I can see what pivot lines are approaching or have been breached, which way the stoch is heading, any relevant candle patterns that may affect my decisions, and the chart itself will tell me if price is heading up or down and for how long. If you looked at last weeks 60 min chart, you would see that it was a dog's breakfast with no real direction or trend. A very ugly chart indeed which would have been difficult to trade if you primarily used this time frame.
Now to the 5 min chart, and this is what I trade off. As already mentioned, I have red and green candles for price action. Candle patterns aren't that reliable on this smaller time frame, so the colours only give me a visual on direction. If you are bullish, it is nice to see green candle after green candle etc.
My one and only indicator below the price chart is also the Stochastic Oscillator with the settings of 10, 6, 6 and Linear Weighted. Slightly different to the 60 min stoch settings. Also on the 5 min stoch, I have only highlighted the Main line, as the Signal line has been made the same colour as the background. In my case, my chart background is black, so that is the colour I select for the Signal line, therefore it should be invisible. My Main line is coloured Steel Blue, so it does stand out nicely. I then add horizontal lines to the stoch at an interval of 5 from 0 to 100. So there are 21 dotted horizontal lines across my stoch. The lines at the 20, 50 and 80 level are red, with all the others yellow. So what you end up with, is a steel blue line snaking up and down through a bucket load of horizontal lines.
I am testing out a possible filter of a slightly modified MACD, that will keep me out of some losing trades, but it also seems to get me into winning trades a little late. More on this later if I think it is worthwhile pursuing.
So first I will look at my 60 min chart to give me an idea of what will give me the highest probability of success, long or short (buy or sell). If I have decided that it is all very bullish, then I will only take long trades on the 5 min chart. If I am undecided, like last week, then I am quite happy to play both sides of the market.
Now if I was thinking long trades only, I would then look at the 5 min chart and see which way the stoch line is heading. If it is heading down and getting close to the 20 level (oversold), I am now waiting for it to turn up before I enter a trade. What I want to see, is the stoch turn up and break through one of these horizontal lines to the upside. If this happens, once that 5 min candle closes, I will open a long trade on the open of the new candle. I always wait for confirmation so therefore the candle has to close to confirm that the horizontal line was in fact crossed to the upside.
As I use Oanda to trade, I have preset my stop in at 20 pips and my target at 10 pips, so they are automatically set as soon as I enter the trade. Once the trade opens, I quickly check the platform to ensure the stop and target are correct. I then look at my 5 min chart and see if there is an obvious place to close my stop in to reduce my risk to less than 20 pips. This maybe just below a previous low or under a pivot level. Then if I am pretty confident the trade is going to go my way, I may remove my profit target altogether and just watch the trade like a hawk. Sometimes, you just know that there is plenty of potential in a trade and the set up is pretty good, that you just wouldn't be that happy with 10 pips. This will come with experience. The plan then is to get the stop to break even as soon as possible, so at least you are in a no lose situation. From there you can manage the trade from a much better mental position.
Okay, so continuing with the above long trade example, the stoch has turned up nicely and now cutting through the horizontal lines as it continues higher. I would be making an effort to trail my stop at a reasonable distance. So price stalls for a bit and the stoch turns down. Now what? My exit signal would be a confirmed break of the next horizontal level down on the stoch. Which again means I would have to wait for the close of that 5 min candle to confirm the break. Or if the stoch line didn't break a lower horizontal line, and then recovered back to the upside, I am still in the long trade. If the stoch is getting close to the 80 (overbought) level, then you would be a little more wary of a potential reversal. It may be a time to take profit, or really tighten up your stop.
Say in the above example, the stoch did cross down on the 5 min chart, and when I looked at my 60 min chart, I see that price has just bounced off the 1st Resistance Level and that there was a big spike candle. This may be enough for me to take a short trade, now looking for the 5 min stoch line to head down through the horizontal levels. Again I will stay in the trade with a reasonable stop, watching for a turn up on the 5 min stoch line.
So in a nutshell, I am using the 60 min chart for a guide on general trading direction. I then base all my trades on the 5 min chart and the movement of the stoch through the many horizontal lines. If I am trading with what I consider to be the main trend, I will give my trades a little more room to develop, but if I am trading against the main trend, then stops will be tighter and I may go for set targets and get out and wait for the reversal to be confirmed.
One other thing I like to look out for is 'divergence', whether it be on the 60 min or the 5 min charts. I find it a very accurate indicator that can really give you a lot more confidence when taking certain trades. Divergence is easily explained as a difference between what price on the chart is doing compared to what your indicator is doing. An example: On the 5 min chart there has been a high, then a pullback, where the market then makes another high and then falls away. So you have had a high followed by a higher high. At the same time on the 5 min stoch, the first high has caused the stoch to head up to say the 80 level and then turn down on the pullback, and then when the chart price is making its higher high, the stoch is only reaching the 60 level before falling away. So the stoch made a lower high, and nine times out of ten, the market price will head lower as the stoch is showing the market as running out of steam. That is only a very rough description of divergence. Google it as it is a pretty interesting subject in itself.
With day trading, you have to really go all out effort wise, with total concentration. You have to be prepared to take small losses and keep chipping away at the market. Just about every day, there are one or two decent moves on the 5 min chart that will make it all worthwhile. Don't be greedy, going for the big kill every trade. Maybe even start your day with a small trade looking for 5 pips just to give you that winning feeling. There is a lot of discretion involved in day trading also, as it is very difficult just to rely on indicators to get you in our out of trades. They certainly help me but there are plenty of times where I just look at the chart and something doesn't look quite right, and in that case, I may just give it a miss. I may regret that decision, but that's just trading. There will be plenty of trades coming along soon enough.
It is very difficult to write down a description of a trading method without charts as examples. Not sure if I can add charts or pictures to this article. It has also been a pretty lengthy post and may have confused some. I apologise for that. If anyone would like more info or even a screenshot of my charts, just drop me an email at buff33@bigpond.net.au and I'll see what I can do.
That will probably do it for now, and at least it gives you something else to look at. Whether it works for you or not, only you can work that out. Thanks.
Article by Jim Brown
A lot more information on Forex Trading can be found at http://www.forexmt4tradingrobots.com or if trading stocks is more your thing, then please check out http://www.accuratestocktrading.com
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