Something Interesting in Financial Video July 2013 - page 5
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A lesson on how most traders have unrealistic profit expectations which cause them to lose all their money and what realistic profit expectations are when trading the stock, futures or forex markets.
The first step in understanding and building a solid money management plan, the key component in successful trading, is setting realistic profit expectations. All too often I see people open trading accounts with balances of $10,000 or under expecting to make enough money to support themselves from their trading profits within a short period of time. After seeing all of the hype that is out there surrounding most trading education, trading signal services, etc it is no wonder that people think this is a reasonable goal, but that does not make it a realistic one.
As most any truly successful trader will tell you, the stock market has averaged somewhere in the neighborhood of 10% a year over the last 100 years. What this basically means is that if you would have invested in the 30 stocks that make up the Dow Jones Industrial Average, the index which is designed to represent the overall market, you would have earned about 10% on your money on average over the last 100 years. With this in mind, what most any truly successful trader will also tell you, is that if you can consistently double that return, on average, over the long term, then you will be considered among the best traders out there.
In our last lesson we looked at what one can reasonably expect to earn from their trading over the long term, and how one can avoid the common misconceptions of most traders which ultimately cause them to fail. In today's lesson we are going to look at the next step in developing a successful money management strategy which is how to manage your losses.
One of the main key's to successful trading is the preservation of capital. Beyond the obvious point here that if you loose your trading capital then you will be out of the game, is the fact that it takes much more to come back from a loss than it does to take the loss you are trying to come back from.
As an example here lets say you start with $10,000 and loose $5000 from a string of bad trades. That $5000 loss represents a 50% loss on your account which now has $5000 left in it. Now ask yourself this question. What percentage gain will you need to make on the $5000 left in your account in order just to be back to breakeven (the $10,000 level) on your account? If you have done the math correctly you will see that in order to make back the 50% loss you took on your account you will need to make a 100% return or basically be twice as successful in your comeback as you were unsuccessful in your drawdown.
It is this concept that is one of the most important to understand in trading, as it underscores the importance of protecting one's trading capital, as it shows the difficulty of coming back from a loss in relation to the ease of taking a loss. It is also most traders lack of understanding of this concept that causes them to take risks which are way to large and is a major contributor to the high failure rate among traders
The Foreign Exchange Market (Forex) is market where currencies are actively bought and sold by banks, funds and investors. The Forex Market facilitates the conversion of one currency for another. It is the relative value of the base currency vs the value of the quote currency. The major currencies of the world are:
These are the most liquid currencies in the world. The US dollar is involed in 90% of Forex Transactions. Currencies fluctuate in fractions of a dollar called a Pip (Price Interest Point) A Pip is the last decimal of a quote
In our last lesson we looked at the difficulty of overcoming a loss in the market to further emphasize the importance of protecting your trading capital as a critical component of any successful trading strategy. In today's lesson we are going to start to look at the first and one of the best ways of protecting one's trading capital, setting your initial stop.
As we learned about in our lesson on the effects of trading losses, 50% or more of the trades made by many successful trading strategies are losers. These trading strategies and traders are successful not because they are highly accurate on a trade by trade basis, but because when they are wrong they cut their losses quickly and when they are right they let their profits run. While the trading strategy that you eventually end up trading for yourself may have a higher success rate than what I mention above, any strategy is going to have loosing trades, so the first key to staying in the game is to have a plan for managing those losses so they do not get out of control and wipe out your chances for success.
With this in mind, what most traders will start with when designing a plan for setting their initial stop loss is the amount they can afford to loose on a per trade basis without having a detrimental affect on their account. While this varies from trader to trader and from strategy to strategy, as Dr. Alexander Elder mentions in his book Trading for a Living, many studies have shown that strategies and traders who risk more than 2% of their overall trading capital on any one trade are rarely successful over the long term. From what I have seen most traders risk way more than this on an individual trade basis, another large contributor to the high failure rate among traders.
Traders who set their per trade risk level at 2% of their trading capital or less, not only put themselves in a situation where a fairly lengthy string of losses will not knock them out of the game, but also put themselves in a situation where any one trade is not going to make or break their account. This is important not only from a money management standpoint but also from a psychological standpoint in that they are not attached to any one trade and are therefore more likely to stick to their strategy.
In order to have a true understanding of what this number should be for a specific strategy you will need to know what the expected accuracy rate is for the strategy, something which will cover in later lessons. For now however it is sufficient to simply understand that you need to have a feel for how much you plan to risk on a per trade basis as a first step in designing a successful money management strategy, and that you should be very wary of any strategy which risks more than 2% of your trading capital on any one trade.
Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.
In our last lesson we looked at determining how much you are willing to risk on any one trade as the first step in developing a successful money management strategy. Now that we have established this, in today's lesson we are going to look at some of the different ways that you can then set your stop, which fit within this initial criteria.
As we learned in last lesson, risking more than 2% of total trading capital on any one trade is a major reason for the high failure rate of most traders. Does this mean that when setting a stop we should simply figure out how many points away from our entry represents 2% of our account balance and set the stop there? Well, traders could obviously do this and to be honest it would probably be a lot better than most of the other money management strategies I have seen, but there better ways.
Although many traders will look at other things in conjunction, having an idea of the historical volatility of the instrument you are trading is always a good idea when thinking about your stop loss level. If for instance you are trading a $100 stock which moves $5 vs. a $100 stock that moves $1 a day on average, then this is going to tell you something about where you should place your stop. As it is probably already clear here, all else being equal, if you put a stop $5 away on both stocks, you are going to be much more likely to be stopped out on the stock which moves on average $5 a day than you are with the stock that moves on average $1 a day.
While I have seen successful traders who get to know a list of the things they are trading well enough to have a good idea of what their average daily ranges are, many traders will instead use an indicator which was designed to give an overview of this, which is known as the Average True Range (ATR)
Developed by J. Welles Wilder the ATR is designed to give traders a feel for what the historical volatility is for an instrument, or very simply how much it moves. Financial instruments that exhibit high volatility move a lot, and traders can there fore make or lose a lot of money in a short period of time. Conversely, financial instruments with low volatility move a relatively small amount so it takes longer to make or lose money in them all else being equal.
As with many of the other indicators we have studied in previous lessons, Wilder uses a moving average to smooth out the True Range numbers. When plotted on a graph it looks as follows:
What you are basically seeing here is a representation of the daily movement of the EUR/USD. As you can see when the candles are longer (which represents large trading ranges and volatility) the ATR moves up and when the candles are smaller (representing smaller trading ranges and volatility) it moves down.
So with this in mind, the most basic way that traders use the ATR in setting their stops is to place their stop a set number of ATR's away from their entry price so they have less of a chance of being knocked out of the market by "market noise".
In our last lesson we learned about the Average True Range (ATR) and how traders use this to get an idea of the volatility in the market so they can incorporate this into their stop levels. In today's lesson we are going to add an additional factor that most traders consider important when setting stops, support and resistance.
As we have learned in previous lessons many traders will use technical analysis to determine where support and resistance is in the market, and look for trading opportunities based on what that chart analysis tells them. In addition to using technical analysis to find support and resistance levels in which trades can be entered, many successful traders also use this method of analysis to determine where their stops should be placed.
One of the most popular methods which we have touched on in previous lessons where many traders use support and resistance in their trading is when trading ranges in the market. Many traders favor ranges, as they provide traders with the ability to enter trades with tight stop losses and much larger potential returns. The reasoning here is that traders can enter a trade just below resistance or just above support in the range, place their stop just outside that level and then their profit target at the other end of the range. Generally the distance between the stop level is much shorter than the distance between the other end of the range, providing traders with a great opportunity for a relatively low risk and potentially high reward trade.
In our last lesson we looked at how many successful traders incorporate support and resistance into their trading strategies. In today's lesson we are going to expand on this concept by looking at how many traders look for multiple support or resistance levels when placing trades as well as how many chart patterns incorporate this concept already, providing traders with areas in which they can place their stops.
As we learned about in our last lesson, when setting a stop many traders will find a level of support if they are buying to enter the trade or resistance when they are selling to enter the trade and place there stop outside of this level. When entering trades many successful traders will also look for trades which have few if any levels of support/resistance in the direction they are trading, but several levels of support/resistance in the direction in which they are placing their stop.
As we have also learned in previous lessons, one of the key reason's why traders favor or recognize certain chart patterns is because they often times signal what is next to come in the market. What is often overlooked however about almost all of the most popular chart patterns, but perhaps just as important, is their ability to point out potential places where you want to place your protective stop loss.
As you can see from the below chart the head and shoulders pattern is a perfect example of this. By entering the trade on a break of the neckline and placing the stop just above the right shoulder of the pattern traders ensure that there are at minimum two resistance levels in between their entry price and their stop level if not more.
Summary: In this webinar presented by Nicole Elliott, a veteran trader and highly respected technical analyst, the attendees will be provided a step-by-step guide on how to construct and use Ichimoku Cloud charts. This will be followed by an analysis of live current markets conditions in order to interpret the cloud charts in a real environment. Nicole is the author of best-seller Ichimoku Charts and has been a regular media commentator on CNBC and Bloomberg.
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Ichimoku
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Forum
USDJPY Technical Analysis 23.06 - 30.06 : Rally Finishing to Ranging
newdigital, 2013.06.27 12:07
Well ... what I am explaining here by text and charts - it is understandable for traders. But there are traders and coders on the forum. And I think we all know that they are using different "forex english" in some cases. So, I am just translating some terms/words I am using for technical Ichimoku analysis onto "coding english" language :) :
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Forum
Market Condition Evaluation based on standard indicators in Metatrader 5
newdigital, 2013.06.28 18:00
as to lower timeframe ... the default settings of Ichimoku is 9/26/52, right? But it is mainly for higher timeframe (started from H1 for example). For lower timeframe - there are 2 kinds of settings:
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Besides, there are many signals of Ichimoku indicator to open the trades. I know about 6 signals (but it is much more signals in combination with each other):
The combination of all those 6 signals = Ichimoku indicator.
So, the request about alert ... it is the request to create alet for all those signals with combination with each other? if yes so it is big project ... I do not have the credits in my profile for all those alerts (which may be - more than 100 different variations) :) ... if you are talking about some particular signal so - it may be possible to make alert.
I am mostly using on the thread just one signal : Chikou Span crossing historical price. So, which signal to be alert?
A Simple Pattern That Signals A Trend Change by Steven Prim
One of the best ways to gain consistency in your trading is to trade with the trend. But wouldn't it be better to know when a trend has changed? Join Steven Primo, Former Stock Exchange Specialist and 36 year professional trader as he reveals -- A SIMPLE PATTERN THAT SIGNALS A TREND CHANGE. In this presentation Steven will show you how to spot these trend changing patterns by displaying numerous chart examples in a variety of currency pairs. Mr. Primo's tools are extremely simple yet versatile, and can also be applied to trading any market, in any direction, and in any time frame.
In our last lesson we learned how many successful traders look for entry opportunities which allow them to set their stop so that there are multiple support or resistance points between their entry point and stop level, and few if any support or resistance points between their entry price and their target. In today's lesson we are going to look at another factor that many traders use when deciding where to place their stops, the use of technical indicators.
As you hopefully remember from watching my previous lessons we have already covered two indicators and gone over specific strategies on how they can be used to set stops which are the Average True Range and the Parabolic SAR. While these indicators were designed specifically to help traders gauge where to place their stops, many of the other indicators which we have looked at using to pick trade entry points can also be used to decide when to exit a trade.
With this in mind the question then becomes, with all the options available how do you choose which indicator if any to look at when deciding when to exit a trade. Which indicator if any you choose to include in your money management strategy for setting stops is going to depend largely on the type of strategy that you are trading. As a general rule however if you use an indicator to signal for example a buy entry on a trade most traders will keep an eye on that same indicator and take into account when that same indicator signals to exit a trade.
As an example of this, lets say that your analysis of the ADX shows that the chart of x is about to start a nice trend and you decide to place a trade on that analysis. Using the knowledge you have gleaned from our lessons on stops so far you also pick a level for your stop which has some nice protection and is close enough that it fits within your two percent loss limit. During this trade however if the ADX which is the indicator you used primarily to enter the trade begins to signal that the trend is weakening and the market is about to range, should you remain in that trade? The answer to that question is going to depend on the strategy and what other things are going on in the market at the time, but I would say at minimum most successful traders would take this into account when deciding whether or not to continue with the position, regardless of whether their stop had been hit or not.
Lastly on this point there is one indicator that so many traders watch that many traders will at least keep an eye on what happens with this indicator and that is the 50 and the 200 day moving average. These indicators are in general thought to be representative of the overall trend in the market and a break above or below these levels and/or a crossing of the 50 day moving average above/below the 200 day moving average is normally seen as significant for a market and as such many traders will take this into account and place their stops accordingly.
As you probably have noticed when thinking about placing stops using indicators, as you don't know where price is going to be when your indicator signals for a trade exit, you do not have a hard stop in the market, are in the very bad position of not being protected in your trade. This is why, as we have talked about many times in our other lessons, that if this method for setting stops is used it should always be used in conjunction with another method which allows you to set a hard stop and stays within the 2% loss limit rule we have established.
This concept of the stop being a sort of "moving target" is a nice lead in to our next concept and lesson where we are going to be talking about what is known as a trailing stop.