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Forum on trading, automated trading systems and testing trading strategies
Indicators: RChannel
newdigital, 2014.04.24 06:24
How to use RSI (based on dailyfx article)
- RSI is a momentum oscillator that can help pinpoint market trends
- RSI can stay overbought for extended periods in an uptrend
- Indicator divergence can signal changes in momentum as well as entry signals
RSI is a momentum oscillator that has become a staple for technicians across markets. While most traders may know how to read RSI, there are some tactics that can be employed for trending markets. Today we will continue our look at indicators by reviewing RSI divergence in trending market. Let’s get started!RSI and the Trend
Normally when traders first use RSI they immediately gravitate to trading every overbought or oversold crossover the indicator offers. While there are merits to considering a crossover based strategy, it is important to help filter these signals with the trend. Using the example below, we can see the EURUSD currency pair trending towards higher highs. At the same time, by the design of the indicator, RSI can remain overbought for an extended duration as price continues higher.
Knowing this, traders should avoid RSI signals to sell as prices continue upward towards higher highs. So how can traders use RSI in a strong trending market?
Positive RSI Divergence
RSI divergence is a great tool for trend traders to use to help filter RSI entry signals. The word divergence implies that we are looking at price separating from our indicator. This can easily be identified on the chart by identifying two points to begin on our graph. In an uptrend, if price is retracing and moving towards a lower low but RSI is forming a higher low this can be used to trigger fresh buy orders. The idea is to buy when momentum is returning to the market. As RSI moves higher it can pinpoint just that.
Below we have an example of positive divergence and RSI at work. There are two potential entries highlighted below. The first uses a traditional RSI crossover for entry. If stops are placed below a swing low, traders would have been exited for a loss on this position. From this point, as the market continues toward a lower low, RSI begins to form a higher low. This is a strong signal that momentum is returning in the direction of the trend. Traders then have the ability to trade the next RSI signal and enter the market upon the trends continuation.
Trading a RSI Strategy
As you can see RSI and positive divergence can be great tools for trading trending markets! Now that you are more familiar with one of the many uses for RSI, you can begin working with the indicator in your trading.
Forum on trading, automated trading systems and testing trading strategies
Libraries: The Moving Average Class
newdigital, 2014.05.01 09:53
Three Ways to Trade with Moving Averages
Indicators can be tricky tools. Knowing which ones to use and how to use them can be complicated enough; but finding out how to properly employ an entire strategy in the right market environment can be the most difficult question for traders to address.
The Moving Average is simply the last x period’s closing prices added together, and divided by the number of observed periods (x). And it’s in its simplicity lies its beauty. When prices are trending higher, the moving average will reflect this by also moving higher. And when prices are trending lower, these new lower prices will begin to be factored into the moving average and it too will begin moving lower.
While this averaging effect brings on an element of lag, it also allows the trader an ideal way of categorizing trends and trending conditions. In this article, we’re going to discuss three different ways this utilitarian indicator can be employed by the trader.
As a Trend-Filter
Because the moving average does such a great job of identifying the trend, it can be readily used to offer traders a trend-side bias in their strategies. So if price action is above a moving average, only long positions are looked at while price action below the moving average mandates that only short positions are taken.
For this trend-filtering effect, longer-term moving averages generally work better as faster-period settings may be too active for the desired filtering effect. The 200 Day Moving Average is a common example, which is simply the last 200 day’s closing prices added together and divided by 200.
After a bias has been obtained and traders know which direction they want to look to trade in a market, positions can be triggered in a variety of ways. An oscillator such as RSI or CCI can help traders catch retracements by identifying short-term overbought or oversold situations.
In the picture below, we show an example of a CCI (Commodity Channel Index) Entry with the 200 day moving average as a trend filter.
As a trigger to initiate positions
Taking the idea of strategy development a step further, the logic of the moving average can also be used to actually open new positions.
After all, if price action is showing a trending state just by residing above a moving average, doesn’t logic dictate that the very action of crossing that moving average can have trending connotations as well?
So traders can also use the price/moving average crossover as a trigger into new positions, as shown below.
The Moving Average can also be used to initiate positions in the direction of the trend
The downside to the moving average trigger is that choppy or trend-less markets can invite sloppy entries as congested prices meander back and forth around a specific MA. So it’s highly suggested to avoid using a moving average trigger in isolation without any other filters or limitations. Doing so could mean massive losses if markets congest or range for prolonged periods of time.
As a Crossover Trigger
The third and final way that moving averages can be implemented is with the moving average crossover. This is an extremely common way of triggering trades, but has the undesired impact of being especially ‘laggy’ by introducing two different lagging indicators rather than just one (as is the case of using the MA as a filter or a trigger individually).
Common examples of moving average crossovers are the 20 and 50 period crossovers, the 20 and 100 period crossover, the 20 and 200 period crossover, and the 50 and 200 period crossover (commonly called ‘the death cross’ when the 50 goes below the 200, or the ‘golden cross’ when the 50 goes above the 200).
The 50 Day/200 Day Moving Average Crossover :
This can be taken a step further with multiple time frame analysis. Traders can look to a longer-term chart to use a moving average filter as we had outlined in the (1) part of this article, and then the crossover can be used as a trigger in the direction of the trend on the shorter time frame.
While no indicator is going to be perfect, these three methods show the utility that can be brought to the table with the moving average, and how easily traders can use this versatile tool to trigger trades ahead and in front of very large, outsized moves in the market.
Forum on trading, automated trading systems and testing trading strategies
Press review
newdigital, 2014.05.02 10:19
How to Trade Short-Term (Day-Trade)
- While short-term trading is attractive, it can also be dangerous.
- Short-term traders will often exercise poor risk management, and this can have very negative consequences.
- We share a strategy that can be used to trade short-term momentum with a focus on risk.
For every 10 traders that come to markets, at least 7 of them want to ‘day-trade,’ or as we call it in the forex market, ‘scalp.’ Even though many of these traders are still learning the market or are very new to trading, they know they want to embark on short-term trading.The rationale behind this desire makes sense. After all, for most things in life the biggest rewards are for the hardest workers; those exhibiting the utmost of control and discipline long enough to properly implement their plan or strategy.
But trading is much different in the fact that this ‘greater control’ that might be offered by short-term time frames introduces other, more difficult variables into the equation of a trader’s success.
Many of the reasons that traders lose money become even more difficult to contend with when ‘scalping’ or ‘day-trading.’ And if these traders are making other mistakes, such as using too much leverage or inappropriate strategy selection that top trading mistake can become even more problematic.
So, first and foremost before we get into the process of short-term trading, I want to specify that this is often the most difficult way for new traders to get started. Preferably, new traders will start with longer-term charts and approaches that may be more forgiving, and as they gain experience and comfort they can then elect to move into faster time frames.
The Biggest Challenge of Short-Term Trading
The biggest challenge of short-term trading is the same as the Top Trading Mistake. Too few traders looking to scalp actually do so correctly, under the incorrect presumption that trading on really short-term charts gives them enough control to trade without stops
While keeping your finger on the trigger may give you more control, it means absolutely nothing if prices gap against your position or if a really big piece of news comes out that completely de-rails your trading plan. So, even though you may be watching price action on a five or fifteen-minute chart, protective stops are still needed.
Further to this point, traders need to be able to focus on winning more when they are right than they lose when they are wrong. To put this another way, just because one is trading very short-term, it doesn’t mean that they can ignore The Number One Mistake Forex Traders Make.
This can be a huge challenge on really short-term charts where near-term price movements are unpredictable. But it’s not impossible. In this strategy, I’ll attempt to show you a way to do this.
An additional concern is variance. Per statistical analysis, the less information that is being analyzed in a data set, the less ‘reliable’ that information becomes. If we’re looking at longer-term charts, such as the daily or the weekly charts, quite a bit of information is going into the formation of each individual candle. On a very short-term chart, the opposite is true. Significantly less information goes into each candle, and thereby each candle is less reliable as a forecast of future candle formations.
The Strategy
With all of the above being said, trading on short-term charts is still possible. It just requires that traders utilize even more control and discipline over their trading approaches and risk management. For new traders that often struggle with risk management, or staying disciplined; the results can be disastrous. But if those boxes are checked, traders can look to exert the upmost of control over their approach with shorter time frames.
But just because we’re trading on shorter-term charts, does that mean we want the entirety of our analysis to be performed on those time frames? Absolutely not. We can still incorporate analysis from longer time frames into our approaches in an effort to get the best probabilities of success.
The indicators that I add are the 8 and 34 period exponential moving averages, based on the hourly chart but plotted on the 5-minute chart (shown below).
Multiple time frame analysis can help traders see the ‘bigger picture’
These indicators act as a compass for the strategy, helping to see what’s taking place with a longer-term time horizon. If the faster 8 period moving average (based on the hourly chart) is above the slower 34 period moving average (also based on the hourly chart), then the strategy is looking to go long, and to only go long. As long as the hourly 8 period EMA is above the hourly 34 period EMA, only buy positions are entertained.
The hourly moving averages work like a compass, showing traders which direction to trade the trend
Once the trend has been identified, and the bias has been obtained, the trader can then look for entries in the direction of that trend; looking for momentum to continue on the 5-minute chart as it has been displayed by our hourly-moving averages.
And when looking to buy, we ideally want to ‘buy low’ or ‘sell high.’ So, just because the trend is up and we’re looking to buy, it doesn’t mean we want to blindly do so. We still need a ‘trigger’ for the position, and for this, we can incorporate another exponential moving average.
The trigger for this strategy is another 8 period exponential moving average, but this one is built on the shorter-term five-minute chart.
When price crosses the 8-period five-minute EMA in the direction of the trend, the trader can look to buy in anticipation of the ‘bigger-picture’ trend coming back in force.
The ‘trigger’ in the strategy is when price crosses the 8-period five-minute EMA in the direction of the trend
The large benefit behind the strategy is that just by the very act of price moving in the trend-side direction over the shorter-term EMA, traders are buying or selling short-term retracements in the direction of the momentum.
Risk Management
The most attractive part of the strategy is that it allows for traders to ‘buy cheaply’ in anticipation of bullish momentum, or to ‘sell expensively’ in anticipation of bearish momentum.
When prices make those short-term retracements, they create swings in price action. And per price action logic, of up-trends making ‘higher-highs’ and ‘higher-lows,’ traders can look to place the stop for their long position below the previous ‘higher-low’ so that if the up-trend doesn’t continue – the trader can exit the position for a minimal loss.
Stops for long positions go below the prior period’s opposing-side swing
In the case of short positions, traders would want to look to place stops for short positions above the previous ‘lower-high,’ so that if the down-trend does not continue, the short position could be closed in an effort of mitigating the damage as much as possible.
In my opinion, this is the most attractive part of this type of strategy. It allows traders to attempt to avoid The Number One Mistake that Forex Traders Make even though very short-term charts are being used to trigger positions.
If momentum does continue in the trend-side direction, the trader could be in a very attractive position as prices continue to move in their favor.
Position Management
If the trend does continue, should the trader just sit on their limit order and wait for the sound of the cash register to ‘cha-ching?’
No way. When trading on short-term charts, things can change VERY quickly, and it’s the day-trader’s job to manage that risk.
When the position gets in the money by the amount of the initial stop (a 1-to-1 risk-to-reward ratio), the trader can look to move the stop to break-even so that, worst-case scenario should prices and momentum reverse, the trader puts themselves in a position to avoid taking a loss.
At this point, the trader can also begin ‘scaling out’ of the position. Since a 1-to-1 risk-to-reward has been realized, the trader is actively attempting to avoid The Top Trading Mistake; and should momentum continue in the trend-side direction, the trader stands to profit considerably more.
As prices continue in the direction of the trader’s position, additional pieces of the trade can be closed or ‘scaled out’ as prices move in their favor.
The goal is to get the ‘average out’ from the strategy as large as possible, and if momentum is to continue, this strategy can allow the trader to do just that.
After the stop has been moved to break-even, and the initial risk is removed from the position; traders can even look to add-to the trade with new positions or new lots in an attempt to build a larger position with a significantly smaller amount of risk.
There is good article concerning to fundamental trading (for creation of the EAs related to News Trading) :
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Building an Automatic News Trader
As Investopedia states, a news trader is "a trader or investor who makes trading or investing decisions based on news announcements". Indeed, economic reports such as a country's GDP, consumer confidence indexes and employment data of countries, amongst others, often produce significant movements in the currency markets. Have you ever attended a U.S. Non-Farm Payrolls release? If so, you already know that these reports may determine currencies' recent future and act as catalysts for trends reversals.
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Press review
newdigital, 2014.05.08 21:49
The Three Keys of Day-Trading (based on dailyfx article)
1. Have your strategy (and plan) set before ever placing a trade
Do you already have a trading plan with your strategy written out? If you don’t, you should. While it may sound overly-detailed, or pedantic; the simple act of just knowing how you want to approach a market can have a massive impact on your overall approach.
Discipline is a necessary trait for any discretionary trader, and perhaps even more important for a short-term trader: But if you don’t know what you should do or how you should do it – how can you expect to have long-term success?
That’s where the trading plan comes in. This is like the trader’s ‘constitution’ as to how they’re going to operate and speculate in a market. This way, anytime a trader begins their operations for a day they already know how they want to attack the market, and they don’t have to make up a brand-new game plan every single morning.
2. Be selective – Trading is not entertainment
A key benefit of having the trading plan written out is that the strategy or mannerism for placing trades is already decided upon, and the trader simply has to look to execute as their strategy dictates.
If a trader takes a position that doesn’t fall within the plan or the strategy, well they know that it’s their fault for not following the plan. It’s an unfortunate truth, but in many cases the only way discipline can truly be learned is by seeing and feeling the ramifications of being undisciplined; and in trading, that amounts to losing money.
If you don’t feel that your trading plan is strong enough then change it; make it better. And if you need to build more confidence behind the strategy or strategies contained within the plan, do some testing until you get that confidence.I know that many traders, particularly new traders want to eschew this testing and building and formulating because, well it’s not all that much fun. But trading is not supposed to be entertainment. If you want entertainment, there are movies and music and all kinds of other things in this world to enjoy. Trading is a way to make (or lose) money.
Surely, there’s an emotional response that human beings get when placing trades… the potential to make or lose money brings on the excitement or thrill of ‘the chase.’
But losing money isn’t fun… making money is. Losing money is painful, costly, and psychologically-defeating. Over a long enough period of losing, most people will eventually abandon their efforts and look for greener pastures elsewhere (by quitting trading and giving up on their goals). And it’s all because that trader couldn’t control themselves enough to stick to their own plan.
Give yourself the best chances of success by choosing high-probability strategies that you’re confident in so that you can simply follow your own plan as opposed to ‘waking up in a new world every morning.’
3. Risk management is critical to short-term traders
One of the biggest misconceptions about trading is that winning percentages are the largest determinant of success. If you look at most other venues in modern-day society, winning is the only thing that matters.
In trading, this is somewhat deceiving; because the size of the losses versus the size of the wins takes on a huge level of importance. So much so that winning only 35-40% of the time could allow for profitability, while a trader winning 60 or 70% of the time could still be struggling while losing money (on net).
But many scalpers think or feel that looking for bigger rewards than risk amounts is simply impossible in the short-term; so they use wide stops and look to take ‘quick’ profits and they try to win 80 or 90% of the time. This doesn’t usually work out well. Why?
It’s because we can’t tell the future. No matter how strong your analysis, or strategy or trading plan – markets (and the future) will always be unpredictable.
Rather, trading is more about probabilities and trying to get the odds on your side, if even just by a little bit. And the shorter-term we get in our approach, the more unpredictable price action becomes. So short-term traders need to know how to lose properly, and when they do win, they have to look to maximize the potential of those scenarios.Forum on trading, automated trading systems and testing trading strategies
Discussion of article "MQL5 for Newbies: Guide to Using Technical Indicators in Expert Advisors"
newdigital, 2014.02.27 16:46
Introduction to Technical Indicators (based on dailyfx aticle)
Trend Following
Trend following indicators were created to help traders trade currency pairs that are trending up or trending down. We have all heard the phrase “the trend is your friend.” These indicators can help point out the direction of the trend and can tell us if a trend actually exists.
Moving Averages
A Moving Average (MA for short) is a technical tool that averages a currency pair’s price over a period of time. The smoothing effect this has on the chart helps give a clearer indication on what direction the pair is moving… either up, down, or sideways. There are a variety of moving averages to choose from. Simple Moving Averages and Exponential Moving Averages are by far the most popular.
Ichimoku
Ichimoku is a complicated looking trend assistant that turns out to be much simpler than it initially appears. This Japanese indicator was created to be a standalone indicator that shows current trends, displays support/resistance levels, and indicates when a trend has likely reversed. Ichimoku roughly translates to “one glance” since it is meant to be a quick way to see how price is behaving on a chart.
ADX
The Average Direction Index takes a different method when it comes to analyzing trends. It won’t tell you whether price is trending up or down, but it will tell you if price is trending or is ranging. This makes it the perfect filter for either a range or trend strategy by making sure you are trading based on current market conditions.
Oscillators
Oscillators give traders an idea of how momentum is developing on a specific currency pair. When price treks higher, oscillators will move higher. When price drops lower, oscillators will move lower. Whenever oscillators reach an extreme level, it might be time to look for price to turn back around to the mean. However, just because an oscillator reaches “Overbought” or “Oversold” levels doesn’t mean we should try to call a top or a bottom. Oscillators can stay at extreme levels for a long time, so we need to wait for a valid sign before trading.
RSI
The Relative Strength Index is arguably the most popular oscillator out there. A big component of its formula is the ratio between the average gain and average loss over the last 14 periods. The RSI is bound between 0 – 100 and is considered overbought above 70 and oversold when below 30. Traders generally look to sell when 70 is crossed from above and look to buy when 30 is crossed from below.
Stochastics
Stochastics offer traders a different approach to calculate price oscillations by tracking how far the current price is from the lowest low of the last X number of periods. This distance is then divided by the difference between the high and low price during the same number of periods. The line created, %K, is then used to create a moving average, %D, that is placed directly on top of the %K. The result is two lines moving between 0-100 with overbought and oversold levels at 80 and 20. Traders can wait for the two lines to crosses while in overbought or oversold territories or they can look for divergence between the stochastic and the actual price before placing a trade.
CCI
The Commodity Channel Index is different than many oscillators in that there is no limit to how high or how low it can go. It uses 0 as a centerline with overbought and oversold levels starting at +100 and -100. Traders look to sell breaks below +100 and buy breaks above -100. To see some real examples of the CCI in action,
MACD
The Moving Average Convergence/Divergence tracks the difference between two EMA lines, the 12 EMA and 26 EMA. The difference between the two EMAs is then drawn on a sub-chart (called the MACD line) with a 9 EMA drawn directly on top of it (called the Signal line). Traders then look to buy when the MACD line crosses above the signal line and look to sell when the MACD line crosses below the signal line. There are also opportunities to trade divergence between the MACD and price.
Volatility
Volatility measures how large the upswings and downswings are for a particular currency pair. When a currency’s price fluctuates wildly up and down it is said to have high volatility. Whereas a currency pair that does not fluctuate as much is said to have low volatility. It’s important to note how volatile a currency pair is before opening a trade, so we can take that into consideration with picking our trade size and stop and limit levels.
Bollinger Bands®
Bollinger Bands print 3 lines directly on top of the price chart. The middle ‘band’ is a 20-period simple moving average with an upper and low ‘band’ that are drawn 2 standard deviations above and below the 20 MA. This means the more volatile the pair is, the wider the outer bands will become, giving the Bollinger Bands the ability to be used universally across currency pairs no matter how they behave. The wider the bands, the more volatile the pair. Most common uses for Bollinger Bands are trying to trade double tops/bottoms that hit an upper or lower band or looking to trade bounces off an outer band in the direction of the overall trend.
Bollinger Bands® is a registered trademark of John Bollinger.
ATR
The Average True Range tells us the average distance between the high and low price over the last X number of bars (typically 14). This indicator is presented in pips where the higher the ATR gets, the more volatile the pair, and vice versa. This makes it a perfect tool to measure volatility and also can be a huge help when selecting where we should set our stop losses.
Support/Resistance
Pivot Points
Being one of the older technical indicators, Pivot Points are one of the most widely used in all markets including equities, commodities, and Forex. They are created using a formula composed of high, low and close prices for the previous period. There is a central pivot line and subsequent support lines and resistance lines surrounding it. Traders use these lines as potential support and resistance levels, levels that price might have a difficult time breaking through.
Donchian Channels
Price channels or Donchian Channels are lines above and below recent price action that show the high and low prices over an extended period of time These lines can then act as support or resistance if price comes into contact with them again. A common use for Donchian channels is trading a break of a line in the direction of the overall trend. This strategy was made famous by Richard Dennis’ Turtle Traders where Dennis took everyday people and was able to successfully teach them how to trade futures based on price channels.
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Press review
newdigital, 2014.05.09 11:42
2 Methods to More Patient Trading
If you hang around trading communities long enough, you’ll hear the wiser traders encouraging the newer traders about trading with patience and removing emotions.
It sounds simple, especially if you are practicing with a demo account. However, see what happens to your patience when your money is on the line!
A few weeks ago, we covered three common mistakes traders make during trendless markets and how to correct them. Over the next few minutes, I want to expand on the third mistake noted in that piece to help equip you with two actionable methods that can promote more patient trading.
One common mistake of traders during trendless markets is that they become impatient and close their trades prior to the stop loss or target being reached. During trendless markets, patterns and waves are slower to develop which breeds the impatience we feel.
To balance that impatience, practice these two methods below.
“Remember the clever speculator is always patient and has a reserve of cash.” Jesse Livermore
Use Conservative Amounts of Leverage
We assume that trades which have historically reached their profit targets quickly should continue indefinitely into the future. Therefore, if prices aren’t hitting their targets quickly, it must obviously not be a good trade so we exit prematurely.
This impatience is in part due to expecting the next trade to be a big home run. As a result, we’ll place a trade size a little larger than normal so as to squeeze a little extra juice out of the trade in case it goes nowhere. However, during this process, the trader ends up risking a significant portion of their account on the outcome of that one trade.
Remember, a 25% loss requires a 33% return to get back to break even. If a 25% loss in a fast moving market is difficult enough to overcome, imagine how challenging it would be to overcome a 25% loss in a slow moving market. Therefore, de-emphasize each trade and think of the next trade simply as the first of ten trades rather than the next homerun.
You can reduce the emphasis by implementing less than 10x effective leverage. Effective leverage is simply taking the total notional trade size and dividing it by your account size. The result will indicate how many times you have your equity levered. According to our research, we recommend implementing less than ten times effective leverage.
Incorporating smaller trade sizes and less leverage will alleviate the stress of having to produce a profitable trade. As a result, you’ll be more likely to let the trade develop and let the trade evolve in the way the patterns indicate.
Analyze Longer Term Patterns
Another way to become more patient is to remember what the longer term chart patterns are suggesting.
Recently, I had been trading the USD/MXN extensively and the movement was quite choppy. It had been a while since I stepped back to review the daily chart. Since it had been several months, the pattern on the daily chart cleared up which affected my near term bias on the trades.
Sometimes, we can get caught up in the minutia of the day to day. Then, we forget what the longer term patterns are suggesting and lose that perspective in trading.
That is the benefit you get with longer term chart analysis. Longer charts help you develop a bias of direction. With each trade you make, there should be some method of determining a bias.
For example, trend traders look at the longer term trend and filter their trades accordingly. Range traders will see the longer term levels of support and resistance and make buying decisions near support and selling decisions near resistance.
The point is that the market tries to lull us to sleep, yet the longer term patterns are still playing out. What better time is there to analyze charts than while the markets are slow!
Good luck and happy trading!
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Press review
newdigital, 2014.05.09 15:55
Can You Trade Forex Well with a Small Balance?
“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”
“Attitude produces better total outcomes than analysis or technique.”
― Mark Douglas, Trading in the Zone
What’s the least amount I can’t start trading with? That’s a common question running through a trader-to-be’s head when they’re about to open a trading account. However, you’ll soon see how that line of thinking can breed a lot of poor thinking patterns and get you in trouble.
Let’s start off with some tough love. You’re not trying to buy something at a discount when you put down margin for a trading account. Less is not more and as you could understand, less is less. Put in other words, the attitude that comes with trying to get the best deal on a large purchase can do damage to your trading.
Here’s how. The attitude you trade with will follow through to how you manage risk and in keeping that mindset, you’ll likely overleverage your trading account and potentially be forced out of trades at the worst possible point. A better approach is to ditch the focus on a win percentage and instead focus on preserving capital / downside risk as opposed to a key juncture break long before an extreme pressed you out of the market. This new attitude that focuses on risk often produces better total outcomes than analysis or technique alone.
The Limits of a Small Balance
There’s a reason Hedge Funds don’t start with $5,000 or $50,000 or even $500,000. That’s because they know their inability to enter into a position with favorable risk: reward is directly tied to limited capital. Now, before you think, “I’m not a hedge fund so that doesn’t concern me,” think about this. Everyone is trying to extract money from the market while risking as little as possible however, there is an amount of agility that is needed to trade well and put the odds in your favor.
In short, a small trading balance limits your agility as a trade. Acute observations from traders with small balances show common traits that limit agility and your edge as a trader:
Agility is a mindset that traders need to have are often doomed without. When you’re agile, you’ll have the ability to pay attention to what matters most in trading, which is exploiting an edge in the market while always limiting risk. Of course, there’s an easy way to do this without trying to find a psychologist to change your mind frame.
The Better Path Regardless of Risk
Always think risk first regardless of your account balance. However, the more trading capital and usable margin you have, the easier it is to stay level headed and agile as the market moves. It’s been said that to enter a trade without a clear risk-point in mind is reckless and I agree. However, the more usable margin you have, which goes hand in hand with a larger account balance, the less you’ll keep holding out for the big winner and rather look for fewer high probability trades. Here’s a look from the Traits of Successful Trader’s Research that shows the correlation to high balance and better performance
The graph above shows a clear pattern: the less equity you trade with, the more prone you are to use high amounts of leverage. The more amount of leverage you utilize, the more focus you’re likely to have on short-term gains. The only problem with an overt focus on short term gains with high leverage is that you’re unlikely to take a small loss in the near term which can eventually lead to a huge or devastating loss before long.
Closing Thoughts
Starting with a small account can become one of the most expensive ways to get started. This article has opened up many of the mental traps that lurk for those trading a small account. The question becomes, are you willing to take trading seriously enough to protect your mental capital and align yourself with those who have made a success in trading before you?
I hope your answer is yes.
Happy Trading!
Forum on trading, automated trading systems and testing trading strategies
How to Start with Metatrader 5
newdigital, 2013.07.24 10:00
I just want to remind about how to insert the images to the post - read this small article
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MQL5.community - User Memo :
2. Messages Editor
All your texts in Forum, Articles and Code Base are edited in a single environment with a convenient and easy-to-use interface. Let us take a look at its capabilities.
The drop-down list where you can select one of the three languages in which your message will be automatically translated by the Google Translate service.
The
button (Ctrl+Alt+L) is used for adding links into messages. The Link window appears as soon as you click this button (shown next).
In the Link field, you should specify the address of the link and then click the Insert button.
The
button (Ctrl+Alt+I) is used for inserting pictures into messages. The Image window appears as soon as you click the button (shown next).
In the Upload image field, you should specify the picture file. To do it, click the Browse button that opens the standard window to choose files. Select the necessary file and click the Insert button to confirm the choice, or click the Cancel button to end without uploading a file. In the Title field, you can specify the comment that will be displayed as a pop-up help if you move the mouse cursor over the picture.
In HTML mode, it is prohibited to insert external links to images (HTML tag "src"). It is also prohibited to insert text, containing such images.
When you try to save text that contains external links to images, such links will be automatically deleted. This is done to ensure safety of MQL5.community members.
Forum on trading, automated trading systems and testing trading strategies
How to Start with Metatrader 5
RaptorUK, 2013.07.24 10:18
How to post code on this forum . . .