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Monthly Archives: October 2016

How to Handle Forex Risk

The single most significant issue for us to understand once first starting to trade is risk management. Of course we all need to trade to aquire money. So the main thing we need to understand is not to lose it. Of course you will experience losing trades, we all do, it is part of trading, it is inevitable. But learn to survive those losses and subsequently endeavour to minimize and keep on minimising them.

With this in mind I confess to being intrigued by the wildly distinctive approaches proposed by various people. Some will tell you to swing trade so that you can capture whichever significant swings that occur throughout the day. Their argument is that by doing this they will not lose out on any major movements that take place. They benefit from sizeable stop losses to allow the trade a chance to breathe, as they say. This way they can permit the trade run and run for a decent long while and gather in a nice high profit. They do not need to stay chained to a laptop all day long and are comfortable in the knowledge that a large stop loss allows them to trade in this way. And various traders do precisely this.

Let us consider the amount they are risking. Suppose for example the pound is falling against the euro and the chart shows the price bouncing down and up against say the 40 daily moving average. Let us imagine that our stop loss is trailing slightly above the 40dma.There might well be a difference between the price and the stop loss of say 2-400 pips. That is one heck of a lot of risk! You need very deep pockets for this method.

Another method that the risk adverse beginner might want to consider is somewhat different. Imagine the chart described above instead of being a daily chart is a 10-minute chart although we will presume its outline is much the same. Because the price variations are smaller the risk is much smaller. Being a smaller time frame it will need closer monitoring than a swing trade but this is a balance that needs to be struck.

It often amazes me that certain traders will let a trade rise to its summit and subsequently let it retrace in the hope that it will take off again to a higher peak. This it might or might not achieve. When a price reaches its high point it is surely wise to exit the trade at the earliest obvious sign of a reversal and to re-enter later on. By following such an approach the stop loss, instead of being placed on a moving average can be placed at say the low of the preceding bar. As a consequence the risk is reduced to a very low level and fulfils one of the criteria outlined at the start of this article. In order to continue to reduce the risk element you might find you can reduce the stop loss to a portion of the proceeding bar so instead of having a 200 pip stop loss you can perhaps get away with say 20. Now that is low risk.

Know the Methods Behind Day Trading

Probably the most imperative things to know about when exchanging are, Tape Reading, Technical Indicators and fundamental Discretionary Trading Rules. Having the capacity to see how to apply these techniques when exchanging is a colossal variable when figuring out how to exchange. These abilities are difficult to learn and somewhat extreme to apply while exchanging. All through this article I will clarify these principles and how to utilize them, so you can have a superior handle and a superior information about them.

What are specialized pointers?

Used primarily by short-term day traders, technical indicators apply a specific formula to the price of a security.  These ‘indicators’ look to predict future market direction by using previous price patterns.

Example of the most common technical indicators includes Moving Averages, Relative Strength Index, Stochastic, MACD and Bollinger Bands.

Day Traders use these ‘indicators’ to identify specific times in the market when the opportunity for winning trades is the greatest.

What are Discretionary Trading Rules?

Discretionary trading rules are one of the most important aspects of consistently profitable day trading.  Just like any business, you must have a business plan or a set of specific instructions on how to run your business.

Everything from start-up capital, research and development, operational expenses and even the re-investment of your profits or the management of losses are included in this plan.

Professional day traders use their rules like a roadmap to success, just like a small business owner uses the business plan they wrote.  A disciplined use of this set of ‘rules’ results in a day trader taking only the trades that meet his/her specific trading criteria, and nothing else.

Just like a small business owner would never buy inventory for a product they don’t sell, a day trader must practice discipline to avoid the trades that do not meet his/her criteria, and to only take the trades that have demonstrated the highest percentage of winning results.

Tape Reading and How To Use It.

What is it?

  • Tape Reading is the study of raw price action as it comes across your time & sales window, and is considered by most to be the ‘purest form of the market.’
  • The term tape comes from ticker tape; print out by the ticker tape machines available since 1870s which reports the latest trade/bid/ask update information.

How it’s used:

  • Predict short term price changes by examining price and volume information as it comes across the ticker tape.
  • Most effectively used at potential turning points in the market to gauge overall market sentiment and help determine the future direction of price.
  • Traders use this to see confirmation of a potential trade set-up, or a heads-up that a set-up should be avoided.

Benefit to the trader:

  • Filter out the highest percentage set-ups
  • Confidence in your entries
  • Know when to exit a trade
  • Maximize profits on each trade
  • Limit the risk on each trade

What to watch:

  • Speed of the orders
  • Size of the orders
  • Order Condition

Learning to read the tape is a vital part to becoming a successful trader in the long term, and understanding how to learn this skill can be difficult if you don’t know what to look for.

Part of Stock Market Trading

It is essential not to bundle together the setting of stops with cash administration, as the two speak to various strands of Stock exchanging. Basically, stops are there to ensure benefits and farthest point the potential drawback whenever once an exchange has been opened, and are a piece of a leave methodology for exchanges that are now open. Cash administration covers position measuring or sums to be gambled inside each exchange of a portfolio.

Inside this possibly complex subject, there are various sorts of stops, and it ought to be included that stops are never ensured unless that office is offered by the dealer for an extra charge. In any case, their utilization is a basic piece of any exchanging technique. For the cases beneath share costs are utilized, however stop misfortunes ought to likewise be utilized when exchanging CFDs in wares, forex or files.

The uses and abuses of stops

Much has been written about the placing of stops and how to avoid them being triggered without too much risk. This of course is the $64m question for most CFD traders and very often causes more consternation than any other aspect of the trading process.

The basic idea behind where to place a stop is by reference to the overall trend or trading range within which the share is moving. As to the actual level of the stop, it depends on several factors including the trader’s overall money management rules, the amount of leverage, the time frame, and crucially the underlying volatility of the share chosen. The stop should aim to be placed at a level which if triggered would confirm the trade was incorrect.

There is no point in trading a highly leveraged CFD account with routine 5% stops as eight losses in a row, which statistically can be expected every few hundred trades, would lead to a minimum 40% drawdown on the account.

Having said that, there is equally no point in attempting to reduce the risk too far by setting 1.5% or 2% stops in highly volatile stocks or takeover situations as each trade needs room to breathe, and stops this tight are likely to be triggered within the normal daily ebb and flow of price movements.

A good rule of thumb is that if you cannot see at least double the potential profit in a trade compared to where you expect to place your stop loss, that trade should be passed over. Indeed some CFD traders look for three times profits achieved against losses as a starting ratio. Consequently an approach like this can be very successful by winning just three or four times out of ten, and is the hallmark of many of the world’s leading traders.

Many losing stock traders look for an entry point or strategy that wins six or seven times out of ten, but this is very hard to achieve consistently. Although the feeling of winning regularly is certainly warm, the win/loss ratio here very often tends to be very poor as too many winners are taken quickly, so the correct use of initial and running stops placement is crucial.

Types of stops

The basic maximum loss stop

The maximum loss stop is the starting point for most traders and is triggered when the share price hits a level below or above the opening price of the trade, depending on whether it is a long or short position. It can be measured in percentage points or actual money terms, but for these examples percentages are used. So if a CFD trader Buys Shares in British Telecom at 330p with a 2% stop loss, then the allowed loss is 6.6p and the position is closed if the bid or selling price falls to 323.4p or lower.

Note that no mention is made of how many shares are purchased or how much is being risked, as this is part of the client’s overall money management.
If the shares gap down below the stop either intra-day or at the open of trading the next day, the closing trade is triggered at the first price available in the market for that size, which is why stops are not guaranteed.

Things You Need To Start Day Trading

Tenacity

Day trading is definitely not for the faint of heart, neither is it for the individual who is not invested for the long haul. It is not something you can learn in a weekend course and be successful at it. You must treat it as any professional career path and expect to spend a couple of years learning to be a good trader.

A great analogy is the ocean. Waves rise and fall, but both have the same energy to propel great ships. In the same way, the wise day trader will use the ‘energy’ of the rise and fall of the markets to propel their ‘ship’ of investment. All traders have wins and losses but the successful day trader must be tenacious and determined. A commitment to stick with wise risk management skills in order to properly build and protect their trading account profits is required.

Training

Anyone with the desire can acquire the proper training necessary to become successful at day trading. Day trading must be treated like the true profession that it is, and that means gaining a lot of education through proper training.

Traders need to understand market fundamentals, the nuances of the different types of investment models, and the skills of proper position sizing, risk management and money management. They must learn how to read and interpret chart patterns, price action, volume action and support and resistance, all of which are fundamental trading skills necessary to achieve success.

During your education process you can still work a full time job because you can research and learn whenever it fits into your schedule. In addition, professional training is available, including through reputable online resources, making training convenient and self-paced.

Technology

The rapid advance of computer and internet technology has radically changed the world of the day trader. Traders can now project trends, switch investment strategies, evaluate indicators, and minimize loss almost instantly. One of the most advanced of these professional trading platforms is TradeStation.

TradeStation will support about any type of indicator and/or strategy you can imagine. Be sure to find and use TradeStation indicators that assist with the fundamental aspects of successful trading, such as price action, volume action, and support and resistance.

Software and hardware advances now allow the trader to understand the market in amazing ways and act very quickly. Many markets also trade after-hours, plus with active international markets it has truly developed into a twenty four hour a day opportunity.