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Questions New Traders Ask

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  1. What is your approach to trading in periods between news releases?
  2. Do you trade in these times of more gradual market activity, and if so, what are your rules for entry and exit?
  3. Which charts (1 min through monthly) do you refer to for entry and exit in these periods and the relevance of each?
  • Watch market very closely when government officials are speaking; join in on any sudden price move assuming the reason is a gov’t official’s statement.
  • Catch up on reading actual economic releases and any articles written about them.
  • Determine the impact of latest misforecast economic release beyond the immediate price shock.
  • Technically I look for trading channels within trading channel; ideally 5 minute trading channel inside a 30 minute trading channel. When both are simultaneously near top or bottom of channel I initiate a trade with a tight stop (channel break) that supports my view. Usually I study and trade EURUSD.
  • For EURUSD I also look at 30 min chart with 60 period moving average and 5 min chart with 60 period moving average. Once again I am looking for a trend within a trend. For example, If EURUSD price is below 60ma on 30 minute chart I am searching for opportunities to sell EURUSD when price pierces 60ma on 5 minute chart to the downside. I consider the 30 minute to be indicative of today’s trend and 5 minute a timing indicator.
  • For GBPUSD I look for short-term bounces or corrections when the price has moved sharply over a very short period of time. I find a crossover on 1 minute chart with 60 period moving average excellent for taking profit or initiating a short-term “bounce” trade.
  • I look for tops and bottoms that are within reach of today’s trading range; determining prior to actually reaching these key points any trading strategy I may wish to employ.
  • I look at bar charts for indications of patterns of higher highs and higher lows and vise verse. It I discover the pattern early on in the move I enter at a level that allows me to join the pattern (assuming continuation) at a price that allows for a tight stop loss and confirmation that the pattern is broken. For example, If EURUSD appears to be putting in a short-term bottom as indicated by two consecutive bars with higher highs and higher lows; I will enter a trade during the third bar that is somewhat close to low of second bar (allows for tight stop because if price goes below low of second bar pattern is broken and reason for trade, continuation of pattern, no longer exists) and hope to be getting in at the beginning of a new short-term trend.
  • Any series of bars with higher highs and higher lows will eventually runs its course and the trend will reverse downward. I look for these patterns to run out of gas when they approach important tops, trading channel tops, and key moving average lines. Oftentimes I switch to candle charts for still further confirmation as these patterns reach their logical stopping place. There are several ways to trade this 1) Sell near top of previous bar with stop above previous bar (tight stop, potential to catch full reversal) 2) Sell near important top with tight stop. 3) Sell top of trading channel with tight stop. 4) Sell below but near moving average line and stop (tight) above moving average.
  • When you take any position always assume it close to an important juncture or pivot point (fault line) so that stop loss can be set close to trade level and the potential if your right clearly justifies the risk.
  • The more trades you do the more likely it becomes that you will be self-defeating due to paying spreads (difference between bid and offer rate) on every transaction you do. When you initiate a trade your chances are 50-50; the spread (3 to 5 points in EURUSD for example) slants the chances of success in the brokers favor. For example, assume you are trading on a four point EURUSD spread. If you do two trades a day your vig (spread cost) is 8 points; if you do 40 trades your vig (spread cost) is 160 points. Spread cost is really masked commissions; could you paid 160 points in commissions everyday and succeed. If you learn one thing – learn this.
  • To recap entry strategy is near critical points were I will either be stopped out quickly (due to tight stop) or participate in short-term trend reversal. When I get it right my exit level is correctly determined by the ensuing price action. Ideally I get a sudden price spike in my favor I gladly exit. In EURUSD if the trade goes 30 points my way I move my stop to breakeven and many times unfortunately that becomes my exit strategy. One of my personal trading rules is never let a good profit turn into a loss. Bottom line with exit points is to have an exit strategy before you enter the trade and stick to it unless you have a compelling reason to change it. Sometimes what looks like a 50 point trade can turn out to be 150 point trade when patient and systematic.
  • On trend reversal trades a good exit strategy is 38% Fib retracement area; many traders jump in there if they expect the trend to continue after what may turn out to be just a healthy correction; making about 35% of the initial move on a trend reversal trade should be fine. Besides, if the Fib level doesn’t hold you can always reenter (problem of paying spreads should be considered though).
  • Regardless of where you enter or exit the market your results will improve dramatically if you are patient and discriminating.
  • Charts beyond 30 minutes are good for big picture view but for day trading don’t go beyond 30 minutes for 300 periods. As they say in Waynes World, “stay in the now man”.

What is the relationship between fundamentals and technicals in these periods?
Without the immediate danger of news related spikes, prices tend to move slowly in well-defined trend channels (technical trading). When prices reach critical levels volatility begins to increase and the potential of a big winning trade re-emerges. Fault lines can be broken without news shocks; however most big moves follow news shocks.
Clearly, technicals take over in the absence of fundamental news.

What is a minimum acceptable ratio of profitable trades (to develop a trading system)
Successful trading is not about being right or wrong (winning and losing); its about return on equity (rate at which the money in your trading account is growing). The great Chicago commodity traders of the 1980’s used breakout systems that lost on 90% of their trades; still they made positve three digit percent returns year after year. How? When they got it right they rode it for all it was worth and when they were wrong they got out quickly (See attached TurtleRules).

The other extreme is the market-maker; this trader makes a good living simply by buying at his buy price (bid) and selling at his sell price (offer) and on average capturing the price difference between them. This is exactly how your broker makes money (and you lose money).

Ratio of profitable trades is unimportant in determining trading success; however the psychological impact can be substantial. Gets tougher and tougher to pull the trigger on the trade after you’ve lost money on consecutive trades.

Focus on risk/reward.

What is the average frequency that you trade (5 times a day? once every two days?)?
Once a day but not everyday

What is the average number of points per profitable trade a new trader should expect over a period of 6 months?
New traders should consider a breakeven result to be excellent during first 6 months of trading. Why do great high school baseball players go to the minor leagues? Need seasoning.

While results will inevitably vary from person to person, what is a reasonable benchmark profit expectation for a new trader in the first 6 months of trading one contract?
If you pick and chose your trades and trade infrequently breakeven would be excellent. If you trade actively your likely to lose your stake. There are exceptions but they are rare.

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