I closed out the current position at 137. This week has been quite a challenge for me, with this currency pair trading in a range for so long “the last month”. This sideways motion leaves a trader unsure of what direction to go and plants seeds of doubt as every decision you make is generally proved wrong. Sitting on the sidelines doing nothing can be just as painful as sitting in a loosing trade, wishing you were out of the trade. I witnessed the large pin bar at 1600 GMT on the 18th and closed out my short positions. After this I went long initially but struggled emotionally due to this being against my methodology, thus I exited with a very small loss.
Currently the FTF account (ForexToFreedom Account) is sitting at break even, well actually at a minuscule profit which is quite negligible. This is far better than being in a deep draw-down and hopefully we will see some decent moves in the very near future. I am thinking of trading two pairs at the same time to diversify my risk and open my exposure. With the huge moves on Friday against the greenback I must admit it was a bit disheartening to miss out on them. I feel it could be beneficial to trade a US Dollar pair as well, this would be easy as I would just split my risk between the two trades. The emotional side of trading is definitely the toughest and requires consistent monitoring and improvement.
I am not going to go into to much depth about the history or design of the candlestick chart. Just Google candlestick charting and you will be inundated with information on this style of charting. Here is a link to a site I feel defines it quite well so feel free to peruse this page before reading the rest of this post. Candlestick Charts
Just on the subject of color, with today’s charting packages you can change the colors of the candles to anything that takes your fancy. I generally use red candles to define a bear candle (sellers are in charge) and blue, green or white to define a bull candle (buyers are in charge). I tend to change these colors regularly as it just changes the appeal of the chart. It can get a bit stale looking at the same colors all of the time.
I primarily look at candlesticks to identify reversals in price. Preferably I like to see price retrace against the trend and then form a reversal at a significant level. This I feel is an ideal place for me to enter a position because it identifies two things for me.
- Firstly it identifies a turning point in the market
- Secondly, as I am assuming this is a market turning point, then it also gives me an ideal place to place my stop loss order. I generally place it 10 to 15 pips below the lowest point of the reversal pattern.
I have two patterns that I use consistently that I have found to be reliable enough to use as additional indicators in my weight of evidence strategy. I say this because I don’t use any one indicator in a vacuum as such. What I look for in my trading is multiple key indicators to line up at the one time. These indicators then complement each other and reinforce my decision to take a trade. The two patterns I prefer are:
- The first, I refer to as twin towers because this is what they look like to me. It is where one candle is the same size as the previous candle or completely engulfs the previous candle. What I am really looking for is a complete reversal of control. For example, a large bull candle indicates the bulls are in charge, but if this is then followed by an equally large bear candle, this signifies that the bulls have completely lost control and the bears are now in charge. Here are some examples on a chart to help identify these patterns. These are not complicated patterns and are very easy to identify. Just pull up any candlestick chart of any instrument. Pick a time frame and observe for yourself, just how reliable this pattern is and then form your own conclusions. For me it is a no brainer.
- The second pattern has a lot of names, it can be called a pin bar, a lwc (long wicked candle), a shooting star, a hanging man and the list goes on. I like to call them pin bars because that is what they look like, A PIN. This is a single candlestick pattern whereas the twin towers is a multiple candlestick pattern. Both these patterns signify the same thing, the transfer of control from the bulls to the bears or vica versa. I use this pattern exactly the same way I use the twin tower pattern so I will insert a chart depicting this particular pattern.
I prefer the wick of the candle to be at least three times the length of the body and negligible on the other side, candles 1 and 4 are great examples of this.
These are the only two patterns that I regularly use in my trading. There are literally dozens of candlestick patterns and no doubt all very effective used in the right way. I try to keep my trading as simple as I can and thus limit myself to just the two of these patterns.
Candles do play an important role in a lot of traders trading and therefore are definitely worthwhile further researching. Some books that are definitely worth a read are:
I have placed a position
Short at 137.90
Stop Loss is placed at 140.10
I placed this position last night at 2am my time, I have been awaiting some form of strong signal to indicate the continuation of the recently formed downtrend. When this twin tower formed I did not hesitate to place my orders. Because by my definition we are in a downtrend it was just a matter of finding a good entry point. Lets see if this one goes my way.
Last week was pretty quite for trading. When price starts trading in a range, trend trading strategies tend to be fairly ineffective. You will note that the trade last week was at one stage in profit to the tune of 400 pips, this trade was ultimately stopped out at break even. The premise behind my trend trading is to
- firstly identify a trend
- Take a position in the direction of that trend
- Add more position size as the trend develops and confirms my analysis is correct
- Stay with the trend as long as it meets my criteria for defining that trend
When trends do develop, this strategy is very effective in generating large profits. However, when the markets do range this does not work. I generally will be stopped out two or three times before it becomes apparent that a range is forming. There are different strategies I could use to trade these ranges, but I am more comfortable with just awaiting the formation of the next potential trend.
To utilize this style of trading, I have to be prepared to sacrifice profits, with the assumption that my analysis is correct and I will be able to add to my position. This highlights the absolute importance or should I say necessity to have a trading plan. A trading plan is paramount. Without one you are doomed to failure.
At its barest minimum a trading plan should consist of
- The big picture (For me this is – Define the trend)
- An entry strategy
- An exit strategy
- A position sizing strategy (This ultimately is derived from stop loss placement)
- A trade management strategy (This would include the likes of adding to position and the moving of stops as the trade progresses)
- Trading psychology (This would include the tools you have in place or utilize to manage the many emotions that are involved with trading)
I will over time share my strategies and trading plan on this site. I have already begun this with the page titled “The Method”. The first part was how I define the trend, the next will be on candlesticks and the patterns that I find most effective.
I primarily focus on the 4 hour time frame and the following are the methods I use to determine the trend and ultimately the direction I am looking to place my trades.
The first tool I use is straight from Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets. It is a 30 period simple moving average. When it is rising, the trend is up. When it is falling, the trend is down. When it is flat, the trend is neither up or down.
The second tool I use is to observe the price chart and take note of where the highs and lows are formed on the chart. If price is forming Higher high’s and higher lows, it is trending up.
A downtrend is the exact opposite of an uptrend. Price will be forming lower lows and lower highs. I prefer both these tools to be in unison prior to placing a trade. For example, for a long position, I want the moving average to be rising and price to be forming higher lows and higher highs.
The only question we still have to ask now, is how do we know when the trend has changed. This is a relatively simple process as well. Imagine price is currently forming higher lows and higher highs. What we would look for is price to form a lower high and then a lower low. Generally by the time this has happened, the 30 period simple moving average will be moving down also. The following chart shows this clearly.
These are very basic strategies for determining the trend but also extremely effective. Note that the above chart is a weekly chart of the Dow Jones Industrial Average and also note that the trend changed about January 2008. Imagine if the so called experts or the general public utilized these methods to trade the stock market. I am confident that anyone using these methods during the 2008/09 financial crisis would have experienced positive outcomes. If you haven’t read Stan’s book I highly recommend it.
I have been sitting on the sidelines all week waiting to see which way and when the guppy would break out of it’s current range (between 141.50 – 135.50). As I primarily focus on the four hour chart, I was looking for a closed candle outside of this range. This has just happened (00.00 EST) as price closed below the previous major low of 135.52. I have placed a short position at 135.32 with a stop loss at 137.15. Where this trade will go, I have no Idea, but as a trend trader my method dictates that every position be treated as if it is the start of a new trend.
Therefore my goal is to continually add to the position whilst at the same time limiting my risk. This allows me to ensure that when I am right, which is only about 60% of the time, I can maximize my profits by riding the trend for as long as possible.
I had one other trade this week, which I didn’t get to post, which was not profitable. The outcome for this week was 3 losing trades in a row. It doesn’t seem to matter how much you trade, it is never easy losing trade after trade. I know it is inevitable and part of the game but it is still a struggle. The only comfort to me is that this system has, in the past, produced a maximum of seven losing trades in a row. Therefore it is not a surprise to experience this sort of draw down again, or something that I am unprepared for. That still doesn’t reduce the pain I can assure you, but it does allow me the confidence to keep trading with the knowledge that good trades are just around the corner.
After the third trade and then with non farm payrolls coming out on Friday, I was done for the week and glad of it. I watched on the sidelines on Friday and no doubt for short term traders, there were good opportunities, but for my style of trading it would have meant more losses I’m sure.
The pound yen is very choppy at the moment, so makes for challenging trading for trend traders. Right now I am going to sit on the sidelines and wait and see where this pair goes. All the Major forex pairs appear to be losing momentum at the moment except the USD/JPY, which I may end up trading this week as it is showing a lot of strength at the moment.
I am still unsure how exactly to record all my trades, as I feel just recording pips lost or made is not very practical. This is not as relevant as the position size. For example, if I have a stop of 30 pips, my position size will be a lot greater than if I had a stop of 150 pips. Therefore, a 100 pip gain is far more significant on the 30 pip position.
I always risk 2% of total equity at any one time so I am starting to think a record in percentages might be a better way to go. I trade multiple accounts, so this can be a bit confusing at times for me. I will ultimately find the best method for documentation as this blog progresses.
Recap for week
- 1st trade stopped out for 131 pip loss (2%)
- 2nd trade stopped out for 100 pip loss (2%)
- 3rd trade stopped out for 90 pip loss (2%)
To date we are pretty much square. Last week I was up 6% and this week I am down 6%. It would be nice to get some runs on the board next week. We will see.