Trading Rules
Hi there!
Losing money in Forex is a very painful experience and it usually leads the trader to one of two decisions:
1- Giving up trading and you return to your old safety job.
2- To set up your rules.
It’s very strange that the most of traders had lost a lot of money before learning the lesson that “there’s no way to make profit trading Forex (or achieving any success in any field) without firmly established rules and the discipline to obey them”.
I’m wondering why don’t you set these rules before gambling your hard earned money and practice your rules and discipline examination in a demo account before going to trade real account? Anyway nothing is free in this world and you have to pay to learn before gaining from the paid lessons “no pain no gain”.
How to set up your rules:
I’ll write down my trading rules which I’m not recommend or ask you to use them (you can use them if you want) but I’m writing them to tell you what’s the kind of rules you have to set up.
Whatever the kind of you trading style you have to answer the most important three questions in trading Forex:
1- When to enter a trade?
2- When to exist a trade?
3- Why should I trade?
These are the 3 must(s) your rules have to answer them:
When to enter a trade?
Betting on the price raising or failing is the only strategy that the losers uses. To trade Forex one of the most important questions you have to answer “Why should I enter a trade?”.
You have to know what should happen to enter a trade, for example your collection of indicators giving you the entry signal. And you have to know how much of money (lots) you are going to trade.
If these questions have no answer how can you except to have trading rules??
When to exit a trade?
“Swimming is the art of breathing control” these words fit the Forex trading too. You have to know when to leave the Forex ocean and control your breath while you are swimming in this ocean.
Exiting in the correct time without hoping of more profit or hoping that the loss decreasing is one of the very important points that you rules have to include!
Why should I trade?
It maybe strange to ask this question to a Forex trader, Why should you trade? The question itself needs to be clearer!
The question means “There are times that you have to enter the market, and there are times that you have to exit the market, right, Huh? well, there are times that you should not trade at all?”
Yes, You have to stop trade when you make a lot of loss and you have to do the following in this case:
1- Ask yourself: did you obey your rules? If no! you have to ask yourself Why? Was is it a problem in myself or it was a problem in the rules (The rules wasn’t clear or wasn’t profitable) and How in the future I’ll obey my rules
2- If you have obeyed your rules and made losses you have to examine your rules again and again to know what was the wrong.
3- In any case you have to stop for awhile to take your breath and continue your swimming. Losing money is a good time to stop trading not to try to compensate them! I heard these words from ages “Don’t cry on whom loss, but cry on whom want to compensate”
What should I do with my rules?
This is a silly question but I have to finish my article with it because the most of us forget to answer it daily and hourly even minutely:
1- Obey them!
2- Obey them!
3- Obey them!
4- “Plan your trade and trade your plan” Which means “Obey them!”
Money Management - 2%-6% rules
Hi there!
In this series of articles i’m going to introduce to you some of the best money management concepts/methods that have been developped by great forex and stock traders.
All of us heard and read about how important the money management but the most of us have been lost in finding clear money management strategies to follow. Our money management strategy today is very simple and easy to follow; it,s the 2%-6% rules.
The 2%-6% rules money management strategy was introduced by Elder Alexander in his book “Come to my trading room” in chapter 7 that labeled “Money Management Formulas”.
Sharks and piranhas :
Elder says “The goal of money management is to accumulate equity by reducing losses on losing trades and maximizing gains on winning trades.” and he affirm that Everyone in the market (competitor traders and brokers) want to eat your money, they have two ways to eat your money:
1- A big single shark bite that wipe of all or the most of your capital.
2- A series of small piranhas bites that none of them is lethal alone but which together strip an account to the bone.
The 2%-6% rules is the Money Management method that protects you from the sharks and piranhas.
2% limit rule:
The first thing you have to do to keep your account away of the sharks is to limit your lose at any trade to 2% of your equity. Do you have 10000USD in your trading account? So, you have to risk 10000 x 2% = 200USD in any of your trades. You have to set your stop loss to this level and you have not lose at any trade you make more than 2% of your equity. Some of professional traders use less than 2% but no more than 2%.
Whenever you make a loss or a profit you have to recalculate the 2% of the equity to know your new maximum risk per trade. For example if you made a profit trade and your account now is 11000USD, your maximum risk will be 220USD. At the other hand if you made a loss and and your account now is 9000USD, your maximum risk will be 180USD.
US Dollar Index
Hi there!
The most traded pairs - that are called Majors - are the pairs that the US dollar is a part of them or by other means that traded against the US dollar (for example the EURUSD pair which is the most traded pair in the world, the EURO is traded against the US dollar).
Any trader will notice the strong relationship between these pairs which called “Correlation” for example when the EURO raise against the US dollar it’s very likely that the GBP will raise against the USD and also the JPY and CHF. We can say in this case the US Dollar had been declined against the other major currencies. Or we can say “The US dollar index had been declined”.
What’s the USDX (US Dollar Index)?
The US dollar Index (USDX) is a measurement of the US dollar value by comparing the US dollar against the majors currencies traded as pairs with the US dollar. The selected currencies are 6 currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base.
How the USDX is calculated?
As mentioned above the USDX is calculated against 6 currencies and it is calculated with this formula:
USDX = 50.14348112 × EURUSD -0.576 × USDJPY 0.136 × GBPUSD -0.119 × USDCAD 0.091 × USDSEK 0.042 × USDCHF 0.036
In the formula above we can notice two things:
1- Not all the currencies have the same weight, but there are currencies more important than others. Table 1 and image 1 show the weight of each currency.
|
Currency |
Weight |
| Euro EUR | 0.576 |
| Japanese Yen JPY | 0.136 |
| British Pound GBP | 0.119 |
| Canadian Dollar CAD | 0.091 |
| Swedish Krona SEK | 0.042 |
| Swiss France CHF | 0.036 |
2- When the the USD is the base currency the value is positive and when it the USD is the quote currency the value is negative.
Note: The above value is compared against the US Dollar relative to March 1973. March 1973 was chosen as a base period because it represents a significant milestone in foreign exchange history when the world’s major trading nations allowed their currencies to float freely against each other.
What the USDX is useful for?
It’s very obvious that when the strength or weakness of the US dollar in the USDX means the same strength or weakness against the currencies that the USD is a part of its pairs. So, you can use the USDX to predict the movement of your favorite pair. Also it’s recommended to observe the other pairs related to the USD while you observing your favorite pair.
Parabolic SAR indicator
Hi there!
Our indicator today and as like as a lot of the previous indicators was introduced by Welles Wilder in his book “New Concepts in Technical Trading Systems”. It’s the Parabolic SAR indicator.
What’s the Parabolic SAR indicator?
The word SAR stands for “Stop And Reverse” and this name clearly indicates the functionality of the indicator.
The Parabolic SAR indicator follows the trend and stops when the trend near to reverse.
The above sentence telling us all about the Parabolic SAR indicator:
1- The trend must be exist first before relying on the Parabolic SAR; which means the Parabolic SAR works perfectly in the trending markets and times while it works very bad when the market start to move sideways.
2- The Parabolic SAR indicator has no answer for the questions “When to enter the market?” and “Is the market trending or not?” but it has a very good answer to one of the most important questions “When to exit the trade?”.
Formula:
The Parabolic SAR indicator in MetaTrader takes two of the parameters that used in its calculation (Figure 2):
Step: This is the acceleration factor used in calculating the Parabolic SAR, The higher the Step value is set, the more sensitive the indicator will be to price changes. Wilder recommends setting the Step parameter to .02.
Maximum: This is the value of reverse when the Parabolic SAR reach it. Wilder recommends setting the Maximum to parameter to.20.
The calculation of indicator then uses one of two formulas depending on is it long or short position:
Long:
SAR(i) = SAR(i-1)+Step*(HIGHEST(i-1)-SAR(i-1))
Short:
SAR(i) = SAR(i-1)+Step*(LOWEST(i-1)-SAR(i-1))
How to use the Parabolic SAR indicator?
The main usage of the Parabolic SAR indicator is as a trailing-stop technique which means the Parabolic SAR will tell you the best time to exit your trade by giving you the best value to trail your stop losses.
At the beginning of the trend the Parabolic SAR dotes are far from the price hence there’s a room for your trailing stop to be wider. As the trend goes weaker the Parabolic SAR dotes come near to the price and you’ll have a tighter trailing stop.
When the Parabolic SAR dotes goes below the price you use its value to trail stop your long position.
When the Parabolic SAR dotes goes above the price you use its value to trail stop your short position.
Psycho-strategy
Hi there!
Maybe it seems as a strange article in the context of the previous series of articles whereas the previous articles were talking technically voice about indicators and strategies used in trading Forex.
This article is talking about trading Forex too but from another point of view; the psychology point.
I’ve found it’s very important to include this article in this series of indicators and strategies articles because I consider it a Forex trading strategy; that’s why I’m calling it “Psycho-strategy”.
What’s the Psycho-strategy?
I’m sure you understand that the Psycho-strategy is a mere metaphor, however we are going to use the same Forex terminology to describe our hypothetical strategy.
The Psycho-strategy is the mind frame you have to set your mind to if you want to make constantly profit in the world of Forex. It’s the way you have to think and feel in the three stages of the trade; before opening a trade, while the trade is running and after closing the trade.
The first thing I have to advice you before reading this article is that you have to to believe that using the Psycho-strategy is not less important than using your technical and fundamental strategies if not important! if you can’t totally believe that I recommend you to skip this article and continue with your favorite technical and fundamental venerable strategies.
The Psycho-strategy setup:
The the Psycho-strategy uses three indicators: Discipline indicator, Greedy oscillator and Fear oscillator.
We use these indicators not to tell us when to enter the market (there are much better techniques to enter the marker where the Psycho-strategy can help) but we are using them to refine our overall trading practice hence our success in the Forex world.
Let’s start with the most important indicator; the Discipline indicator:
Discipline indicator:
It is unquestionable that nobody could achieve a goal if he have not already set this goal. Give the best archer the best tools and tell him to shot aimless target! what do you think he will do?
In the Forex (and in live un general) you have to define your goal and keep it obvious if you want to achieve it. For example you have to determine how many pips you want to gain daily, weekly and monthly from your trading.
Your goal have to be realistic, attainable and measurable: realistic goal means you have to set a goal that is not impossible for you and anybody to achieve, for example you can be a millionaire from trading Forex for few weeks or months. attainable goal means you can easily achieve the goal for example gaining 100 pips daily is not impossible in Forex trading so it’s a realistic goal but 25 pips per day is more attainable goal, get it?
The goal you have set have to be measurable which means you can easily say I’ve achieved my goal of today or this month. Goals like “I want to be a millionaire or I want to get the maximum pips the market could offer” are not measurable goals.
The first line in the Discipline indicator is the Goal line, the second line in the Discipline indicator is the Rules line.
Any successful person has his set of rules which he extremely bind himself to it, you too have to set you trading rules and obey them to the end, for example one of successful traders rules “Set stop loss before trade”.
You have to discover your trading rules and more important to obey them to the end, of course you can change this rules occasionally (i.e. every six months you have to review your trading rules) but once you have set them you can’t change them “Rules couldn’t’ be changed while playing the game”.
The Discipline indicator now has two lines: Goal line and Rules line; these lines have to be unbreakable, untouchable, you have to limit you trade between these lines and don’ let Greedy or Fear indicators to breaks your Goal and Rules lines.
Fear and Greedy oscillators:
The fear making of loss and Greedy of making more profits are very like bulls and bears that imagined fighting each others and move the market accordingly. Both of the fear and greedy trying to break your Discipline indicators lines.
Fear of losing maybe advising you to ignore setting stop loss for you trade and break one of your trade rules. Fear maybe asking you to close a profitable trade once the market start to move against you for awhile.
Greedy acts the same trying to break your rules but inversely of fear; Greedy will tell you to continue in a profitable trade although you Goal has been achieved seeking more pips. Greedy will advice you to remove your trailing stop hoping o make the maximum of he market.
As long as Fear indicator and Greedy indicator oscillate between the Discipline upper line - Goal line - and lower line - Rules line - you will constantly make profits with the Psycho-strategy!
Trading on news
Hi there!
A friend of mine told me today his yesterday trading story which I want to share.
“I was driving my car home and my pocket pc is on and MetaTrader, I was shorting 2 lots of EURUSD and longing 1 lot of USDJPY and waiting for the FOMC 29 June 2006 Meeting news.
I didn’t limit my orders because I do hate to use stop loss and I want to capture as profits as I can, so I didn’t set a take profit limit. 400 Pips in less than 1 hour were my loss, I hadn’t have the courage to hit the close button, indeed I was thinking it’s a joke and hoping it stops”
SHI Channel indicator
Hi there!
Our indicator today is not one of the popular indicators yet, but it’s growing popularity among the Forex traders in their forum; the SHI Channel indicator.
Channel trading in general is one of less use trading method, however it has its fan who trading the two methods of channels: Channel direction follower and Channel breakout.
The MetaTrader version of the SHI Channel indicator (SHI_Channel_true.zip) was created by Shurka & Kevin
How does the SHI Channel indicator work?
The SHI Channel indicator and as the all of the channel indicator uses the highest high and lowest low of the price to determine the upper and lower bands of the channel.
In the SHI Channel The channel is calculated according to the given period of calculation and the time frame of the used chart, and the channel is self-adjusted (Like the Bollinger Bands).
As you see in figure 1 there are two thick lines that indicates the upper and lower channel and a dashed center line.
The channel gives the overall direction of the price movement - up or down - and may change from time to time, specially if it used with a low timeframe (1, 5 and 5 minutes).
How to trade using the SHI Channel indicator?
Actually you can’t trade with the SHI Channel indicator alone, it will not tell you when to enter the trade neither when to exit, The SHI Channel indicator telling you the overall direction of the price trend and the channels with the middle line warn you how much the trend is strong or weak, however , you have to use another indicators to generate the entry/exit signals.
Some of SHI Channel indicator users recommend to use it with this set of indicators:
Juice indicator
LerGuerre indicator
I_Trend indicator
Perkyasctrend1
When the above four indicators give you the entry signal, it must to be in the same direction of the SHI Channel; if the signal was sell and the SHI Channel is sloping down we sell (Figure 2), conversely, if the signal of the three indicators was buy and the SHI Channel is sloping up we buy.
ATR indicator
Hi there!
We are going to talk today about an indicator that was created by Welles Wilder and introduced in his well known book “New Concepts in Technical Trading Systems”; the ATR indicator.
The ATR (Average True Range) is a volatility measuring indicator hence it indicates the strength or weakness trend , so the ATR is not signal generator and will not tell you when to enter the market. But it’s very important indicator that widely used in many of strategies to indicate the best entry point when the trend warm up and it used too to indicate the best time to exit trade when the trend lose its interest.
How does the ATR work?
The normal volatility formula that uses the high and low of the given period of the calculation didn’t fit Welles’s aspirations, That’s because the gaps and limited moves in the price are effecting the accuracy of the common formula.
To overcome this issue Welles started by defining TR as the greatest of the following values:
1- Current high - Current low
2- Absolute value of current high - previous close
3- Absolute value of current low - previous close
The ATR is the moving average of the TR for the giving period (typically 14 days) - Figure 1.
It advised as a general usage of the ATR indicator that low and high records indicate a potential reversal of the trend, however the best usage of the ATR indicator is using it in trailing stop your orders.
ATR Trailing Stop:
We’ve said that the best usage of the ATR - and the volatility measuring indicators - is determining the best time to exit the trade. This based in a simple fact “When the volatility go down the trend loss its interest”.
What are the trailing stops anyway?
Trailing stop is a line of the stop points that follows your trade, when you make profit the trail stop modify you stop loss value to protect your profit and if the price drop back to the stop loss level the position will exit.
The hard coded trailing stop number doesn’t respect the movement of the price and could prevent a potential profit.
Best time to trade Forex
Hi there!
The Forex market opens 24 hours, it on Sunday night (5 PM EST) and closes on Friday afternoon (4PM EST).When the Asian market closes its doors, the European market starts followed the US market then the Asian market open it doors again and etc.
During this period you have the freedom to trade in the Forex market anytime and whenever you want. This Time-Freedom-Trade is one of the characteristic that makes the popularity of trading Forex. However, not all the times are suitable for trading Forex that’s because the volatility of the market changes too much during the 24 hours according to the major countries (markets) opens, closes and overlaps.
So, the question “When to trade?” is a very important question for any trader seeks profit in the Forex market, whatever your trading style is.
World time:
Let’s talk about the world time to make sure that your hand-watch is accurate and you can convert easily the time of Forex market sessions to your local time.
There are two main world time systems that widely used:
GMT:
The GMT (Greenwich Meridian Time) is the time of Greenwich – England time and it considered the world standard time system!
The time of Greenwich is 0 and the countries are located in the east of Greenwich have positive GMT time (for example Tokyo time is GMT +9), while the countries located in the west of Greenwich have negative GMT time (for example Alaska time is GMT -10).
You have to note that the GMT time named too UTC (Coordinated Universal Time).
The GMT time will be named BST (British Summer Time) when the UK changes the clock (GMT+1) in the summer and that occures between the last Sunday in March and the last Sunday in October each year.
EST:
The EST (Eastern Standard Time) is the time of North America and it is GMT-5 (UTC-4 during daylight saving time and in this case called EDT).
The major Forex sessions:
There are three major sessions of the Forex market, in these sessions the volatility of the market is much higher in general and for specific currencies according to the session:
Asian session (7PM : 4AM EST):
The Asian session starts at 7 PM EST (12 AM GMT) and ends at 4 AM EST (9 PM GMT).
The most important countries work in this season is Tokyo followed by Hong Kong then Singapore.
The most trading currencies in this session are: GBP/JPY, GBP/CHF and USD/JPY; these three currencies can fluctuate up to 110 pips in this session.
The AUD/JPY, GBP/USD and USDCHF too are traded too much in this session and can fluctuate up to 60 pips.
U.S. session (8 AM : 5 PM EST):
The U.S. session starts at 8 AM EST (
Momentum Trading
Hi there!One of the most exciting aspect of the Forex market that makes it an unique trading experience is that you can make profits from the price rising and also from the price falling. I.e. when you buy a currency pair - say EURUSD - and when the price of this pair raises (which means the price of EUR raises against the USD) you make profit equal to this raising in the price. And when you sell the same pair - EURUSD and the price of EUR fails against the USD you make profit from this failing.
The price of any pair is between the raising and failing in a cycle mode and the opportunities of profit (and loss) are unlimited!
Our trade style today is how the trader benefits from the cycle movements of the currencies prices!
Three types of traders:
According to how long you are going to keep you opened position you are one of three traders:
1- Short-Term (Scalper) trader: The trader who holds the position from few seconds to few minutes trying to get his profits from the small price movements.
2- Mid-Term trader: