NOT WHAT YOU THINK

“If your trading isn’t going the way you want it to, change what you are doing… Maybe you need to change something about your trading system (your exits or your position sizing strategy). Or maybe you need to change how you approach your life in general.”

“Life is a process. There is no success or failure—only feedback. You’ve been getting feedback about what you’ve been doing for a long time. How have you been responding to it so far? Have you been making up a lot of excuses? Are you more interested in being right than making progress toward your goals? Are you willing to change now? It’s never too late. You’re never too old.” – Dr. Van K. Tharp

Hello:

The kind of trading approach that ensures survival is trend-following, and in view of any other trading methods, one should do trend-following only. Those who trade against the trend tend to pay those who trade with the trend.

One of the time-tested secrets of successful trading is to follow a trend. This prevents us from trying to pick tops and bottoms in the currency markets, which is part of the reasons why novice traders often get slaughtered and cooked for dinner. This article shows you how to trade alongside the ongoing trend. It also suggests a safe position sizing rule that goes with the strategy; something that can help you meet your trading objective.

A 50-period SMA and a 20-period Williams’ Percentage Range are used for the purpose of this strategy. The William Percentage Range (%R) technical indicator was developed by renowned futures author and trader Larry Williams. The system attempts to measure overbought and oversold market conditions. The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale. The %R indicator is designed to show the difference between the period high and today’s closing price within the trading range of the specified period. The indicator therefore shows the relative situation of the closing price within the observation period.

Selling just because a price seems to be overbought (or buying just because it is oversold) may take a trader out of the particular market long before the price falls (or rises), because overbought/oversold level can remain in an overbought/oversold level for a long time – even though the market prices continue to rise and fall. If you choose to use any technical indicators, they should be used as tools to confirm your trading decision, rather than depending solely on them to initiate a trade. Simply taking trading signals off an indicator, or analyzing several indicators at the same time usually would have a negative effect on a trader’s bottom line. It’s very important that you’re able to make a trading decision based on your observations of the price action and by what you see on the chart.

Details of the Strategy

Time frame: 30-minute charts

Indicators: Simple Moving Average (SMA) and Williams’ Percentage Range (%R)

Indicators parameters: EMA 50 and %R 20, levels -30 and -70

Entry Signals: In a downtrend, sell short when the %R goes below -70 (oversold region). In an uptrend, go long when the %R goes above -30 (overbought region).

Orders type: Instant executions

Position sizing: 0.01 for each $1000 (thus making it 0.1 for each $10000)

Stop loss: 50 pips

Take profit: 150 pips

Risk-to-reward: 1:3

Potential risk per trade: 0.5%

Number of pairs and crosses: 7

Names of pairs and crosses: EURUSD, USDACD, GBPUSD, AUDUSD, NZDUSD, EURJPY, and GBPJPY

Maximum duration per trade: One week

Note on hit rate and survival possibility: Long-term survival assured with only 33.3% hit rate. If you hit only 3 out of 10 trades, you’re a survivor

Trade Management

Once a trade has been placed, the market should be allowed to play itself out, since the price might sometimes reverse against you by a few tens of pips before going in your direction. Simply put, either the stop or the target would be hit, but some trade management must be put in place so that trading results can be optimized. As soon as a trade moves in your favor by up to 40 pips or above, you may move your stop to breakeven. Moving your stop when the price has moved by only a few pips would usually result in premature exits (tighter trailing stops would often get you stopped out by negligibly transitory fluctuations in price before continuing in your favor). Then the position should be left until it gains up to 80 pips before 40 pips are locked by moving your stop. Adjust the trailing stop to 80 pips if the trade goes in your favor by 120 pips or more. A favorable trade may or may not hit the target, or it may hit the trailing stop within the one-week duration of the trade. Once an open trade is up to one week old, it must be smoothed regardless of the profit or loss status. The stop must never be widened under any circumstances.

A Trade Example

Attached is a chart depicting where the trade on the EURJPY was entered and exited. Please don’t forget that the SMA 50 would be used to determine the overall trend on the chart, then the %R would be used as entry points (see ‘Details of the Strategy’). In this example, the EURJPY was clearly in an uptrend and a long position was taken when the %R confirmed an entry point in the direction of the trend. The trade was profitable. Take note that the 2nd signal would’ve resulted in a breakeven at worst, and the 3rd signal would’ve made you enjoyed a nice bullish ride.

Instrument: EURJPY

Order: Buy

Entry date: May 17, 2011

Entry price: 114.60

Stop loss: 114.10

Trailing stop: 115.80

Take profit: 116.10

Exit date: May 17, 2011

Exit price: 116.10

Status: Closed

Profit/loss: 150 pips

A Note to Readers

This is another gift for you, my loyal readers. It’s another way of saying ‘thank you for reading my articles.’ It’s important to know that the %R should be used alongside the ongoing trend and every signal it generates against the trend should be ignored. This is another way of using the %R indicator – a simpler but more effective method. Going contrary to the entry rules may put you in the danger of trying to pick tops and bottoms or getting caught on the wrong side of a new wave of the market direction. If you follow all the trading, money management and exit rules explained here, your long-term survival is then possible. You’d do well to open a long-lasting demo account with a reliable broker who allows flexible money management and practice with this strategy for at least, 2 months. You’d be able to verify the effectiveness of this strategy yourself. What would be your trading results after that? Please, I’d love to hear your thoughts, questions and feedback on this strategy. You can email me at my email address provided below.

NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘Resist the Lure of High Risk (Part 2).’ ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood, ‘If I Were a Trading Neophyte…,’ ‘Developing the Right Attitude towards Losses (Part 2),’ ‘The True Holy Grail,’ ‘Monthly Trading Report,’ etc.

A quote from Boris Schlossberg ends this article:

“I have seen traders make the same mistake a thousand times. Instead of following market direction, traders always want to fade it, because they think they know best. I find it ironic that the single most popular video on the BK Youtube website is “Picking Tops and Bottoms” which has more than 10,000 views while my videos on flow – a much more effective trading strategy – garner only 1,000 views. Perhaps that’s as it should be. Perhaps if everyone traded trend and didn’t try to second guess the market, we would never be able to make any money out of it. But all I know is that being too clever for our own good never ends well when you are trading FX,”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

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