CALM BEFORE THE STORM
“Sometimes… I have personally had numerous trades fall short of their targets. As frustrating as this can be at times, I have also had plenty of trades that have hit their target perfectly and closed out for a great profit. All we can do is stick to our plan of action and don’t let our feelings get in the way.” – Sam Evans
What do you think is the easiest period to enter a trend? The easiest time to catch a trend is when the price is moving slowly and can change direction easily. It’s foolhardy to jump into the market when there’s a thunderous and maniacal movement in the market. For a price to change direction it must first pause. Some candles in a sideways market phase are characterized by spinning tops and dojis. It’s this kind of pausing zone that a good trader should endeavor to identify. By doing this, you can find a calmly moving price for entry which can enable you to get caught in large moves for nice profits, plus if large moves reduce your speed in the markets they automatically lessen your exposure to the unpredictability that may cause profit to evaporate.
Performing an analysis is all fine, but of course an analysis becomes useful only when it’s used to generate trading signals which can be taken advantage of. The strategy discussed here enables you to make very simple analyses and benefit from the price movements that result from them. It includes some CHF pairs, but not all of them. The markets will never move straight up or straight down forever. Markets go into sideways phases because they’re building up strength for the next major trend. CHF pairs in particular tend to consolidate a lot and later break out in a sustained and predictable manner. The likelihood of a trend continuing is greater than the likelihood of a trend reversing itself. Therefore you may only exit a position on a basis of trend reversal.
For this strategy, the instruments used are USDCHF, EURCHF, GBPCHF, AUDCHF, CHFJPY, and CADCHF. Granted, a few of the instruments listed here have high spreads, but the cost of trading the NZDCHF is even higher. Therefore the NZDCHF isn’t included in the strategy. The typical stop is determined with high spread in mind.
The best approach is to draw horizontal trendlines to map out a good consolidation zone (consisting of 2 lines), marking highs and lows of the price. If price then breaks above the upper line, you orient yourself with the bulls. But if the price breaks below the lower line, you orient yourself with the bears. It’s wise to allow a breakout candle to close above or below the trendline so that you can avoid a false signal.
Alternatively, certain traders who wouldn’t want to draw trendlines may use the SMAs 50 and 200, giving each SMA a different color. They identify an uptrend when the SMA 50 is above the SMA 200; and vice versa for a downtrend. In an uptrend, they buy when price breaks the SMA 50 to the upside and sell when it breaks the SMA 200 downwards, going south. In a downtrend, they buy when price breaks the SMA 200 to the upside and sell when it breaks the SMA 50 down, going south. If the price hovers between the SMAs 50 and 200, they stay out of the market.
A few hundreds pips are targeted on this small time-frame. Why run trades on 5-minute charts for as long as possible? Yes, it makes logical sense to ride a winning trade until a chosen target is possibly hit. What you see on a smaller timeframe could be the beginning of a long-term trend on a larger timeframe. What you see on larger timeframes first started building up on smaller timeframes. Some moves that start on smaller timeframes eventually become huge moves on bigger timeframes. The only problem is that it’s difficult for impatient traders to sit thru the ups and downs of these moves.
Details of the Strategy
Strategy name: A CHF Breakout Strategy
Trading style: Short-term cum swing trading
Instrument names: USDCHF, EURCHF, GBPCHF, AUDCHF, CHFJPY, and CADCHF
Timeframe: 5-minute charts
Tools: Horizontal trendlines and price action (breakouts). The highs and the lows of the price are marked.
Buy signal: Enter long after a candle closes above an established sideways market as confirmed by valid horizontal trendlines
Sell signal: Enter short after a candle closes below an established sideways market as confirmed by valid horizontal trendlines
Alternative setups: Please see paragraph 5 of this article
Exit rule: A position is closed if the stop or target or trailing stop is hit
Position sizing: 0.01 lots for each $1000 (thus making it 0.1 lots for $10000 or 1.0 lots for $100000)
Risk: 1% per trade
Stop loss: 100 pips
Take profit: 200 pips
Breakeven rule: Change the stop to the entry price once you’ve gained up to 70 pips or more
Trailing stop: Apply a custom-set trailing stop of 100 pips once your profit reaches 180 pips or more
If the pairs and crosses traded are more than 10, I’d reduce the risk per trade to 0.5%, but since they’re less than 10, the risk per trade is 1%. The stop is not too tight to the point of stopping out many trades as a result of normal market volatility. Experienced traders know that tighter stops often result in higher losing rates, whereas only a decided movement against a position should make the position get stopped out as a loss. Also take note of the trailing stop in the trade example below. Anyone using tight trailing stop would’ve mostly been stopped out during minor counter-trend fluctuations.
A Breakout Trade Example
A chart depicting the trade example mentioned here is attached with this article. Spread was not considered in this example. The horizontal lines are drawn to mark a consolidation phase of the price movement on the GBPCHF, including its highs and lows. 2 vertical lines are also drawn – the one on the left shows where the trade was entered while the one on the right shows where it was exited. You can see that the price broke out upwards after some sideways movement within the trendlines, following a few tests of the lines. To avoid a bad signal, I waited for the candle that broke the upper trendline to close above it. Then I went long immediately upon the formation of another candle, after a previous one was closed.
Entry date: August 16, 2011
Entry price: 1.2850
Stop loss: 1.2750
Trailing stop: 1.2950
Take profit: 1.3050
Exit date: August 16, 2011
Exit price: 1.3050
Profit/loss: 200 pips
The key to survival is to lose as little as possible in bad markets and gain as much as possible in good markets. A sensible RRR is one of the features that can help you achieve this. As far as your equity curve is concerned, it’s better to zigzag upwards than downwards. Take risk reduction measures.
NB: Please watch out for my coming articles with these titles: ‘Mastering the Market Equilibrium Zones,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple RRR – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Excellent Money Management Flexibility – Make the Best Choice!’ ‘Resist the Lure of High Risk – Part 3 (Use Low Risk and Reap Benefits),’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Advanced Gap Trading – Trading with Insane Accuracy,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses – Part 3 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘Achieve Success through Sensible Risk-to-reward Ratio (An Interview with a Trading Enthusiast),’ ‘ Clarifying Some Issues – Part 5,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Is It Realistic to Give Guarantees in Trading?’ ‘Monthly Trading Report (Augsut 2011),’ etc.
This article is concluded with more helpful quotes from Sam:
1. “I will always be the first to admit that taking a stop-out is difficult in the early days, mainly due to the feeling of being wrong. Combine that with the fact that you just lost a little bit of your money as well and it can be a bitter pill to swallow. However, we soon come to realize that losing small is a vital part of the game. If you don’t have small losses, you can never have larger wins.
2. “Take the stop on the chin and move on. Things won’t always go your way in the markets, just as they won’t always go your way in real life either.”
3. “We can also have issues when faced with a losing streak in our trading. The very worst thing a trader can do is pass on a trade which matches their trade plan because they fear another loss. This can often result in passing on a quality setup which could have greatly turned the overall profit and loss situation around and impact the final results and consistency. The idea is simple: If a trade comes up which meets the criteria for the plan, then it must be taken; no questions asked. Remember that you have to be in it to win it. Passing on a trade opportunity due to emotional setbacks is not objective practice.”
Your questions and opinions are highly welcome.
With best regards,
Forex Signals Strategist, Funds Manager &Coach
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