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Former investment bank FX trader: some thoughts
Hi guys, I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert. I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning. When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions. The first topic is Risk Management and we'll cover it in three parts Part I
Why it matters
Using stops sensibly
Picking a clear level
Why it matters
The first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.” You have to keep it before you grow it. Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around. The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices. Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizing
The first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose. Position sizing is what ensures that a losing streak does not take you out of the market. A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples. So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000. We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be? We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator". https://preview.redd.it/y38zb666e5h51.jpg?width=1200&format=pjpg&auto=webp&s=26e4fe569dc5c1f43ce4c746230c49b138691d14 So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital. You should be using this calculator (or something similar) on every single trade so that you know your risk. Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later. The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work. As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you. Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints. For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly: https://preview.redd.it/q2ea6rgae5h51.png?width=1200&format=png&auto=webp&s=4332cb8d0bbbc3d8db972c1f28e8189105393e5b To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you. Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown. It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance. Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k. Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money. Do not let this happen to you. Use position sizing discipline to protect yourself.
If you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number? The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round. This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet. Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin. Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips. Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds. Applying the formula to forex trading looks like this: Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically. If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss. So that’s 0.3 - (1 - 0.3) / 3 = 6.6%. Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit! With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not. Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account. Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see. This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders. Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How many live trades have you done? Often they’ll have done only a handful of real trades and the rest are simulated backtests, which are overfitted. The model will soon die.
What is your risk-reward ratio on each trade? If you have a take profit $3 away and a stop loss $100 away, of course most trades will be winners. You will not be making money, however! In general most traders should trade smaller position sizes and less frequently than they do. If you are going to bias one way or the other, far better to start off too small.
How to use stop losses sensibly
Stop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them. A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter. The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’. This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK. Why are stop losses so important? Well, there is no other way to manage risk with certainty. You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter. Learning to take a loss and move on rationally is a key lesson for new traders. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Bruce Kovner, founder of the hedge fund Caxton Associates There is an old saying amongst bank traders which is “losers average losers”. It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong. Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear level
Where you leave your stop loss is key. Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible. If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200. The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up. Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD. https://preview.redd.it/moyngdy4f5h51.png?width=1200&format=png&auto=webp&s=91af88da00dd3a09e202880d8029b0ddf04fb802 If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend. So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level. There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section. There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high. https://preview.redd.it/ygy0tko7f5h51.png?width=1200&format=png&auto=webp&s=34af49da61c911befdc0db26af66f6c313556c81 Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument. Here are some guidelines that can help:
Use technical analysis to pick important levels (support, resistance, previous high/lows, moving averages etc.) as these provide clear exit and entry points on a trade.
Ensure that the stop gives your trade enough room to breathe and reflects your timeframe and typical volatility of each pair. See next section.
Always pick your stop level first. Then use a calculator to determine the appropriate lot size for the position, based on the % of your account balance you wish to risk on the trade.
So far we have talked about price-based stops. There is another sort which is more of a fundamental stop, used alongside - not instead of - price stops. If either breaks you’re out. For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part II
EDIT: part II here Letting stops breathe When to change a stop Entering and exiting winning positions Risk:reward ratios Risk-adjusted returns
Coming up in part III
Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Former investment bank FX trader: Risk management part II
Firstly, thanks for the overwhelming comments and feedback. Genuinely really appreciated. I am pleased 500+ of you find it useful. If you didn't read the first post you can do so here: risk management part I. You'll need to do so in order to make sense of the topic. As ever please comment/reply below with questions or feedback and I'll do my best to get back to you. Part II
Letting stops breathe
When to change a stop
Entering and exiting winning positions
Letting stops breathe
We talked earlier about giving a position enough room to breathe so it is not stopped out in day-to-day noise. Let’s consider the chart below and imagine you had a trailing stop. It would be super painful to miss out on the wider move just because you left a stop that was too tight. Imagine being long and stopped out on a meaningless retracement ... ouch! One simple technique is simply to look at your chosen chart - let’s say daily bars. And then look at previous trends and use the measuring tool. Those generally look something like this and then you just click and drag to measure. For example if we wanted to bet on a downtrend on the chart above we might look at the biggest retracement on the previous uptrend. That max drawdown was about 100 pips or just under 1%. So you’d want your stop to be able to withstand at least that. If market conditions have changed - for example if CVIX has risen - and daily ranges are now higher you should incorporate that. If you know a big event is coming up you might think about that, too. The human brain is a remarkable tool and the power of the eye-ball method is not to be dismissed. This is how most discretionary traders do it. There are also more analytical approaches. Some look at the Average True Range (ATR). This attempts to capture the volatility of a pair, typically averaged over a number of sessions. It looks at three separate measures and takes the largest reading. Think of this as a moving average of how much a pair moves. For example, below shows the daily move in EURUSD was around 60 pips before spiking to 140 pips in March. Conditions were clearly far more volatile in March. Accordingly, you would need to leave your stop further away in March and take a correspondingly smaller position size. ATR is available on pretty much all charting systems Professional traders tend to use standard deviation as a measure of volatility instead of ATR. There are advantages and disadvantages to both. Averages are useful but can be misleading when regimes switch (see above chart). Once you have chosen a measure of volatility, stop distance can then be back-tested and optimised. For example does 2x ATR work best or 5x ATR for a given style and time horizon? Discretionary traders may still eye-ball the ATR or standard deviation to get a feeling for how it has changed over time and what ‘normal’ feels like for a chosen study period - daily, weekly, monthly etc.
Reasons to change a stop
As a general rule you should be disciplined and not change your stops. Remember - losers average losers. This is really hard at first and we’re going to look at that in more detail later. There are some good reasons to modify stops but they are rare. One reason is if another risk management process demands you stop trading and close positions. We’ll look at this later. In that case just close out your positions at market and take the loss/gains as they are. Another is event risk. If you have some big upcoming data like Non Farm Payrolls that you know can move the market +/- 150 pips and you have no edge going into the release then many traders will take off or scale down their positions. They’ll go back into the positions when the data is out and the market has quietened down after fifteen minutes or so. This is a matter of some debate - many traders consider it a coin toss and argue you win some and lose some and it all averages out. Trailing stops can also be used to ‘lock in’ profits. We looked at those before. As the trade moves in your favour (say up if you are long) the stop loss ratchets with it. This means you may well end up ‘stopping out’ at a profit - as per the below example. The mighty trailing stop loss order It is perfectly reasonable to have your stop loss move in the direction of PNL. This is not exposing you to more risk than you originally were comfortable with. It is taking less and less risk as the trade moves in your favour. Trend-followers in particular love trailing stops. One final question traders ask is what they should do if they get stopped out but still like the trade. Should they try the same trade again a day later for the same reasons? Nope. Look for a different trade rather than getting emotionally wed to the original idea. Let’s say a particular stock looked cheap based on valuation metrics yesterday, you bought, it went down and you got stopped out. Well, it is going to look even better on those same metrics today. Maybe the market just doesn’t respect value at the moment and is driven by momentum. Wait it out. Otherwise, why even have a stop in the first place?
Entering and exiting winning positions
Take profits are the opposite of stop losses. They are also resting orders, left with the broker, to automatically close your position if it reaches a certain price. Imagine I’m long EURUSD at 1.1250. If it hits a previous high of 1.1400 (150 pips higher) I will leave a sell order to take profit and close the position. The rookie mistake on take profits is to take profit too early. One should start from the assumption that you will win on no more than half of your trades. Therefore you will need to ensure that you win more on the ones that work than you lose on those that don’t. Sad to say but incredibly common: retail traders often take profits way too early This is going to be the exact opposite of what your emotions want you to do. We are going to look at that in the Psychology of Trading chapter. Remember: let winners run. Just like stops you need to know in advance the level where you will close out at a profit. Then let the trade happen. Don’t override yourself and let emotions force you to take a small profit. A classic mistake to avoid. The trader puts on a trade and it almost stops out before rebounding. As soon as it is slightly in the money they spook and cut out, instead of letting it run to their original take profit. Do not do this.
Entering positions with limit orders
That covers exiting a position but how about getting into one? Take profits can also be left speculatively to enter a position. Sometimes referred to as “bids” (buy orders) or “offers” (sell orders). Imagine the price is 1.1250 and the recent low is 1.1205. You might wish to leave a bid around 1.2010 to enter a long position, if the market reaches that price. This way you don’t need to sit at the computer and wait. Again, typically traders will use tech analysis to identify attractive levels. Again - other traders will cluster with your orders. Just like the stop loss we need to bake that in. So this time if we know everyone is going to buy around the recent low of 1.1205 we might leave the take profit bit a little bit above there at 1.1210 to ensure it gets done. Sure it costs 5 more pips but how mad would you be if the low was 1.1207 and then it rallied a hundred points and you didn’t have the trade on?! There are two more methods that traders often use for entering a position. Scaling in is one such technique. Let’s imagine that you think we are in a long-term bulltrend for AUDUSD but experiencing a brief retracement. You want to take a total position of 500,000 AUD and don’t have a strong view on the current price action. You might therefore leave a series of five bids of 100,000. As the price moves lower each one gets hit. The nice thing about scaling in is it reduces pressure on you to pick the perfect level. Of course the risk is that not all your orders get hit before the price moves higher and you have to trade at-market. Pyramiding is the second technique. Pyramiding is for take profits what a trailing stop loss is to regular stops. It is especially common for momentum traders. Pyramiding into a position means buying more as it goes in your favour Again let’s imagine we’re bullish AUDUSD and want to take a position of 500,000 AUD. Here we add 100,000 when our first signal is reached. Then we add subsequent clips of 100,000 when the trade moves in our favour. We are waiting for confirmation that the move is correct. Obviously this is quite nice as we humans love trading when it goes in our direction. However, the drawback is obvious: we haven’t had the full amount of risk on from the start of the trend. You can see the attractions and drawbacks of both approaches. It is best to experiment and choose techniques that work for your own personal psychology as these will be the easiest for you to stick with and build a disciplined process around.
Risk:reward and win ratios
Be extremely skeptical of people who claim to win on 80% of trades. Most traders will win on roughly 50% of trades and lose on 50% of trades. This is why risk management is so important! Once you start keeping a trading journal you’ll be able to see how the win/loss ratio looks for you. Until then, assume you’re typical and that every other trade will lose money. If that is the case then you need to be sure you make more on the wins than you lose on the losses. You can see the effect of this below. A combination of win % and risk:reward ratio determine if you are profitable A typical rule of thumb is that a ratio of 1:3 works well for most traders. That is, if you are prepared to risk 100 pips on your stop you should be setting a take profit at a level that would return you 300 pips. One needn’t be religious about these numbers - 11 pips and 28 pips would be perfectly fine - but they are a guideline. Again - you should still use technical analysis to find meaningful chart levels for both the stop and take profit. Don’t just blindly take your stop distance and do 3x the pips on the other side as your take profit. Use the ratio to set approximate targets and then look for a relevant resistance or support level in that kind of region.
Not all returns are equal. Suppose you are examining the track record of two traders. Now, both have produced a return of 14% over the year. Not bad! The first trader, however, made hundreds of small bets throughout the year and his cumulative PNL looked like the left image below. The second trader made just one bet — he sold CADJPY at the start of the year — and his PNL looked like the right image below with lots of large drawdowns and volatility. Would you rather have the first trading record or the second? If you were investing money and betting on who would do well next year which would you choose? Of course all sensible people would choose the first trader. Yet if you look only at returns one cannot distinguish between the two. Both are up 14% at that point in time. This is where the Sharpe ratio helps . A high Sharpe ratio indicates that a portfolio has better risk-adjusted performance. One cannot sensibly compare returns without considering the risk taken to earn that return. If I can earn 80% of the return of another investor at only 50% of the risk then a rational investor should simply leverage me at 2x and enjoy 160% of the return at the same level of risk. This is very important in the context of Execution Advisor algorithms (EAs) that are popular in the retail community. You must evaluate historic performance by its risk-adjusted return — not just the nominal return. Incidentally look at the Sharpe ratio of ones that have been live for a year or more ... Otherwise an EA developer could produce two EAs: the first simply buys at 1000:1 leverage on January 1st ; and the second sells in the same manner. At the end of the year, one of them will be discarded and the other will look incredible. Its risk-adjusted return, however, would be abysmal and the odds of repeated success are similarly poor.
The Sharpe ratio works like this:
It takes the average returns of your strategy;
It deducts from these the risk-free rate of return i.e. the rate anyone could have got by investing in US government bonds with very little risk;
It then divides this total return by its own volatility - the more smooth the return the higher and better the Sharpe, the more volatile the lower and worse the Sharpe.
For example, say the return last year was 15% with a volatility of 10% and US bonds are trading at 2%. That gives (15-2)/10 or a Sharpe ratio of 1.3. As a rule of thumb a Sharpe ratio of above 0.5 would be considered decent for a discretionary retail trader. Above 1 is excellent. You don’t really need to know how to calculate Sharpe ratios. Good trading software will do this for you. It will either be available in the system by default or you can add a plug-in.
VAR is another useful measure to help with drawdowns. It stands for Value at Risk. Normally people will use 99% VAR (conservative) or 95% VAR (aggressive). Let’s say you’re long EURUSD and using 95% VAR. The system will look at the historic movement of EURUSD. It might spit out a number of -1.2%. A 5% VAR of -1.2% tells you you should expect to lose 1.2% on 5% of days, whilst 95% of days should be better than that This means it is expected that on 5 days out of 100 (hence the 95%) the portfolio will lose 1.2% or more. This can help you manage your capital by taking appropriately sized positions. Typically you would look at VAR across your portfolio of trades rather than trade by trade. Sharpe ratios and VAR don’t give you the whole picture, though. Legendary fund manager, Howard Marks of Oaktree, notes that, while tools like VAR and Sharpe ratios are helpful and absolutely necessary, the best investors will also overlay their own judgment. Investors can calculate risk metrics like VaR and Sharpe ratios (we use them at Oaktree; they’re the best tools we have), but they shouldn’t put too much faith in them. The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments.Howard Marks of Oaktree Capital What he’s saying is don’t misplace your common sense. Do use these tools as they are helpful. However, you cannot fully rely on them. Both assume a normal distribution of returns. Whereas in real life you get “black swans” - events that should supposedly happen only once every thousand years but which actually seem to happen fairly often. These outlier events are often referred to as “tail risk”. Don’t make the mistake of saying “well, the model said…” - overlay what the model is telling you with your own common sense and good judgment.
Coming up in part III
Available here Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Real quick before I get into my next steps of my FX Journey, id like to say thank you to all the people who commented on my last post! All of the tips I got were really eye-opening and introduced me to different parts of FX trading that I didn't even know existed. So thank you so much, and I hope to get more interesting feedback from you guys in the future! Also Im going to probably change my writing frequency from daily to biweekly. I think writing about every little trade is not going to be as beneficial to me as writing about my overall progress at certain points throughout the week. I started this trading day out by learning up on order flow. A whole bunch of you guys suggested really interesting youtubers to watch, and I started with Mr. pip's series on order flow. After I finished up watching a few of his videos, I started to tweak my trading plan so that I could get in some chart time. I changed currency pair from EUUSD to the AUD/USD, the time frame from the 4 hour to the 1 hour, and my indicators from RSI, Stochastic, 2 SMAs and ADX to ATR, RSI, and Ichimoku Kinko Hyo. I also added a little fundamental analysis in my trading plan because I think that I am being far too reliant on my indicators. I planned to check the economic calendar and determine the general trend of the currency pairs that are strongly correlated to the AUD/USD before I began my chart analysis. In addition to all of my analysis, I tried to practice using the techniques I learned in Mr. Pip's videos and analyze the order flow of the chart. Even if my analysis of order flow is wrong, as long as I am getting practice I am learning. Eventhough I planned to use today to back-test indicators and find a solid new plan, I did not have enough time. I ended up getting on my demo account really late in the day, and started to force myself to enter a trade. Destructive habits like this could lead into some massive issues when I eventually get into live trading. To combat this harmful attitude specifically, I will restrict myself to trading on certain parts of the day (for example session overlaps, news releases, and earlier in the day). Despite this mistake I still continued with my trading strategy. I calculated all the currency correlations for AUS/USD using the past weeks economic data, and set my indicators in place. After checking the overall trend of the most strongly correlated pairs (Positive: EUUSD, GPB/USD, Negative: USD/CAD, USD/JPY) I started to analyze the order flow. All the correlated currencies, except for EUUSD, indicated that the AUD/USD would fall, while my order flow analysis indicated the opposite. Seeing as though I am extremely new to order flow, I dismissed this analysis, and ended up forcing a trade on the AUD/USD going short when my indicators seemed to line up correctly. I learned from last time that I should not alter or close my trade purely based on emotion, and to just wait till the market hits my stop loss or take profit. I included a trailing stop loss of 60 pips this time, but I have no evidence to base that number range on. The trade is currently open and I am down about 30 pips. Although I am not labeling this trade as a loser yet, I can definitely see a lot of holes in my trading strategy. The most obvious mistake in my eyes right now is my use of indicators. Currently all my trades are purely based on what my indicators say, and since I do not have any back-tested data to support the credibility of my indicators, it feels a lot like strategic gambling. Another issue is that I feel far too reliant on indicators alone. I think that if I can find ways to include various types of analysis efficiently and evenly in my trading plan I will become a much more skillful and well-rounded trader. In order to combat these two issues I will begin forming various types of trading strategies this weekend and back-test them all extensively. I also plan on researching more on price action, order flow, and Naked Forex. Once again any and all feedback is welcome. I am just beginning Forex, but it had been a huge passion of mine and I don't plan on stopping anytime soon.
Disclaimer: None of this is financial advice. I have no idea what I'm doing. Please do your own research or you will certainly lose money. I'm not a statistician, data scientist, well-seasoned trader, or anything else that would qualify me to make statements such as the below with any weight behind them. Take them for the incoherent ramblings that they are. TL;DR at the bottom for those not interested in the details. This is a bit of a novel, sorry about that. It was mostly for getting my own thoughts organized, but if even one person reads the whole thing I will feel incredibly accomplished.
For those of you not familiar, please see the various threads on this trading system here. I can't take credit for this system, all glory goes to ParallaxFX! I wanted to see how effective this system was at H1 for a couple of reasons: 1) My current broker is TD Ameritrade - their Forex minimum is a mini lot, and I don't feel comfortable enough yet with the risk to trade mini lots on the higher timeframes(i.e. wider pip swings) that ParallaxFX's system uses, so I wanted to see if I could scale it down. 2) I'm fairly impatient, so I don't like to wait days and days with my capital tied up just to see if a trade is going to win or lose. This does mean it requires more active attention since you are checking for setups once an hour instead of once a day or every 4-6 hours, but the upside is that you trade more often this way so you end up winning or losing faster and moving onto the next trade. Spread does eat more of the trade this way, but I'll cover this in my data below - it ends up not being a problem. I looked at data from 6/11 to 7/3 on all pairs with a reasonable spread(pairs listed at bottom above the TL;DR). So this represents about 3-4 weeks' worth of trading. I used mark(mid) price charts. Spreadsheet link is below for anyone that's interested.
I'm pretty much using ParallaxFX's system textbook, but since there are a few options in his writeups, I'll include all the discretionary points here:
I'm using the stop entry version - so I wait for the price to trade beyond the confirmation candle(in the direction of my trade) before entering. I don't have any data to support this decision, but I've always preferred this method over retracement-limit entries. Maybe I just like the feeling of a higher winrate even though there can be greater R:R using a limit entry. Variety is the spice of life.
I put my stop loss right at the opposite edge of the confirmation candle. NOT at the edge of the 2-candle pattern that makes up the system. I'll get into this more below - not enough trades are saved to justify the wider stops. (Wider stop means less $ per pip won, assuming you still only risk 1%).
All my profit/loss statistics are based on a 1% risk per trade. Because 1 is real easy to multiply.
There are definitely some questionable trades in here, but I tried to make it as mechanical as possible for evaluation purposes. They do fit the definitions of the system, which is why I included them. You could probably improve the winrate by being more discretionary about your trades by looking at support/resistance or other techniques.
I didn't use MBB much for either entering trades, or as support/resistance indicators. Again, trying to be pretty mechanical here just for data collection purposes. Plus, we all make bad trading decisions now and then, so let's call it even.
As stated in the title, this is for H1 only. These results may very well not play out for other time frames - who knows, it may not even work on H1 starting this Monday. Forex is an unpredictable place.
I collected data to show efficacy of taking profit at three different levels: -61.8%, -100% and -161.8% fib levels described in the system using the passive trade management method(set it and forget it). I'll have more below about moving up stops and taking off portions of a position.
And now for the fun. Results!
Total Trades: 241
TP at -61.8%: 177 out of 241: 73.44%
TP at -100%: 156 out of 241: 64.73%
TP at -161.8%: 121 out of 241: 50.20%
Adjusted Proft % (takes spread into account):
TP at -61.8%: 5.22%
TP at -100%: 23.55%
TP at -161.8%: 29.14%
As you can see, a higher target ended up with higher profit despite a much lower winrate. This is partially just how things work out with profit targets in general, but there's an additional point to consider in our case: the spread. Since we are trading on a lower timeframe, there is less overall price movement and thus the spread takes up a much larger percentage of the trade than it would if you were trading H4, Daily or Weekly charts. You can see exactly how much it accounts for each trade in my spreadsheet if you're interested. TDA does not have the best spreads, so you could probably improve these results with another broker. EDIT: I grabbed typical spreads from other brokers, and turns out while TDA is pretty competitive on majors, their minors/crosses are awful! IG beats them by 20-40% and Oanda beats them 30-60%! Using IG spreads for calculations increased profits considerably (another 5% on top) and Oanda spreads increased profits massively (another 15%!). Definitely going to be considering another broker than TDA for this strategy. Plus that'll allow me to trade micro-lots, so I can be more granular(and thus accurate) with my position sizing and compounding.
A Note on Spread
As you can see in the data, there were scenarios where the spread was 80% of the overall size of the trade(the size of the confirmation candle that you draw your fibonacci retracements over), which would obviously cut heavily into your profits. Removing any trades where the spread is more than 50% of the trade width improved profits slightly without removing many trades, but this is almost certainly just coincidence on a small sample size. Going below 40% and even down to 30% starts to cut out a lot of trades for the less-common pairs, but doesn't actually change overall profits at all(~1% either way). However, digging all the way down to 25% starts to really make some movement. Profit at the -161.8% TP level jumps up to 37.94% if you filter out anything with a spread that is more than 25% of the trade width! And this even keeps the sample size fairly large at 187 total trades. You can get your profits all the way up to 48.43% at the -161.8% TP level if you filter all the way down to only trades where spread is less than 15% of the trade width, however your sample size gets much smaller at that point(108 trades) so I'm not sure I would trust that as being accurate in the long term. Overall based on this data, I'm going to only take trades where the spread is less than 25% of the trade width. This may bias my trades more towards the majors, which would mean a lot more correlated trades as well(more on correlation below), but I think it is a reasonable precaution regardless.
Time of Day
Time of day had an interesting effect on trades. In a totally predictable fashion, a vast majority of setups occurred during the London and New York sessions: 5am-12pm Eastern. However, there was one outlier where there were many setups on the 11PM bar - and the winrate was about the same as the big hours in the London session. No idea why this hour in particular - anyone have any insight? That's smack in the middle of the Tokyo/Sydney overlap, not at the open or close of either. On many of the hour slices I have a feeling I'm just dealing with small number statistics here since I didn't have a lot of data when breaking it down by individual hours. But here it is anyway - for all TP levels, these three things showed up(all in Eastern time):
7pm-4am: Fewer setups, but winrate high.
5am-6am: Lots of setups, but but winrate low.
12pm-3pm Medium number of setups, but winrate low.
I don't have any reason to think these timeframes would maintain this behavior over the long term. They're almost certainly meaningless. EDIT: When you de-dup highly correlated trades, the number of trades in these timeframes really drops, so from this data there is no reason to think these timeframes would be any different than any others in terms of winrate. That being said, these time frames work out for me pretty well because I typically sleep 12am-7am Eastern time. So I automatically avoid the 5am-6am timeframe, and I'm awake for the majority of this system's setups.
Moving stops up to breakeven
This section goes against everything I know and have ever heard about trade management. Please someone find something wrong with my data. I'd love for someone to check my formulas, but I realize that's a pretty insane time commitment to ask of a bunch of strangers. Anyways. What I found was that for these trades moving stops up...basically at all...actually reduced the overall profitability. One of the data points I collected while charting was where the price retraced back to after hitting a certain milestone. i.e. once the price hit the -61.8% profit level, how far back did it retrace before hitting the -100% profit level(if at all)? And same goes for the -100% profit level - how far back did it retrace before hitting the -161.8% profit level(if at all)? Well, some complex excel formulas later and here's what the results appear to be. Emphasis on appears because I honestly don't believe it. I must have done something wrong here, but I've gone over it a hundred times and I can't find anything out of place.
Moving SL up to 0% when the price hits -61.8%, TP at -100%
Adjusted Proft % (takes spread into account): 5.36%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%
Adjusted Proft % (takes spread into account): -1.01% (yes, a net loss)
Now, you might think exactly what I did when looking at these numbers: oof, the spread killed us there right? Because even when you move your SL to 0%, you still end up paying the spread, so it's not truly "breakeven". And because we are trading on a lower timeframe, the spread can be pretty hefty right? Well even when I manually modified the data so that the spread wasn't subtracted(i.e. "Breakeven" was truly +/- 0), things don't look a whole lot better, and still way worse than the passive trade management method of leaving your stops in place and letting it run. And that isn't even a realistic scenario because to adjust out the spread you'd have to move your stoploss inside the candle edge by at least the spread amount, meaning it would almost certainly be triggered more often than in the data I collected(which was purely based on the fib levels and mark price). Regardless, here are the numbers for that scenario:
Moving SL up to 0% when the price hits -61.8%, TP at -100%
Winrate(breakeven doesn't count as a win): 46.4%
Adjusted Proft % (takes spread into account): 17.97%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%
Winrate(breakeven doesn't count as a win): 65.97%
Adjusted Proft % (takes spread into account): 11.60%
From a literal standpoint, what I see behind this behavior is that 44 of the 69 breakeven trades(65%!) ended up being profitable to -100% after retracing deeply(but not to the original SL level), which greatly helped offset the purely losing trades better than the partial profit taken at -61.8%. And 36 went all the way back to -161.8% after a deep retracement without hitting the original SL. Anyone have any insight into this? Is this a problem with just not enough data? It seems like enough trades that a pattern should emerge, but again I'm no expert. I also briefly looked at moving stops to other lower levels (78.6%, 61.8%, 50%, 38.2%, 23.6%), but that didn't improve things any. No hard data to share as I only took a quick look - and I still might have done something wrong overall. The data is there to infer other strategies if anyone would like to dig in deep(more explanation on the spreadsheet below). I didn't do other combinations because the formulas got pretty complicated and I had already answered all the questions I was looking to answer.
2-Candle vs Confirmation Candle Stops
Another interesting point is that the original system has the SL level(for stop entries) just at the outer edge of the 2-candle pattern that makes up the system. Out of pure laziness, I set up my stops just based on the confirmation candle. And as it turns out, that is much a much better way to go about it. Of the 60 purely losing trades, only 9 of them(15%) would go on to be winners with stops on the 2-candle formation. Certainly not enough to justify the extra loss and/or reduced profits you are exposing yourself to in every single other trade by setting a wider SL. Oddly, in every single scenario where the wider stop did save the trade, it ended up going all the way to the -161.8% profit level. Still, not nearly worth it.
As I've said many times now, I'm really not qualified to be doing an analysis like this. This section in particular. Looking at shared currency among the pairs traded, 74 of the trades are correlated. Quite a large group, but it makes sense considering the sort of moves we're looking for with this system. This means you are opening yourself up to more risk if you were to trade on every signal since you are technically trading with the same underlying sentiment on each different pair. For example, GBP/USD and AUD/USD moving together almost certainly means it's due to USD moving both pairs, rather than GBP and AUD both moving the same size and direction coincidentally at the same time. So if you were to trade both signals, you would very likely win or lose both trades - meaning you are actually risking double what you'd normally risk(unless you halve both positions which can be a good option, and is discussed in ParallaxFX's posts and in various other places that go over pair correlation. I won't go into detail about those strategies here). Interestingly though, 17 of those apparently correlated trades ended up with different wins/losses. Also, looking only at trades that were correlated, winrate is 83%/70%/55% (for the three TP levels). Does this give some indication that the same signal on multiple pairs means the signal is stronger? That there's some strong underlying sentiment driving it? Or is it just a matter of too small a sample size? The winrate isn't really much higher than the overall winrates, so that makes me doubt it is statistically significant. One more funny tidbit: EUCAD netted the lowest overall winrate: 30% to even the -61.8% TP level on 10 trades. Seems like that is just a coincidence and not enough data, but dang that's a sucky losing streak. EDIT: WOW I spent some time removing correlated trades manually and it changed the results quite a bit. Some thoughts on this below the results. These numbers also include the other "What I will trade" filters. I added a new worksheet to my data to show what I ended up picking.
Total Trades: 75
TP at -61.8%: 84.00%
TP at -100%: 73.33%
TP at -161.8%: 60.00%
Moving SL up to 0% when the price hits -61.8%, TP at -100%: 53.33%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%: 53.33% (yes, oddly the exact same winrate. but different trades/profits)
Adjusted Proft % (takes spread into account):
TP at -61.8%: 18.13%
TP at -100%: 26.20%
TP at -161.8%: 34.01%
Moving SL up to 0% when the price hits -61.8%, TP at -100%: 19.20%
Taking half position off at -61.8%, moving SL up to 0%, TP remaining half at -100%: 17.29%
To do this, I removed correlated trades - typically by choosing those whose spread had a lower % of the trade width since that's objective and something I can see ahead of time. Obviously I'd like to only keep the winning trades, but I won't know that during the trade. This did reduce the overall sample size down to a level that I wouldn't otherwise consider to be big enough, but since the results are generally consistent with the overall dataset, I'm not going to worry about it too much. I may also use more discretionary methods(support/resistance, quality of indecision/confirmation candles, news/sentiment for the pairs involved, etc) to filter out correlated trades in the future. But as I've said before I'm going for a pretty mechanical system. This brought the 3 TP levels and even the breakeven strategies much closer together in overall profit. It muted the profit from the high R:R strategies and boosted the profit from the low R:R strategies. This tells me pair correlation was skewing my data quite a bit, so I'm glad I dug in a little deeper. Fortunately my original conclusion to use the -161.8 TP level with static stops is still the winner by a good bit, so it doesn't end up changing my actions. There were a few times where MANY (6-8) correlated pairs all came up at the same time, so it'd be a crapshoot to an extent. And the data showed this - often then won/lost together, but sometimes they did not. As an arbitrary rule, the more correlations, the more trades I did end up taking(and thus risking). For example if there were 3-5 correlations, I might take the 2 "best" trades given my criteria above. 5+ setups and I might take the best 3 trades, even if the pairs are somewhat correlated. I have no true data to back this up, but to illustrate using one example: if AUD/JPY, AUD/USD, CAD/JPY, USD/CAD all set up at the same time (as they did, along with a few other pairs on 6/19/20 9:00 AM), can you really say that those are all the same underlying movement? There are correlations between the different correlations, and trying to filter for that seems rough. Although maybe this is a known thing, I'm still pretty green to Forex - someone please enlighten me if so! I might have to look into this more statistically, but it would be pretty complex to analyze quantitatively, so for now I'm going with my gut and just taking a few of the "best" trades out of the handful. Overall, I'm really glad I went further on this. The boosting of the B/E strategies makes me trust my calculations on those more since they aren't so far from the passive management like they were with the raw data, and that really had me wondering what I did wrong.
What I will trade
Putting all this together, I am going to attempt to trade the following(demo for a bit to make sure I have the hang of it, then for keeps):
"System Details" I described above.
TP at -161.8%
Static SL at opposite side of confirmation candle - I won't move stops up to breakeven.
Trade only 7am-11am and 4pm-11pm signals.
Nothing where spread is more than 25% of trade width.
Looking at the data for these rules, test results are:
Adjusted Proft % (takes spread into account): 47.43%
I'll be sure to let everyone know how it goes!
Other Technical Details
ATR is only slightly elevated in this date range from historical levels, so this should fairly closely represent reality even after the COVID volatility leaves the scalpers sad and alone.
The sample size is much too small for anything really meaningful when you slice by hour or pair. I wasn't particularly looking to test a specific pair here - just the system overall as if you were going to trade it on all pairs with a reasonable spread.
Here's the spreadsheet for anyone that'd like it. (EDIT: Updated some of the setups from the last few days that have fully played out now. I also noticed a few typos, but nothing major that would change the overall outcomes. Regardless, I am currently reviewing every trade to ensure they are accurate.UPDATE: Finally all done. Very few corrections, no change to results.) I have some explanatory notes below to help everyone else understand the spiraled labyrinth of a mind that put the spreadsheet together.
I'm on the East Coast in the US, so the timestamps are Eastern time.
Time stamp is from the confirmation candle, not the indecision candle. So 7am would mean the indecision candle was 6:00-6:59 and the confirmation candle is 7:00-7:59 and you'd put in your order at 8:00.
I found a couple AM/PM typos as I was reviewing the data, so let me know if a trade doesn't make sense and I'll correct it.
Insanely detailed spreadsheet notes
For you real nerds out there. Here's an explanation of what each column means:
Pair - duh
Date/Time - Eastern time, confirmation candle as stated above
Win to -61.8%? - whether the trade made it to the -61.8% TP level before it hit the original SL.
Win to -100%? - whether the trade made it to the -100% TP level before it hit the original SL.
Win to -161.8%? - whether the trade made it to the -161.8% TP level before it hit the original SL.
Retracement level between -61.8% and -100% - how deep the price retraced after hitting -61.8%, but before hitting -100%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -61.8% to -100%. Positive 100 means it hit the original SL.
Retracement level between -100% and -161.8% - how deep the price retraced after hitting -100%, but before hitting -161.8%. Be careful to look for the negative signs, it's easy to mix them up. Using the fib% levels defined in ParallaxFX's original thread. A plain hyphen "-" means it did not retrace, but rather went straight through -100% to -161.8%. Positive 100 means it hit the original SL.
Trade Width(Pips) - the size of the confirmation candle, and thus the "width" of your trade on which to determine position size, draw fib levels, etc.
Loser saved by 2 candle stop? - for all losing trades, whether or not the 2-candle stop loss would have saved the trade and how far it ended up getting if so. "No" means it didn't save it, N/A means it wasn't a losing trade so it's not relevant.
Spread(ThinkorSwim) - these are typical spreads for these pairs on ToS.
Spread % of Width - How big is the spread compared to the trade width? Not used in any calculations, but interesting nonetheless.
True Risk(Trade Width + Spread) - I set my SL at the opposite side of the confirmation candle knowing that I'm actually exposing myself to slightly more risk because of the spread(stop order = market order when submitted, so you pay the spread). So this tells you how many pips you are actually risking despite the Trade Width. I prefer this over setting the stop inside from the edge of the candle because some pairs have a wide spread that would mess with the system overall. But also many, many of these trades retraced very nearly to the edge of the confirmation candle, before ending up nicely profitable. If you keep your risk per trade at 1%, you're talking a true risk of, at most, 1.25% (in worst-case scenarios with the spread being 25% of the trade width as I am going with above).
Win or Loss in %(1% risk) including spread TP -61.8% - not going to go into huge detail, see the spreadsheet for calculations if you want. But, in a nutshell, if the trade was a win to 61.8%, it returns a positive # based on 61.8% of the trade width, minus the spread. Otherwise, it returns the True Risk as a negative. Both normalized to the 1% risk you started with.
Win or Loss in %(1% risk) including spread TP -100% - same as the last, but 100% of Trade Width.
Win or Loss in %(1% risk) including spread TP -161.8% - same as the last, but 161.8% of Trade Width.
Win or Loss in %(1% risk) including spread TP -100%, and move SL to breakeven at 61.8% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you moved SL to 0% fib level after price hit -61.8%. Then full TP at 100%.
Win or Loss in %(1% risk) including spread take off half of position at -61.8%, move SL to breakeven, TP 100% - uses the retracement level columns to calculate profit/loss the same as the last few columns, but assuming you took of half the position and moved SL to 0% fib level after price hit -61.8%. Then TP the remaining half at 100%.
Overall Growth(-161.8% TP, 1% Risk) - pretty straightforward. Assuming you risked 1% on each trade, what the overall growth level would be chronologically(spreadsheet is sorted by date).
Based on the reasonable rules I discovered in this backtest:
Date range: 6/11-7/3
Adjusted Proft % (takes spread into account): 47.43%
Demo Trading Results
Since this post, I started demo trading this system assuming a 5k capital base and risking ~1% per trade. I've added the details to my spreadsheet for anyone interested. The results are pretty similar to the backtest when you consider real-life conditions/timing are a bit different. I missed some trades due to life(work, out of the house, etc), so that brought my total # of trades and thus overall profit down, but the winrate is nearly identical. I also closed a few trades early due to various reasons(not liking the price action, seeing support/resistance emerge, etc). A quick note is that TD's paper trade system fills at the mid price for both stop and limit orders, so I had to subtract the spread from the raw trade values to get the true profit/loss amount for each trade. I'm heading out of town next week, then after that it'll be time to take this sucker live!
Date range: 7/9-7/30
Adjusted Proft % (takes spread into account): 20.73%
Starting Balance: $5,000
Ending Balance: $6,036.51
Live Trading Results
I started live-trading this system on 8/10, and almost immediately had a string of losses much longer than either my backtest or demo period. Murphy's law huh? Anyways, that has me spooked so I'm doing a longer backtest before I start risking more real money. It's going to take me a little while due to the volume of trades, but I'll likely make a new post once I feel comfortable with that and start live trading again.
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The foundation of successful trading in the forex market is having a trading strategy. It’s based on a specific methodology that best suits your trading needs. Strategies could be manual, automated, or a combination of both.
Over the past decade, there has been a proliferation of automated trading strategies made available for retail traders.
And while there are many serious traders with established track records for their trading systems, there are many more low-quality trading systems falsely marketed as high-quality by overly eager affiliates, making it harder for investors to navigate the market for trading signals.
There has also been an increase in the social copy trade. Where an operator can mimic other operators’ businesses in real time.
Whether using a copy-trading platform or an automated trading system, in almost all cases, this type of investing is considered self-directed and doesn’t require a power-of-attorney or another third-party money manager to handle your account. Unlike other copy and social trading platforms, Wiseinvet’s AI has the ability to execute a huge set of market data. It does by combining technical and fundamental analysis. This strategy can increase the accuracy of trading signals.
Self-directed forex investors
Compared to investing in a managed fund, there is greater responsibility. Traders put it on self-directed traders who use trading systems. A self-directed trader should conduct more detailed due diligence. It can avoid falling for the countless low-quality trading systems that exist on the internet.
Good quality trading systems will have established track records (historical results), and there will be other quantitative performance rankings, along with qualitative data about the strategy developers and any proprietary math used to operate the strategy.
Bad quality trading systems will usually promise high returns will not equally emphasizing potential risk.
There are no guarantees that a strategy will perform well. But conducting proper due diligence can help traders assess various trading systems. They consider using them to aid their trading or investment strategy.
I am a big believer in the concept that one of the best (maybe the best but it is subjective) ways to make money money in the markets comes down to patience and well timed aggression. There are some extreme golden opportunities in the markets and to a trained eye they are often very easy to spot and relatively easy to trade. The tricky bit is not losing during all the other times haha. Patience ... well timed aggression. I have been quite stagnant in my trading for a few weeks and then as the Brexit was due, got extremely active and we got the best trades of my FX life (in terms of how quickly the results came, we have had swing trades achieve similar results over 6 months or so). We done far better than I expected but I had always been saying that the opportunity comes AFTER the Brexit, the market will mis price some things and as it happens, some things strongly broke SR levels. So... now it is game time. Not only on the Pound although it is in focus but in general this volatility jump presents multiple opportunities. I will keep a running commentary on some of the analysis I have, moves I am looking to make and where I feel the money is to be made here if you'd like to follow along. Things to take note of; 1 - Not all my trades win, I am rarely over 70% accurate over a longish time period. 2 - My strategies are risk:reward based and expected to be profitable on risk:reward basis. 3 - Money management used is a set percentage basis, so on every trade the same amount of risk is used, lot sizes are adjusted based on the number of pips in stop loss . http://www.myfxbook.com/forex-calculators/position-size helps with this. 4 - Correlation risk is real! If I am for example selling GBPUSD, GBPJPY, GBPAUD and GBPNZD, to risk 2% on each trade is really more like a 8% risk . This should be considered and to use 0.5% risk in each trade here would be shroud, rather than 2% in each. http://www.myfxbook.com/forex-market/correlation 5 - Any thing I post is for educational purposes only, I am not telling you to trade anything in the markets, any trades you take are exclusively at your own risk and you should do you own analysis and due diligence. 6 - I am not your, or anyone's financial adviser. I hold no qualification for this, I am just a guy on the internet. 7 - The strategies and tactics I use are ones I have used for a long time and found them to be successful but there is absolutely no assurance they will be profitable in the future. 8 - At times there will perhaps be a portfolio approach or sympathetic hedging approach used. Lets say for example. I am short on GBPUSD with a 300 pips stop and 600 pips target from a larger chart and the Pound is rallying against this position, I may start to look for short term momentum buys on GBPJPY, Let's say the GU hits 300 pips stop and GY wins 50 pips for a 50 pips stop, because of the money management method used, the GY trade has covered the GU risk. 9 - If you can not afford the pips, you can not take the trade. We are in volatile times and some stops will have to be several 100 pips and even at that be somewhat tight, if losing the trade on the smallest lot size you can trade would exceed an acceptable level of risk, do not trade. 10 - Don't think I have a 10 but we got to 9 and it's good to finish on a round number. Analysis will be posted in comments.
Forex trading is the simultaneous buying of one currency and selling of another… Read more
Before trading currencies, an investor has to understand the basic terminology of the forex market… Read more
Fundamental analysis is the study of the overall economic, financial, political… Read more
Technical analysis is the study of prices over time, with charts being the primary tool… Read more
The term ‘trend’ describes the current direction of the financial instrument… Read more
What is a Technical Indicator
Technical Indicators are a result of mathematical calculations/algorithms… Read more
As an investment, gold is the most popular of the precious metals… Read more
A market order is an order to open a buy or sell position at… Read more We complete our education centre with a breakdown of Gold Trading and details of the different Order Types. You can also review our glossary to find brief definitions of various trading and financial terms you may encounter. Once you have familiarised yourself with the information and concepts, you can open a Demo Trading Account to practice what you have learnt and build on your knowledge and understanding of how to trade successfully. Treat your demo account as you would your real account. Aprender a operar con Forex | Lernen Sie Forex zu handeln
What is Forex? Think the stock market is huge? Think again. Learn about the LARGEST financial market in the world and how to trade in it.
What Is Forex?Learn about this massively huge financial market where fiat currencies are traded.
What Is Traded In Forex?Currencies are the name of the game. Yes, you can buy and sell currencies against each other as a short-term trade, long-term investment, or something in-between.
Buying And Selling Currency PairsThe first thing that you need to know about forex trading is that currencies are traded in pairs; you can’t buy or sell a currency without another.
Know Your Forex History!If it wasn’t for the Bretton Woods System (and the great Al Gore), there would be no retail forex trading! Time to brush up on your history!
When Can You Trade Forex? Now that you know who participates in the forex market, it’s time to learn when you can trade!
Forex Trading SessionsJust because the forex market is open 24 hours a day doesn’t mean it’s always active! See how the forex market is broken up into four major trading sessions and which ones provides the most opportunities.
When Can You Trade Forex: Tokyo SessionGodzilla, Nintendo, and sushi! What’s not to like about Tokyo?!? The Tokyo session is sometimes referred to as the Asian session, which is also the session where we start fresh every day!
When Can You Trade Forex: London SessionNot only is London the home of Big Ben, David Beckham, and the Queen, but it’s also considered the forex capital of the world–raking in about 30% of all forex transactions every day!
When Can You Trade Forex: New York SessionNew York baby! The concrete jungle where forex dreams are made of! Just like Asia and Europe, the U.S. is considered one of the top financial centers in the world, so it definitely sees its fair share of action–and then some!
Types of Forex Orders“Would you like pips with that?” Okay, not that type of order, but buying and selling currencies can be just as simple with a little practice.
Demo Trade Your Way to SuccessCurrency market behavior is constantly evolving. Trade on demo first to get a lot of the rookie mistakes out of the way before risking live capital. There are no take-backs in the real market.
Forex Trading is NOT a Get-Rich-Quick SchemeWhile possible if you’re a trading genius with ice in your veins and you’re luckier than a lottery winner, building wealth through trading takes time and practice to build the skills and experience needed to be successful.
So, long time lurker of this subreddit, but only have posted once before. I'll get to that later. First, I'd like to share my appreciation for this sub as a new beginner getting into trading. There's a lot of crap out there and it’s hard to sift through it. Not saying crap doesn't get posted here, but it's well modded. So thanks for that. This is a decent place to get grounded. Intention of this post is info from one newb to other newbs getting started. The purpose of this post is more for information and factual stuff than advice. As a beginner some times just factual info can be the most help rather than advice. I’ll try to make this quick. Probably won’t be, I’m summarizing a year and 4wks here. How I got started. I was listening to Jim Cramer on Mad Money while at work. Yea don’t laugh. I always wanted to trade stocks, but never really had the capital to do it. The idea of working from home and trading always appealed to me like it has to many others. Also, I was getting frustrated with my job, (still there by the way). Anyways, once I finished paying off all my school loans I started seriously looking in to trading. I’m 26 atm. Quickly learned I still didn’t have the capital to trade stocks the way I wanted to. Living in the U.S. and subject to the pattern day trading rules I would need 25k. Which I don’t. Not sure where I found the info but looking for other ways to trade I discovered spot forex. Hey! And you don’t need 25k to trade like a mad man. Quickly learned from multiple sources, seriously its everywhere, if doing FX you need to go through babypips. So 1 year ago at the beginning of March I started working my way through baby pips. Also, I opened up a practice account with Oanda at the same time of starting babypips. Being in U.S. the broker options are limited. I saw the big 3, Gain, FXCM, and Oanda. Gain had terrible reviews, FXCM already had a sketchy past, so I picked Oanda. But honestly they all have bad reviews, but I wanted to trade. Took me about 2 months to work my way through baby pips course while trying every indicator under the sun on my practice account. Also discovered tradingview during this time. Best analysis center out there honestly. Now around my 3rd month I started to hit this wall ( this is a magical wall that re-appears throughout this endeavor whenever you finally think you’re getting somewhere) . Realizing that with all the crap and indicators on the screen and if I’m being honest with myself I haven’t got a clue what the crap I’m doing. I knew I needed to simplify things and stick with things that stuck out to me (you know what they say, find your edge). For me that was going to be MACD. It’s the one thing I thought I understood. Keyword “thought”. And only in the larger time frames 4hr + charts. I could clearly see divergence and convergence throughout the charts. And I could clearly see a shift in the trend after things like divergence. So my goal was to master the MACD. It was brutal, but in some ways it worked for me. I could clearly see that an up or down trend was dying out on the daily or 4hr. charts. So when I thought the trend was almost over I would start taking reversal trades or what I thought were break outs of the trend. My practice account almost got murdered multiple times. But if I was convinced the trend was turning, I kept buying or selling more positions until it reversed (but sometimes it never turned and I just ended up cutting a huge loss). Now I’m getting close to 6 months of trading. I was up about 40% on my 100k practice account. Believe me, I understand I still didn’t have money management, and it was probably complete luck, and it was stupid trading with such a large practice account, but at this point in my mind I thought I was ready for the “next stage.” Going live, some people suggest not going live until you have your strategy completely mastered. ( I didn’t) So naturally my sympathy’s fell with those who suggest after 3 months of positive trading you should start prepping yourself mentally with a small real account. By this time I had saved up $3k to throw into my live account with Oanda. And I told myself I was mentally prepared to completely lose all 3k (was I really? I don’t’ know). Why did I pick 3k as my start amount? To me it was just large enough that it would hurt if I lost it, and the potential wasn’t too small where if I was successful I would only be able to buy a happy meal from McDonalds. So here I am, 6 months into trading with a live account. It started about as bad as one could expect for someone with no money management. I still didn’t know how to take profit with targets. It’s like I took a stupid pill right before trading live. Cause not only did I not trade divergence all the time, I started taking trades from others on tradingview. Hence my first post on this reddit which I got railed for copying another persons trade. I had to take break for like 2 weeks after that to recoup my mind. I lost about 25% or more of my account. Started taking money management seriously at this point. Started reading up on it, started taking calculated trades with risking only 2% of my account. Those first 2 weeks were necessary for me to grasp money management. Believe me I read all about money management, I even understood it for the most part, but I didn’t really utilize it till I took that hit on my account. Reading is not the same as experiencing. Now things started to work out for me again. I went back to searching for divergent trades, my trades. But I also started looking for others on trading view who traded just divergence. This helped, especially when it came to spotting trades you agreed on. I didn’t just follow the highest rated traders, I followed those who were trading similar to my style. Now, believe me, I still suck at trading at this point, but my money management still allowed me to recover my account, and even gain on it. But I was break-even trader 9-10 months in with my bad trading. Now this is going to be the part that I never thought I would do, especially since its frowned on in general by this group. But I paid for a trading course, well more like to join a permanent trading group who trains you. (I’m not recommending this) I won’t say who or what the group is. This is just factual information. Yes I paid 2.5k to join a group. So don’t ask who the group is. I’m not writing all this just so the mods delete it as a promotion. But through trading view I found someone whose charts I liked a lot and got in contact with him. Our trading styles were similar and he peaked my interest and was nice when I contacted him and I wanted to learn more faster. So like I said, I found someone whose trading style I associated with. Your style maybe completely different and probably is. So finding a group who doesn’t trade like you would be a complete waste of time. And what do I think of my experience in a trading group? I refrained from live trading during these several weeks of training. I wasn’t the only student. In general we had 1 week of lessons, then split into a small groups for 2 weeks of 1 on 1 trading with a senior trader. Rinse and repeat for a couple of weeks that was my training. All in all, it wasn’t all I expected and yet it was more than I could have expected. I did learn new techniques that I believe help me, but I only finished 2 weeks ago. So all in all its been 1 year and 4 wks since I started trading. I haven’t made globs of money in a short time. And I’m still not as good as the senior traders in our group. I still maintain a full time job because it’s necessary for me at this point. I was waking up at 4:30am in the morning just so I could attend these training sessions. And trade before and after work, and have reduced my work hours from 50+hrs a week down to just 40 hrs so I have more time to trade. I hope one day to quit my job so I can trade full time. Anyways that’s my first year of trading in a nutshell. Going into my second year. If you would like me to update again at the beginning of my 3rd year give it a thumbs up. God Bless.
Technical & fundamental news on currencies.I would advise newer traders not to trade solely on external opinions because that won't cement your own methodology or reasons for trading.Excellent website for if you want an overview of the markets and daily reports. Also includes a trading journal and a lot of media attention.
This is absolutely amazing! I can't put a value on this! It's one of the best gems of the internet. Podcasts interviewing successful traders, some are notable such as 50pips, Walter Peters & Chris Kapre.
One of the best free online schools which tracks your progress and teaches you heaps on information. The forum is the gem, where many people keep trade journals and put up their strategies. Don't copy them but borrowing concepts and ideas is good.
SUPER IMPORTANT This website is paramount to your success, still in development but will provide users with an easy way to document trades. Success is determined by your willingness to follow through with the boring bits so keep this one in your bookmarks.
The common trait he sees in successful traders, how long it took him to become profitable, the most important trade that made him successful, his favourite books and why they both like Jessica Peletier.
A warehouse worker went through his trials and tribulations to be given the offer of managing an $80 million fund. How he started with $800 and no clue what to do, 2 biggest mistakes he sees traders making, how he continues to improve and what has happened to his lifestyle since becoming a full-time trader.
How Timothy Sykes inspired her, what minimalism is all about and how it's spread to every facet of her life, what her single pair to trade is, what the 2 best traits for successful traders are and plenty more!
What plastic bottles have to do with trading, how much money you need to have to be properly funded and go full-time, how much work you have to do and how long it'll take to get there, 2 best traits to have and loads loads more!
Can you actually trade from a beach? The use of hypnosis to make him a better trader, the method that works with his psychology, how much you need to get started, how long it took him to become profitable and what he would do differently if he had to start over! plus loads more!
Personal Favorite I love this guy because he's true and noble. He is philanthropic, offers trading courses that are cheap and really knows what he's talking about. He explains how a 3 second glance can stop you 2nd guessing yourself, how much he made with $3000 in 6 months and plenty more!
How he's turned some traders around in 30 minutes, why you never trade on a monday, the courses he bought, why he teaches outside the classroom and why he sent his kids to learn chinese.
Edit - I've spent about 2 hours making this now. I hope you guys find it useful! I'll continue to update it and may you all find trading success. If you want to help me out spread the link! put it on forums or share it with friends. Good luck to you all and happy trading! Edit 2 - My brain is fryed... time for a rest. Edit 3 Once I've categorized this post making it easier to navigate i'll be adding books to read, videos to watch & the traders that will help on your journey to self-sufficiency. Happy trading everybody!
ECN. Used most by professional traders. Difficult platform for beginners
Minimum deposit $10000 (or $3,000 if under 25yo) * Well diversified -Oanda
Market maker. Second largest retail FX brokerage in the US. Easy platform for beginners.
No minimum deposit
Not well diversified, but well capitalized -Gain Capital (whitelabel forex.com) *Market Maker *Fair spreads *Minimum deposit $250 *Well diversified -FXCM Inc
ECN. Largest retail FX brokerage in the US
Minimum deposit $2000
Not well diversified. CAUTION: FXCM nearly went bankrupt in Jan-2015 due to a lack of diversification and low capitalisation. As a result FXCM LLC was bailed out with a large loan which may prove difficult to pay back. Be warned that their business may not be sustainable in the long term. -MBTrading
ECN. Mid-sized retail FX brokerage
Minimum deposit $400
International Only- -LMAX (whitelabel DarwinEx) *DMA broker based in the UK. Note that as a DMA broker LMAX eliminates the ability for LPs to last-look transactions. This may result in reduced liquidity during volatile times as liquidity providers would be likely not to risk posting liquidity to LMAX's pool. *Tight spreads *Minimum deposit $10,000 *Fairly well diversified -Dukascopy *ECN based in Switzerland, but available elsewhere depending on local regulations. *Tight spreads *Minimum deposit $100 *Fairly well diversified -IC Markets *ECN based in Australia *Fair spreads on standard account, tight spreads on professional accounts. *Minimum deposit $200 *Fairly well diversified -Pepperstone *ECN broker based in Australia. *Fair spreads on standard account, tight spreads on professional accounts. *Minimum deposit $200 *Not well diversified Software / Apps: Desktop/mobile
Apps are typically broker dependent. Some brokers have their own proprietary software, while others lease common software like Metatrader or NinjaTrader. Some software has a large development community for indicators and EAs.
Terminology/Acronyms: www.forexlive.com/ForexJargon - Common terms and acronyms FAQ: I need to exchange money, how do I do it? This isn’t what this sub is for. Your best bet is using your bank or an online exchange service. Be prepared to pay a hefty fee. I have money in one currency and need to exchange it into another sometime in the future, should I wait? Don’t ask us this. We speculate intraday in FX and shouldn’t be relied on to tell you what’s best for you. Exchange the money when you need it. I have an FX account, should I start trading demo or live? This is highly debatable. You should definitely demo trade until you have mastered how to use the trading platform on desktop and mobile. After that it’s up to you. Many think that the psychology of trading live vs demo trading is massively different. So it may pay to learn to trade live. Just be warned that most FX traders lose almost their entire first account so start with a low affordable balance. What’s money management? Money management is a form of risk management and is arguably the most important aspect of your trading when it comes to long term survival. You should always enter trades with a stop loss - the distance of the stop allows you to calculate how large of a percent of your account balance will be lost if your trade stops out. You can run a monte carlo simulation to figure out the risk of having a number of trades go against you in a row to drain your account. The general rule is that you should only risk losing 1-4% of your account per trade entered. More on this here: www.investopedia.com/articles/forex/06/fxmoneymgmt.asp www.swing-trade-stocks.com/money-management.html What about automated trading? Retail FX traders have been known to program “Expert Advisors” (EAs) to automate trading. It’s generally advisable to stay away from that until you’re very experienced. Never buy an EA from a developer because the vast majority of them are scams. What indicators are best? That’s up to you to test and find out. Many in this forum dislike oscillating indicators since they fail to capture the essence of what moves price. With experience you will discover what works best for you. In my experience indicators that are most popular with professional traders are those that provide trading “levels” such as pivot points, fibonacci, moving averages, trendlines, etc. What timeframe should I trade? Price action can vary in different timeframes. In longer term timeframes the price action and fundamentals are much more clear. Unfortunately it would take a very long time to figure out whether or not what you’re doing is successful on longer timeframes. In shorter timeframes you can often tell very quickly if what you’re doing is profitable. Unfortunately there’s a lot more “noise” on these levels which can prove deceptive for those trying to learn. Therefore the best bet is to use a multi-timeframe analysis, working from top-down to come up with trades. Should I trade using fundamental analysis (FA) of technical analysis (TA)? This is a long standing argument in these forums and elsewhere. I’ll settle it here - you should have an understanding of both. Yes there are traders who blindly ignore one of the other but a truly well rounded trader should understand and implement both into the analysis. The market is driven in the longer term through FA. But TA is necessary to give traders a place to enter and exit trades from a psychological risk/reward standpoint. I’ve heard trading Binary Options is an easy way to make money? The general advice is to stay away from binaries. The structure of binary options is so that when you lose the broker wins. This incentive has created a very scammy industry where there are few legitimate binary options brokers. In addition in order to be profitable in binaries you have to win 55-65% of the time. That’s a much higher premium over spot FX. Am I actually exchanging currencies? Yes and no. Your broker handles spot FX is currency pairs. Although they make an exchange at the settlement date they treat your position in your account as a virtual currency pair. Think of it like a contract where you can only buy or sell it as a pair. In this sense you are always long one currency while short another. You are merely speculating that one currency will appreciate or depreciate vs another. Why didn't my order fill? Even if price appears to cross over a line on your chart it does not guarantee a fill. Different charting platforms chart different prices - some chart the bid price, some the ask price and some the midpoint price. To fill a limit order price needs to cross your limit's price plus the spread at the time that it is crossing. If it does not equal or exceed the spread then it will not fill. Be wary that in general spreads are not fixed. So what may fill at one time may not at another.
How to calculate the margin and pip value of CFDs (such as Stock Index), specially, Oanda CFD?
Hi all, To extend my vision, I start studying CFDs, such as Stock Index, Oil, Commodity, etc. Unlike Forex, I don't understand how margin and pip value is calculated for Stock Index and other CFDs. I tested with Oanda CFD, seems the margin for 1 unit UK 100 is about $10000, and 1 unit Brent Crude Oil is about $50. Seems the margin for BCO is just the price of the oil, but how about the Stock Index, what's the price? Thanks EDIT: the margin I talked above is the total money required, not leveraged. And the leverage provided by Oanda is 50. So the leveraged margin for 1 unit BCO is only $1. EDIT2: Though on Oanda forum nobody answered my question about what the multipliers are, eventually I realized for fxTrade the multipliers are just 1, but different conttacts are quoted in different currency. FTSE is quoted in GBP, so 1 contract value is 7000 GBP, which is about 10000 USD, which is exactly how I observed. And the pip value is always 1 quote currentcy. For FTSE, the pip value is 1 GBP, which is about 1.5 USD.
An advanced pip calculator by Investing.com. Sign up to create alerts for Instruments, Economic Events and content by followed authors PIP Calculator What is a PIP Calculator? As you know profits in Forex are called PIPs. When you win 30 pips in a trade, how much have you actually won? If you were to have traded a .01 lot, it would have […] Use our pip and margin calculator to aid with your decision-making while trading forex. Maximum leverage and available trade size varies by product. If you see a tool tip next to the leverage data, it is showing the max leverage for that product. Please contact client services for more information. Forex Compounding Calculator. You can use the compounding calculator to calculate profits of the Swap Master Trading System and other interest earning. This allows you to understand better, how your trading account will grow over time. One of the most interesting facts about compounding is, that even a moderate monthly gain turns your initial capital into a serious amount of money over time ... Our pip calculator will help you determine the value per pip in your base currency so that you can monitor your risk per trade with more accuracy. All you need is your base currency, the currency pair you are trading on, the exchange rate and your position size in order to calculate the value of a pip. The calculation is performed as follows: Pip Value = (One Pip / Exchange Rate) * Lot Size ... Use our handy Pip Calculator to accurately calculate the value of Forex pip(s) per currency pair quickly and easily. Our tools and calculators are designed and built to help the trading community to better understand the particulars that can affect their account balance and their overall trading. Forex Pip Rechner Kontowährung: Transaktionsgröße(T): Einheit . Berechnen. Währung Preis Standard Lot (Einheit 100,000) Mini Lot (Einheit 10,000) Micro Lot ... ‘Pip’ stands for ‘point in percentage’.It’s the measure of movement in the exchange rate between the two currencies. In most forex currency pairs, one pip is a movement in the fourth decimal place (0.0001), so it’s equivalent to 1/100 of 1%.. In currency pairs that include the Japanese Yen (JPY) a pip is quoted with two decimal places instead of four, so the second digit after the ... The Position Size Calculator will calculate the required position size based on your currency pair, risk level (either in terms of percentage or money) and the stop loss in pips. Mit dem Pip-Wert Rechner von XM bestimmen unsere Kunden den Wert je Pip in ihrer Basiswährung. Somit lässt sich das Risiko pro Trade besser überwachen.
HOW TO CALCULATE PIPS, PROFIT & PIP VALUE IN FOREX TRADING ...
Calculating pips, here' show to do it. Ready to catch pips while learning how to trade? Go here to find out how http://tradewithed.comJoin my Free Forex group o... When you open a trade on the Forex Market, the numbers on the screen will start to change. You need to be able to count the price units also known as PIPS, i... How to calculate pips in forex trading? A lot of people are confused about pips forex meaning and the forex trading pip value. You need the value per pip to ... Download your Pip Value Calculator here...: https://www.tradingwithrayner.com/pip-value-calculator/ 👇 SUBSCRIBE TO RAYNER'S YOUTUBE CHANNEL NOW 👇 https://www...