Category Archives: Forex & Stock Education

What Really Drives The Market? How News Affect The Market?

What Really Drives The Market? How News Affect The Market?

There is always a struggle between fundamentalists and technical analysts about the relevance of news on markets. News event tend to impact markets but what drives them and how they affect trading?

I stumbled upon a great video by Jason Stapleton which gives insights into this topic.

-TradeYodha

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How To Minimize Trading Risks With Stop Losses – Part 1

How To Minimize Trading Risks With Stop Losses

Like any other financial instrument, trading is also game of managing risks. When we put our money into a process to gain profits, there are risks associated with it. Managing this risks the biggest part of trading.

Risk Taking

I trading, traders use stop loss levels to limit their risk exposure in a particular position. However at time we have opportunities which demand extra bit of risk for a major gain. Depending on what is their in our individual trading plans, we usually have few options:

  1. Pass that trading opportunity
  2. Manage risk by either taking an entry at a better level in our favour or placing optimal stop loss levels.

However in certain cases optimal stop losses can not be determined. This series of posts on How To Minimize Trading Risks With Stop Losses is about how to manage risks in these conditions.

Method 1: (Limit Trade Risk By Reducing Position Size)

Lets say I trade with one contract and you have set risk appetite of 50 pips in my trading plan. The trading opportunity that I have demands for 60 pips. I can reduce my position size from 1 lot to a lower contract size to reduce my exposure in that trade.

However this method has one disadvantage. If lets say I was supposed to gain 120 pips in the trade and my trade was successful, I will not profit as much as I could. The over all dollar (cash) profit will be smaller because of reduced position size.

Method 2: (Take a Better Trading Entry in Our Favour To Reduce Risk)

Lets say I want to short a currency pair. It is demanding 60 pips of risk instead of my usual 50 pips risk appetite because I trade with 1 lot. I do not want to follow the method 1 above as it does not give me good dollar profit in my bank.

In such cases, I can wait for the market to come into the zone and wait for a confirmation. Because the price is already there in my risk zone against me, I can take a better entry reducing my overall risk. My stop loss level will still be there where I planned but because I entered the trade late, I will have lower risk.

Wait For Confirmation To Get A Better Entry Price And Reduce Risk Exposure
Wait For Confirmation To Get A Better Entry Price And Reduce Risk Exposure

This method also comes with its disadvantages. The price may just touch the zone and start moving immediately. So I may never get a chance to be in the trade as I planned. It may also never come deep enough into the zone to give me better risk profile that I was looking for.

Method 3: (Adding to Trade Position To Average Down Overall Risk)

Traders also call it Zoning or Average Down/Up or Adding to Position.

This method works with Method 1 and Method 2 above. Initially I will reduce my position size to ensure that I have lower risk profile on the trade but have a guaranteed entry.

Once I have trade running and if it comes deeper in to my zone against me, I will wait for a confirmation and take another trade to average down my overall position. This averages down my overall risk exposure because I took second part of trade at a better price level.

Average Down Your Risks With Multiple Trade Positions Inside The Zone
Average Down Your Risks With Multiple Trade Positions Inside The Zone

This method is only effective if your average of multiple positions is actually reducing risks/reward ratio. So it is essential to set entry levels and position sizes in advance.

Of course as it has few characteristics of Method 2, it comes with disadvantages of Method 2 too. However it comes with advantage of being in the trade of Method 1.

Method 4: (Tail Stops To Actively Reduce Risk)

This method is a very common method and is used by a lot of traders to protect their profits as well as their overall risks. We can use it in conjunction with any methods mentioned above.

I can take an initial position in a trade depending what method I used for my entry. I also have an initial stop loss level set. Once I am in the position, and the price action has started moving in my favour, I start moving my stop loss level too. Moving stop loss level is usually done in certain conditions only. (Moving stop loss levels when trade is going against us, is strongly discouraged as it increases your risk exposure.)

These conditions are:

  1. If the price action has reached our predefined target I can take part of my profits and move stop loss level to a break even position. This allows to me have no loss (break even) if the trade reverses and goes against me.
  2. If the price action goes in my favour and creates a new zone where I can safely my put my new stop level. For example, in a short position if my initial stop loss level above previous swing’/structure high, I can move it a new swing high/structure if price action has created that for me. This allows me to have much safer risk exposure.
Move Stop Loss Level To Reduce Risk Exposure In Trading Position
Move Stop Loss Level To Reduce Risk Exposure In Trading Position

More to come on this series of managing trading risks. Please feel free to leave me a comment or your ideas. I would love to hear from your experiences and techniques.

Have a great trading time.

-Trade Yodha

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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USD Forex Trading Mistakes of The Day

USD Forex Trading Mistakes of The Day

Another day, another mistake and more learning.

I took a trades based on 2618 shorting style. I made 3 trading mistakes today:

USD Forex Trading Mistake of the Day
USD Forex Trading Mistake of the Day
  1. First Trading Mistake was that there was psychological price 1.3200 level just above which I should have included in my stop loss calculations. That would have meant bigger stop which leads me to second trading mistake.
  2. The second trading mistake was to wait for a confirmation in the zone to take an entry as stop levels were supposed to be high.
  3. Third mistake is the one which caused all this mess to start with. I missed/ignored the fact that there was a news expected on USD today.
    FriOct 23 9:45am USD Flash Manufacturing PMI

All these are there in my trading plan so moral of the story again is remember to remember your trading rules. One deviation from it can be costly.

-TradeYodha

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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Why Rules and Trading Psychology Matter – AUDUSD Example

Why Rules and Trading Psychology Matter – AUDUSD Example

I wanted to post a review of my previous AUDUSD trade but I thought it will be a good post to record my experience on that trade. EURUSD trade last week humbled me and reminded me of my mistakes which I am glad that I did not do in this AUDUSD trade.

I initially planned for this trade as below:

AUDUSD Bat Gartley Patterns for Long Short Forex Trade
AUDUSD Bat Gartley Patterns for Long Short Forex Trade

But it turned out as below:

Why Trading Rules and Trading Psychology Matter - AUDUSD Example
Why Trading Rules and Trading Psychology Matter – AUDUSD Example

Soon after entry, the market started showing bearish signs but my stops were in place with acceptable losses so it was ok. The market then turned in my favor. And then again turned bearish. It was going completely against me.

It was quite a roller coaster in its behaviour. Honestly at several times, thoughts of cutting my losses and getting out of market for a little profits came to me. But then last week’s lessons reminded me to stick to my plan and rules. Once a trade is in, it is in. There is nothing I can do to control the market. I can only work with it. So I stuck to my plan and accepted that it will probably hit my preplanned acceptable stop loss.

I guess for my patience and discipline luck also favored me by few pips. The market came very close to hit my stops but due to spread it did not.

The out come was great. It hit my first target making this overall trade a break even now and is still going strong in my favor.

Trading Psychology is the biggest factor and that is what differentiates Winning Traders from Losing Traders.
-TradeYodha

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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How To Read Market Structures, Trends and Their Reversals – Example EURUSD

It is astonishing fact that most of us still get confused when it comes to reading a market. This is the biggest killer in Technical Analysis and differentiating factor between Wining and Losing trades. No matter what trading strategy traders use, they must always be able to read the chart with naked eyes without any indicators. Below is an example where I have tried to explain it a bit in steps. Lets walk this through together.

Reading A Market Trend:

    1. On a chart we always start with a Swing High or Swing Low. In this example we have a Swing High. We call that Initial Structure High (ISH). In case of bull market we will call that as Initial Structure Low. We see that the market has been in heavy bearish action in Step 1. it creates a New Structure Low (NSL) i.e. Swing Low.reading market trend structrure reversal(Click on image to open bigger version)

 

  1. Then in in Step 2 it reverses from NSL and tries to retest upwards and gets rejected. However it comes back down to NSL and does not violate it. This is the first major sign of trend reversal as no new Lows are being made. Remember, for a market to stay in bearish trend it has to create new lows.
  2. Market then rallies to create a NSH which violates the previous high (Marked In Yellow). This satisfies the second condition for an Up Trend. Remember for an Up Trend we need two conditions i.e. Higher Lows and Higher Highs. This confirms that market trend has shifted.
  3. In 4th step we enter a consolidation phase where price moves in a range. In consolidation phase the price does not violate Highs and Lows. It stays in a range.
  4. In 5th step, we see that market breaks out of the range upwards creating further new highs. Now for it to stay in up trend it must respect previous low. It is common for the price to come back to retest those lows but it must not violate previous lows.

How To Take Trading Opportunity (S.E.T.):

  1. Stop Placement: If we were to take a trade at the market we must have our stops below previous major lows.
  2. Entry and Targets: For targets always look at the previous highs. The new previous high from here is the Initial Structure High. So a retest of that High will be our target. But if we are conservative in trading your first target must always be 127.2 Fibonacci Extension of last high. However, this in this chart gives a little less than 1:1 Risk/Reward ratio. If that does not work for us we can either wait for the market to go down a bit and take the entry at market to give us better R/R ratio.

Good Trading
@TradeYodha

 

 

 

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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Psychological Biases in Financial Markets Can Be Deadly

Psychological Biases

A trader or investor must stay objective, logical and emotionally detached. Remember that performance of one trade or few lost trades do not affect the whole outcome. A trader must carry on making rational and logical decisions to make the most of next trading opportunity.

I stumbled upon a great article on twitter by Danan Kirby and thought of sharing here.  It lists down all kinds of biases that we have in markets. Know Your Biases, it will help improve results.

original_36332774[1]

Credit: http://charts.stocktwits.com/production/original_36332774.png?1430762000

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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Understanding Market Structure Bulls versus Bears

There are only two big forces that drive the whole market.
1. Fear
2. Greed

Both of these induce each other too. For example: Fear of losing an opportunity to make more money. That is Greed inducing Fear. Another example is Fear of losing profits made so far. That is Greed inducing Fear.

Markets are run by Humans and hence these psychological factors are always present in a market. Markets as a whole represents the emotional and psychological state of its participants. These participants can be:
1. Retail Traders
2. Institutional Traders
3. Retail and Institutional Long term holders
4. Market Makers

These factors make markets go up and down. As human nature is so predictable and often very similar, markets follow almost same cycle again and again in which BULL and BEAR patterns emerge. Below are 2 charts which represent these cycles.

Understanding Market Structure Bulls versus Bears

Similar to above

2015-09-06_08-42-10

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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
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DOW Theory versus London AIM Stocks


See larger image

Additional Images:

The Dow Theory – A Must Read For All Investors


Published by Barron’s, this is an explanation of Dow Theory development and an attempt to define its usefulness as an aid to speculation. Rhea carefully studied 252 editorials of Charles H. Dow and William Peter Hamilton in order to present Dow Theory in terms that would be useful for the individual investor.
New From: £11.54 GBP In Stock

Disclaimer: This post is just for information and educational purposes. Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.

——————————————————————————————————————————-

The Dow theory has been around for almost 100 years. It was authored by Charles H. Dow from 1900 until the time of his death in 1902. It is a strong proof of human emotions and manipulations in a stock’s life cycle. Nearly all markets and all sectors show this behaviour because they are all driven by human emotions. During my trading in London AIM stock market I have seen it working more times than usual. It is probably because the AIM market is not very liquid and emotions run high on bulletin boards and hot tip providers. Institutions and bigger players are aware of this and they manipulate long term investors. Manipulation is a big element explained in DOW theory.

Dow theory can be essentially broken into few stages which are shown below.

2015-09-06_08-42-10

Now look at these charts of 15 well known and well traded stocks to compare them against diagram above. Few of these have already completed all stages while others are still in the process. Other thing to note is that the amount of time taken to complete these stages can not be determined with accuracy however, stages can be determined so if you are planning to take positions in the market you may have to keep them open for a long time. Else you can open and close positions on the way while keeping the bigger picture in mind.

QPP (Coming out of Despair phase)

qpp dow

QFI (Quadrise Fuels, going into Despair phase)

qfi

Coms (In Despair stage)

coms

Fusionex (Came out of despair phase finally)

fxi

SEE (Seeing Machines, going towards despair phase)

see

FLOW (Is in Despair phase)

flow

AVO (Going towards despair phase)

avo

IGR (It is in Return To Normal stage)

igr dow

LBB (Is in Despair stage)

lbb

APC (Is close to Despair stage)

apc

VLS (Is in Despair Stage)

vls

NPT (NetPlay is coming out of Despair stage)

npt

ODX (Going towards despair stage)

odx

CBUY (Is coming out of despair stage)

cbuy

EPO (Return to Normal stage)

epo

AFC (Return to Normal Stage)

afc

 

 

 

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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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Use STOPs as a conservative order technique for extra confirmation

Why and how to use Sell STOP Order in Forex Trading

As traders many times we define a potential reversal zones only to see it getting broken due to high volatility. Violation of the prz does not mean that the zone is not valid and price will not react to it. To tackle this problem we can make use of STOP orders instead of LIMIT orders. For example in the trade below the prz is shown in red. We usually Sell LIMIT here so that as soon as the prices reaches the zone we are in the game. But we can achieve the same with minimal risk by using SELL STOP order too. Once the price has come to the zone the order is paced in the queue and as soon as it leaves the zone, it gets fulfilled. Your stop loss will be set wherever you ordered for. This gives a better confirmation on the trade by checking whether the price is going in the anticipated direction or not.

USDJPY SHORT IDEA
How to use sell stop

 

Another example is as below where we have used BUY STOP to fill the order as soon the price left the zone.

 

How top use buy stop
How top use buy stop

 

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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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How To Trade Forex Harmonic Patterns

Trade Forex Harmonic Patterns

AB=CD (50.0)

  1. C point retraces less than 50.0 of AB, CD will be equal to AB
  2. Do not trade an AB=CD pattern with less than 38.2 retracement
  3. Always use Double Top with divergence for entry.
  4. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

ABCD (Alternative ABCD) (50.0, 127.0, 1.414, 1.618.0)

  1. C point retraces more than 50 of AB, CD will be 1.27AB or 1.414AB or 1.618 AB
  2. Always use Double Top with divergence for entry.
  3. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

abcd

Gartley (61.8 XA, 61.8 AB, 127.2 AB) – (60-70% Profit Making Pattern)

  1. B must touch at least 61.8 of XA but must not touch (wick) or close beyond 6 of XA
  2. C touches at least 61.8 of AB but its wick cannot go beyond point A
  3. D point will be at 127.2 of AB in confluence with 78.6 of XA. 127.2 AB extension is more important.
  4. PRZ between 127.2 AB extension and point X
  5. Must have at least valid ABCD pattern
  6. Stop is 2 ATR below X
  7. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

gartley

Butterfly (78.6 XA, 38.2 AB, 127.2 AB) – (Low Profit Making Pattern)

  1. B retraces to at least 78.6 of XA but must not touch (wick) or close beyond 6 of XA
  2. C retraces to at least 38.2 of AB but its wick cannot go beyond point A
  3. D point will be at 127.2 of AB. D point must pass point X
  4. PRZ between 1.27 AB and 1.618 AB
  5. Stop is 2 ATR below previous structure, look left on the chart
  6. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

butterfly

Bat (50.0 XA, 61.8 AB, 161.8 AB) – (80% Profit Making Pattern)

  1. B touches at least 50.0 of XA but must not touch (wick) or close beyond 8 of XA
  2. C retraces to at least 61.8 of AB but its wick cannot go beyond point A
  3. D point will be at 161.8 of AB, 0.886 of XA
  4. Stop is 2 ATR below X
  5. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

bat pattern

Cypher (38.2 XA, 127.2 XA, 78.6 XC) – (80% Profit Making Pattern)

  1. B retraces to at least 38.2 of XA but must NOT close beyond 8 of XA
  2. C is at 111.3 of XA in the XA direction (must close above A), must not close above 1.414
  3. D must touch 78.6 of XC
  4. Stop is 2 ATR below X
  5. Target 1: 38.2 of AD leg, Target 2: 61.8 of AD leg

cypher pattern

 

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Leave a comment: I would love to hear your thoughts, suggestions on this topic. Please leave a comment.
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Disclaimer: This web site is just my financial trading log and is for educational purposes.
Please do your research, analysis and take your decisions. You must not rely on my actions or analysis.
Please see the Disclaimer page.
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