Tag Archives: educational

3 Drives Pattern To Drive Trading Profits

3 Drives Pattern To Drive Trading Profits

3 Drives pattern is a Harmonic Trading Pattern which is highly profitable and predictable. It however requires patience to wait for it complete. It is not a very common pattern as the formation of this pattern requires the price action to go up and down in opposite directions and hence it can be confusing too. Combines with other trading tools it can be very powerful.

A Three Drive Pattern as the name suggests has 3 main legs. The pattern itself is a 5 leg pattern. It can also be thought of combination of two ABCD patterns.

3 Drives Pattern
3 Drives Pattern

It starts at a certain point and an initial AB leg is completed. Then a retracement follows between 61.8 and 78.6 Fibonacci levels to form BC leg. Price action then creates another leg  CD (ideally equal to AB leg or 127.2 Fibonacci extension of AB leg). This complete the first ABCD pattern. Once this ABCD pattern is complete the price action is expected to reverse and go in the direction of point C. If the price action does not close above C and start retracing towards point D again creating another equal or 127.2 Fibonacci Extension, we have a 3 Drive Pattern forming.  Then in order to correctly identify it, we mark new abcd pattern starting with point C of first ABCD pattern and wait for secondary abcd pattern to complete. Between point A and point d we have 5 legs which first condition of a 3 Drives Pattern. Legs BC, CD, cd form 3 impulse legs which makes it a 3 Drives pattern.

At the completion of of point “d”, we expect market to reverse and at least heights of c point. In a string trend, price action can go up to point C and A too.

 3 Drives Pattern Bullish

3 Drives Pattern Bullish
3 Drives Pattern Bearish
3 Drives Pattern Bearish

-Happy Trading

TradeYodha

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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 The Magic Of RSI To Beat Market Trends

Use The Magic Of RSI To Beat Market Trends

RSI MagicRSI (Relative Strength Index) is a Momentum Oscillator. It indicates whether a market is losing or gaining its momentum in the current direction. If used correctly in association with other tools, we can use RSI To Beat Market Trends.

Usually RSI is usded in 3 ways. But to produce best results, a trading strategy must make use of other tools and use RSI as one of the additional indicators to give confirmation. This is because of the fact that RSI can stay at a level for a long period of time while price is still moving.

  1. Overbought/Oversold Conditions
    1. RSI crossing over 70 level is considered as Overbought

      RSI Overbought
      RSI Overbought
    2. RSI crossing below 30 level is considered as Oversold

      RSI Oversold
      RSI Oversold
  2. Divergence (Loss/Gain of Momentum)
    RSI Divergences Chart
    RSI Divergences Chart
    Price Action RSI Expected Type
    Making Lower/Equal Lows Making Higher Lows

    (Gaining Upward Momentum)

    Bullish Regular
    Making Higher/Equal Highs Making Lower Highs

    (Losing Upward Momentum)

    Bearish Regular
    Making Higher/Equal Lows Making Lower Lows

    (Losing Downward Momentum)

    Bullish Hidden
    Making Lower/Equal Highs Making Higher Highs

    (Gaining Downward Momentum)

    Bearish Hidden

    RSI Bullish Regular Divergence Example
    RSI Bullish Regular Divergence Example
  3. Center Line Crossover
    1. Bullish above 50:
      1. Not very reliable so other factors/tools need to be added to produce better results.
      2. A cross over 50 level RSI downwards indicates bearish move.

        RSI 50 Crossover
        RSI 50 Crossover
    2. Bearish below 50
      1. Not very reliable so other factors/tools need to be added to produce better results.
      2. A cross over 50 level RSI downwards indicates bearish move.

        RSI 50 Crossover Level
        RSI 50 Crossover Level
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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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Bracketing The Market – Make Profits Either Way

Bracketing The Market – Make Profits Either Way

Bracketing The MarketBracketing is planning technique which plans for both Long and Short string opportunities in a market. There are situations in a market where it is not clear where it is heading to. It is in the middle of nowhere in sort of no man’s land. We do not have a clear indication hence no pre-planned bias on going Long or Short. In such scenarios, we can use Bracketing The Market technique.

We look for both long and short opportunities which are high probability in the market. Once the market gives a signal where it is heading we re-evaluate these planned trades to see if we can benefit from all of them or few need to be cancelled. After we have the clear signal we can also have smaller trading opportunities along the way.

For example: In this EURUSD market, we did not have a clear signal. The price was in the middle of the swing and the RSI was also at 50 level. So we planned for both Long and Short Opportunities.

Bracketing The Market - Make Profits Either Way Long OR Short
Bracketing The Market – Make Profits Either Way Long OR Short

Have a great trading time!

-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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Four Stages Of Trade Management For Better Risk/Reward

Four Stages Of Trade Management For Better Risk/Reward

 

Four Stages Of Trade Management In Trading For Batter Risk-Reward Ratio
Four Stages Of Trade Management In Trading For Batter Risk-Reward Ratio

We are in a trade for a purpose and for every purpose there are four stages which realise that purpose. Here are Four Stages Of Trade Management For Better Risk/Reward.

Trade Management is last yet most important stage of a trade. Most traders concentrate on Entry points and others on Stop Loss levels. Picking an entry point and placing stops are far more easier than managing a trade when it is running. They are important in Trade Planning phase but Trade Management stage is the one which fulfils the purpose of trade by realising profits and reducing risks.

Trade Management is all about monitoring and realising profits while reducing risks associated with the trade. There are four stages of Trade Management starting from the point the trade is planned.

  1. Assume Risk (Calculated Risk/Reward)

This stage is the initial stage where we plan the maximum risk that we are planning to take on a particular trade. This come from Trading Plan’s Risk Management and Money Management sections. Usually there are few things that we ask ourselves in this stage:

  1. What is maximum allowed risk per trade in my Trading Plan?
  2. Why my Stop Loss level at this level where it is? Is there any valid rule based reason for that?
  3. What is expected Risk/Reward ratio.

Once decided, we do not change stop loss levels to increase or decrease risk.

2.  Reduce Risk (Moving Stops in our favor)

After a trade is in and started moving in our favor, we must reduce the risk at the first opportunity. But there have to be rules for it. For example: If we are trading a Bat Harmonic Pattern the first target is at 38.2 Retracement and second target is at 61.8 Fibonacci retracement. So as soon as the price exceeds 23.6 Fibonacci level ,we move our stops to in our favor by the same number of pips/points as price action.

3. Eliminate Risk (Break Even)

In this stage we try to break even as soon as the price action has covered half of trading position. We move stops to a half way after taking profits on half of the position. This gives us the liberty to stay in the trade without any risks. If the market reverses and comes back to hit our stops, the worst case scenario will be a Break Even trade.  For example: If we are trading a Bat Harmonic Pattern the first target is at 38.2 Retracement and second target is at 61.8 Fibonacci retracement. So as soon as 38.2 retracement is hit, we close half of the position, move our stop loss level to break even and let half  position run for secondary or extended profits. Here are few Trade Risk Reduction Strategies

4. Closing Trades (Take Profits)

We need to plan this little in advance during trade planning stage. During Trade Planning stage, we decide on Position Size, Risk-Reward and Targets. If there we are planning to have multiple targets in a trade, we must have a position size which is divisible. For example if we want to take two profits targets and trade with 1 contract, we will not be able to close half of that position. So in this case we must trade with two contracts. First 3 stages were more about risk management where as this stage is all about maximising profits without risk. As soon as we break even in a trade, the first priority has to be maximising profits. We can either multiple predefined targets or we can actively manage the trade by tailing stops. For example: in our Bat Pattern Trade example, we can either take profits at 61.8 which was pre-planned or we can continue to tail stops based on a rule based strategy such as formation of structure etc.

Hope this helps. I would love to hear your opinion and suggestions.

Have a great trading time!

-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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BAMM The Bat Harmonic Trading Pattern!

BAMM The Bat Harmonic Trading Pattern!

Bat Pattern is one of the most Risk/Reward Ratio favorable harmonic patterns in the directory of harmonic patterns. It completes at 88.6 fibonacci confluence with 161.8 or 261.8.

Bat Harmonic Pattern
Bat Harmonic Pattern

Harmonic Trading
In his book Harmonic Trading Volume 2, Scott Carney described another phenomenon that occurs during the formation of a BAT Pattern. It is called BAMM.

BAMM stands for Bat Action Magnet Move. According to Scott Carney when CD leg of a Bat Pattern forms and it exceeds point B of the potential Bat Pattern, the price action starts to experience a Magnetic Attraction towards 88.6 Fibonacci level where the Bat Pattern is expected to complete. The price action tends to get pulled towards D point.

BAMM The Bat Harmonic Trading Pattern Trigger
BAMM The Bat Harmonic Trading Pattern Trigger

This behaviour is not 100% consistent but is very common and can be used to make more profits.

Usually once the CD leg exceeds point B, the price action comes back to retest the zone between point B and point C before resuming direction towards point D at 88.6. Similar to 2618 Trade Entry Technique we can follow 2618 Trade Entry Technique rules to enter the market in this zone with a target completion at 88.6 i.e. point D. Stops will have to be either beyond point C or based on Supply/Demand zones in CD leg.

BAMM The Bat Harmonic Trading Pattern
BAMM The Bat Harmonic Trading Pattern

At point D we can take profits on this trade and enter a new trade at the completion of the Bat Pattern.

Leave me a comment. I would like to hear your opinions and suggestions.

Have a great trading time!

-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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What Is 2618 Trade Entry Technique?

What Is 2618 Trade Entry Technique?

2618 Trade Entry Technique is probably the safest way to trade a double top or double bottom and although the Risk/Reward ratio is a little less favorable.

The basic concept behind this technique is that after a double top or double bottom formation, the market usually comes back to retest the structure before it finally resumes the originally diverted trend.

In double top formation the trend is downwards and in double bottom formation the trend is upwards. After the retest the market starts following these trends again.

2618 Trade Entry Technique
2618 Trade Entry Technique

This retest gives us a very good opportunity to get involved in the market. 2618 Trade Entry Technique is the best confirmation you can get in double tops and double bottoms.

The PRZ runs from 61.8 fibonacci retracement to highest high of the recent double top formation. In case of double bottom it is between 61.8 retracement and lowest low of double bottom formation. Hence the stops must be above double top highest high and below double bottom formation.

Few points to remember:

  1. This method has few disadvantages:
    1. The price may never come back to retest the PRZ
    2. Reward may be lower and risk higher because of confirmation in wide PRZ. So if possible we should wait for candle stick formations inside the zone to take a late entry.
  2. V formation and break:
    1. Double top and double bottom formation is only valid if a V (double top) or inverted V (double bottom) formation has been formed.
    2. We must use 2618 Trade Entry Technique only when the market has broken this V formation and has come back to retest the PRZ.

Have a great trading time

-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 Score A Trading Opportunity With Your Tools

How To Score A Trading Opportunity With Your Tools

Tools for Scoring Trading Opportunity
Tools for Scoring Trading Opportunity

Not every trading opportunity that we see on charts is same. Trading opportunities must be filtered and we must pick only the best ones. To cherry pick trading opportunities which have best expectancy and best profit margins, we must have a Scoring Card in our trading plan. This helps us filter out a lot of risk even before trades have been booked.

I use below tools for scoring a trade. Each trade can have a score between 1-5 depending on their quality but each trade must have at least score of 20. That means at least 3 factors with best quality must be a present in a trade. More the better score.

Depending on score I can change my position sizing too to minimize risk.

Tool
Fibonacci Confluence
Advanced Harmonic Patterns
ABCD Pattern
50 SMA
200 SMA
SMA Crossover
Double Top/Bottom With RSI Divergence
Bollinger Bands Extreme Deviation
RSI Oversold/Overbought
How Far The Price Has Moved From The Zone In Past
How Much Time It Has Spent In The Zone In Past
Is Zone Fresh

 

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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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Holy Grail of Financial Trading

Holy Grail of Financial Trading

Holy Grail of Financial Trading
Holy Grail of Financial Trading

Lets face it, this is a hard fact to swallow that 95% of traders fail. Only 5% of traders make money consistently. Unless a traders is making money consistently he/she is still in 95% of unsuccessful traders. One of the main reasons why traders fail is because they are always searching for a Holy Grail system. A strategy which will some how make them rich and famous. They hop on to strategies one after another. As soon as one strategy stops working, they are on the look out for another one. So what is is Holy Grail of Financial Trading and where is it?

Van K. Tharp’s Trade Your Way to Financial Freedom
book gives a complete account of Trading Holy Grail and where it can be found! He was able to unravel this mystery once and for all.

A trader’s Holy Grail is within himself. It is not some system or strategy. There are thousands of strategies used by successful traders. They do not use the same one. So what makes them successful? It is they themselves. So question is how to find this Holy Grail of Financial Trading? Well, here are some clues:)

  1. Trader’s Psychology is the biggest part in Trader’s success. It is not strategy or system. It is the person inside the trader. A trader should be disciplined to follow strategy day in and day out. There is no strategy which gives 100% results and there will be losses/draw downs on the way. That is when trader’s psychological strength is tested. If the trader understands that losses are part of the business  and treat them as cost of running business like any business, he/she will excel. Small acceptable predefined losses must always be welcomed. They are better than losing capital and accumulating losses. A small loss in a trade tells the trader that it is time to get out. Fail Fast and Move On to Next Thing. Trader must run trading as business. It may be small to start with like any other startup.
  2. Trader must remain calm, objective and indifferent to successes or failures of trades. It is the process which is more important than outcome. A process with positive expectancy repeated over time automatically produces good outcomes. But trader must follow the process objectively. An example will be a machine which has certain fixed input and certain output.  A machine stays objective and keeps on processing. If there is a positive expectancy in the machine processing to produce output, it will generate output. But machine must conduct processing else there is no output.
  3. There is no such word as BIAS in trading world. If trader is biased towards something in a market, the analysis will be biased too. This goes against the objectivity of the process (point 2 above). Biases hurt objective processing and can be deadly. (Read more about biases.)
  4. There is no EGO in markets. Markets represent collective decisions taken by millions of buyers and sellers at a given time. A trader can not fight that. Market runs and can not be controlled by a single trader. There is no point in fighting it. However you can stay with it. A trader must learn to read what market is saying and act upon it.
  5. Have a tested rule based trading plan. Traders mistake trading with trading strategies. Strategies are just one part of trading plan. Strategies tell a trader how to enter and exit positions but plan contains rules which have been developed based on experience while using those strategies. It contains a whole lot more than just strategies. A trader’s trading plan is what a Business Plan is for a business. It must contain all aspects of trading business. For example: Money Management, Risk Management, Position Sizing, Trading Rules, Market Portfolio, Contingency Plans, Equity Withdrawal Plan and lot more.
  6. Traders must have Money Management and Risk Management in their trading plans. They are key to success and grow the business. Traders are often confused between Money Management and Risk Management. Risk Management is about how to protect the capital. Like any other business trading can not survive without cash in the bank. Protecting capital is number one priority. Money Management is all about how to make use of capital in most effective way without increasing risk of losing capital.

Here are some DON’Ts to help along the path to finding Holy Grail of Financial Trading:

  1. Never accumulate losses. Never add to losing positions for averaging.
  2. Never risk more than predefined limits on a single trade. Limits must be well defined and tested.
  3. Never trade without a protective stops.
  4. Never exit a position without a good reason. If there are reasons to enter a position, there must be reasons to exit too.
  5. Never fight the market. Once a position is in the market there is nothing a trader can do about it other than early exiting which will stop the Process which we talked about in point 2 above.
  6. Never enter a position without your own analysis. A trading plan is trader’s personalised business plan. Follow that. If a trade fulfils all rules of trading plan, enter the trade else must not.

Good luck with trading. I welcome your comments and suggestions.

-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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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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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 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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