Where To Place Your Stop

Many traders have a problem defining where they should place their stop loss. They have no problem entering a trade but often have a problem defining where they should take profits or cut their loses.

In this lesson we will cover some of the popular methods of choosing a stop loss.

1. Dollar value.
2. Support and resistance.
3. Fibonacci.

A lot will also depend on your trading time frame but for this exercise I shall use 4 hourly charts as a compromise between our longer-term traders and the intraday day traders.A trader using a dollar value stop loss will place his stop loss (stop) a given number of dollars away from where he entered the market.

In the example of EUR/USD the trader enters the market long at 1.0840 on the breakout of resistance at 1.0835. He determines that he will use a dollar value as his stop of $300. This makes his stop level of 1.0810 (30 pips at $10 per pip). If the market should retrace 30 pips or more then his stop will be hit and he will be out of the market.



When using support or resistance for placing a stop a trader will first determine where they will get into the market and if long will then place their stop under the nearest support. If they are short they will place the stop above the nearest resistance. In the case of the EUR/USD the trader goes long at 1.0750 which a break of resistance at 1.0746 and places his stop at 1.0680, which is a few pips away from support at 1.0683.

Although the break of the resistance level of 1.0746 should eventually become support when you enter a trade you don't know if the break is real or false so the safer place is the most recent support.



When using fibonacci to place your stop you would first measure the move and in the case of the USD/JPY the move was from 117.85 to 119.52. This gave us three retracement levels 118.88 (38.2%), 118.68 (50%) and 118.49 (61.8%). In this example the trader entered the market slightly ahead of the 38.2% at 118.90 and placed his stop at 118.45 just below the 61.8% retracement. He could just as easily have used the 50% retracement depending on the market and market conditions.



The three methods we discussed in this lesson are not all the ways to place a stop loss but they are the most common. The question you are probably asking now is which method is the best. Well, there is no right answer to this, it depends on many factors such as account size personal preference and what method you have back tested for optimal results.

In the case of the dollar value method the disadvantage is that the dollar amount may no be logical for the market conditions. You may find that by using this method you are taken out to frequently only to find the market taking off in the direction of the original trade. The best way to overcome this is to do some back testing to find the best amount for the market you are trading. The advantage is that is easy to implement. There is no working out of figures or levels and you can place your stop as soon as you get into the market.

The second method of using support and resistance may be very logical but the distance between where you enter the market and where you can place your stop may be so large that the dollar amount would put your account in jeopardy. The way round this would be to only take trades that fitted in with your level of risk and personality.

The last method of using fibonacci is very adaptable but can also mean that your stop is so far away that your dollar risk could be too large. The alternative could be to use the 50% retracement instead of the 61.8% retracement to place your stop. The advantage is that fibonacci retracement can be very accurate.

Conclusion

There is no reason why you can not use all three methods and use a particular stop loss placement depending on market conditions. You will also find that you will probably have a particular method that you prefer. First back test each method then find the one that most suits your trading style and fits in with your risk tolerance.

Good Trading

Author: Mark McRae
Source: tradeology.com

How To Make Money On Forex

During the last 10 years global changes have taken place in exchange trading. Thanks to swift development of Internet trading millions of private investors have the possibility to get profits on the financial markets which were accessible only to banks and large corporations before. After introducing the mechanism of leverage trading the international currency market Forex became the most popular trading market in the world.

The key principle of this market is simple. You can get income from fluctuations of world currencies by making transactions with the sums which exceed your deposit 50, 100, and even 200 times! A remarkable example of successful leverage trading was done by George Soros in 1992, when after two weeks of work on Forex he made the net profit of $1,000,000,000 by selling US dollar against British pound and German mark.

How to make money on Forex? Let's examine the real trading situation which happened on May 17, 2004. For example, you have $2,000 on your trading account. The brokerage company gives you the right to use 1 lot (100,000 of the base currency) for each $1,000 of your deposit, without taking any commissions for this loan. You open the position to buy euro against dollar in the size of 1 lot (i.e. 100,000 EUR) at the quote level of EUR/USD 1.1792 (entry point to the market, shown on the chart with (1))



In two days euro grew in price to 1.2061, or made 269 pips! If you exit the market at this moment (point (2) on the chart) and close the position, your net profit in this case will be 2,690 USD! You have more than doubled your trading account within two days only!

Now you can see why Forex is the most popular currency market in the world.

Profitable Trading with Market Cycles

Cycles are prevalent in all aspects of life. They range from the very short term, like the life cycle of a June bug, which lives only a few days, to the life cycle of a planet, which takes billions of years.

In trading, there are important to recognize the Market Cycles. They go up, peak, go down and bottom. When one cycle is finished, the next begins.

The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase.

Another significant challenge is that, even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one. But an understanding of cycles is essential if you want to maximize investment or trading returns.



Here are the four major components of a market cycle and how you can recognize them:

Stage I: Accumulation
Market has Bottomed – someone is buying ( experienced traders, value investors and smart Money Managers ).
General market sentiment is still bearish.
The market emotion is doom and gloom.
Price go flat.Sentiment switches from Negative to Neutral.

Stage II: Mark-Up (Trending)
The market has been stable and is beginning to move higher.
The early buyer includes technical traders, breakout traders, pattern traders and momentum traders.
They recognize that the market direction and sentiment have changed.
Near End of Trending Phase;
o Late majority jump in
o Market volumes up substantially
o Prices climb fast.
o Smart Money getting out

Stage III: Distribution (Topping)
Sellers begin to dominate.
Bullish sentiment has changed to mixed sentiment.
Classic Patterns may appear like double and triple top, as well as head and shoulders top patterns.

Stage IV: Mark-Down ( Decline )
The most painful for those who still hold positions.
Hanging on to losers.
Down 50% or so.

Although not always obvious, cycles exist in all markets. For the smart money, the accumulation phase is the time to buy since values have stopped falling and everyone else is still bearish. These types of investors are also called contrarians since they are going against the common market sentiment at the time.

These same folks sell as markets enter the final stage of mark-up, which is known as the parabolic or buying climax. This is when values are climbing fastest and sentiment is most bullish, which means the market is getting ready to reverse.Smart investors who recognize the different parts of a market cycle are more able to take advantage of them to profit. They are also less likely to get fooled into buying at the worst possible time.





Recomended Time Frame



Source: FXSIFU

7 DEADLY TRADING SINS

1. Thinking that trading the FOREX is a get-rich-quick scheme.

2. Reacting emotionally to market movement instead of assessing the market rationally using proven methods for high probability trades.

3. Chasing the Market.

4. Lack of preparation - entering the market with little or no understanding of what the probabilities are and how to handle them. Being unaware of special events or announcements that may be big marketmovers.

5. Poor Equity management.

6. Butterfly Trading. Trying one method after another without mastering any.

7. "Go-it-alone" Syndrome, hoping to discover the 'secret code' for trading. Most successful traders have learned from other successful traders. This can eliminate years of trial and error, and some very painful trading losses.

Author: Mr Don Schellenberg E-mail: don@thenextview.com

Reasons Why You’re Failing to Make Money in Forex Trading

If you’re frustrated with your trading time for money, then you’re going to love what I’m about to share with you. Something I’ve realised over the last year is that being successful forex trader is as much to do with having the correct attitude and mindset as anything else.

Like any new venture, there’s a steep learning curve involved building a profitable expert advisor and it can often be a frustrating experience.

Particulary as the daily bombardment of marketing messages about new forex trading systems and new expert advisors tends to make you feel like you’re the only one left not making money.

So anyway, I’ve been thinking about why many newbies find it difficult to make money in forex trading. Here’s my top ten reasons…

1. Spending too much time reading, learning, buying, watching and not enough time DOING your own research.
2. Not taking your trading business seriously enough.
Always keeping a trading diary; by keeping a diary forces you to think through your idea because you have to write it down. Additionally a written trading record provides you with an opportunity to review your thought process so that you can replicate the successful trading ideas and modify the unsuccessful one.
3. Not focusing your efforts on a trading system (whether it be day trading, swing trading, scalping trading or whatever) for long enough to see results.
Often this is because you get distracted by the ‘next big thing’ forex expert advisor being promoted by all the so-called ‘guru’s’. You must trust your own trading method. You must have a methodology by which you go about your trading business and you must trust it; otherwise you are not operating in businesslike manner. you will end up chased the crowd.
4. Because there are so many forex trading system and forex mechanical system (ie:expert advisors), it becomes almost impossible to know where to start. So you end up doing nothing.
5. Lack of perseverance. You start off thinking earning money in forex trading is easy (because everyone else seems to be doing it) and quickly become disillusioned and give up when it dawns upon you that it actually takes hard work and dedication.
6. Directing all your efforts into a forex trading system that is either unprofitable, or you lack the knowledge to make it profitable.
7. Not setting up your expert advisor in the right way to be profitable from the outset.
8. Lack of a clearly laid out route to success. Always be aware of the bigger picture.
9. A failure to set practical, achievable, specific goals.
Lot of newbies set an impossible profit target and set your goal to high. There is no free money in forex trading. Don’t dream it, many so called guru advertise their very profitable a trading system which almost guarantee make profit every month.
10. You are not using so called money management.
You need to know when to cut your losses. Wheter you are fundamental or technical trader, always remember that market conditions change all the time. Most newbies ‘believe’ the market at the end will play out your way, and you end up losing to much money.

Perhaps some of those ring true with you? I know I’ve been guilty of most of them at one point or another. So if you do recognize yourself in that list, atleast take heart from the fact you’re not alone. And remember, it’s never too late to change bad habits or direction if necessary.


Author: Yohanes R. Gagahlin ( fxhope.com )