This morning I posted a juicy GBP/USD trade but told you I was waiting for a pull back to $1.9720 before I would sell. Not everything goes smoothly while trading and I missed the pull back by 5 pips when the pair rallied to $1.9715 and halted. I hope some of you were able to latch onto this GBP/USD free fall.

At this point I’m not keen to take any trades until after the FOMC statements are digested tomorrow morning so look for more trade ideas from me Wednesday.

Where would my stop have been?

Peter posted a comment this morning that I’d like to respond to. His question is:

I was looking at this trade earlier on my demo account. My question is: trades like this require quite a large stop loss don’t they? Could you tell us where you placed your stop? I am trying to trade on a small account to replicate my account when I go live but the stop looks a bit big.

First I’d like to commend Peter for using a demo account that reflects the amount he actually intends to trade with, I think that is great.

Second, here is a 60 minute chart of what I had planned to do but remember, I missed the entry so I did not take this trade.

My ultimate profit target was around $1.9500, on the daily trend line.

I look to place stops slightly beyond the nearest logical area of support or resistance. Sometimes that means 80 or 100 point stops but many of my setups have a potential profit that covers that risk, although I don’t always get the perfect risk to reward ratio.

If you have a small account there are a few things you can do to lessen the impact of large stops.

1. Lower your leverage, do you really need 1:100 or 1:400?
2. Just skip the trade, there will be others with less risk.
3. Trade a lower volume such as a 1K micro lot or less “units” if your trading with Oanda.
4. Switch to a lower time frame to trade the pull back.  On this morning’s trade I could have shorted at $1.9693 with only a 30 point stop had I been paying attention to the 15 minute chart.

Hope this was helpful.

Ryan

There are four rate announcements on the docket this week from central banks in the UK, US, Euro Zone and Australia. Nobody is expected to change their rates but that doesn’t mean the market won’t be volitile around the releases so use caution this week.

What do you do when you miss the breakout?

When you trade support and resistance breaks your bound to find a nice setup only to miss the entry when the breakout occurs at an inconvenient time. Before you give up on the trade the market usually gives you a second chance in the form of a pull back which is the focus of today’s GBP/USD short trade.

I’m a little late to the party on this breakout and would liked to have sold the pair on the breakout candle. I am now waiting for a pull back to the $1.9720 level to get short when the market tests the resistance level from below. I need to see the market hold $1.9720 before going short because the pair could easily rally to test the trend line from below around $1.9770 at which point I would get short there.

Normally I enter these trades on the 240 minute chart but since I missed the entry and I need to fine tune the entry price I’m watching this on the 60 minute chart right now.

Best of luck,

Ryan

I receive a lot of email asking what books I might recommend so today I thought I’d share one.

Generally speaking I don’t read books about trading because most of them hash out the same garbage on technical analysis covered many times already. I read books about psychology, spiritual inspiration, discipline and military strategy. In my mind the market is nothing more than a battlefield between buyers and sellers fighting to overcome the affects of their own fear and greed. If you study humans you’ll be a leg up on the average retail trader blindly following a cocktail of technical indicators.

I’m currently reading “Simplexity” by Jeffrey Kluger which attempts to explain the relationship between complexity and simplicity. The book explores why simple things become complex and how complex things can be made simple.

The currency market would be a great study for the theory of Simplexity. The forces that move the market are rather simple to understand and range from the anticipation of a fundamental indicator to intervention by a central bank or perhaps even an interbank trader who is looking to fill a big order before their one o’clock tee time. Average retail traders often over complicate their decision to buy or sell by polluting their charts with several indicators convinced that when they all line up the market will move.

Take the rally we have seen in Dollar this week. The Government’s weekend bailout has continued to reduce fear in the market on top of last week’s comments that interest rates should be raised sooner rather than later. Oil and the VIX had fallen and finally fundamental data this week has been positive for Dollar. Attaching yourself to pro Dollar price action was a pretty good idea Tuesday and Wednesday.

Despite this I’m sure there is a trader somewhere convinced Dollar rallied because the 10,5,3 Stochastic crossed down on their 30 minute chart followed by bearish MACD divergence on the four hour chart.

That is crap and you know it.

Why do we make a marketplace of buyers and sellers more complex than it really is? “Simplexity” explores the desire to over complicate the simple which is something traders do with great skill.

I prefer to keep things extremely simple. I use two short term trading systems, one uses price action alone while the other uses two trend lines to make trades. I keep my finger on the pulse of market sentiment by reading news and knowing the fundamental landscape. Combined with price action that is a powerful trading system.

If you want to use indicators use only one or two at the most but in my opinion price action and market sentiment rule the roost. If you remove complexity from your charts you’ll be amazed how simplicity wins.

What do you think about this? Share your comments by clicking here.

Best of luck,

Ryan

While Dollar pounded the majors for hundreds of pips this week USD/CAD was content boring me to tears waiting for our profit target to be reached. Click here to see the original trade idea. I was long the pair at $1.0082 on the 4 hour breakout candle.

Your primary job as a currency trader is to protect your capital first and make a profit second. Making a trade that results in a loss is fact of life for traders but what you do when things go bad can make a big impact to your profitability. If you followed my USD/JPY short from last week by now you know it didn’t work out. I was stopped out but how I managed my stop is the subject of today’s post.

Managing stops usually fall into two schools of thought. Traders either attempt to trail the market by moving their stop or they leave their stop where it sits until they either take profit or are well in the money. I fall into the second group of traders.

Many traders live and die by the adage “never let a winner turn into a looser” but this kind of zero tolerance thinking can hurt long term traders because the market needs room to breathe.

Stops are there to predetermine the risk your willing to accept on a trade, not limit your profit. If you trail too closely you may be taken out moments before the trade runs in your favor.

Some people probably think I’m crazy to not protect a trade that was 50 points in the money but if I had a pip for every trailing stop order “ticked” out just before the market moved in my favor, I’d be a NetJets customer by now.

When things go horribly wrong however there is no reason to stand there and wait for the train to run you over. This morning U.S. Treasury Secretary Henry Paulson and Philadelphia Fed President Charles Plosser dropped two comments that tanked my short position. Paulson said the U.S. Government supports a strong USD and Plosser said the FOMC should raise interest rates “sooner rather than later”.

This is a perfect example of market sentiment changing on a dime. The Dollar rallied smartly and it was clear my short was going to lose its shorts. I bailed on the trade early with only a 20.5 point loss rather than a 60 point loss had I stuck with my stop.

The point is managing your stops is a personal preference. I like to leave them where they sit until I’m well in the money because long term trades need room to grow but when things go horribly wrong fast don’t be afraid to dump the trade early.

What are your thoughts on stops? Share them by clicking here.

Best of luck,

Ryan

Following up on last night’s trade idea I like the last 240 minute candle enough to place a small position short on USD/JPY this morning. I don’t expect much to happen today being Friday so be patient with the pair or just wait for next week if you want.

This descending channel could be considered a bull flag pattern on the daily chart but I don’t think this pair has the strength to break out just yet and institutional folks are still net short.

Have a great weekend!

Ryan

Since my interview on Trader Radio I’ve enjoyed reading emails from a number of traders. Many of them have similar questions and I thought everyone would benefit if I shared my thoughts over the next few posts.

Keeping Your Profits

Many traders seem unsure whether or not they are “over trading” which makes sense because everywhere you turn for education on trading you are warned to avoid “over trading”. But what does that mean? What if your averaging 5 trades a week, or 50 trades a day, is that “over trading”?

I would submit to you “over trading” is really a warning to avoid taking unnecessary risks once your profit objectives have been met for the day, week, month or lunar calendar year.

Personally I shoot for 400 points a month or 100 points a week. Knowing my monthly goal allows me to pace myself each week and keep my profit. I have traded only one day this week because I’ve had a good month thus far and I’m ahead of my weekly pace. I don’t feel like giving that profit back by over trading. Think about what you want to make and shoot for that goal. Once you achieve it, do not expose your profit to losses with trades you didn’t need to take.

This may sound like obvious advice but a lot of people struggle with limiting their trading activity once they have some profit and end up giving it back. I was one of those traders until I focused myself on a set monthly and weekly goal which is achievable for my style of trading.

A Plethora of Trading Ideas

Tonight I am watching a number of support and resistance opportunities for your consideration.

Last week I shared a trade idea on the USD/CAD which I believed would fall to parity after breaking support on the 4 hour chart. If you need a refresher, click here for the original trade idea. During my interview on Trader Radio I said I pay a lot of attention to fundamentals and market sentiment. I believe the sentiment may have shifted slightly on this pair which brings me to today’s post.

The U.S. and Canadian fundamentals have been in a shoving match producing a nice trading range on the daily chart.

Friday, Dollar was beat to a pulp in every major pair except USD/CAD. Dollar actually rallied before being pushed back nearly where it started for the day.

Look, here’s the deal. USD/CAD is my archnemesis. This pair has done some freaky things to me in the past and frankly I don’t want to subject myself to another fake out.

I don’t see a clear “weaker/stronger” matching and the COT report indicates the institutional folks are net long the USD/CAD leading me to believe I’m on the wrong side of this trade.

I’ve had a great month thus far and I don’t feel like giving any back to this pair so I’m closing this position with +14 points.

Nobody has ever gone broke taking a profit and there will be better “weaker/stronger” opportunities later this week to trade.

The pair may fall to parity, it may not. If you feel the lower trend line is still possible I would encourage you to at least think about lowering your stop to risk less or perhaps a break even stop if you got in $1.0160.

I hope you had a nice weekend and are ready to do battle this week!

Best of luck,

Ryan

If you joined me shorting the USD/CHF you should take profit now.  Here is the original trade setup.

You might note that if you didn’t short when the trend line was initially broken a nice entry was offered around $1.0265 this morning as the pair started to break down.

This morning I was interviewed by Rob Booker on Trader Radio and had a blast chatting with Rob and the gang. If you haven’t listened to Rob’s show I encourge you try it out at http://www.traderradio.net.

You can listen to the interview by clicking here. One point to correct on the post; I’m not a Father yet but I do have a very high maintenance poodle, does that count?

There are a few of points we discussed which I believe are most important for anyone struggling or just starting out trading FOREX or any market:

1) You can’t force success. Trading is a professional skill you must develop through experience. Be patient and simply your life by trading only one or two pairs until you know their personallites.

2) You don’t need to trade every day or make 1,000 points a month. S. Wade Hansen authored a short but brilliant piece on what it really takes to earn 25% or more annually on a standard FOREX mini account. The truth is, 47 EUR/USD points a month depending on your leverage will grow your capital around 25% per year. If you can do that, you would be ranked among the best in Barron’s annual “Top 50 Best Hedge Fund” listing. You can find Hansen’s article by clicking here. Think about that, 47 points a month is all it takes. Can you develop the discipline to hang on to 50 points once you have it for the month if you knew it annualized to 25% on your money?

3) Striving for a perfect risk-to-reward ratio is an academics game. Your in the market to make money so take it when the market offers you some. Don’t be a hero and let a positive trade melt down into a loss just because you didn’t quite make 2:1 on your risk.

I want to thank Rob for the invitation to appear on his show and I hope sharing my thoughts and comments will help you out. I look forward to the next opportunity to chat on Trader Radio.

I’d love to hear from those of you who listened to the show. If you have questions or comments email me at pipcoach@gmail.com.

-Ryan