It’s not The Quantity of Trades… It’s The Quality

Hello and welcome to to another edition of the bulls versus the bears. Today I have another simple message for you. It’s not  the quantity of your trades..It’s the quality. There is absolutely no need to enter trades day in day out as if your pants are on fire. If you’re afraid of missing the next big market wave? Don’t bother! If you miss what you believe is a juicy trade pattern, you’re sure to see it the next day. Keep your fears at ease!

Don’t act as if forex trades are “reduced to clear situations”.  The forex market is not up for sale that you have to trade as if every trade could be your last. Do you know what this kind of strategy is called? It’s called overtrading. I can hear somebody asking:

What Constitutes Overtrading?

First off, you are always in a trade. You feel you absolutely must be in every trade or else you are going to lose your sanity. You are so obsessed with the forex markets and your trades that you go to sleep with your trades and dreaming about the next trade. Even worse, you are involved in multiple trades which is forex suicide. But you can get away with multiple trades  only if you apply solid risk management.

IF you want quality trades just trade at least 6 times a month. Or  pick one or two high probability sets that are  solid enough to keep you outside of the house for long periods of time. Just set and forget and smell the roses.

Let me show you how overtrading affects your trading process and your trading account

You Trade Too Much You Blunt Your Edge

Yes! When you trade too much your trading edge  becomes blunt. Instead of focusing on quality trades which give you an advantage over other trades you settle for bread crumbs. By bread crumbs I mean low quality trades that fall outside the criteria for your trading edge. And when you  do that, your chances of prosperity become slim.

If you want your forex trades to  be high quality you need to know the difference between market noise and high probability price events(trades). Now market noise is a fancy term for sideway markets while high probability price events are, well. high probability trades. It’s absolutely crucial that you know the difference between these two trade categories or else you may end up taking trades that are nothing but loud speaker thumping noise and not real price signals. Even worse they end up blunting your precious trading edge.

For more information  on market noise and high probability trades look up Forex Market Goes Sideways and How To Spot High  Probability Trades.

Brokers Get Rich At Your Expense

The more you trade the more forex brokers get rich at your expense.  Of course I can hear somebody asking “But how do these brokers get rich at my expense?” They get rich through the spreads and commissions that they charge you. So that every time you trade they make money from your trades. So if you want to gain an edge over your broker,  TRADE LESS!

Too Much of A Good Thing  Is Bad

I’m sure most of you know the phrase “Too Much Of a Good Thing Is Bad.” You like something so much that it become an addiction to you. The same thing scenario applies when you trade too much. You become  fixated with the trading process that you feel like you have to jump into the market at every  opportunity. tlike gambling. You get this huge adrenaline surge  to blow all your money all at once. And when that happens all your money is gone.

So How do you cure your trading addiction? By laying out a trading plan where you identify your trading edge which will guide how you enter your trades on the market. Failure to develop a trading plan could be highly detrimental to your trading health Your trading addiction becomes progressively worse and you  will end up blowing up your  trading account. Two things could happen in the process. Either you learn your lesson and go back to trading the right way or you become so dehydrated from your addiction that you end up quitting as a trader all together.

I guess the appropriate question is:

How Do I Cure OverTrading?

First:

Trade Less

You need to trade less. In other words you don’t need to trade 70 times a month.  The ideal number is 5-7 times a month. Anything beyond that is a crazy addiction. While you are at it, put some strict rules withing your trading plan. At the same time add some flexibility to your trading plan to complement the rigidity. By that I mean where you place your stop loss, How you enter your trade, How much you can afford to risk, e.t.c.

Look For Trade  Setups Which Align With Your Trading Plan

You need to look for trade setups that align with your trading plan.  You must identify setups that satisfy the criteria in your trading plan, visavis your trading edge.  And while you are it, apply what is  known as a T.L.S. filter. Basically you create a set of criteria to ascertain whether the trade is worth risking your money on.  The filter must satisfy two  at least two of these criteria:Trend, Level, and Signal. These criteria are what you call multiple factors of confluence.  For more information on multiple factors of influence look up Something Called Influence

You need to adopt the mentality of a hunter waiting patiently for his prey to appear. It doesn’t  mean you go after every trade your eagle eye  spots on the chart. You only save your cash for trades that you know will take you to the Promised Land. Just like a hunter who only so many bullets to waste, you have only so much cash to risk. So be frugal with your money or your trading account will blow up like dynamite.

Set and Forget 

I’m quite sure you have heard this phrase”Set and Forget.” It’s a simple but effective approach. All you have to do is set your trade, forget about it and get on with life while the trade rakes in the moolah for you. Instead of jumping into the next available trade let your original entry play out for as long as possible to allow your your profits to accumulate.

You need to understand that solid trades take a while to play out . And if you want to catch the big waves on the market you need to adopt the hunter mentality that I alluded to earlier. Stay patient with your cash cocked, and when the opportunity presents itself, you pull the trigger. This also means that you stay away from your screen. Take a chill pill while your entry racks in the cash for you. In so doing you improve your chances of making substantial trades. You certainly do not need to trade loads of times to rake in those profits.

And Finally

Stick To One Market Direction

Please stick to one market direction.  If it’s the bullish trend you enjoy trading with do that. If it’s the reverse trend, by all means  do that also. But whatever you do, STAY AWAY FROM CHOPPY WATERS. Because you will crash and burn. The market is moving  sideways in this scenario. All you have here is a whole lot of noise, and the price signals aren’t that clear either.

And when you do get burned in choppy waters, you are tempted to jump into another trade again(Trade addiction anybody?) That’s highly dangerous and inflammable in that your trading account could end up in flames. So your best option would be to stick to markets that are strongly trending and moving in one clear direction.

For more information on sideways markets and trends look up Forex Market Goes Sideways and Trade Trends with Price Action Analysis

 That’s a wrap for “It’s not The Quantity of  Trades… It’s The Quality”.  Less is more where forex trading is concerned. Unlike what people may think here are not too may  trade setups to go around throughout a calendar year. So it does not make sense that you go kamikaze looking for trades like a chicken with his head cut off.  It only make sense to be less conspicuous on the market. The less you trade, the better your health will be.

Take a low frequency approach when trading. But that’s not to say that you don’t turn the other way on  the most obvious trade setups. Of course it takes considerable skill and education to identify the most obvious trade setups. I mean you don’t just accomplish these at the snap of your fingers. With the help of  price action techniques such as Set and Forget, you should be able to nail down obvious trading setups with ease.

Till next time take care.

 

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The Phenomenon of Risk/Reward in Forex Trading

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Hello and welcome to another episode of the bulls vs the bears. Today we are going to look at the phenomenon of risk /reward in Forex Trading.  And I’m going to start today with a simple message:Put in your risk you get your reward.  Let’s get one thing straight.  Trade setups is all about possibilities. If you can visualize these possibilities  in terms of risk/reward you  should have no problem achieving consistency in your trades.

Now how do we achieve consistency in  trading? Develop a sharp instinct for identifying clear and unadulterated trade setups. Of course  You need to be at the right place and at the right time to spot these setups.  It’s like  the watching the eclipse over and over again.  Risk to reward trade setups give you a significant opportunity to make consistent profits.  So if you are able to master the risk/reward process, you’re on your way to the promised land. So how do we master risk/reward? First:

Draw Risk/Reward Levels

You need to draw risk/reward levels or ratios. before deciding on how much you want to risk.   Basically all you are doing here is calculating how much money you are willing to risk to give the trading setup the opportunity to convert from probability to actuality. Please do not think of reward first before risk. OR you put a stop so tight that it could choke the life out of your trade. Do any of these , and you will burn a huge hole in your trading account.

Now why do I say calculate risk first before reward? Because you want to create a heightened sense of awareness of the risk involved in each trade setup. In so doing you don’t obsess  too much how huge a profit you are going to make with the setup. In so doing you are able to manage risk more effectively than merely entering a trade like a gambler. The best traders in the business are the best because they are great risk managers.

Now once you have identified the trade setup and labelled the risk level, you then label the reward levels as multiples of your risk. Now there are three levels you need to draw: 1* the risk, 2*the risk, and 3* the risk. Now let’s take a look at a few illustrations of drawing risk/reward levels breakout trap and reverse trade reward Right in front of you is a perfect illustration of risk levels drawn on a bearish breakout trap and reverse trade. As you can see the risk/reward levels are nicely  labeled from 1:1 through 1:3. The risk(labelled RISK) was entered as the bears broke out on the slope. However, the reward was achieved at the bullish reversal trend as price hit the 1:3 ratio. 

This is the classic case of price action and money management working hand in hand. Conventional wisdom says  a ratio of 1:3 is the optimal as far as getting a huge return on your investment. However, a note of caution: The higher the risk ratio, the harder it will be for you to get a return on your investment. That’s greed talking, not trading logic.

Let’s look at another illustration using the support/resistance route In this instance  we see the trade going long.  So naturally you let the trade run until you claim your profits at the resistance level. If you want to go short you claim your profits at the level of support. This technique only works during ranges or weak trends.

You don’t need to go for absolute highs in this scenario.Why? Because the market may not reach those levels and then do the reverse. Besides the market is in range mode which makes absolute highs/lows a pipe dream. So what’s the moral of the story? Since the market is in range mode, you don’t need t0 gung-ho with your risk/reward. Just take a conservative stance and exit  with your loot a few pips earlier.

Use of Trailing Stops

Now should you want a a trade setup run forever, you will want to employ the use of the trailing stop. Now in case you’ve forgotten, the trailing stop is a market order that is placed below the market price. Somebody is probably asking”How Do we do this?” First set your risk ratio levels. But this time let the trade run without  a set exit target. Once the market moves in your direction, you use your pre-set reward levels to trail your stop loss. In so doing you stand a chance of locking in some serious profits and lessening your risk at the same time. The best way to use the trailing stop on risk/reward levels is when the trade is one or two times your risk.

You can also bring your trailing stop 50% closer to the entry level trade once the trade has hit the the 1R level. Reason being that you want to give the trade some air or room to breathe.  So that if you are up 1 to2, you trail your stop up to lock on 1 times your risk. If the market moves at 1:3 you  you trail your stop to lock in 2 times your risk. This technique is quite reliable. Why? because you are locking inn on your profits while at the same time leaving open the possibility of the trade turning in your direction. Now let’s a look at an illustration of the trail stop  on a pin bar setup. download

This is a nice illustration of using a trailing stop to lock in your profits. The “R” represents the risk Entry level is at the engulfed level. You put your stop loss at the tip of the candlestick. Now as you can see the uptrend is running away and racking up profits at every turn. Why,?it’s because you have no set exit plan, paving the way for you to lock up more profits. For more information on trail stops look look up Forex Basics -Top To Bottom Part II.  I suggest you read up on Forex Basics Top To Bottom – Part I  so as to get the full trading pictujre

So How Do Achieve Consistency  In Risk Reward?

Very Simple! DON’T MEDDLE WITH YOUR TRADES! Stay out of them. You don’t want to enter a trade at a risk/reward ratio of 1:2. Later you enter a low probability trade and incurr a loss. When you do this you limit the power of risk/reward, not to mention your own potential to achieve as a forex trader.

Let me illustrate what I’m talking about. Let’s say you are losing 65% of your trades at a ratio of 1:2 and you risk $200 on each trade. This means you are losing  35 out of 100 trades. This means you’ve lost 65*200=$13,000.00 However, you  made 2 times the risk on your winning trades($200):65*400=$14,000). So after 100 trades you made a profit of $14,000 even though you lost 65 of them. See the power of risk/reward? So what’s the moral of the story? You can still make money from your trades even if you lose more trades than you win. Just stay out of the way and let the market do the heavy lifting for you

That’s a wrap for “The Phenomenon of Risk/Reward in Forex Trading.” It takes discipline combined with knowledge to master Risk/Reward concept. Plus, you can’t second guess yourself either.  With these two concepts you could be the Usain Bolt of forex trading.  Just allow the trades to play out and you’ll be laughing all the way to the bank with your profits- even if you lose more trades than you win. It’s a win win situation. Til next time  take care.

 

 

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A Closer Look At Price Action Event Zones And Support & Resistance Levels

Hello and welcome to another edition of the bulls vs the bears.  Today we are taking  a closer look at price action event zones and support &resistance levels. Now price action zones/support and resistance levels are two crucial components of price action analysis that every forex trader must know like the back of his hand. I’m sure most of you are familiar support and resistance levels. They are one of the basic technical tools and are fairly easy to comprehend. In fact I’d be shocked if you have no idea of this tool.

However, price action event zones(or event areas) have been around for quite a while. It’s just that it’s only recent years that they have been introduced to forex traders. So we’ll define individually what these two tools are. And then we’ll identify the differences between these two tools. But first  off:

Price Action Event Area

A price action event area is a critical horizontal area on a price chart where a price signal is born(formed)  or from which  a huge trend move(up or down) or a sideways range breakout is initiated. These event areas are considered “hotspots” on the price charts.  You should watch them like a hawk in case price retraces back to them in the not too distant future. Expect the major players in the market to consider their options if price pays these event zones another visit. Now let’s take a look at a price event area using, you guessed it, a pin bar signal

Event zone Ladies and gentlemen here is the price event area  through the eyes of the pin bar signal. The grey shaded areas represent the   both the support and resistance areas.  The small white arrows pointing downward  represent the price retracing after bouncing off the key areas. However, watch the first white arrow at the first key level. Here the bulls  break  out  thanks to the pin bar formation along the line of support.

Next,  watch the second white upwards pointing arrow at the line of resistance. the line of support converts into a line of resistance, the bulls break through this key level and head for the mountains on the back of another pin bar signal. And when such an event happens, Huge profits await. Understand one thing about price event areas. If you miss the first price signal,  don’t panic! Just wait for price to retrace in the same event area and then you jump in. If you want to learn more about price event areas look up Identifying Dynamic Support and Resistance Levels.

Next up is

Support and Resistance Levels

As you probably know by now,  support and resistance levels are static horizontal levels that are drawn across the the price chart minus the highs and lows. Check out my post on how to draw support and resistance levels on price action charts. Now let’s look at an illustration of support and resistance levels Image result for forex standard support and resistance levels This graphic illustrates drawing of support and resistance levels.  As you can see there are no obvious price signals nor spectacular breakout from a consolidation situation nor key levels. These are standard support and resistance levels drawn across highs and lows. However,  There are lots of examples whose lines are a lot more elaborate and longer in length  than this illustration. So don’t panic. Now Let’s look at support/resistance levels on a daily chart  time frame using the AUD/USD pair

Image result for forex standard support and resistance levels on daily chart time frame Here is another illustration of  support/resistance levels drawn in the daily chart time frame. Some of you may be wondering “Why do we see support/resistance drawings, but no event areas?” Well it’s true that support/resistance levels dominate the charts. Just remember event areas carry a higher premium than support/resistance levels. Why?Because the reflect a major price occurrence. Support/resistance levels, on the other hand are drawn across market areas that bear little significance. Not to say support/resistance levels don’t play an important  role. But it’s the way it is on the charts. Now to the most important exciting part of this post:

What Is The Difference Between Support/Resistance Levels and Price Event Zones

Hmmmm……..How Do I Put this as clearly as possible without sounding offensive? Every event zone is a support/resistance area, but not every support/resistance area is a price event area. Now some of are probably  asking:

How Do I Tell The Difference?

For an event zone look out for a price action signal leading to to a huge breakout from a consolidation area or key  level. Let’s take a look at such an illustration using the power of confluence. Image result for forex price action signal in event zone Here is the classic illustration of a price event area using the AUDUSD pair. We have several price action signals along the key levels as indicated by the black circled numbers and the the red arrows.  These price signals then touch off major breakouts at both support and resistance levels.  And yes, when such events occur, you have price action events in motion. For more information on multiple price singles look up Something Called Confluence Now let’s see why support/resistance levels are not price event zones using the CADJPY pair.

Image result for why support/resistance levels are not price event zones Here is why support/resistance levels cant be price event zones. If you look at the price charts you will see that unlike the price event areas there is no sustained consolidation before the breakout. Even worse there is no evidence of a  price signal triggering the breakouts in either of the key levels. So based on what we see on this graphic, there is no way support/resistance areas could be labelled as price event zones.

That’s a wrap for “A Closer Look At Price Action Event Zones And Support & Resistance Levels.” As you can see price action event zones and Support/resistant levels help you understand the  overall dynamics of the formation of a trade. This give and go between the price signal/entry and the market condidtions give rise to the high probability opportunities. Til next time  take care.

 

 

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