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The presented article covers one of the most important (in author's opinion) aspects of trading in general and Forex trading in particular - managing of orders and positions. This includes choosing entry points, making decisions about exit points, stop-loss and take-profit of the trader. I hope this article will help new traders, who just began to work with Forex, and also to experienced traders who trade regularly and regularly make or loose their money to the market.
When I started to trade Forex and made my first big losses and profits I began to notice when very important thing about the whole trading process.
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While the right time to enter a position was rarely a problem for myself (nearly 80% of all my open positions had gone into the "green" profit zone), the problem was hidden in the determining the right exit point for that position. Not only was it important to cut my risk on the potential losses with stop-loss orders, but to limit my greediness and take profit when I can take it and make it as high as I can.
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There are many known guidelines and ways to enter a right position at a right time - like major economic news releases, global world events, technical indicators combinations, etc.
But while the entering into a position is optional and trade can decide to miss as many good/bad entry point moments as they wish, this is untrue if we talk about exiting a position. Margin trading makes it impossible to wait too long with an open position. More than that, every open position in a certain way limits trader's ability to trade.
Choosing the good exit points for positions could be an easy task if only the Forex market wasn't so chaotic and volatile. In my opinion (backed by my trading experience) exit orders for every position should be toggled constantly with time and as the new market data (technical and fundamental) appear.
Let's say, you took a short position on EUR/USD at 1.2563, at the time you are taking this position the support/resistance level is 1.2500/1.2620. You set your stop-loss order to 1.2625 and your take-profit order to 1.2505. So now, this position can be considered as an intraday or 2-3 days term position. This means that you must close it before it's "term" is over, or it will become a very unpredictable position (because market will differ greatly from what it was at the time you have entered this position).
After the position is taken and initial exit orders are set, you need to follow the market events and technical indicators to adjust your exit orders. The most important rule is to tighten the loss/profit limit as time goes by.
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| Usually if I take a middle term position (2-4 days) I try to lower the stop and target order by 10-25 pips every day. I also monitor global events, trying to lower my stop-losses when very important news can hurt my position. If the profit is already quite high, I try to move my stop-loss the entry point, making a sure-win position. The main idea here is to find an equilibrium point between greed and caution. But as your position gets older the profit should be more limited and losses cut. |
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Also, traders should always remember that if the market began to act unexpectedly, they need to be even more cautious with exit order, even if the position is still showing profits.
Every trader has their own trading strategy and habits. I hope this article will make its readers think about such an important aspect of trading as the exit orders and this will only improve their trading results.
by Andrey Moraru
http://www.earnforex.com
http://earnforex.blogspot.com |
Filed under Strategy by wizardoftrading.
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There are many ways of using moving averages to trade but by far the most common method is to trade when a short-term moving average crosses over a longer term moving average. For example, if the 10-day MA crosses above the 30-day MA we typically assume that we have a new buy signal.
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Let's stop for a minute and think about what exactly is occurring at the point of a crossover.
When the 10-day MA and the 30-day MA are at the same price, the trend is not nearly as clear as it should be.
What we are really observing at the crossover point is that the average of the last 30 prices is exactly the same as the average of the last 10 prices.
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If we are looking for trends to trade, this equal relationship of the two moving averages is not a reliable or logical indication of a trend.
In an upward trending market the average prices over the last 10 days should be much higher than the average of the last 30 days. By implementing new trades at crossover points we are limiting our trading to points that may not clearly reflect what we should be doing. For best results in a trend-following system we want to be trading when the trend is clear and reliable; not when the trend is confused and questionable.
Instead of trading at crossovers we should be implementing our trades when the moving averages are parallel or when the short-term moving average is moving farther away from the longer-term moving average. Perhaps the short term MA should remain a minimum of some units of Average True Range above the longer term MA for several days. I believe that this procedure would give us more reliable and more frequent entry signals in the direction of the prevailing trend, which is exactly what we want. To identify the most reliable trends we want to see the slopes of various moving averages all moving steadily in the same direction and not crossing back and forth.
Take a look at a chart of any market with a strong trend. You will see that the moving averages are not crossing back and forth repeatedly. They will be moving in the same general direction in a more or less parallel fashion. Now look at a chart of a non-trending market. As this market moves sideways the moving averages will be crossing back and forth very frequently. Look at the implications of this simple examination of the charts. If we are trading the crossovers we will be trading most frequently in non-trending markets and trading most infrequently in strongly trending markets. Is that what we want? No, it's obviously not what we want. We want just the opposite. We want frequent entry opportunities in trending markets and we want to avoid as many trades as possible in non-trending markets.
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The error in the logic of trading moving average crossovers also extends to some interpretations of MACD (Moving Average Convergence and Divergence) and DMI (Directional Movement Indicator).
If we are looking at MACD we want to see both lines (each line reflects a moving average relationship) moving in the same direction. We don't want to see them crossing.
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When looking at DMI we want to see the Plus DI lines and the Minus DI lines moving in opposite directions and definitely not crossing.
Remember, when the Plus DI and the Minus DI lines intersect it is telling us that the market is in balance and has no direction; the amount of upward and downward directional movement are exactly equal. What makes our favorite indicator, the ADX, so effective is that it rises only when the Plus DI and the Minus DI are moving in opposite directions and the distance between the two indicators is widening.
With a little thought and effort I'm sure we can design some reliable entry signals that are based on moving averages but avoid the typical crossover signals. For example we could measure the slope of several moving averages and when all the averages slope upward we would have a buy signal.
We could also measure the distance between several moving averages and implement our trades when the averages are all headed in the same direction but start getting farther apart. This procedure would give us a series of entry signals within the same original trend. This should provide an excellent entry and re-entry strategy.
By Chuck LeBeau
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Filed under Strategy by wizardoftrading.
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