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| TheRumpledOne 6,411 posts msg #62937 - Ignore TheRumpledOne |
5/22/2008 9:30:56 AM Meant for Forex. Look at "THINGS TO AVOID". Found it here: http://forexfactory.com/showthread.php?p=2014096#post2014096 Making Money and the Most Basic of All Basic Strategies by BillyRayValentine I have been getting a lot of pm’s in regards to a thread I started last week called “No Brainer Trades”. You can find it here: http://www.forexfactory.com/showthread.php?t=86429 All of the trades posted in the blog by either myself or other members have proved anywhere from +20 to hundreds of pips with the exception of one, so the success rate has been very high thus far. We hope to continue it and educate as we go along. In response to some of the questions I have been getting and through my own diligence here I thought I would write the following, outlining the major methods I use. Throughout my years of trading, I have been lucky to have had some good experience and have picked up two important things: 1.Trading as a means of steady income is not a painful process if you know what you are doing 2.Trading can be a very painful process if you listen to the wrong information New traders suffer a severe disadvantage because they do not understand what moves the market and how to react to certain outcomes. When attempting to learn, the overflow of information out there can be both beneficial and disastrous. This article is intended to provide one winning strategy that provides a very high winning percentage rate, uses no indicators, and is simple to learn and follow. It is also intended to provide information regarding market movers and how they generally operate in relation to this strategy, as it is probabilistically the most widely used and followed. I’m going to outline my own abbreviated trading plan, making it easier to understand through explanations and presenting examples as to how I trade on a long-term and intraday basis. Before you read on, I encourage you to take a look at a general overview of the interbank market and how it works. It baffles me that such a large portion of retail traders out there have no clue of this structure, and it’s no wonder why so many of them lose money on a regular basis. Deficiency of knowledge in any endeavor will usually lead to failure. Understand what you are trading before you trade it, and then move on. You can find one here: http://www.investopedia.com/articles.../interbank.asp Banks control the cash. Retail traders such as you or I, as well as major funds play a key part in the movement of the market, but at the end of the day, the banks are the ones putting on multi-million dollar positions which essentially drive the markets. We would like to think we are a bigger part of it, but we’re not. Working for a major fund and a bank for several years, I realized what a joke a lot of trading really was and how simple it really can be for any novice investor with a willingness to learn. In my shop, we had one dedicated analyst per pair and he or she basically called out the shots to traders on the desk. The trader is responsible for moving the cash while securing profit whenever possible. With virtually no spread, most of the positions would last from a few seconds to several minutes. Many of them would take tiny profits trading countertrend all day long, along with hedging other traders, causing rises and shifting bars as you see on a regular basis. When an order gets placed that seems larger than life, and chips start to stack on, others usually follow like a herd like sheep. The largest orders are placed in areas of extreme support and resistance, and most of the market makers are fully aware of this fact. Analytics done by the banks usually outline these areas first and foremost, hence it’s the most widely used and followed technique at distinguishing reversal points. Other analytics are used as well, such as diagonal trend lines, pivots, price channels, macd, moving averages, etc., but issues over ambiguity arise with all of them. The technique I’ll describe below uses nothing more than support and resistance, with other methods allowing for possible trend-riding along the way. It’s what the big players do; therefore, it makes sense to be doing it as well. No strategy is going to be perfect, because on top of everyday speculative trading there are other influences on the foreign exchange market, and it might be difficult to discern when one price level will be more influential than another. As a retail trader following this technique, however, it is fully possible to profit 80 to hundreds of pips in a five hour session, each and every day. Less is more, in this case. I make about 5 to 10 trades per session, each one fitting into the framework of a high probability. I’ve used this technique over the past 3 years now because it has proven to me to be the most reliable and simple to trade. Others will argue, but while they argue and are looking to short GBP, I’m already closing my trade with 20 pips of profit. They go short, and price bounces back up, and I hope to explain why here. Areas of support and resistance hold because unlike other methods, anyone trading in any timeframe can look at a chart and see where price has reacted many times in the past, or what will be a “no brainer” in the immediate future. Any level is subject to a breakout on a reaction of news, or other various influences. It is important at all times to gauge the current market conditions and in good judgment decide whether or not the level should hold or bust. For example, on days of hysteria where the dollar is getting smashed, you’re a lot less likely to make a ton of pips on these levels if they are countertrend. The same can be true for Fridays (stop hunting day), in times of option expiration or at the very end of the month. Regardless, even on these days, it is possible to use this technique to enter trades in the direction of the trend on a retracement to the exact pip, allowing you to take advantage of the madness of the volatility. The Trading Itself There are 2 different types of support and resistance which generally hold: long-term and near-term. Long-term support and resistance levels can be distinguished on a 1-hour or greater timeframe. I typically start with a 4-hour chart and scroll down or up depending on the situation. Long term support and resistance levels, under laxed market conditions, can be good for 100+ pips at a time, unless under the conditions previously described. Here is an example of a current USD/JPY trade that bounced right off of predetermined levels. As I write it is currently +40 pips in profit, and the original posting before the trade can be found here: http://www.forexfactory.com/showpost...&postcount=238 As you can see from the chart below, this entire area has been used as both support and resistance many times in the past. Due to the heavy influence it has had in the market during previous times, a very high probability exists that price will bounce right off of it. The range of the level might be difficult to discern, as it can be rather wide. Looking at the most recent reactionary levels, one can determine that the most relevant range of price action is 102.74 to 102.60. Within this 15 pip range price was expected to bounce, as it did, right off of 102.73. Another example on AUD/USD you can find below. You can see that, on several occasions in the past, price used the .9290 level as support. This time was no different. Price hit it right on the nose and started its long journey into new highs. The original posting for this trade can be found here: http://www.forexfactory.com/showpost...63&postcount=3 This AUD trade is a good example of ranges, and how to tell which level price will bounce off of if multiple areas of support/resistance can be found in the same area. You can see here that in addition to .9290 support, there is also relevant support lower at 0.9273. One strategy is to scale into the position, putting on a portion of it at .9290 and, if price dropped any lower, put the rest on at 0.9273. Your stop loss should be placed directly under these levels, as if price continued to move any lower, it would signify a follow through, and clean break of this level. Near-term support and resistance occurs when a previous level is breached, and that support (or resistance) level acts as a resistance (or support) level. The best timeframe to view these on is 1-hour. An example of this can be found with a trade I took today on USD/CAD. On news, price spiked down through the former 0.9872 level of support, all the way down to 0.9817. Two hours later, price lurked its way back up to 0.9872, and began to sell off for approximately +35 pips of profit. These happen over and over again on a daily basis, and can be very easy to spot. Another example below on AUD. Again on news, price made new highs, busting through 0.9558 resistance. Several hours later, price moved back down to this level, tapped it, and was good for approximately +92 pips profit at maximum. You can also see that several opportunities were present to short AUD/USD previous to the news spike, as well. Taking Profits Profit should be taken in relation to the setup and current market conditions. No two trades are exactly alike; market conditions change all the time. Typically speaking, near-term support and resistance provides for smaller moves. For some, they can lead to trend continuation; for others, they can lead to consolidation. With the exclusion of market conditions, here are the rules I generally follow: For long-term support and resistance, I will typically take partial profits at around +40 pips or so, and leave the rest on and see if I get a runner. I will look for opposing areas of support and resistance and use them to scale out of a position. For near-term support and resistance, I will typically take partial profits at around +20 pips or so, and leave the rest on for continuation. Again, I will look for opposing areas of support and resistance to scale out. Understanding current market conditions is crucial to taking profits. Whether it be a long-term or near-term support or resistance trade, current market conditions could leave you empty handed for the day if you are not working with them properly. In a wild market, it is best to secure some profit as early as possible (20 pips or so). Once any trade is +20 pips in the money, I will usually set my stop loss to breakeven. If the market turns on you, it is probably doing it for a good reason. If the trade is a continuation of a current trend, you might have a better shot at more pips, though it is not always necessarily the case. Long-term support and resistance can commonly act as major barriers, priming the market for a trend reversal. Things to avoid: 1.Putting on a counter-trend trade during a news spike 2.Not setting a stop loss to breakeven when profit is +20 pips in the money 3.Holding too much conviction on a long-term move 4.Generalizing beliefs on where price will head 5.Not waiting for the setup 6.Chasing a trade late after a setup has already occurred 7.Sloppy trading (“sure, it’s going up”) 8.Letting a profitable trade turn red I have some other methods I use, and will try to post them later. But I hope this helps for now. Thanks, |
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