Friday, April 26, 2013

A Trader’s Trick Entry Technique

The trading technique described in this article is one of the trader’s entry techniques available for traders. This one comes with the Simple Moving Average period 12 (SMA 12), and the Commodity Channel Index period 20 (CCI 20). Here, the way the CCI is used is unique because it isn’t according to the uses suggested by the conventional trading wisdom. Conventional trading wisdom suggests that any CCI reading above the +100 level is an overbought situation (which would make a trader seek short trades), and any reading below the -100 level suggests an oversold situation (which would make a trader seek long trades). However, with this strategy, the CCI overbought and oversold situations are done away with; only the level 50 is used with the idea that any reading above the level 50 means an uptrend and any reading below the level 50 means a downtrend. This is true no matter how far the CCI is above or below the level 50. In a strong uptrend, the price will be above the SMA. In a downtrend, the price would be below the SMA.  When the SMA shows a strong uptrend and the CCI supports it - no matter the extremity of the CCI – then any transitory bearish correction that pushes the price towards the SMA is a high probability buying opportunity. When the SMA shows a strong downtrend and the CCI supports it - no matter the extremity of the CCI – then any transitory rally that pushes the price towards the SMA is a high probability selling opportunity.

Details of the Strategy
Strategy name: A Trader’s Trick Entry Technique
Time horizon: 4-hour charts
Suitability: Good for both part-time and full-time traders
Indicator 1: SMA 12
Indicators 2: CCI 20, level 50
Instruments: Use any pairs and crosses whose spread is not more than 15 pips each.
Long entry rule: Buy when the price dips and touches the SMA 12, while the SMA is sloping upwards and the CCI is above 50 (no matter how far above 50). The long trade is best opened as soon as there is a bullish candlestick which follows the scenario above.
Short entry rule: Sell when the price rallies and touches the SMA 12, while the SMA is sloping downwards and the CCI is below 50 (no matter how far below 50). The short trade is best opened as soon as there is a bearish candlestick which follows the scenario above.
Stop loss: 100 pips
Take profit: 250 pips
Risk-to-reward ratio: 1:2.5
Lot sizes: Please use 0.01 lots for each $2000 (and thus making it 0.1 lots for $20000); or 0.1 lots for each 20000 cents in a cent account (making it 1.0 lots for each 200000 cents)
Trade management rule: Move your stop loss to breakeven after you’ve gained up to 70 pips or more on a trade. Lock about 100 pips of your profit thru a custom-set trailing stop after you’ve gained up to 200 pips or more.
Maximum trade duration: 2 weeks

A Trading Instance
There are numerous trading examples that can be taken in bull and bear markets. In order to prove that the strategy also works in bear markets, the trading instance shown here is a short trade. The vertical red line on the left pinpoints where the trade was entered, and the vertical red line on the right pinpoints where the trade was exited. On the attached chart, it would be seen that both the SMA 12 and the CCI 20 show a Bearish Confirmation Pattern on the chart while the price was trading below the SMA. On February 22, 2013, the price rallied in the near-term and pushed against the SMA. Then it traded in a range, showing indecisive candles. We wouldn’t have taken this trade if the price crossed the SMA 12 to the upside and closed above it. If that happened, we’d not take the trade. But in this particular scenario, the SMA 12 was acting as a kind of barrier to the bulls’ interests.  That same day, there came a bearish engulfing candle and the opportunity was quickly taken: going short. The spread wasn’t considered here.  
Instrument: GBPJPY
Order: Sell
Entry date: February 22, 2013
Entry price: 142.207
Stop loss: 143.207
Trailing stop: 141.202
Take profit: 139.707
Exit date: February 25, 2013
Exit price: 139.707
Status: Closed
Profit/loss: 250 pips

When It Goes Out of Sync with the Markets
The only thing that can go wrong is when we’re on a wrong side of a trade. When this happens, the instrument that has been going up for several months (even years) would just hit a great distribution territory and begin to fall from the pinnacle of its strength, just like Napoleon after Moscow.  Stop Loss limit assists in checkmating risk, but since we’re not 100% sure whether or not a particular trade would be positive, the strategy trades each valid signal until there is a winning trade. But that’s part of the probabilistic win-loss proportion that must be agreed with from the outset. There’d be losing orders, but we’ve confidence in the expectancy ratio that confirms that the strategy would soon become profitable again and recover some recent negativity. One needs not get mad because of a losing trade. Even Market wizards also sustain negativity, yet they beat the markets on annual basis. It’s too bad to take some negativity too serious and quit an activity that could ultimately give you some decent returns in a foreseeable future.  Therefore the more stable (that is, the more vivid) a winning or a losing period is, the more dependable the strategy could be, especially, in those periods that a market type is not favorable to it. If negativity and positivity are statistically weighed the strategy would possibly appear more effectual and perhaps might be more profitable or the returns would be increased, irrespective of some uncertain assurance for tomorrow. A protracted winning or losing period would proffer vivid indications when a market type is not favorable to it, as those periods materialize. Conversely, the alternate losing and winning periods is enhanced in favor of the trader, portending a more robust strategy.

Conclusion: Mature traders exude rectitude when it comes to being loyal to their trading plans. In this aspect, mature traders aren’t remiss. This is one of the keys that can make us stay long in trading, for this is our major aim. Any temporary loss that’s encountered won’t deter us from taking new trades that could possibly go in our favor. So we’re advised to:
1.      Speculate only on what we see, not what we want.
2.      Use small position sizing so that we’d only have small losses which can be recovered quickly. This idea is very helpful to the trader’s mindset.
As emphasized in this conclusion, if we’re faithful to our trading rules, we’ll end up being victorious in the markets.

The article is concluded with a quote from Dr. Van. K. Tharp:

“I think the most important trait that all top traders have (or top people in any field) is the ability to assume total responsibility for what happens to them. And for top traders and investors, this means that they assume total responsibility for their investments results.”

Disclaimer: This is not a trading recommendation. The article in this piece is just about what the author is doing, not what he wants others to do. There’s risk of loss in trading.

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