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Monday, October 6, 2014

A Simple Change in Trading Signals Approach

“Trading for a retail trader is the best job in the world, and if you can perform it without holding a PhD in statistics… how much time you’ve saved!” – Professor Emilio Tomasini

We’d like to announce a necessary but simple change in our trading signals approach. With the new approach, a market direction for a relevant trading instrument would be given, e.g. USDCAD = Sell. Then an interested person would simply set a stop loss of 100 pips and a take profit of 200 pips for the trade. The stop loss and take profit can be set before, or immediately after a trade is opened.

This is necessary because effort has been made to improve the accuracy of the signals, and therefore, the frequency of the signals will be increased. The signals generated since September 19, 2014 have been reflecting the effort. We can now look forward to better trading results on a quarterly basis (with thousands of pips in some months).

For example, should it be seen that the CHF pairs might become weak, there would be signals thus:

USDCHF = Buy

EURCHF = Buy

GBPCHF = Buy

AUDCHF = Buy

NZDCHF = Buy

CADCHF = Buy

CHFJPY = Sell

When the USD is very strong, almost every pair that has the USD as the base currency would rise and any pair that has the USD as the counter currency would fall. When the USD is very weak, almost every pair that has the USD as the base currency would fall and any pair that has the USD as the counter currency would rise.

Someone who predicted that the EUR would be strong around the middle of September 2014 would have been somewhat correct in spite of the fact that the EURUSD was weak throughout that month. Why? The EURAUD, the EURZND, and the EURJPY rallied massively in September 2014 (the EURNZD alone rose by more than 800 pips). Therefore, EURUSD fell only because the USD was stronger than the EUR.

Successful Forex trading is all about matching weak currencies with strong currencies, and anyone that can do that effectively will always come out ahead no matter what, when her/his results are evaluated on monthly/quarterly/annual basis.

With improved hit rate, one may be tempted to bet big on each trade, but it’s far better to bet very small. What cause big roll-downs are lot sizes that are too big for a particular portfolio balance. For each trade, only 0.5% should be risked. In trading, the less our risk per trade, the more money we make in the long run. Another benefit is that 0.5% risk per trade isn’t only a protection to our portfolios; it’s also a protection to our nerves. With this kind of low risk, we’re naturally indifferent to the outcome of an individual trade. Yes, we trade with peace of mind.

Since we use an RRR of 1:2, we simply have good chances of moving ahead. It’s like risking 0.5% to gain 1% - risking $1 to gain $2. With seven trades, we risk a total of 3.5% to gain a total of 7%. The forecasts come with about 70% potential accuracy, but with only 40% accuracy we’ll be ultimately triumphant. In another instance, we make nice profits even when we win 9 trades out of 21. We break even when we win only 7 trades out of 21.

Trade and risk management recommendations would accompany the signals. The purpose of risk management is to keep our accounts permanently safe no matter our trading results. Nevertheless, risk management can’t make us money – only bold predictions will make us money. Bold predictions make our accounts grow when we’re correct, and risk management keeps our accounts safe when our predictions are wrong. This is one example of the beauty of trading.

Our breakthrough in the markets begins in a new direction. Until you become a trader or an investor, you can’t access the riches the markets offer.

This article is ended by the quote below:

“Professional traders have a rare talent, and feel fulfilled because they express their talent by trading profitably.” – Joe Ross


Learn from the Generals of the Markets: Market Generals


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