Trading Is Life
I want to begin with the premise that some decent amount of volatility will be present in the marketplace; without it, why even trade? One look at the weekly candlestick chart of WTI Crude Oil CFD should convince you that, yes indeed, it is there.
By the same token, we don’t want to see much of this on a weekly candlestick chart:
Now, if both the high and low “spindles” are at least 150 – 175 pips apart, we still have a high probability of profit for the week. Only if this type of spindle is small [125 pips or smaller] are we going to see the probability of loss increase dramatically. Since the start of 2010, this has occurred 1 time in 194 weeks; add in the very high volatile period from 2005 – 2009 and you have 1 time in about 8 years. If this doesn’t excite you as a trader, I don’t know what will.
But, as the old saying goes, “you don’t get somethin’ for nothin”. When it comes to trading Forex and/or CFD’s, you can never have an algorithm that makes money under all trading circumstances; you have to give up something [potential losses] in order to have the possibility of making money.
What we “give up” is a low volatility trading environment over the course of a trading week. Sure, we care about price because that is the benchmark for making money; but what we are really trading, and what we should really care about is intra-week volatility.
We start the week on Monday at the open [Forex-Metal server time 00:00; 6:00 P.M Sunday night Chicago time in Daylight Savings Time, 5:00 P.M Central Daylight Time the rest of the year]. We then place the horizontal line [choose your color] on this open, and it will remain there for the current week [delete and change for new week] as a visual reminder of higher price [green candles] and lower price [red candles] values for the week.
When the market is in a range of +35 pips to -35 pips from this horizontal line [open] we do nothing and are not in the market. The majority of the time at the start of the week, unless there is some news driven event, the oil market will most likely do nothing in price terms until the European open [around Midnight – 1 A.M. Chicago time].
When the market rallies over the +35 pips from the open we establish long positions; when the market breaks under -35 pips from the open we establish short positions.
After establishing a new position, we then follow the yellow and plum lines [5M EMA LOW VALUES – 3 PERIOD FOR PLUM, 9 PERIOD FOR YELLOW], and also the exhaustion levels [AQUA AND RED LINES], to determine when the market may be changing short [or even long] term direction.
However, instead of liquidating out position, we HEDGE it with an offsetting position, until we are given a new signal, at which point we take off the hedge.
Since we are highly confident [over 90% to be exact] that at some point the high or low of the week will be AT LEAST 200 pips, when we reach that level from our position, we can ring the register and stop for the week, or continue trading from the signals for a higher pip amount.
[Note: When you trade online through a brokerage house, they use multiple market makers and/or banks as liquidity providers for every market. They usually use between 5 to as many as 10 banks; the bid / offer you see on your MT4 screen is the highest bid from somebody and the lowest offer from probably somebody else.
When you open a position it is with some bank [say bank A]; in order to liquidate this position, you have to specifically close it with this bank [bank A], otherwise some other bank [say bank B] will be on the other side, and instead of being out of the market you will have offsetting positions [a hedge].
This is what is meant by “hedging”.]
Of course from these basic rules of the algorithm, you can adjust things to your own individual risk profile, and tailor your trading.
Next post I will be profiling specific trading examples and how I would trade them for the week. I will show how to hedge and use the yellow/plum lines as well as the aqua/red exhaustion line. To be sure, I’ll go over reversal weeks and other types of action that you can expect in the marketplace.
Have a great day everyone.