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.
-vegas
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