Part VIII How To Choose The Trading Software
8.3. Oanda.com
http://www.oanda.com
Oanda provides a free demo account that is an excellent place for new traders to practice their trading strategies. When you open a demo account you will receive a
$100,000 fictional balance and you can start placing your trades. Oanda provides some basic charting capabilities however it would be best if you would combine Oanda’s trading platform with one of the free charting packages such as Net Dania or FXTrek charts. Figure 8.4. is an example of Oanda’s trading screen.
Figure 8.4.
Part IX
Trading Strategy
Now the battle is about to begin and you should get ready for it. Before you go any further ask yourself the following questions:
Are you willing to invest your time, money and effort in a profession in which success is not guaranteed? Are you comfortable with and aware of the fact that the chances of failure are high?
Do you have a comfortable basic knowledge of the Currency Markets in general?
Are you familiar with key concepts and terms as related to currency/forex trading.
Have you opened an account with an online broker/dealer that meets the criteria that we have outlined in Part III? Have you set aside the amount of money that you are willing to risk?
Are you set up with the necessary hardware and Internet connection? We will assume that you will be using two monitors for the purpose of this strategy. If you haven’t installed two monitors yet, you will have to jump between the screens.
Eventually, if you are serious enough about trading, you will realize that using only one monitor puts you at a huge disadvantage.
Have you gained a solid understanding of key Technical Analysis concepts as explained in Part VII?
Have you found a decent data feed and charting software provider?
9.1. How To Prepare For A Trading Day?
For the purpose of this strategy we will be using Esignal charting software and Oanda.com trading platform. Which software and which trading platform you will be using is entirely up to you, however our setup will give you a general idea of what capabilities should your software have.
Our examples will deal mostly with EUR/USD however if you live in Canada I would encourage you to trade USD/CAD, if you live in Australia you should trade USD/AUD, if you live in East Asia you should trade USD/JPY, if you live in UK you should trade either USD/GBP or EUR/GBP, if you live in European Union you are best off trading EUR/USD and finally if you live in the United States you should trade USD against the currency that you are most familiar with (EUR, JPY, GBP, CAD, SFR).
Trading the currency that you are familiar with has lots of advantages vs. trading currencies that you have never used. For example a person who lives in Canada remembers approximate range of CAD vs. USD during past ten years or more and has much better understanding of those currencies than average person from Japan. Principles that are explained in this strategy can be used to trade any of the above currencies.
Although forex markets are in essence 24-hour markets, for the purpose of our strategy we will define when does the trading day start and when does it end. Lets have a look at figures below:
Figure 9.1.
Figure 9.2.
Figure 9.3.
Figures 9.1. , 9.2. , 9.3. are 15-min candlestick charts for USD/JPY, USD/CAD and EUR/USD respectively. What do they all have in common? We can observe that the time of the lowest trading volume for all of them is at approximately 5pm EST or 10pm GMT. That is the time when almost all of the forex trading centers around the world are closed. Therefore we will use 10pm GMT as the time when previous trading day ends and the new trading day begins. Here is an example: “You live in Europe. It is Thursday
morning 9amGMT. Previous trading day has started on Tuesday 10pmGMT and it has ended Wednesday 10pmGMT. Another example: You live in North America. It is Thursday morning 9amEST. Previous trading day has started on Tuesday 5pm EST and it has ended Wednesday 5pm EST.”
For those who don’t know:
Eastern Standard Time (EST) = Greenwich Mean Time (GMT) – 5
Why is it important to determine when does the trading day start and when does it end?
It is important because we will need values such as Previous Day High, Previous Day Low and Previous Day Close later on in our strategy.
9.1.1. Economic Calendar
Another important place to look at is Global Economic Calendar that has exact times and dates of all the major economic reports and events during current week. If you are trading EUR/USD you need to pay attention to the reports coming out of EU and US.
If you are trading USD/CAD you need to pay attention to the reports coming out of US and Canada etc… Some of the important indicators that you should pay attention to are Weekly Jobless Claims, CPI, University of Michigan Sentiment, Federal Reserve or Central Bank Meetings … However you will not look at those indicators as trading signals because by the time you get the news it is already too late, price has already started moving. The reason you need to be aware of those reports and events is that at those times markets can get extremely volatile and for a beginning trader it is best to stay out of the market at such times. It doesn’t mean that you cannot have a trade going on if there is a report due to come out. Those reports come out almost every day so you cannot avoid them. If you are already in the market you should watch the situation closely at those times and be ready to quickly react. Figure 9.4. shown below is an hourly EUR/USD candlestick chart. You can notice that majority of the time price is trading in a close range and then suddenly there is a sudden upward or downward price move.
Majority of those sudden moves happen immediately after the economic reports that we have described above come out. Again, if you are beginning trader, don’t enter your trades just before such reports are due to come out.
Figure 9.4.
One of the places where you can find economic calendar is: http://www.forexnews.com Figure 9.5 shown below is an example of how a Global Calendar can look like however at the time when you are reading this course the website mentioned above can change and you will have to find the calendar someplace else. Here is another place where you may find it: http://www.dailyfx.com/calendar/Calendar.html
Or if you are looking for a US calendar you may find it at: http://biz.yahoo.com/c/e.html or http://moneycentral.msn.com/investor/calendar/econ/current.asp
For Canadian economic calendar http://www.baystreet.ca/econcalendars.cfm
Figure 9.5.
As we have already mentioned our goal is to catch large currency swings as that’s where the real money is in currency trading. However, in order to be able to do so, we have to choose the best possible place of entry or the place that has the highest probability that the trade will go in our direction. Before we start to look for the place of entry (it doesn’t matter at what time of the day we plan to place our trades) we need to do a preparation.
9.1.2. Calculating Major S/R Areas
Let’s say it’s 8pm EST or 1am GMT and we are planning to trade tomorrow morning. First we need to have a look at previous trading day’s chart.
Figure 9.6.
Figure 9.6. shown above is a 15 min candlestick chart for EUR/USD. From the chart above we can determine that
Previous day High PdHigh = 1.176 Previous day Low PDLow = 1.1585 Previous day Close PDClose = 1.172.
We will now calculate PIVOT POINT PP
PP = (PDHigh + PDLow + PDClose)/3 = (1.176 + 1.1585 + 1.172)/3 = 1.169
Next we need to find major Fibonacci Retracement levels.
Figure 9.7.
Figure 9.8.
Figure 9.7. shows Fibonacci Retracement levels for May – September move and Figure 9.8. shows Fibonacci Retracement levels for September – October move. You may be
asking why are we using two different price moves when calculating Fibonacci levels in this example. As you can see on the charts above in October the price did not break the May/June highs therefore May – September move is still majorreference point, however September – October move is also an important move and it is also more recent therefore in this case we will be using Fibonacci Retracement levels from both moves.
We will now list our major S/R levels for the next trading day:
PdHigh = 1.176 PDLow = 1.1585 PDClose = 1.172.
PIVOT POINT PP = 1.169
Fibonacci (May – Sep) 0.786 = 1.167 Fibonacci (Sep – Oct) 0.786 = 1.160
That will end our preparations for the next trading day.
9.2. How To Set Up Your Screens?
OK, our trading day is about to start. We now need to set up our monitors with the necessary charts.
Figure 9.9.
Figure 9.9. is a snapshot of the two monitor set up on Wednesday Oct 15, based on the data that we have collected from the previous trading day. As we can observe on the chart above we have placed daily candlestick chart to the left, hourly candlestick chart in the middle and five minute candlestick chart together with the most important S/R lines to
the right. On the daily candlestick chart we have placed a 20 Day Moving Average (blue line) and you could also place a 50 Day Moving Average as it is also an important and widely followed Moving Average. On the hourly chart we have placed 12 hour (blue line) and 4 hour (red line) moving averages. On the five-minute chart we have Bollinger Bands, RSI, Volume, PDHigh, PDLow, 0.786 Fibonacci, Pivot Point and Close which are the lines that are most likely to act as Support/Resistance lines in the current trading day.
How will your set up look like will depend on the type of charting software that you will be using however our example can give you a general idea.
Here is a closer look at the each component of our set up:
Figure 9.10.
Figure 9.11.
Figure 9.12.
9.3. When To Enter The Trade?
We will now define our entry strategy.
If the current price is above 20 DMA (daily moving average) it means that the price is trading in an upward short term trend and therefore we will adopt a bullish strategy.
If the current price is below 20 DMA it means that the price is trading in a downward short-term trend and therefore we will adopt a bearish strategy.
If bullish we will be looking to enter our position on upside breakouts through (Pivot Point, PDHigh, Fibonacci Retracement and PDClose) resistance lines and on the upside bounces from the (Pivot Point, PDLow, Fibonacci Retracement and PDClose) support lines as those lines are most likely to act as S/R levels for the current trading day.
Other bullish signals that we will be looking for are:
Easily recognizable bullish chart pattern is being formed on hourly chart Easily recognizable bullish chart pattern is being formed on five-minute chart 12 1HrMA about to cross 4 1HrMA from above to below
RSI (5minute chart) approaching or breaking lower line (30) and price touches lower Bollinger Band (when the price is bouncing off the Support/Trend line)
RSI (5 minute chart) is approaching or breaking 70 and price touches upper Bollinger Band (when the price is moving through a known Resistance/Trend line)
Price bouncing off a trendline after declining or moving through a trendline if rising Price moving through 50 Day MA on the way up
Increase in positive volume (closing prices being higher than opening prices for periods being observed) – if you don’t have a volume on your software that’s ok, you will have to do without it
If bearish we will be looking to enter our position on downside breakouts through (Pivot Point, PDLow, PDClose, Fibonacci Retracement) support lines and on the downside bounces from the (Pivot Point, PDHigh, PDClose, Fibonacci Retracement) resistance lines as those lines are most likely to act as S/R lines for the current trading day.
Other bearish signals that we will be looking for are:
Easily recognizable bearish chart pattern is being formed on hourly chart Easily recognizable bearish chart pattern is being formed on five-minute chart 12 1HrMA about to cross 4 1HrMA from below to above
RSI (5minute chart) approaching or breaking upper line (70) and price touches upper Bollinger Band (when the price is bouncing off the Resistance line)
RSI (5 minute chart) is approaching or breaking 30 and price touches lower Bollinger Band (when the price is moving through a known Support line)
Price bouncing off a trendline after advancing or moving through a trendline if declining Price moving through 50 Day MA on the way down
Increase in negative volume (closing prices being lower than opening prices for periods being observed) – if you don’t have a volume on your software that’s ok, you will have to do without it
After we have spotted three or more bullish or bearish signs we will start to observe our chart more closely in order to determine specific point where we will enter the trade. All of the TA tools that we have at our disposal do not carry equal weight. In order to make our trading decision as mechanical as possible we will now develop a table that assigns different values to different TA tools according to their importance.
9.3.1. Entering On The Long Side (buying) Price bouncing off support level
(PDLow, PDClose, PP, Fibonacci Retracement) ………. 8 points Price moving through resistance level
(PDHigh, PDClose, PP, Fibonacci Retracement)………. 8 points Easily recognizable bullish chart pattern
developing on hourly chart……….… 6 points Easily recognizable bullish chart pattern
developing on five minute chart………. 4 points 12 1HrMA about to cross 4 1HrMA from above to below…………... 6 points
RSI (5minute chart) approaching or breaking lower line (30) and price touches lower Bollinger Band (when the price is
bouncing off the Support/Trend line)……… 6 points RSI (5 minute chart) is approaching or breaking 70
and price touches upper Bollinger Band (when the price is
moving through a known Resistance/Trend line)……… 6 points Price bouncing off a trendline after declining or moving
Through a trendline if rising……….. 6 points Price moving through 50 Day MA on the way up……….... 8 points Increase in positive volume (closing prices being higher than
opening prices for periods being observed) – if you don’t have a volume on your software that’s ok, you will have to
do without it………. 4 points Bullish candlestick pattern being formed on hourly chart………….. 4 points We will enter the trade if the current score is 38 or more.
9.3.2 Entering On The Short Side (short selling) Price bouncing off resistance level
(PDHigh, PDClose, PP, Fibonacci Retracement)……… 8 points Price moving through support level
(PDLow, PDClose, PP, Fibonacci Retracement)………. 8 points Easily recognizable bearish chart pattern
developing on hourly chart……… 6 points Easily recognizable bearish chart pattern
developing on five minute chart………... 4 points 12 1HrMA about to cross 4 1HrMA from below to above…………. 6 points RSI (5minute chart) approaching or breaking upper line 70
and price touches upper Bollinger Band (when the price is
bouncing off the Resistance/Trendline)……… 6 points RSI (5 minute chart) is approaching or breaking lower line 30
and price touches lower Bollinger Band (when the price is
moving through a known Support/Trend line)……… 6 points
Price bouncing off a trendline after advancing or moving
through a trendline if declining……… 6 points Price moving through 50 Day MA on the way down……….. 8 points Increase in negative volume (closing prices being lower
than opening prices for periods being observed) – if you don’t have a volume on your software that’s ok,
you will have to do without it………. …4 points Bearish candlestick pattern being formed on hourly chart………….4 points We will enter the trade if the current score is 38 or more.
What kind of order should you use to enter the trade?
The only negative consequence you may get from not entering a trade is just that;
you haven’t entered a trade. It is better to miss a trading opportunity than to have your order filled at a price that is far from your entry target price. If you feel the opportunity gap is closing too quickly, simply wait for the next opportunity to come along. It’s worth it to save your money than risk losing it simply because you’ve got an itchy “trigger finger”. To get into the trade you should always use Limit orders.
What size should you be trading with?
If you are a beginning trader you should start very small and when you are able to build up your account you can start trading with larger amounts. This applies even if you are starting with substantial start up capital. You need time to perfect your trading strategy. It is much better to preserve your capital for later on, when you become more formidable market participant. For example if you are trading currency futures you should start with one contract and if you are trading spot market you should start with low amounts such as not to risk more than $200 per trade.
9.3.3. How To Properly Use Leverage
Leverage can be your best friend and your worst enemy at the same time. Many beginning traders don’t fully understand the concept of leverage. If you have a start up
capital of $5,000 and if you trade on 1:50 margin, you can control $250,000 with your capital. However, a two percent move against you and your capital is completely wiped out. If you are a beginning trader you should not use more than 1:10 margin until you get comfortable and profitable and then and only then you can attempt to use higher margins up to 1:20. What does 1:10 margin means? It means that with your $5,000 you will control $50,000. Let’s say you are trading EUR/USD and by using our entry strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against EURO. Let’s say current EUR/USD rate is 1.1584. Again, if your trading capital is $5,000 and you are using 1:10 leverage you will effectively be exchanging $50,000 to Euros. If the current rate is 1.1584 you will receive 50,000/1/1584
= 43,163 Euros. If the trade goes in your direction that margin will work in your favor and 1% decline in USD will mean 10% increase in your start up capital. So if EUR/USD rate moves from 1.1584 to 1.1699, you will be able to exchange back your 43,163 Euros
* 1.1699 to approximately $50,500 for a profit of $500. Since your start up capital was
$5,000 it is effectively a 10% increase in your account. However, if the trade went against you and USD dollar appreciated 1% vs. EURO your account would be reduced to
$4,500. You can then imagine what would have happened to your account if you were trading with 1:50 margin. If you are trading currency futures it works in the same way although the minimum amount that you can buy is one contract. For example Canadian Dollar contract size is $100,000, Swiss Franc contract size is 125,000 SF, Euro Currency contract size is 125,000 EURO, E-mini Euro contract is 62,500 Euros. Initial margin requirement to purchase 1 E-mini Euro contract is $1,215. So with $1,215 you are controlling approximately $70,000. That is approximately 1:50 margin, however by having additional $5,000 in your account your margin will effectively be 1:10.
9.4. When To Exit The Trade?
“Let your profits run, cut your losses short.” Sounds easy, doesn’t it? It is actually much harder than most beginning traders realize. The majority of successful traders will tell you that proper trade management, once you are in the trade, is the single most important factor that will either make you or break you in the active trading business.