Part IX Trading Strategy
9.3. When To Enter The Trade?
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.