Candlesticks Or Technical Indicators For Exits

In the field of trading, I am sure all of you should know the candlesticks and technical indicators provided in trading charts. Many of us have our own unique style of trading the market. Often those who used technical analysis, most definitely or likely will be using candle charts.

Candlestick charts provide much more information and is pictured easily for traders to identify candle stick patterns. These candlestick patterns allow traders to spot turns before potentially large moves. For technical indicators, it is a reflection of the movement of the past candles and provides another wealth of information on past history patterns of the market.

So you may be thinking, do I stick to just candlestick trading or using just technical indicators for analysis? Well, for a start, most people are using candlesticks in a wrong manner. One of the most dangerous and misuses of candlesticks is trying to use them as a standalone trading system. Candlestick by itself is just a trading tool and not a trading system. That is why there shouldn't be a preference of candlestick or technical indicators.

Both of them must be used together to gather information and also as confirmation for your intended trades. Well it is true that some people whom I've met are better at just using one of these tools but it is just the minority. If you are just starting out, you may want to incorporate both of these tools into your trade analysis where you will be sharpening your foundation in recognizing common candlestick trend reversal patterns together with technical indicators patterns.

With experimentation through your demo account, you can find out a set of suitable technical indicators that you are comfortable in applying to your trade. Candlestick patterns and technical analysis not only helps you in identifying trade entries but also trading exits. These trading exit strategies must be learned and developed by you to suit your trading plan.

Though in general, there are many ways to formulate your exits like for example having a take profit target or shifting your stop loss manually closer to the price action in order to secure profits, it is often a tedious way to do.

Having the combination of candlesticks and technical analysis, you can pick out the perfect spot to exit your trade without risking too much of your profit lost to the market and riding the trend till it dies out.

So in short, always have your foundation built up in candlestick patterns and technical analysis, experimenting with several combinations to develop your set of entries and trading exits strategies.

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Winning Forex Trading With Trailing Stops

Many traders attempt to lock in profits as the market moves in their favor by trailing the market with various trailing techniques. Personally, I use trailing stops every time I trade a trending based system. When these trailing stop strategies are used correctly, they manage the stop loss level such that they convert floating profit into 'earned' profit. Trailing stop by its nature have these two features in-built.

1. Pip Protection Mechanism

Shifting of this stop loss level for the purpose of locking in earned pips acts as the pip protection mechanism and secure your profits even before a forex trader closes the trade. In addition, it provide a plan for traders to exit their trade when the trending market become exhausted.

2. Pip Maximization Mechanism

A trailing stop will exit the trade when it detects that market has some form of trend exhaustion while at the same time maximizing the potential of profit from a trend. This is what we called pip maximization mechanism.

However, when trailing stops are not used properly, a trader will end up adding volatility to his results in terms of risk to reward ratio and return of investment. This is because using trailing stop will some time allow the trade to exit prematurely due to noise resulting in a stop out. After a stop out occurred to a trade, price seems to consolidate and continue trending again.

The value of a trailing stop order is obvious. Because it prevents the forex trader from leaving after achieving a small profit, he will have a plan to ride a trend for as long as it is profitable. He will only leave when trend exhaustion is detected as market goes into consolidation phrase and no more opportunity to capture more pips from the trend.

While trailing stop has their limitations, we believe that their advantages outweighs their limitations and it is very important for beginning traders to apply trailing stop strategies to their trading system where they are just starting and have not have a solid plan for risk management. Trailing stop provides the discipline and a plan for traders to exit and cash in their profits rather than risk having to give back to the market.

There are many techniques to manage a trailing stop. Traders often start moving their stop when their positions have earned twice the amount risked. Another popular technique is to trail the market with a stop placed near the high or low price over the last 2 candles. Both of these techniques are effective for short-term trading or otherwise called intraday trade.

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The Power Of Forex Technical Analysis by using Forex Trailing Stop

In the world of trading, the worst enemy to encounter is oneself. The emotional impulses stem from a person normally will win over the rational mind which results in bad trading decisions. Technical analysis is there to help us to put objectivity and rationalization back in place.

Forex technical analysis is a study of price action through pattern recognition and indicators to help us in the aid of forecasting the move of the market.

As technical analyst assumes that all fundamentals aspect of the market will be reflected in the price, all he needs to do is to focus of the price action of the market. The collective power of the market psychology is the force behind the movement of the market and often shows in a patterned way reflected in the charts.

History always tend to repeat itself and these technical indicators are in place to gather the past data of the market and make an indication for traders like you and me to unlock the codes to the possible market future behaviour. You do not need to worry about having to listen to so called expert on the prediction of the market through constant fundamental analysis and more often than not it is mostly their own opinion of what is happening.

What technical indicators do is to pick out the truth of the market psychology through the analysis of past data and present that to you. All you have to do is to find how to use these technical indicators to extract the information needed to support your trade decision. No emotions or unnecessary advices to steer you away from reality.

Human nature always present itself in patterns and cycles which is always reflected somewhere in the history of the charts. You have to spend time to decipher these data and make them useful for you. Do take note that although having indicators to aid you in your trade will be helpful but having too many indicators cluttering up your chart is a no go.

When you have too many, its like having lots of advisers telling you what to do and what do you do? You end up analysing most of the time and you lose your chance to trade. At most you should have only three to four indicators on your chart in that way you can fully harness the power of the forex technical analysis.

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Defensive FX Trading - The Rob Booker Way

Rob Booker mentioned in his book The Currency Trader's Handbook, that he aimed to achieve a 10 pip profits every day. He never try to make a ton of money on each trade, and never will he let himself lose a lot of money in any single trade. He talked about defensive fx trading. A method that made him very successful today.

Defensive FX Trading includes using break even stop after a predetermined take profit level is achieved. The action of shifted initial stop loss to entry price is called break even stop. This means which ever the direction the market decides to move, the risk after implementing a break even stop is zero loss.

While using a break even stop, a forex trader can also execute partial close when the first take profit level is achieved. This means that he can close 50% of his contract and can extract a small profit out of the market.

The advantage of using partial close together with break even stop is that you will extract a profit regardless of where the market will be headed for. It is a way to minimise risk and grab a small profit while at the same time allowing the trader to participate in longer term market actions.

Rob Booker's Forex Defensive Trading Plan

It is a powerful plan where a trader can turn from $10,000 into $130,000 in one year (trading 17 days a month) earning 10 pips a day. A trader will no longer need to be greedy because he need not require to capture 100 pip market movements. Advanced traders are conservative with their trading capital because they know that the market can take BIG swings against them when they're waiting for 100+ pips.

Out of 10 trades, would you accept 5 break even trades, 2 losers of 20 pips, and 2 winners of 50 each? I would. That's trading defensively, and it's what made him a successful forex trader.

For example, I find a great opportunity to go for 10 pips trade. I entered a market order, to buy the EUR/USD at 1.2900 and set a stop at 1.2880 (20 pips). I am now long the EUR/USD at 1.2900 which means i make money money when EUR/USD go up. When the market price reaches 1.2910, I made a 10 pips profit. I can either exit the trade with my profit, or stay in the trade longer.

Here is how I stay in the trade:

First, stop loss will be moved to the entry price. This step is called break even stop. If my initial stop was 20 pips (or, on this trade, at 1.2880), then I move my stop to 1.2900. That means that if the price falls back to 1.2900 my trade automatically closes and I have lost nothing. I have gained nothing. I have traded defensively.

But if the trade goes to 1.2920, and 1.2930, and beyond, I am prepared to get more money. I can lose nothing - I am in a 100% risk free trade. Now I can let my profit run and I don't have to worry about where the market will be headed for.

Defensive trading is about how a forex trader manages a trade. Most professional traders will use one or a combination of partial close, break even stop and trailing stops to manage and exit trades.

This is a strategy where risk can be reduced to minimal but with profits potential maintained. It allows the common saying 'higher profits with higher risk' does not applies anymore if you employ break even stops and trailing stops.

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Why Forex Trailing Stop is Important to Traders Survival

Whenever many novice forex traders come across the term forex money management, they either did not choose to employ it in their trading plan or they didn't even know about it. They take it as an afterthought and that the problem of money management will take care of itself if they are able to nail the perfect trade. This should raise an alarm as the existing leverage provided by brokers serves as a double edge sword.

This thing called leverage enables you to have a little amount of money to control a huge position size where you can profit the market tremendously but also can strike you down with heavy losses due to your losses multiplied many fold when you are in the red. Learning money management in trading is like learning to manage your little soldiers in battle with the market to win the trade for you or in the worse case to allow you survive another day of battle.

Once i attended a course on basic forex trading with a so called guru paying a few thousand dollars for it. I learnt the basics of forex together with some simple strategies to apply and was excited about the whole trading thing and what fortune it could bring to me. After a few trades i was on a hot streak or so i thought when i hit a few losses along the way.

The losses was starting to be more heavy and its compounding the whole time while i maintain hope that i can win all that i have lost. Alas it wasn't working and i blew the account. I thought just by setting my stop loss fifty pips away will be fine and that is all i can lose.

But i didn't know that there is calculation on position sizing and amount risk from my equity to be done. I thought that there was only one kind of position size and that is one standard lot. The amount risk is will total to about $500 each trade and that's damaging to my account.

From that point onwards, I've explored and learnt about the importance of knowing money management. Knowing set up your stop loss level isn't enough, you need to know how much you want to risk per trade and how much you can afford to lose in a single month before you go bonkers.

The norm in forex trading is that many will choose to only risk 1-2% of their equity per trade and up to 6% of their equity per month before they stop trading to reassess their strategy. Anything more than what you think is safe will result in recovering your losses more arduous.

Having a basic money management plan in place will keep you out from blowing your account and ensure you receive a loss that you can tolerate and expect. With additional money management rules such as having more advanced trailing stop strategy methods allows you to minimize your losses and in fact allows you to lock in those profits you've earned along the way if you know how to.

So one may have the best trading set-up out there that is highly profitable but without a forex money management in place, no matter how profitable one is, one will soon be in the red. Trust me it will be hard to make that come back unless you are that top 1% of the traders out there.

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Forex MT4 Demo and Backtesting

Back testing and demo-ing are a key component for evaluating effective trading system. The theory is any strategy that work well in the past is likely to work well in the future. Conversely, any strategy that performed poorly is most unlikely to perform good results in the future.

Advantages for Performing Demo and Back-testing Evaluation

1. History repeats itself. Repeated patterns can be identified from the back-test.

2. Investors can be educated with key ratios like max draw-down so that they know what to expect when using the systems.

3. Increases investors' confidence to rely on the systems during the draw-down period. Thus, investors know when to stick to the trading rules and when to discard the trading system.

4. Provides an estimate of the probability and magnitude of the potential trade profits and losses because the performance statistics can be reproduced by back-testing.

Limitations of Demo Testing and Back-testing

1. Spreads

Liquidity conditions during certain news hour may narrow the spreads. GMT day spread and night spread may differ due to liquidity conditions. All of this widening and narrowing of spreads may not be accurately accounted for in the bid and ask price.

Strategy that requires certain max spread conditions would not have perform as well in live trading compared to a back-test.

2. GMT OffSet

The server time may change at certain time of the year in UK and US due to summer and winter daylight saving hour. The price and history feeds may not correspond to the specified chart timing. This will mean that certain strategies that only trade at certain hours may get prices mismatch figures.

3. Brokers' Manipulation

Certain brokers' will offer close to ideal trading conditions in the back-test and demo test. This ideal conditions certainly do not happen when trading live. The idea doing this is to attract as many potential traders to use their services. You can find out more information on some of the popular forex forums online.

4. Trade Entry Method

Systems that use market order for entries may face difficulty in getting in at the right price you want in the live conditions. The fact is during live conditions, the market price will be very volatile and getting in at the right price manually will be a problem. There will be a difference in the entry prices between back-test or demo with live conditions.

Summary

Having to recognize the limitations of backtests and demo test, it will help us in understanding more about how the trading systems work and how to evaluate and analyse a system better. It does not mean that backtest results do not work, the fact is, it still works.

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