Running out of trade opportunities?

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I’m sure every trader reading this has come across this problem – the lack of trade setups.

Perhaps you’re used to trading on the H4 or Daily chart and ideal trades don’t come by that often.
Then you start to consider options such as:

  • Maybe I should jump down to the shorter timeframes to find more trading opportunities
  • Maybe I should eliminate some of my rules to increase the probability of finding a “valid” trade
  • Or maybe there is just something wrong with my system that is not picking up enough trades

Sounds familiar?

But today, I’ll share with you a technique that helps me to find more trading opportunities out of my system, without breaking my rules.

Ever heard of the term – correlation?

According to dictionary.com, correlation means the degree to which two or more attributes or measurements on the same group of elements show a tendency to vary together.

In FX trading, being directly correlated means the two currency pairs tend to move in the same direction. Being negatively correlated means the two currency pairs tend to move in the opposite direction.

For example: Given that EUR/USD and AUD/USD share a highly positive correlation – this means that a fall in EUR/USD will also lead to a similar degree of bearish action in AUD/USD

You can find out more on the correlations that the different pairs share through this tool: https://www.oanda.com/forex-trading/analysis/currency-correlation

Note: This is NOT a sponsored post. It is a tool that benefitted me in understanding the relationship that the FX pairs share.

However, today we’re not talking about the correlation between different currency pairs. We’re talking about 1 currency versus other currencies. Which means when we’re looking at AUD, we’re looking at AUD/USD, AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, EUR/AUD, GBP/AUD, etc. – everything that has an AUD in it.

Perhaps an illustration would be clearer:

If we’re watching a nice setup forming on AUD/USD, but hey, all of a sudden, it starts to run further and further away from your ideal entry price. Now, the risk to reward has started to diminish, making it less attractive to get in the trade.
Does that mean you’re all out of options, having to look for new setups in the market again?
Heck no.

Now, you start looking for possible setups in AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, EUR/AUD, GBP/AUD, especially those that have yet to move much, and hopefully they present a reasonably attractive risk to reward ratio too.

Instead of having just 1 setup, you now have another 6 more chances at finding an entry to go short or long the AUD, based on which pair you choose, all without breaking your system rules!

Remember I mentioned at the start of the week I had a bias in shorting the AUD/USD?
(AUD/USD – Ready for Next Move Down?)
AUD/USD ran before I could enter with my trade rules.
I found AUD/CAD and netted a cool +2.81% gain on it, which was yielded the same effect as AUD/USD.


By learning to bend the circumstances in your favor, trading isn’t so boring after all now, ain’t it?

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A Mini Strategy-Crafting Guide

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If you’re just starting out, this article might be useful to you.
But if you’ve been trading for a while now and have a profitable strategy, then this should bring back some warm nostalgic feeling.

Sure, everyone wants to have a system that is profitable. We want a system that we can rely on all our lives so that we might, one day, not have to work in future and let our money work for us.

But does trading work that way? If so, your friends and family – everyone of them would be billionaires sitting at home right now.

In order to succeed in trading, it takes more than reading a Dummies guide to Technical Analysis, or watching Bloomberg.
You need to have serious PASSION for this, because when the drawdowns hit, it is the only thing that keeps you going.
You need to develop a strong interest in the markets – economic news, brokers, TA, FA – learn everything as widely as you can.
You need to know that there will be psychological challenges throughout your journey, even for the most experienced – not just a simple keying in a buy or sell.

If you think you’re ready for it, then here goes.

Once you have developed a level of understanding of the markets and basic TA, it is time for you to start demo trading. Do not start on a live account until you’re consistently profitable on your demo

1) Your character
Do you think you’re a really patient trader and can wait for a potentially large profit?
Or are you someone who prefers taking multiple trades per week?
Or are you an extremely daring person, willing to take trades multiple times in a day?
Once you find out the type of trader you are, this determines the time frame you ought to be looking at.

2) The nature of your trades – your trading style:

  • Trend Trader
  • Swing Trader
  • Breakout Trader
  • Mean Reversion Trader

Each type of trader looks at different things on the chart and uses different indicators or charting tools to help them.

3) Indicators and Chart Tools
There are tons of trading indicators out there that can aid you in crafting your first trading strategy.
RSI, Stochastics, Pivot Points, Bollinger Bands, etc.
Find out the function of each one and see how it suits you as a trader.
For example, if you’re a mean reversion trader looking at taking reversal trades, perhaps Bollinger Bands might help you in that area.

Most importantly, what you choose must be relevant to your strategy and you must have a full understanding of your tools.
Although some experienced traders might beg to differ that they can trade on a naked chart, this is only gained through experience. For starters, this would be a good way to get started.

4) Entries and Exits
Are you going to wait for some candlestick pattern to form before entering?
Are you going to wait for a certain level to break before entering?

Have well defined entry and exit rules, not click buy and sell whenever you “feel” like it.

5) Backtest
Now, put them altogether and start trading on your demo account.
Create an Excel spreadsheet to keep track of your trades – entries, exits, even screenshots of your before/after taking the trading.
The screenshots of your trades are the only visual evidence you have of your mistakes and success when doing a strategy review.

 

If your new system is consistently performing well for around 3 months, feel free to take your trading to a live account.
Start with a small sum first, then if you’re feeling more confident and the results of your strategy is kicking in, that’s the time you can start thinking of depositing the actual amount you’re willing to invest in your trading.

But if your system turns out to be unprofitable in demo trading, have a look at your screenshots and find out what the issue is.
Most likely, you’ll need to do some tweaking to your system specifications – whether or not it is an indicator problem or emotionally-charged entry, only you know the problem yourself.
Rinse and repeat till results are ideal to you.

 

And there you have it, a strategy tailor-made for yourself.

What I can say is that having a profitable strategy does not automatically turn you into a profitable trader. It requires an acute sense of discretion when analyzing potential trades, strong emotional control, strict risk management and last but not least, experience.

 

Weekly Focus/News Trading Strategy

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This week is going to be one that will yield great volatility in the FX markets.

We have our monthly famous NFP, AUD interest rate and ECB meeting/bid rate on the calendar.

(All in Singapore Time, GMT+8)nfp

I personally love such events as with great volatility comes great trading opportunities.

Very often you hear of advice being thrown around, such as:

Don’t trade when there is high impact news as you can get stopped out when price whipsaws.

And next thing you know, you’re seeing things like:

Captured XXX pips from XXX/XXX

Ironic, you may think to yourself.

How these traders profit from such large moves by major news events is actually pretty simple:

  • Have a bias of where price is likely to push into
  • Time your trade such that the stop loss is reasonably distanced from entry price and provides a good risk to reward
  • If price doesn’t move in your favor much within few hours from time of major news release, close out the position at breakeven or at a small loss.
  • If price moves starts to move in your favor progressively, time to start shifting your stop to breakeven
  • Wait for news release

The idea is to position yourself well before the news actually occurs, with the exception of black swan events which no one can predict.

Now there will be two outcomes to this:

If news is favorable to your FX pair, enjoy rolling your profits – you’ve successfully achieved your objective.
If news is unfavorable to your FX pair, it would be best to close out immediately to protect your profits instead of waiting for it to hit your stop-loss at breakeven.

Either way, you win.

Manage your risks accordingly and trade safe!