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Thursday, January 31, 2013

Harnessing Profits from Short-term Trends

Finicky traders are usually attracted to high-flown trading systems. In the end, they see that even a complicated system can’t enjoy long-term survival in the markets if safe position sizing and risk control measures are not included in it. The strategy discussed in this article is very simple, but powerful. Top traders have found a way of making quarterly or annualized profits using simple speculative methods. Below is one way of doing this.

Trading on 5-minute Charts
The Simple Moving Average period 10 is used as the sole indicator with the strategy, since the price action is enough to show the direction of the market. If the market is rising or falling or moving sideways, you’ll see it yourself. It should also be noted that only pairs and crosses with small spreads are used for this strategy (a pair or cross whose spread is more than 5 pips oughtn’t be chosen, for they’re good only for swing or position trading systems, not intraday systems, like the one described here). Tuesdays, Wednesdays and Thursdays remain the optimal days of the week for this strategy, though as the example below shows, it can be used successfully on Mondays and Fridays as well. Please see the section titled; “Details of the Strategy,” Normally, there’s been a significant northward push prior to sighting an equilibrium zone in the market. This significant northward push could happen sooner than we think or earlier than that.
It’d be sufficient for this bullish push to be conspicuous and as a result, for the SMA 10 to be trending upwards. Having this condition is mandatory. Additionally, we need to know when the bullish push is happening. This is merely a situation in which the price makes higher highs and lower highs on 5-minute charts in which more and more buying pressures push the market upwards, at least in a near-term.  Short-term trend is thus vividly visible on a small timeframe like the 5-minute chart, because this can also be capitalized on. Normally, the SMA goes up only when there are buying pressures. The bullish push would then be so strong that bears would be pummeled continually, as distribution territories are broken upwards (one after the other). With these conditions, there is great possibility that a long trade, if opened, would probably go in the forecasted direction of the speculator. This is a clean bullish market. It should also be noted that the idea explained above could be reversed logically for a bearish market.

Strategy Summary
Strategy name: 5-minute Trend Catcher
Suitability: Good for full-time traders
Charts: 5-minute charts
Indicator: Simple Moving Average period 10
Instruments: Typically popular pairs and majors with no more than 5 pip-spread each (e.g. EURUSD, EURGBP etc.)
Entry condition: There must be a strong bullish market or a bearish market (stay away from a sideways market)
Entry rule: When the price is trending northwards and the SMA 10 is sloping along, enter a long trade as soon as the price pulls back and touches the SMA 10. Reverse the logic for a bearish market.
Best trading days: Tuesdays, Wednesdays and Thursdays (but could be used on Mondays and Fridays)
Position size: 0.02 lots for each $1000 (or 0.01 lots for each $500)
Stop loss: 15 pips
Take profit: 45 pips
Trailing stop: You can lock about 15 pips of your trade if you’ve made around 30 pips in profit
Exit rule: You exit when your stop is hit or your trailing stop is hit or your take profit is hit or when the maximum trading duration expires.
Risk-to-reward ratio: 1:3
Maximum trading duration: 12 hours
Worst-case scenario: Stop trading for the week if you go down more than 5% of your current balance. This may mean the week isn’t favorable to the system
Survival possibility: Long-term survival is possible with 35% hit rate

Trade Example
We’d be able to show only one example here, for limited space and time. This is a typical instance in which a trade was managed with discipline. Please see the chart that comes with this strategy. Here on the GBPUSD 5-minute time horizon, the red vertical line on the left shows where the trade was entered while the red vertical line on the right shows where it was exited. In this example, the spread was not considered. On January 21, 2013, there was already a short-term downtrend on the Cable, as the SMA 10 was sloping downwards. In the afternoon, the price (which had previously closed and trended below the SMA 10) retraced upwards and touched the SMA 10. A short trade was opened, after which the market moved sideways. Later it moved downwards – not in a straight manner – and eventually hit the target. Please note that the trailing stop was used in this example. Besides, it’s imperative that we stick to our trading plan, no matter what the market does.
Instrument: GBPUSD
Order: Sell
Entry date: January 21, 2013
Entry price: 1.58600
Stop loss: 1.58750
Take profit: 1.58150
Trailing stop: 1.58450
Exit price: 1.58150
Status: closed
Profit/loss: 45 pips

This is one best-case example for this trading methodology. However, there is a fact: the money and risk management recommendation that comes with the system would ensure your survival with less than 50% accuracy. Any advanced trader would easily comprehend what is meant by this. Can we predetermine how many trades we can win or lose? Certainly not. It’s nice to think we can win all our trades, but that isn’t realistic. The Holy Grail would cause one person to have an undue advantage over all other traders. If you’d a system that can never lose, then you’d quickly have all the money in the world. Once again, this isn’t realistic.

Conclusion: It’s our hope that this simple strategy would bring improvement to your trading experience as you make more than you lose. We’re determined to continue providing good trading methodology of enlightening and appealing positive expectancy – in Forex and other types of financial markets – to benefit our many readers who acknowledge the potential in trading and who want to benefit from activities in the markets.

This piece is concluded with a quote below:

“Actually, when you are in the markets, every blemish, weakness and character flaw in your personality will be challenged, called out and tested.  Now, that doesn’t mean that the markets are doing that to you.  On the contrary, the markets have no intention for you; there are no rewards, punishments, pain or risk in the markets, only consequences.” - Dr. Woody Johnson

Disclosure: This article is only for education purposes only, and is not a trading recommendation. It was written as what the author was doing, not what he wants others to do. There is risk of loss in trading.

1 comment:

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