Sayamoza Move Forex Market

Not risking too much money on any given trade is essential for day traders. Unfortunately, when most people start day trading, they do not think about the risk that they are taking - only about the potential rewards.

Every day trading strategy must take into consideration the maximum percentage of the total trading capital that should be risked in any one transaction. In fact, a day trader's ability to limit his losses is just as important (or even more important) as his success in managing winning trades.

Think about it. If a trader losses a small amount on every transaction, won't he stay in the game a lot longer? Taking huge losses is one of the primary reasons why so many traders don't survive in this business. Why do traders commit financial suicide this way, you may ask? If all big losses start small, shouldn't it be easy to prevent a small loss from becoming unmanageable? The answer is "YES".

Limiting losses when day trading involves a lot of common sense. To begin with, I don't think any trader should risk more than 2% to 5% of his trading capital on any given trade. Why? If a trader sticks to a 1% to 2% maximum loss guideline, his chances of staying in the game are greatly increased because it will take many consecutive losses to wipe him out and he will have more opportunities available to him.

If a trader will be trading a $10,000 account, he should not lose more than $100 to $200 (1% to 2%) on every position taken. Using the same reasoning, if we are dealing with a trading account that's $100,000 in size, the maximum allowable loss can be increased to $1,000 or $2,000 per trade. Based on these percentages and on the amount the price can move against the trader (determined from the charts), he can calculate the maximum size his position should have. This becomes much clearer with an example:

Position Sizing Example using Currencies:

Assume that an investor can trade a lot of 100,000 USD with a 2,000 USD deposit (50 to 1 leverage) and that he has $10,000 in an account. With this account size, he can trade a maximum of 5 lots (5 x 2000 margin deposit = 10,000), but is this a wise thing to do? Let's look into this a little further.

Let's say that based on his trading strategy, the day trader analyzes the chart and determines that in order for him to take a long position with a potential reward of $800 per lot, he must be willing to lose $200 per lot. He realizes that if he takes a 5-lot position and all goes well, he could have a gain of $4000 or 40% (5 lots x $800 per lot = $4,000). Using a position size of 5 lots would also require that he be willing to lose $1,000 (5 lots x $200 per lot = $1,000). Should he take the trade? Not with 5 lots!!!

A loss of $1,000 represents 10% of his trading capital! How long will anyone be in business after a few consecutive 10% loses? In this example, his maximum position size should only be one lot. With one lot, he will be risking $200 (2% of his account size) to make $800 (8% return). While it might be tempting to try to make the $4,000 on one trade, I don't think it is a smart thing to do. Trading is all about your probability of survival. To survive, you cannot risk more than you can afford. Risking too much is not smart money management.

*In general, day traders with less than $10,000 should consider trading with a mini account. A forex mini account can be opened with as little as a few hundred dollars.

Risk in day trading (or in any other form of speculation) must be controlled. One effective way of managing risk in trading is by not taking on a position larger than an account of a given size can handle. While some authors and "experts" have complicated ways of determining position size, these methods tend to confuse traders and slow them down. The 1% to 2% guideline simpler to use in my opinion. It is common sense more than anything else. Don't become another day trading statistic - limit your losses all the time with protective stop orders!

Please note that stop orders do not guarantee you'll get filled at your stop price. If the market gaps against you or there's not enough liquidity in the market at the time your stop is supposed to get hit, your exit price can be a lot worse than you expected. This is true for any market.

Price Behavior and analyzing Price Structure are some of the most important aspects of Technical Analysis and of trading, and yet they are the most overlooked. Understanding Price Behavior and Structure will put the ODDS on the trader’s side so that he can make better decisions, trade more successfully and with better results.

Today, more and more traders and sophisticated investors use some type of technical application that he or she use in their investment or trading decisions.  Trading has become a function of taking “buy” and “sell” signals off technical indicators rather than applying the basic principles of Technical Analysis and the study of price behavior and chart structure.

Take a look at figure 1 and figure 2 and try to decide which would be the high probability trade? Should we Buy? Or Sell?


How to study Price Behavior and Structure?

There several rules and as simple as they may seem, they are the tenants of technical analysis

1. The Market is a discounting mechanism, events are usually discounted in advance with movements likely the result of the so called “Smart Money” or the “informed” buyers and sellers.
    
2. Price moves in trends, trends move in waves – we have “impulse” waves in the direction of the trend, followed by “countertrend moves” better named “corrective waves”.
   
   (Just by accepting this simple truth that prices NEVER move in a straight line, you will stop trying to pick tops or bottom and view the corrections instead as an opportunity to take a trade in the direction on the trend)
    
3. Trends are created by an imbalance in supply/ demand and that moves price.
    
4. Usually, movements in the market tend to have a relationship to each other.  Price will alternate between areas where prices have been marked up to a new higher level or marked down to a lower level, and after a big move in either direction price will consolidates at that new price level  (see Fig 3)

5. Trends usually begin from low volatility sideways or contracting price zones. Trends start from an area of price equilibrium. Once there is an increase in demand, prices breakout of this equilibrium area and are bid higher or “marked up” to the next level where the market consolidates at the new equilibrium zone. ( the opposite is in a down market)
    
6. Trends do have greater odds of continuation rather than reversal. A trend in motion will tend to continue in motion until a major event takes place that would cause it to change its direction.
    
7. Trends in most cases do not change direction without giving signals or warning signs that it is about to change. These signals are usually a price patterns and sometimes accompanied by a buy or sell Climax. It takes time for a trend to change.
    
8. Momentum precedes price, this is a very important concept. I can not emphasize this enough. Momentum is what confirms the trend and it usually precedes the price. Momentum tends to accelerate as the trend develops. So if you are just looking at the chart and see momentum increasing and making new highs or new lows, the odds are that higher prices or lows will probably follow.
    
9. This breakout out of an equilibrium zone would be evidenced by increase in volatility and momentum until prices reaches the next level of equilibrium where volatility will decline and momentum will decrease.
    
10. A loss in momentum is NOT a sign of trend reversal, it is merely a pause. The loss in momentum and volatility is because buyers and sellers now agree to the new established price level or the new level of equilibrium. They will continue to buy and sell within a narrow range which is known as backing and filling, thus forming some of the known patterns like triangles, ledges, flags etc. 
     
11. The breakout in between equilibrium zones offers the trader the biggest profit potential.

Let’s go back and review the charts (fig 1 & fig 2) and let us apply what I have just mentioned above, and together let us decide which trade we should have taken?
Here are some questions we should be asking ourselves:

1. What is the market condition? Trending or consolidating?
2. Is momentum increasing or decreasing?
3. What is the major trend?
4. Do we have a Trend changing pattern and /or a buy /sell Climax?
5. Where is Support & Resistance?

We can answer the above questions?

1. Yes the market is trending up, series of higher highs and higher lows.
    
2. Yes, momentum was increasing all the way to the top. You can see that the blue price bars have bigger ranges and are more explosive in the direction of the trend, the magnitude of the price swings are bigger in the direction of the trend than the corrective swings; thus indicating that higher prices will follow.
    
3. The major trend is up.
    
4. Yes, at the top, we do have a buy climax followed by a failure of prices to make higher highs, prices then gapped down taking out support. That would be our  First signal that trend has changed and for us to go Short.

Now let us examine the next swing down Box 2 answering the same questions

1. Taking it from the Top – we had a buying Climax followed by a Failure to make higher highs and then prices broke down through support.  The market is now trending down.
    
2. Momentum is increasing to the downside evidenced by bigger down swings and red price bars. The final push down, as you see, is indicating a loss in momentum – but that does not indicate a trend change – it could be a profit taking area for us –  and we would be still expecting  a new lower low to follow.
    
3. The trend is Down – Lower highs and lower lows.
    
4. The next swing down made a higher low and consolidated at an area marked with low volatility  - Coiling  and followed by a breakout to the upside and an increase in momentum indicating a new trend to the upside.

Now let us examine the next swing up Box 3 – apply the same rules and answering the same questions, let us see if we can choose the high probability trade

1. The market broke out of a consolidation and is trending up – Trend change is evidenced by prices failing to make a lower low. Actually making a higher low.
    
2. Momentum is now increasing to the upside, large upswings – small corrective down swings, an increase in momentum is evident on the charts.
    
3. The trend is now up. Indicating that new price highs are yet to come.
    
4. The last corrective swing down at the top of the chart is shallow, moving sideways for about 7 days; holding support.

To say the least, we have no reason whatsoever to go short, even though all the indicators (fig 2) are giving sell signals, and by the information we get from the price action I think we can all conclude that the high probability trade is to be go LONG.

See fig #7 and fig #8


It Gapped up - If you were a student of Price behavior and structure, at least you would not have shorted and if you were long would stayed in your position

As you see by studying the price behavioral and applying the principals of technical analysis you would have been on the right side of the market and would have also taken several profitable trades.  And if you choose to use some technical indicators, they should be used as tools to confirm your trading decision rather depending solely on them to initiate a trade.

I am attaching more charts in different markets to show you that the same type of analysis and rules do apply in all markets and on any time frame


Simply taking trading signals off an indicator, or analyzing several indicators at the same time usually would have a negative effect on trader’s bottom line.

It is very important that you to be able to make a trading decision based on your observations of the price action and by what you see on the chart. There is a great deal of information you can derive from the charts that will put the odds on your side and add to your confidence level and you will have a reason to get into a trade and stay in it  longer – give it more room - if you so choose.

And if prices do not act in the way you expect them to act, then get out of the trade and re-study the chart. Take in the Big Picture; Make sure that you have enough price data on your charts.

Let me emphasize NO one knows where the next tick in price is going to be. Our job as traders is to put the odds on our side and to Identify and Quantify our risk; i.e. where is my exit on that trade if I am wrong? And then decide if that level of risk is acceptable to me.

On many occasions I always say, "We need to emphasize that the key to making money is to minimize risk and take a small loss, try to never take large losses and laid the chance on your side."

Profits will then take care of themselves.

Let’s get into my favorite part of trading... creating my own trading system! 

Whilst it is critical to have the right trading mindset and risk management, at the end of the day, you still need to develop a simple forex trading system, or a simple trading strategy for forex, CFD or whatever product you are trading. For short term trading of this nature, primarily this is using technical analysis.

You only need to master one trading setup to be a consistently profitable trader. Screen time (in other words, watching the screen and prices move) will allow you to master one setup and after this, you can perhaps add another setup to your repertoire. This can be an ongoing process developing your own style.

In this section we'll you a rough picture of what a trading system should look like. This should give you an idea of what you should be looking for when you develop your system.

Trading Setup

• Trade on daily chart (swing trading)
• 5 SMA applied to the close
• 10 SMA applied to the close
• Stochastic (14,3,3)
• RSI (9)

Trading Rules

1. Entry Rules
   1. Enter long if:
      • The 5 EMA crosses above the 10 EMA and both stochastic lines are heading up (do not enter if the stochastic lines are already in the overbought territory) .
      • RSI is greater than 50 .
   2. Enter short if:
      • The 5 EMA crosses below the 10 EMA and both stochastic lines are heading down (do not enter if the stochastic lines are already in oversold territory) .
      • RSI is less than 50 .
2. Exit Rules
   • Exit when the 5 EMA crosses the 10 EMA in the opposite direction of your trade OR if RSI crosses back to 50 .
   • Exit when trade hits stop loss of 100 pips .

Okay, let's take a look at some charts and see this strategy in action...

The "So Easy it's Ridiculous" System

As you can see, we have all the components of a good trading system.

First, we've decided that this is a swing trading system, and that we will trade on a daily chart. Next, we use moving averages to help us identify a new trend as early as possible.

The Stochastic help us determine if it's still ok for us to enter a trade after a moving average crossover, and it also helps us avoid oversold and overbought areas. The RSI is an extra confirmation tool that helps us determine the strength of our trend.

After figuring out our trade setup, we then determined our risk for each trade. For this system, we are willing to risk 100 pips on each trade. Usually, the higher the time frame, the more pips you should be willing to risk because your gains will typically be larger than if you were to trade on a smaller time frame.

Next, we clearly defined our entry and exit rules. At this point, we would begin the testing phase by starting with manual back tests.

Here's an example of a long trade setup:


If we went back in time and looked at this chart, we would see that according to our system rules, this would be a good time to go long.

To backtest, you would write down at what price you would've entered, your stop loss, and your exit strategy. Then you would move the chart one candle at a time to see how the trade unfolds.


In this particular case, you would've made some decent pips! You could've bought yourself something nice after this trade!

You can see that when the moving averages cross in the opposite direction, it was a good time for us to exit. Of course, not all your trades will look this sexy. Some will look like ugly heifers, but you should always remember to stay disciplined and stick to your trading system rules.

Here's an example of a short entry order for the "So Easy It's Ridiculous" system.


We can see that our criteria is met, as there was a moving average crossover, the Stochastic was showing downward momentum and not yet in oversold territory, and RSI was less than 50.

At this point we would enter short. Now we would record our entry price, our stop loss and exit strategy, and then move the chart forward one candle at a time to see what happens.

You can see that we would’ve stayed in this trade until the moving averages crossed again and RSI went back to 50.


As it turns out, the trend was pretty strong and pair dropped almost 800 pips before another crossover was made! Now isn't that ridiculously easy?

We know you're probably thinking that this system is too simple to be profitable. Well the truth is that it is simple. You shouldn't be scared of something that's simple. In fact, there is an acronym that you will often see in the trading world called KISS. It stands for Keep It Simple Stupid! It basically means that trading systems don't have to be complicated. You don't have to have a zillion indicators on your chart. In fact, keeping it simple will give you less of a headache.

The most important thing is discipline. We can't stress it enough. Well, yes we can. YOU MUST ALWAYS STICK TO YOUR TRADING SYSTEM RULES! If you have tested your system thoroughly through back testing and by trading it live on a demo for at least 2 months, then you should feel confident enough to know that as long as you follow your rules, you will end up profitable in the long run.

Trust your system and trust yourself!

Summary: Creating Your Own Trading System

There are many systems out there that work, but many traders lack the discipline to follow the rules and as a result, still end up losing money.

Your trading system should attempt to accomplish 2 goals:

1. Be able to identify a trend as early as possible.
2. Be able to find ways to avoid whipsaws (confirm your trend).

If it is profitable, then you trade your system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually backtesting.

Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!

There are 6 steps to developing your system:

1. Find your time frame.
2. Find indicators to help you identify trends early.
3. Find indicators to help you avoid whipsaws and confirm your trend.
4. Define your risk.
5. Define your entry and exit.
6. Write your trading system rules down and ALWAYS stick to those rules!

There are 3 phases to testing your system:

1. Go back and time and move your chart forward one candle at a time. Trade your system according to its rules and record your trades to see if it ends up being profitable. This is called backtesting.
    
2. If it is profitable, then you trade your system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually back testing.
    
3. Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!

Make a decision to be successful right now. Most people never decide to be wealthy and that is why they retire poor - Brian Tracy

The main focus of this article is to guide you through the process of developing your system. While it doesn't take long to come up with a system, it does take some time to extensively test it. So be patient; in the long run, a good system can potentially make you a lot of money.

Step 1: Timeframe

The first thing you need to decide when creating your system is what kind of trader you are.

Are you a day trader or a swing trader? Do you like looking at charts every day, every week, every month, or even every year? How long do you want to hold on to your positions?

This will help determine which time frame you will use to trade. Even though you will still look at multiple time frames, this will be the main time frame you will use when looking for a trade signal.

Step 2: Find indicators that help identify a new trend.

Since one of our goals is to identify trends as early as possible, we should use indicators that can accomplish this. Moving averages are one of the most popular indicators that traders use to help them identify a trend.

Specifically, they will use 2 moving averages (one slow and one fast) and wait until the fast one crosses over or under the slow one. This is the basis for what's known as a "moving average crossover" system.

In its simplest form, moving average crossovers are the fastest ways to identify new trends. It is also the easiest way to spot a new trend.

Of course there are many other ways traders' spot trends, but moving averages are one of the easiest to use.

Step 3: Find indicators that help confirm the trend.

Our second goal for our system is to have the ability to avoid whipsaws, meaning that we don't want to be caught in a "false" trend. The way we do this is by making sure that when we see a signal for a new trend, we can confirm it by using other indicators.

There are many good indicators for confirming trends, but I really likes MACD, Stochastics, and RSI. As you become more familiar with various indicators, you will find ones that you prefer over others, and can incorporate those into your system.

Step 4: Define your risk

When developing your system, it is very important that you define how much you are willing to lose on each trade. Not many people like to talk about losing, but in actuality, a good trader thinks about what he or she could potentially lose BEFORE thinking about how much he or she can win.

The amount you are willing to lose will be different than everyone else. You have to decide how much room is enough to give your trade some breathing space, but at the same time, not risk too much on one trade. You'll learn more about money management in a later lesson. Money management plays a big role in how much you should risk in a single trade.

Step 5: Define entries & exits

Once you define how much you are willing to lose on a trade, your next step is to find out where you will enter and exit a trade in order to get the most profit.

Some people like to enter as soon as all of their indicators match up and give a good signal, even if the candle hasn't closed. Others like to wait until the close of the candle.

In my experience, I have found that it is best to wait until a candle closes before entering.  I have been in many situations where I will be in the middle of a candle and all my indicators match up, only to find that by the close of the candle, the trade has totally reversed on me!

It's all really just a matter of trading style. Some people are more aggressive than others and you will eventually find out what kind of trader you are.

For exits, you have a few different options. One way is to trail your stop, meaning that if the price moves in your favor by 'X' amount, you move your stop by 'X' amount.

Another way to exit is to have a set target, and exit when the price hits that target. How you calculate your target is up to you. Some people choose support and resistance levels as their targets.

Others just choose to go for the same amount of pips on every trade. However you decide to calculate your target, just make sure you stick with it. Never exit early no matter what happens. Stick to your system! After all, YOU developed it!

One more way you can exit is to have a set of criteria that, when met, would signal you to exit. For example, you could make it a rule that if your indicators happen to reverse to a certain level, you would then exit out of the trade.

Step 6: Write down your system rules and follow it!

This is the most important step of creating your trading system. You MUST write your trading system rules down and ALWAYS follow it.

Discipline is one of the most important characteristics a trader must have, so you must always remember to stick to your system! No system will ever work for you if you don't stick to the rules, so remember to be disciplined.

Oh yeah, did we mention you should ALWAYS stick to your rules?

How To Test Your Trading System

The fastest way to test your system is to find a charting software package where you can go back in time and move the chart forward one candle at a time. When you move your chart forward one candle at a time, you can follow your trading system rules and take your trades accordingly.

Record your trading record, and BE HONEST with yourself! Record your wins, losses, average win, and average loss. If you are happy with your results then you can go on to the next stage of testing: trading live on a demo account.

Trade your new system live on a demo account for at least two months. This will give you a feel for how you can trade your system when the market is moving. Trust us, it is very different trading live than when you're backtesting.

After two months of trading live on a demo account, you will see if your system can truly stand its ground in the market. If you are still getting good results, then you can choose to trade your system live on a REAL account.

At this point, you should feel very confident with your system and feel comfortable taking trades with no hesitation.

YOU HAVE MADE IT!

Mechanical trading systems are systems that generates trade signals for a trader to take. They are called mechanical because a trader will take the trade regardless of what is happening in the markets.

In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.

If you do a simple search in Google for “forex trading systems” you will find many many people out there who claim to have the “Holy Grail” system that you can purchase for “only” a few thousand dollars. 

These systems supposedly make thousands of pips a week and never lose.  They will show you supposed “results” of their perfect system and it will make your eyeballs turn into dollar signs as you sit there and say to yourself, “wow I can make all this money if I just give this guy $3,000.  Besides, if his system making thousands of pips a week, I’ll be able to make my money back in no time.”

There are some things you should know before you give them your credit card number and make that impulse buy.

• The truth is that many of these systems DO in fact work.  The problem is that traders lack the discipline to follow the rules that go along with the system.
   
• The second truth (there's such thing as a second truth?) is that instead of paying thousands of dollars to buy a system, you can spend your time developing your own system for free, and use that money as capital for your trading account.
   
• The third truth is that creating systems is not even that difficult.  What is difficult is following the rules that you set when you do develop your system.

There are many articles that sell systems, but I haven’t seen any that teach you how to create your own system. 

This lesson will guide you through the steps you need to take to develop a system that is right for you.  At the end of the lesson, I will give you an example of a system that I trade just so I can show you how awesome I am!  (insert evil laugh here).

Goals of your trading system

I know you’re saying, “My goal of my trading system is to make a billion dollars!”  While that is a wonderful goal, it’s not exactly the kind of goal that will make you a successful trader.

When developing your system, you want to achieve 2 very important goals:

1. Your system should be able to identify trends as early as possible.
2. Your system should be able to avoid you from whipsaws.

If you can accomplish those two things with your trading system, I GUARANTEE you will be successful. 

The hard part about those goals is that they contradict each other. 

If you have a system who's primary goals is to catch trends early, then you will probably get faked out many times. On the other hand, if you have a system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.

Your task, when developing your system, is to find a compromise between the two goals.  Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones. 

Smart money management doesn't just involve risking an appropriate amount on every trade, it also involves managing a winning trade from start to finish. This is an important part of any good trading methodology that is often overlooked by beginning and expert traders alike.

"What do I do after I enter a trade and it begins to make money?", is a question that is frequently asked by traders.

You hear so-called experts often making general comments such as "Don't let a winning trade turn into a loss" or "You'll never go broke taking a profit". These tidbits belong in the same trash can as "The trend is your friend" and other similar remarks. This general pieces of advice can do more harm than good because of their nature - THEY ARE TOO GENERAL!

A beginning trader cannot be left filling in the blanks. Everything must be defined. That is why a complete trading strategy must include specifically how winning trades will be managed until the position is closed.

The basic diagram below was provided to illustrate, in a funny way, what typically happens to traders that don't have a smart trade management plan in place. I have included the trader's thoughts (in blue) on the diagram as the trade progresses (in this example, I assumed that the trader is not completely clueless and at least has a stop loss in place. In reality, if the trader did not use a stop loss, it could have gotten a lot nastier and funnier).


Even though the example about is very basic, it does illustrate the importance of protecting existing profits by raising your stops. When the trade became profitable, instead of having left the stop at 1% below the initial entry point, the trader should have raised the stop.

The stops on different portions of the entire position could have been set at different logical points; for example, a certain amount above the initial entry point, below the point corresponding to thought number 4, below the point corresponding to thought number 5, and so on and so forth. Even though I am oversimplifying the management of these stop losses, this example demonstrates the importance of using a logical money management technique to handle winning trades.

Since one of the goals of every day trader should be to protect his trading capital, protecting profits becomes just as important as limiting losses. If you think about it, protecting profits is a way to limit losses as well. When a trader is in a winning trade, the amount of unrealized profit becomes part of the total equity of his account. Consequently, protecting profits through smart money management is equivalent to conserving the value of the trading account.

Smart money management should be a part of every trading strategy and it is something that I really stress all the time to my traders.

In day trading, a stop loss is a must. Before entering a trade, the trader must know precisely when he is getting out if the trade goes against him. For example, if a currency trading strategy calls for a stop loss to be placed below the low of the previous 30-minute bar on a long position, it must be done. A trader has to be very disciplined about this (please note that even though placing a stop loss order doesn't guarantee that you'll get filled at a certain price, I think it is still important).

When exiting a trade with a loss depends on an indicator reaching a certain value or condition, the stop loss order cannot be placed right after the trade is entered. For example, in the basic explanation of the moving average crossover strategy, a long trade is entered when the short-term moving average crosses over the long-term moving average and it is exited and reversed (short trade established) when the short-term moving average crosses below the long-term one. Consequently, in a strategy like this a trader has to wait for a crossover before exiting a position.

There are some other strategies where the exit point from a losing trade is a fixed amount or is based on a preexisting level on the chart. For example, if I was using a day trading strategy where the exit point for a long trade due to a loss was one cent below the low of the previous 15-minute candle, then I could place a stop loss order right after I would enter the trade. Let's say that I bought 1 lot of EUR/USD at $1.2520 and that the low of the previous 15-minute candle was 1.2505. Right after buying the 1 lot I would instantly place a sell stop order at 1.2504 (one cent below the low of the previous 15-minute candle). Thus, my stop would be in place at 1.2504 and if the stock came down, I will exit at a price near 1.2504.

The reason why I like this type of strategy is because by forcing himself to place a stop loss order every time after entering a trade, a trader will be building discipline and learning to treat losses just like gains (becoming emotionally detached from his trades). By physically placing the stop, a trader won't run the risk of holding a losing position too long due to the use of discretion or because of fear.

An effective strategy must be very clear on where stops will be placed to limit a loss and all traders should learn how to use proper stop loss placement techniques.

Since trading capital is the lifeblood of a day trader, he must protect every ounce it. The best way to do this is by knowing before entering where his exit point will be. Not only should the trading strategy provide the trader an entry with a higher probability of making money, but also with strategic and specific points to limit losses. These stops should keep the losses from bad trades at a manageable level and also be flexible enough to give winning trades room to grow.

In my trading and risk management article I suggest how much you should risk on each trade and how big your trading positions should be.

A day trading strategy must include entry and exit signals; in other words, when to get into a position and when to get out of it.

The entry signal has to be specific and must include the conditions that must be met in order to enter a trade. For example, when Condition A, B, C, ... , etc. are met, enter the trade. These conditions must be as objective as possible. For example, specific conditions can be "buy or sell when the currency breaks the highest price of the previous 30 minutes or the lowest price of the prior 60 minutes respectively" or "buy when the price of a currency goes 15 pips above its 19-period moving average." These are quantifiable events. They can be measured.

The condition, "buy when the price of the currency is trending up", is not specific enough. It does not specify what "trending up" means. How can you trade based on a signal that you don't know exactly what it means? Generalities like these are what cause traders to lose money.

After the day trading system being used generates an entry signal and a position is taken, the exit conditions also have to be known; in other words, when the position will be closed. The closing of the position can either be when the desired profit is realized or when the maximum allowable loss is reached (on article Stop Loss Placement, I discuss this in greater detail).

The strategy has to define exactly when the trader will realize his profit and look for another trade. If the profit condition is met, the day trader MUST exit. He cannot use discretion and try to guess if the profit will be more or less than usual - he MUST follow his own rules! To minimize the probability of getting out of a winning position too early, the strategy can use multiple exit signals for different parts of the whole position; for example, instead of selling the 300,000 Euro - U. S. Dollar position all at once, the trader can sell one lot (100,000) at a time based on specific conditions as the trade progresses.

Even though it would be great if every trade was successful, the trader has to be prepared for a reality of trading: losing. Consequently, the day trader must know [based on his strategy] exactly when to exit a trade if it goes against him.

A complete system must pinpoint where on the chart the trader must take his loss. This could be when the price of a currency breaks a technical support or resistance level on the chart (the high or low price during a period of time - the last day, the last 10 minutes, the last hour, etc.), when an indicator reaches an extreme value, or a combination of conditions. Again, these signals have to be quantifiable and not subjective ("when I see the price starting to stall" is not a good enough signal).

BEFORE the trader even enters a trade, he must know where the exit point will be. This is essential to build trading discipline and to make sure that the trader will reduce his overall risk. This is discussed in more detail in the Stop Loss Placement article.

If a trader gets a buy signal based on his strategy, but the logical place to limit his loss on the chart represents a loss that is too big for his account, he should not enter the trade. Thus, he must make sure that every trade that he takes is within the maximum allowable loss according to his system. Controlling the amount of risk that he takes is of paramount importance to his trading survival. This is discussed in greater detail in the Trading And Risk Management article.

How a trader manages his position after entering a trade is explained in the Smart Money Management article.

I fell that a well-defined strategy is essential in day trading. Without a specific system, traders are like soldiers without a mission. The strategy has to specify when to get in and when to get out of a position. Every step that a trader must take has to be spelled out because generalities in day trading are a disaster waiting to happen (pardon the cliché).

Many of my novice trades are surprised when they hear statistics that claim that over 80% of day traders lose money. They incorrectly conclude that day trading is a loser's game. To me, day trading is a BUSINESS - not a game. It is no different than the many small businesses that are formed every year. Statistics say that about 80% of new businesses go bankrupt in their first two years of existence.

Why is this? - It could be because most new entrepreneurs are not properly equipped to run the operations they start. Whether it is due to a lack of enough practical experience or a lack of understanding of the risks and inner workings of the business, many are probably not prepared to operate the business. They likely start a business out of impulse, thinking only about the great potential rewards that lie ahead.

Since day trading is a business too, most people that start doing it also fail to prepare themselves properly before beginning. Without plenty of learning and practice, most day traders simply become another small business statistic.

So what kind of strategy do I need to learn to day trade, you ask? There are many out there.

You are constantly being bombarded by internet, TV, and print advertising from gurus that want to sell you their "secret" trading system. Since most people are looking for shortcuts ("secrets") all the time, they wind up buying these magical systems or courses, sometimes spending thousands of dollars in the process. Eventually, they find out the hard way that these secret methods probably don't work and give up day trading altogether

The reality is that there are many different strategies that day traders can use that might work. What I feel is important is that the strategy be as well defined and as objective as possible; in other words "if this specific condition happens, then take this specific action (OBJECTIVE)," rather than, "analyze the market and get a feel for it before placing your order (SUBJECTIVE)" or, "based on your interpretation of what Bernanke (or some other important person) says about the economy, place your order (SUBJECTIVE)."

Many that use a subjective strategy might wind up making the wrong decision or staying in a trade too long because they reach a "logical" conclusion, but the market acts "illogically."

Many of these "logical" strategy traders try to determine where the market is going, instead of reacting to what the market IS doing (I will discuss this later).

What should be defined in a trading strategy?

1. Entry and Exit Signal
2. Stop Loss Placement
3. Smart Money Management

Remember that these three articles of a strategy have to be as specific as possible and they have to make sense. A day trader cannot be thinking in the middle of a trade, "Where will I place my stops this time?" or "I wonder if I should be buying or selling now?" This has to be clearly defined by the system being used so that the day trader is simply following a set of conditions in any given market situation. When this is accomplished, every new position that the trader enters or exits builds the discipline he needs to survive.

Mastery of the day trading strategy will come over time, as the trader learns to apply it with precision and consistency. That is why it is also important that the strategy [at first] be simple enough to apply without having a Ph.D. from MIT.

When the strategy has too many indicators and conditions, a novice day trader can be easily confused, and a confused trader has a lower chance of executing successful trades. A trader also has to make sure that he's applying all the steps of the strategy correctly. The problem is that many traders tend to shift their style and start changing the strategy or abandon it altogether before they have even mastered it - a very common and costly mistake.

In my opinion, only highly experienced day traders should start experimenting with strategy modifications - but the great majority of traders should first execute the strategies they learn without any modifications (like a soldier following orders - ATTENTION!!!).

In the risk management article you will learn guidelines on how much money should be risked on each trade and how big your positions should be (an essential part of trading).

Due to the continuous growth in the forex market nowadays, more and more forex signals provider can be seen everywhere, especially on the internet. Although forex signals is quite a common term in the forex market, some may have unheard about it. Actually, forex signals are signals generated by a certain signal provider for their customer indicating to the forex traders whether they should buy or sell their currencies in the forex market.

In the actual reality, there has been a lot of dispute and debates going on regarding the reliability of the forex signals in forex trading.

First of all, one may wonder how all this buying and selling signals are generated in the first place? Many of the forex signal providers claimed that they utilize an advance method to analyze the flow of the forex market and in addition to that, some even claimed that they generated their buying and selling signals based on insider’s information. This is a signalling approach where an insider has access to information not available to the market. This in term means that, moves made by insider can signal information to the traders outside and thereby, changing the exchange rate in forex market.

On top of all this, there is one major question regarding all these forex signal providers. If their buying and selling signals are as good or as accurate as they claim it to be, why wouldn’t they get involve in the forex trading using all of the resources they have in the first place. There is no obvious or reason given regarding this matter as we all know where the profit generated from forex trading with the aid of leveraging is far more greater than the profit generated from providing trade signals.

Regardless of all the negative comments about forex signals, there are still a few reliable sources of forex signals provider in the market. This is because for these trustworthy forex signals provider, their signals are generated using a known method and is being constantly monitored by financial experts. Actually, some of the newly established signals provider joined in the rank of providing signals in order to earn some fast profit (such as registration and subscription fees from their customers) without setting up a proper foundation and as a result of that, most of the forex signal providers are getting a bad name due to these bad apples.

Practically, a forex trader shouldn’t rely fully on the forex trading signals itself. In fact, they should first draft out a strategy for their trading, and only after that, they should use the trading signals as a guideline. This is because by doing so, the forex trader will know where is the limit of his profit and when to look for another trade. In addition to that, the forex trader can use the entry and exit signals (buy and sell) as a reference as to when he should start buying and selling his currencies. Sometimes, as the signals are not fully reliable, a trader may end up selling or buying another currencies when he is on a winning streak and in order to counter this problem, most experts would recommend a multiple exit signals where for example, instead of selling all of the currencies in one go, it can be split to a few proportion and trade them off individually according to the signal.

In reality, there is no absolute winning method in forex trading as some of the forex signals provider claimed, in order for one to gain the most out of their investment, it is most advisable where the trader himself must first draft out a proper investment strategy (time, funds and others) and abide by the investment plan he had draught. After all, the hardest thing to overcome in trading is one’s own mind and thoughts.

What do you think about day trading signals?

Let me answer a question with a question. Do you want to learn how to become a day trader or do you want to be an order taker? When you rely on entry and exit signals from a program or a company, you are simply taking orders — you are not learning how to determine where to get in and where to get out yourself. You are not evolving as a trader. Why do people so desperately look for trading signals then? Because they want to have their cake and eat it too.

Many of these signal lovers want to be told what to do, but also want to feel in control. Placing the orders makes them feel like traders, but the day trading signals give them a fake sense of security — since they are acting on "professional" or "privileged" information.

When you are day trading, you need to react on information in an instant. When you are waiting for a signal before buying or selling, there is a reaction delay that can cause you to leave some money on the table. Furthermore, if the day trading signals you are relying on are so great, why doesn't the company that sells them to you offer them as an automated package? Why would the signal company reduce the effectiveness of the signals by allowing you to press the trigger and possibly mess everything up? It's silly. Don't rely on signals for day trading. Learn how to trade. There is no other way.

Day trading signals advise

Personally, I will say do not pay for forex signals. Think about it — if a forex signals provider sells forex signals for living, you can doubt their forex trading skills? or else if they are pretty good in forex trading and making lot's of profit, I am wondering why do they still bother to sell forex signals for money. Thus, what would be the value of such forex signals providers? The answer is ZERO.

There are forex traders who have been relying on forex signals arguing those forex signals providers really help them making money in forex trading. These forex traders can even show their forex trading logs as evidence. After some though, I came out with the assumption that assuming I am the owner of a forex signals provider, in order for my business to be in black, obviously I need some satisfying customers. If I have 100 new customers this month, I send out buy signal for the 50 of my new customers while the another half with sell signal. At the end, I will able to have "some satisfying customers". Finally, free advertising and testimonial will be made available.

If you are really new into forex trading, it's better for you to sign up a demo forex trading account from any forex brokers and try some practice trades for a few months. This will give you insight into how the forex market behaves. Then only deposit a small amount of money to get a real feel. There are great differences between demo trading and real trading due to personal trading psychology.

Final words, if you really wish to buy forex signals from a forex signal provider, make sure they have got an audited results and do provide a free trial over a substantial period.

if you decide not to use the trading signals from a signal provider, you can browse the Internet, use the keyword "free trading signal". Testing every signal/prediction that you take from the internet and evaluate the results. after that follow the free signal more in line with market conditions.

To provide a description and ideas on how to trade. On this page and the next page you will find different types of trading strategies. I hope these examples trading strategies can provide inspiration to you to get an idea of profitable trading, or idea for creating your own trading strategy.

Recently, a close friend of mine who knows me for years admitted to me that he lost over $21,000 on forex market in less than three months time. Well, there would be nothing strange about it if there wasn't one very important fact. He is my friend and he knows that I'm a forex trader. I asked him why didn't he consult me when he was starting, actually I was very disappointed that he hid from me the fact that he was involved in forex. He told me that every time he heard me talking about forex, I was always using words such as "hard", "stressful", "dangerous"... He said that he didn't like to hear those words.

So one evening he was surfing the web and he stumbled upon one site that he says "stood out". Everything that he read on that site was completely opposite of anything that he heard from me. "Forex trading is easy...", "Anyone can do it with just a little bit of effort...", "You can quit your day job...". And he was hooked. He bought their system and opened demo account. His demo account was set at $50,000, few lucky trades over the next four weeks and his demo account grew to $78,000. Wow! Twenty eight thousand dollars in four weeks. As any other beginner he was thrilled. He withdrew $10,000 from his hard earned savings account and he was all set to accomplish his dreams.

However, very soon he realized that trading for real money and trading demo account have nothing in common. When real money got at stake, he became different person. Nervous, scared, he took his profits way too early and stayed in losing trades far more than he was supposed to. His money was melting before his eyes! He added another $5,000. Then he borrowed another ten thousand from his line of credit. He came to me when he was down to the last three thousand and nine hundred dollars.

What was the first advice that I gave to my friend

After spending a few hours talking to him, reviewing his system and listening to his trading experiences I came to the following conclusions.

There were THREE MAJOR problems with his trading method:

1. His Trading "System"

- His system was producing way too many entry signals

The efficiency (profitability) of the system is not based on the QUANTITY of signals that it produces. It is based on the QUALITY of entry signals that it produces. The entry signal needs to put probability of a trade moving into your desired direction on YOUR side. His signals were working AGAINST him.

- His system was relying on lagging indicators

Most of the indicators that his system was using were so called lagging indicators. Basically, it means that he was always the last one to enter a profitable trade and the last one to get out of a losing trade.

- His system was not clearly defined

The system needs to have a clear set of entry and exit rules. It can not be left up to the trader's discretion to decide when to enter the trade and when to get out. In the real, professional system, you MUST enter the trade when the signal occurs, because that is where your winning edge is in the long run.

2. His Mind Set

- He was always stressed out when his real money was inside the trade

You can not and should not trade with "scared" money. You can only trade with the money that you can afford to lose. That will make you calm and therefore less likely to make a bad judgment.

- He was getting out of winning trades too early

Even when his entry signals were good he was not able to extract maximum profit from them. The MANTRA is "let your profits run". It is not "cut your profits short". You need to extract MAXIMUM profit from EVERY single trade in order to be profitable in the long run.

3. He did not pay attention to SENTIMENT

The forex market sentiment is the "collective" and intuitive opinion or better to say "gut feeling" that is formed inside the forex trading community regarding the future direction of a given currency pair (EUR/USD, USD/CAD, GBP/USD, etc..). I'm sure that all of you who are already involved in the forex market have noticed  that sometimes, when market sentiment is negative for the particular currency, even the best news can do nothing more than temporarily stop the negative  direction of that currency.

For example, let's say that current opinion is that Central  Bank will rise interest rates by .25 points on the next meeting. And they actually raise it by .50 points. If the sentiment for that particular currency was bullish or even  neutral, it would definitely trigger that particular currency to go higher. However, if the sentiment was negative, all that would happen is that sell off of that currency would stop for short period of time and then it would resume.

So, why is the sentiment important?

Sentiment is by far the most important tool at the hands of forex trader. Why is it so? Because it gives to the forex trader a clue when NOT to take particular trading signal. The power of successful forex trader is to know when NOT to participate in the trade.

How this applies to you?

Let's say that you own a trading strategy that generates either bullish or bearish signals for the particular currency pair. Sentiment will help you determine whether to take the signal or to stay on the sidelines. If the signal is bearish but current sentiment is bullish, you DO NOT take the signal. If the signal is bullish but current sentiment is bearish, you DO NOT take the signal. You only take the signal if it is confirmed by current sentiment.

I hope that you have learned something from my friend's mistakes.

A Chart About Greed, Panic and Fear

When you're starting out, one of things you discover is that only a few forex traders actually scoop profits out of the market consistently. Just a tiny minority. Everyone else is losing, or just breaking even.

So what's their secret?

Do winning forex traders have some special talent?

Have they found some inside knowledge and locked the rest of us out?

Do they have a knack of thinking "positive" or thinking "winning"?

Are their computer more powerful and their trading software more sophisticated?

What is it?

Well... it's none of the above!

Let's have a look at the figure below.



Let's discuss for moment a chart about greed, panic and fear that you just saw above.

The typical beginner trader moves with the "herd".

He sees a rally, doesn't want to be left out, and enters the market at point A.

However, by then, winning traders, who were in earlier, start to cash in on their profits and the rally loses steam.

So the beginner's position falls. His money is dissolving before his eyes!

Either he panics and gets out at point B, when he can't bear the pain any more. Or, if he somehow manages to stay in long enough to see the next rally, he leaves at point C, relieved to recover at least some of his losses.

This is exactly the kind of "herd" trader that successful traders prey upon.

But actually the beginner also lost at point C.

Because during that exact same move the winning traders had leveraged their trading capital, entered and exited at the optimum times, and stuffed their accounts with profits!

If you want to learn how to enter and leave like the winners do, you should keep reading.