Saturday, June 4, 2011
Determining Your Risk When Spread Betting The Forex Markets
Many people trade the forex markets using a traditional forex broker, but I am well aware that lots of people, particularly here in the UK, like to trade using a spread betting company instead. I nearly always trade this way and it's a fairly simple way to trade because you don't need to worry about lots or anything like that. You simply choose your stake, ie £1 or £10 per point for instance, and enter your position long or short.
Anyway in this article I want to discuss how you can determine your risk when spread betting the forex markets, and subsequently how much you should be staking per point. It is quite straight forward, but it can be slightly difficult if you are new to spread betting.
The first thing you need to do is to determine how much of your account you are prepared to risk per trade. The common advice is to risk no more than 2-3% per trade, and I myself rarely risk any more than this except on very rare occasions where I am extremely confident about a particular position.
So let's assume that you have £5000 in your spread betting account and you are prepared to risk 3% per trade. Your maximum loss from this trade is therefore £150 (3% of £5000).
The next step is to look at your stop loss for this particular set-up. If you are planning to enter a position with a stop loss set at 50 points, then your stake would be £3 per point because 50 points @ £3 per point would give you a maximum loss of £150, which is the 3% that you were prepared to risk on this trade.
Similarly if you intend placing a stop loss just 15 points away, then you would therefore be looking to enter a position at £10 per point to give you the same maximum loss of £150.
Of course there is always the chance that you may not be automatically closed out at this exact stop loss due to slippage, in which case your loss may be slightly more than £150. However you can hopefully see the point I am trying to make.
In summary then, if you want to determine your risk when spread betting, you simply work out how much you are prepared to lose based on a percentage of your capital, and then determine how many points away you are going to place your stop loss. You can then work out your stake per point fairly easily and enter your trade.
Forex Day Trading Using Price Action And Pivot Points
Today I want to talk about how you can day trade the forex markets using nothing more than price action and pivot points. I sometimes visit a few trading forums and often come across some really complicated trading systems that use many different indicators. However the fact is that you can do just as well stripping away all of these indicators and just following price action, using pivot points for additional guidance.
So you basically want to set up a basic 5 minute candlestick chart and add pivot points to this chart.
Then if you simply study these charts really closely on a daily basis for the major currency pairs, you should start to see the same sort of patterns reoccurring, and you will soon have enough confidence to start opening and closing positions.
I actually placed a few trades today on the GBP/USD pair earlier today, which will hopefully show you my own thought processes when trading these shorter time frames. First of all let me show you the chart:
I should point out that I will only consider trading the 5 minute chart if the overnight trading range is small (in comparison to the average daily range) . Luckily this was the case today.
The overnight trading range between 12.00 and 08.00 (UK time) was approximately 40 points, compared to a daily average of around 120 points (according to the Average True Range indicator on the daily chart). This means that there was always likely to be a decent sized breakout either upwards or downwards at some point during the day, so there were plenty of points available.
You can see from the chart that there were 4 points of interest:
FALSE BREAKOUT - The price broke down through the pivot point and closed below the overnight trading range (as indicated by the blue lines) just before 8.00. So this was a high probability trade and a great opportunity to go short. However after opening a short position at 1.6139, it turned out to be a false breakout and I closed out for -14 points after the price closed back above the pivot point.
INITIAL UPWARD BREAKOUT - After looking as if it might have another crack at breaking downwards, the price then moved sharply higher and closed above the overnight trading range. At which point you basically have two options. You can either enter a long position and hope that the breakout continues, or you can wait for confirmation. I personally went long straight away at 1.6198 after the breakout candle closed.
CONFIRMATION BREAKOUT - There was then a short period of consolidation followed by a confirmation breakout. So if you hadn't already entered a long position on the initial breakout, you could have taken a long position with more confidence at this point.
CLOSE POSITION - The obvious exit point for this trade was always going to be the first line of resistance, ie R1, and you can see that the price just about touched this resistance level at around 1.6241 before falling back downwards again. So in the end I banked a profit of 43 points from this particular trade.
Of course if you subtract the spreads and the loss from the false breakout earlier, the total profit is only around 23 points. However it was still a profitable trading day overall, and hopefully you can see how easy it can be to bank a decent profit on days like today when the overnight trading range is relatively small.
Should You Use Multiple Time Frames When Trading Forex?
In today's article I want to talk about the merits of using multiple time frames to trade the various different forex pairs. If you go to some of the forex forums and check out the different strategies that people use, you will find that some prefer to use just one time frame, whilst others prefer to use two, three or four different time frames. So how many time frames should you use?
Well the short answer is that you can potentially make money from forex trading using however many time frames you want. There is no right or wrong approach in my opinion.
You may automatically assume that you are more likely to make winning trades using multiple time frames because you can find pairs that are trending in the same direction on each of these time frames, and then pinpoint your entry point on the shortest of those time frames. For example you could look for currency pairs that are trending upwards on the 1 hour, 15 minute and 5 minute charts, and then look to go long at the most opportune moment on the 1 minute chart.
This kind of strategy definitely has it's merits because you are always trading in the same direction as the longer term trend, and therefore you always have probability on your side. However if you use too many time frames you can over-complicate things and you ultimately end up getting a lot of conflicting signals and fewer and fewer opportunities to actually trade the markets.
That's why when I trade my main 4 hour trading system (see right for more details), I only use two time frames. I use the daily chart to highlight the current trend, and the 4 hour chart to find opportunities to go long/short in the same direction as this trend.
The actual system I use only produces a few really good trading opportunities every week (and sometimes none at all) across the major currency pairs. So if I were to use the weekly and monthly charts for additional confirmation of the long term trend, then my trading system would barely produce any trades at all.
I also think it's important to point out that whilst it's a good thing to always be trading in the same direction as the long term trend, you don't always need to use multiple time frames when trading forex. For instance the Forex Morning Trade system, which has made me a lot of money since I first started trading it last September, only ever uses the 15 minute charts.
Similarly when I trade early morning breakouts using my own breakout trading system, I only ever use the 5 minute charts to enter and exit positions. I don't even look at the 15 minute or 1 hour chart, for instance, to look at the longer term trend. All I am interested in is finding a profitable breakout opportunity on the 5 minute chart using simple price action and a couple of technical indicators.
So the point is that you can indeed use multiple time frames to trade forex. I myself use two different time frames when trading my main 4 hour trading system. However as you start to use more and more time frames, you will start to get a lot of conflicting signals and you will also get a lot fewer trading opportunities. Furthermore it is sometimes just as easy to make profits trading just one single time frame, as I have hopefully demonstrated using the two examples above.
The fact is that everyone has their own trading strategies, and it doesn't really matter how many time frames you use because you can still generate profits regardless of how many you use.