Entering the Market

very precise adherence. Because we are discussing intraday trading, the choice of an entry point represents an especially important and difficult task because of the limited time—one day—and limited space—the aver- age daily range of any given exchange rate. First, we should always re- member and consider the fact that, during an intraday trade, all trading activity reflects only a market noise. In other words, the result of any sin- gle trade is greatly influenced by the casual movements of the market and its chaotic fluctuations of significant amplitude, viewed against an average daily range. Therefore, the tactics that can and should be applied to intra- day trading can be characterized as the hit-and-run technique.

The choice of an entry point should be based on technical signals that are submitted by the market when it comes close to a critical level defined by a trader in advance. According to this rule, a new position opening point should be at the closest possible distance from the technical level that you should define as critical at the present moment.

A certain line drawn on the chart (whether a support or resistance, trendline, or border of some formation) should be considered as the critical level. In some cases, a narrow price range can also be defined as a critical

FIGURE 14.1 Commonly known recommendations: Buy ahead of a support and sell ahead of a resistance.

zone; above it, the market submits a buy signal and below it a sell signal. A long position should be opened ahead of a support, and a short position should be opened ahead of a resistance. See Figure 14.1. When done so, the stops should be placed on the opposite side of the line, dividing the market space into two different parts. (Below the line, a short position is prefer- able; and above the line, go long.)

A new position open price should be at the closest possible distance from the technical level you consider as critical at the present moment.

There are three rules I follow about when to enter the market:

1.There should be some period of time between the moment of mak- ing a decision about opening a new position, and actual transaction exe- cution. This period of time gives a trader an opportunity to reconsider his decision and to abort it if necessary. It also prevents him from making im- properly justified and impulsive decisions.

Such an approach guarantees you against making impulsive and in- sufficient decisions. It will save you a lot of worry and money. The dura-

tion of this period can fluctuate from several minutes to several hours. As was already indicated earlier, no transaction can be executed before the levels and conditions of protective stops for a new position are deter- mined. The duration of this period will also give you an opportunity to again reconsider your trading plan and, if necessary, to introduce addi- tional corrective amendments into it. In some cases, such a period of ex- pectation can result in radical changes to the initial plan, and even in its complete rejection.

Often, the same price level gives an opportunity for opening positions in opposite directions within the same trading day. Such conditions often come after the market completely fulfills one trading signal and creates an oppor- tunity for entering the market in the opposite direction. See Figure 14.2.

2.Generally speaking, any position (if open in the direction of the current market’s movement) will give a trader an appreciable statistical advantage in the prevalence of profitable trades over unprofitable ones. This advantage amplifies if such a position opens at the moment of highest market activity and greatest speed of the move.

Such a trading tactic is the most conservative and safest one. Even if it seems that such an approach lowers the average size of the potential

FIGURE 14.2 The market provides an opportunity to make a profitable short trade before going long on the break of the resistance.

profit, it gives a statistical advantage—the prevalence of profitable trades over unprofitable ones. This tactic can also be considered the least stress- ful because, in most cases, some profit will be generated almost immedi- ately after opening a position.

I open the overwhelming majority (75 to 80 percent) of new positions in the direction of the current movement of the market. The statistics of profitable and unprofitable trades show that the majority of profitable trades are accomplished by opening a position in the direction of the cur- rent market movement. I am absolutely sure that if you follow the rule of opening new positions only in the market but not against it, the statistical prevalence of profitable trades over unprofitable ones could be over- whelming.

Planning most trades in advance provides some additional comfort to a trader. In this case, positions can automatically be taken in accordance with the preliminary designed plan at the desired price levels. There will be no need to monitor the market constantly, and, most of the time, I use a limit or an entry stop order for opening the initial position. I do this even if I’m not going anywhere and am only watching the market. There are sev- eral advantages to such a trading technique:

• First of all, I’m saving my time, and if the position according to my plan is taken using a limit order, then I can place a protective stop si- multaneously. After that (if no reverse was planned), I have nothing to worry about and there is no need to watch the price action at all.

• In case the position is taken through an entry stop order, then all I need to do is set an alarm. When the computer gives me a signal that the order is executed, then I place protective stops and once again have nothing to worry about and can spend my time doing something else besides watching the market.

• Automatic position entry also saves worry. It gives me a feeling that I’m in control of the situation at any moment. I feel myself in charge of the trading process, because I chose the price at which to enter and exit the market, as well as price at which to give up if things turned bad for me. If, for some reason, the market didn’t reach my projected price level, I consider it as the market’s own problem, and there was no good trading signal or price to enter it.

• Automatic order execution also allows me to enter and exit the mar- ket at the exact price I planned from the very beginning, and not to re- consider my previous trading plan too often. In case the position opens through an entry stop order, I’m not missing the move if the market is moving too fast.

• Such a technique also supports my money management requirements and allows me to calculate my potential losses in advance.

I open up to 85 to 90 percent of my positions using this technique, and the overwhelming majority of them are in the direction of the current movement of the market.

3.If, in accordance to a trading plan, the position should be opened in the direction opposite to the most current movement of the market, it would be better to do it during the least market activity and its slowest movement.

Many traders have failed and were compelled to leave business for- ever because their basic tactics for a trade were mostly based on attempts to catch the moments of the market reverse. It is incredibly difficult to catch the exact moment of change in the trend or the market direction, es- pecially when trading short-term contracts. In longer-term trading, this is- sue looks a bit easier and can be successfully performed in some cases. Using the common sense trading technique often allows me to catch the price close to extreme with a relatively high degree of success, but it also works well in case my interest at the moment is not higher profit but rather the safest way to make some profit.

Because the trend has high momentum and inertia, the reverse process usually takes a significant period of time. Therefore, it is possible to open positions in the direction opposite to the direction of a previous or current market’s movement only when the market calms down a bit and shows signs of inability of further movement in the initial direction. The speed of its movement should be considerably reduced, and the mar- ket should be moving sideways before it gives a chance to open a new po- sition. If the market stops moving during some period of time and does not form new local extremes, you can think of opening a new position in the opposite direction. The details will be described in the templates of this book.

4.The most effective trading tactic can be considered the one that as- sumes a new position opening only in the most probable direction of move- ment of a day. A good trading plan should never be based on possible retracement of the main move. It’s also dangerous to open a new position against the main direction of a day movement, if the market has already de- termined this direction. The less time remaining until the end of a trading day (24 hours), the less is the probability that the market will suddenly change the direction of the main intraday movement to the opposite.

This recommendation also follows directly from the philosophical concept of the method. First of all, the market is not a sewing machine in which the needle runs up and down with identical amplitude and speed.

Usually, if the market is active enough, it has a highly visible intraday ba- sic direction.

Statistically, before a reversal, there should be a certain period of market hesitation that a trader can use either for liquidation of the prof- itable position or for planning to open a new position in the opposite di- rection. However, all this can be correct and will work only when the market has not yet chosen the direction of the main intraday trend, and has not finished formation of a daily trading range. The market also re- quires some time to reverse and to begin its movement toward the oppo- site side of the previously established range—especially if there is not much time left before the end of the day and the average amplitude hasn’t been seen yet. Therefore, at the opening of new intraday short-term posi- tions, I consider the following rules 5 and 6 useful:

5.Do not open new positions on the European currencies against

USD at the beginning of a trading day or during the Asian trading session.

This rule is also connected to the fact that, more often than not, the increase in activity of European exchange rates begins only after the opening of the European trading session. During the Asian session, the rates of European currencies against USD and other non-Asian currencies trade passively, most of the time in a narrow range that demonstrates clas- sical behavior of the market in a narrow side trend. There are rare excep- tions to this rule, such as when I consider making a safe short (20 to 40 pips) trade with tight stops and to liquidate the position prior to the begin- ning of the European session. This situation does not happen very often, and I try to not make many of these trades. From the time when I was an absolutely green novice and traded without stops, I remembered well that the longest lasting positions were targeted for a fast profit. Therefore, I don’t recommend such trades to my students (especially beginners), and I don’t plan to describe this technology in this book.

The other kind of exception occurs in cases when, during the Asian session, the rate of the European currency reaches some critical level, the definition of which is possible by analyzing the longer-term charts like daily, weekly or monthly. In these cases, it is necessary to react to the sig- nal received, even if such situations happen very rarely.

6.I do not open new positions against the major market move of the day after the beginning of the New York trading session, and especially af- ter ending of the European session.

It is not so difficult to determine where the main movement of a day has been directed. In most cases, it could be clearly seen on the charts by

the closing time of the European session. It is characterized by a highly visible intraday trend and also by expansion of the intraday range, which has occurred during the entire previous period of time from the beginning of a current trading day.

The only case in which you can accept some risk and open a new po- sition against the main movement of a day during the New York session is as follows:

• The market has reached one of the main technical levels such as a ma- jor support or a major resistance. This level should have more than lo- cal intraday significance, but it has to be easily determined on daily charts as a minimum.

• The daily range has already exceeded its average typical range for the particular currency by the time the major technical level was achieved.

• The main move of the day was formed as a result of an impulsive mar- ket reaction to someone’s comment or market news.

When these conditions are met, there is a possibility for a counter- trade with stops placed outside the most current extreme, major support, or resistance zone. However, the probability of making a profitable trade in such a situation does not usually exceed 50 percent.

CHAPTER 15

Exiting the Market

In my trading method, I use several different ways to take profit and to liq- uidate profitable positions. The choice of one or the other in a real market situation depends on the current technical picture, presence or lack of trading signals, timing, market speed, amplitude and sequence of the pre- vious fluctuations, short- and medium-term trend direction, and such. It’s absolutely impossible to describe each and every combination of different factors. Here, I will give you just a few general tips on how and when a profitable position can be squared and profit pocketed.

PROFIT-TAKING AT THE MOMENT YOU RECEIVE A SIGNAL TO OPEN A POSITION IN THE OPPOSITE DIRECTION

At first glance, such a way of trading may seem in general like the ideal one. This way seems like it would allow a trader to stay in the market for- ever by switching his positions from long to short ones, taking profits and losses, and every time reversing in the opposite direction. However, for a million obvious reasons, such a scenario is almost absolutely impossible, especially if trading on an intraday basis. Even if you exclude such fac- tors as physical impossibility to control the market for the whole day, five days a week, and that more trades usually result in fewer profits, it still

wouldn’t be reasonable to try to catch every intraday fluctuation. For in- traday trading, for example, when a trader has to deal within a limited time frame and market space, a hit-and-run tactic might be considered as the most sufficient and effective. This tactic does not give traders an op- portunity to switch from one position to the opposite one, without risk- ing their floating profit every time they wait for a signal to take profit and open a position in the opposite direction.

The average daily range, even on the most volatile and active cur- rencies, doesn’t usually exceed 180 to 200 pips. Also, a lifetime of an in- traday position rarely lasts more than several hours—and sometimes, even minutes. It is also obvious that in order to complete such a daily range and stay within it for a 24-hour period, the market has to fluctuate inside this range, going up and down through the same levels several times in one day. Thus, we can come to a conclusion that because the market most likely gives the opportunity to enter opposite positions at the same price level but at different moments of the day, a profit-taking tactic based on trading signals cannot be considered as too effective. Of course, there are some exceptions to the rule. I think that the tactics described earlier can be used in such cases as when, during the day, the market approaches major and long-term trendlines, supports, and resistances, and different formations’ borders—all of which can be identified on longer-term charts starting with daily. In these cases, traders also have an opportunity not just to liquidate their profitable po- sition, but also to open a new one at the same price but in the opposite direction.

This criterion can also be used as a signal to pocket your profits. Unfor- tunately, in practice it’s not always possible to know exactly if the mar- ket activity decrease means that it is getting ready to turn in the opposite direction, or if the initial move will continue after some mar- ket hesitation and trading sideways. However, there are some signs that may help you to determine further market intentions. First of all, usu- ally the turn doesn’t happen at once. It usually takes some time to change the direction of the move to the opposite. Also, the market usu- ally forms a sharp top or bottom (V-formation) when reaching a real ex- treme, even if this extreme is a local one and can be seen on an intraday basis. So if the market has formed a sharp top or a bottom and then

is trading sideways after some correction, it might be a sign to think about pocketing your profits. If there is a flat surface formed on a very top or a very bottom of the range, then the market will most likely con- tinue its move or at least make some extension in the same direction. See Figure 15.1.

To determine, for an intraday trade, whether the stop of the move is final or not, we should take a look at short-term charts—starting from 5 minutes and up to 15 minutes bar charts. If your position is having a floating profit at the moment and the last extreme has a flat end (top or bottom), then it would be better to wait a bit longer before taking a profit. If the market stops for long and doesn’t make a new high (or low) within the period of time equal to that which it took to commit the move, then the position had better be liquidated and profit fixed. This criterion is very simple to apply to real trading. All you need is to count a number of bars on 5-minute intraday charts. If the number of bars after the market formed its last extreme equals or exceeds the number of bars that formed the last wave, then it’s time to get out. See Figure 15.2.

FIGURE 15.1 Flat surfaces at the top are illustrated.

FIGURE 15.2 The number of bars at high are 6. Number of bars after the mar- ket formed its last extreme is 4. Time to get out and take profit.

This is one of the most simple and reasonable ways to pocket a profit be- cause the market has its own specific cycles of activity. These cycles are changing from time to time, but it’s easy to identify a particular one after some watching. Some of those cycles can sometimes be identified on the basis that the market makes extremes at certain periods of time of the day. If such a pattern is seen and proven, then it gives a trader, not just an opportunity to liquidate his position at nearly the best price, but also to take another position in the opposite direction.

The other choice related to timing would be pocketing profit at a cer- tain moment—for example, 30 to 40 minutes before the end of the Euro- pean session. The profit taking may start when the correction against the main move of the day will begin, or at the very end of a trading day before the closing of the New York session.

PROFIT-TAKING BASED ON AMPLITUDE OF A DAY RANGE

This one should also work pretty well and (at least statistically) makes a lot of sense. By calculating the average day range for the last couple of

months (for example), we can easily make a projection for any current day in terms of its possible range. So, the position might be liquidated and profit taken if the market has already reached its average day limits and fully com- pleted its daily task. Such an approach is usually good when a position was taken after the market has already formed some intraday range and the tim- ing (in regards to cyclical changes) is also taken into consideration.

So we have a variety of different approaches to profitable position liq- uidation, but it is also important to remember that the time frame for each trade should be planned (even roughly) in advance. It would be better to follow the initial plan from the very beginning to the very end, unless some dramatic market changes call for its review and reconsideration.

Position liquidation with simultaneous opening of a new one in the oppo- site direction is a method that I apply frequently. In most cases, I apply it at the moment of liquidation of an unprofitable position, but there are cases in which the reverse occurs at liquidation of a position with profit. Between these two cases, there is a basic difference, and it makes sense to consider each of them separately.

Date: 2015-12-17; view: 838