The Rest of the Story

I’ve always wanted to say that. Remember Paul Harvey? Anyway, with trading there is never really a “rest of the story” but I wanted to offer some insight and important reminders for any new or struggling traders.

The Forex market offers high rewards but just as much, if not more, risk; however, much risk can actually be avoided by due diligence, proper preperation and avoiding impulsive decisions.

So, “for what it’s worth”..

F$%k Nike

Well, kinda.. You probably should “Just do it!”, otherwise 10 years later you may be adding to your bucket list of regrets like, Bitcoin, circa. 2010.

At the same time, don’t rush it. I recommend divorce, foster home for kids, nursing home for grandparents, and at least 360 days of training, with half the year on demo. (Just playing about the kids and grandparents)

Learn to backtest sooner than later and if you learn to program and write your own script to test multiple strategies in a short period of time, smiley stickers will be rewarded.

Choose your training material wisely. There is an endless amount of assholes that will sell you a holy grail signal. Nothing is guaranteed to work everytime and many ‘foo-ru’s’ are only selling signals because they failed trading.

Heck, I read about one scam so ingenius I thought about trying it. Guy found 6 desperate individuals and sold signal for say, $5,000. Sent 8 people a buy and the other half, a sell signal on the same asset. 4 people got their money back and the other 4 discontinued service.

Rince and repeat, he’s left with 2 clients. One tries a couple more times and goes bankrupt. The last fellow swears by this guy.

You can add this up and see it wouldn’t take but a few more clients to be super rich or super incarcerated.

I suppose you could duplicate the anecdote, given you have no morals but I am only using this as a cautionary tale.

A great deal of information can be found online for free but the right trading software or platform is indespensible.

Chat with traders is a free podcast I highly recommend and these books are filled with hidden gems that is hard to find in the “mainstream”.

Reading between the lines

Support and resistance lines and channels are some of the most fundamental tools a trader can use but be sure to study proper placement of these lines.

Here’s a nice party trick. Try placing random horizontal lines on any chart and see how many times price crosses and even seems to “respect” the lines.

For very new traders, it is imperative to remember this, to have better judgement sifting through education materials or mentors especially when spending money.

Learning to properly use the Fibonacci retracement tool is also beneficial.

The fibonacci tool works best for setting stop loss, profit targets and spotting reversals.

No pattern is guaranteed to work. Our job is to find an opportunity that our data has shown a high probability of success and then, managing risk systematically, to induce a consistently profitable state.

Order Flow

Your homework for today’s lecture is: placing orders instead of market fills.

When you press buy or sell and instantaneously obtain a position, you have placed a market order and in Forex, your order will be filled 99% of the time.

We have talked about patience but that was level 1 patience. Placing orders is level 2.

This was one of the hardest tasks in my discipline and still is. Here is how this works: Imagine you are trading EUR/USD and your strategy is trading breakouts. Price breaks out of consolidation and pulls back.

Now, you can put in an order to buy at this last peak but if it happens to be a fakeout and price continues down or back to consolidating, your order is not filled.

Or, if you are expecting this fakeout, you may place a sell order at a certain level above the currrent price action so that when price jumps up, you are entered into a sell.

Many orders may never be filled and once they are filled, there’s still the possibility of the trade being a loser; however, you can place as many orders as you want and this way you can choose a better position. This also helps if you have trouble waiting for pattern to form or the pullback after a breakout.

Now, order flow is a slightly different subject.. but in the same class.. To be honest, I have not mastered interpreting order flow data but I will try my best to explain it’s importance.

First, try to find a free platform that offers order flow data.I have not done an extensive search but based on the book, “Order Flow” by Trader Dale, Ninja Trader, a premium platform, offers a free demo account so, one could pull up whatever pair or correlated country index and analyze chart then, return to his/her preferred platform to trade.

I believe order flow can be shown as a total number of contracts that includes buyers and sellers or independantly but that is only part of this beautiful element.

We often hear about buyers being in control or vice versa with sellers.

Bull or bear market. So, order flow tells who’s in control, right? Yea.. but wait.. there’s more!

Let’s note all the different orders that can be in the market at any given time.

Before we get into that; however, I want to touch on the bid and ask. The bid is the highest price a buyer is willing to buy; whereas, the ask price is the lowest amount a seller is willing to receive.

So, we have those two orders to match up but also, anyone placing an order to buy or sell is more than likely setting a stop loss, limit sell order, for protection and a profit target, limit buy for partial or whole profit take.

The seller is placing a buy stop for protection and limit sell for profit target. These orders will probably be placed after their actual order is filled.

Where it gets interesting is when an “aggressive” buyer or seller comes in and places a market order which, is executed immediately. First, placing market orders are bad for liquidity. Your homework is to find out why.

Also, according to Trader Dale, aggressive buyers show up in the ask column and aggressive, or market sellers now, show up on the bid.

Remember, passive buyers, or those who place orders noting the highest amount they will pay for x-units, are on the bid while, passive sellers are on the ask.

So, in actuality, on the bid we have passive buyers and aggressive sellers. On the ask, or offer side, we have passive sellers and aggressive buyers.

Volume

Besides price, and order flow being a close runner-up, volume is probably the most important indicator.

Every other indicator only reflects a computed value derived from the price that we can readily see. They are just like speculations based on some algorithm. Break down the formula and end up with price.

Volume, especially when combined with order flow, helps us frame a better picture of how the market is behaving and choose a directional bias that is highly probably to bring profit in our desired time frame.

Most free trading platforms display volume on the bottom of the chart with vertical lines, if any volume data is given at all.

This; however, is volume based on time and displays current volume at current time.

Volume has a deeper level, as well, that is rarer still to find on many platforms.

Known as volume profile, this type is generally placed on the left side of the chart, with horizontal bars instead of vertical bars like the time volume.

Volume profile shows the volume levels corresponding to price. Because of this price based approach, this is particularly helpful when setting support and resistance lines or channels.

Find your Thrill on Capital Hill

New traders often find trading much more complicated than it seems. Then, they add more complication with different strategies and indicators, without back testing any of them.

For this reason, simple strategies work best. Ever notice how much easier it was to trade a demo account? Remember, healthy psychology is another important aspect in trading. If you are lucky enough to have $50,000 in a trading account, without having to stress about what bills are going to the debt collectors office, you would probably have a much better trading experience.

Maintaining capital is priority which, means proper risk management. Most traders risk no more than 2% on any given trade. New traders should only risk .5 – 1%.

What makes foreign exchange trading popular is the amount of leverage traders have access to. In the US, maximum leverage is 50:1 but in some countries, 500:1 or more is allowed.

Say, you start with $100 USD. This allows you to purchase $5,000 worth of units. If your trading platform allows micro lots, the minimum purchase is 1,000 units.

EUR/USD, currently trading around $1.20, would cost $1200 but with 50:1 leverage can be purchased with $24.

So, already one position has taken a quarter of our account. If the spread is 1 pip which, is common for this pair, you will start at a 1 pip loss. 1,000 units purchased will put us down .10 cents.

Risking 1% of $100 only gives you .90 cents, or 9 pips, for the price to move against you.

Now, if you are only risking $1 for every trade, you had better have a quite high success rate or see your account being ate away 1 dollar at a time.

Learning to properly manage risk is more than important in this game and if you have $100 to lose, this would actually be a great exercise to become disciplined.

Now, if you want to trade a standard lot, 100,000 units, you will need $25 – 3000 to purchase 1 lot.

As this article has already become longer than I intended, I will discuss hedging at another time.

Hedging is basically protecting your position by purchasing an opposite position on a different pair or correlated commodity.

The point is that this is normally done with less money than your initial position. So, if you feel that your probability for profit (based on data from your trading journal. Yet, another article in que.), you may buy 2,000 units of one asset and sell 1,000 of another.

Another reason for a greater amount of capital. If you want to quit your day job (I know I do. Who doesn’t?), you;ll need enough money to take care of bills when losses incur.

The first time I made $50 on a trade and showed my friend, he said, ‘wtf is that?’ With only $500 on margin, I made 10%. Thinking in percentages helps but I forgot to add the percent of time lost or the percent of money I had loss, or even the percent of the year that I was going to have to work to replace that money.

Big dreams require time, knowledge, and usually, deep pockets.

I’m going to find a sewing machine.

“Good Day!”

DISCLAIMER

Futures and options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All trades, patterns, charts, systems, etc., discussed in this video or website and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations.