HOW TO SET RULES FOR PROFITABLE FOREX AND STOCK TRADING

I have always said and will say it again; Trading is about following your rules, everything else is amateur behaviour. This is part of what i train in trader enhancement.

Your rules should protect you from chasing the market ie early or late entries, protect you from over trading and over risking and keep you calm. In a nutshell, Only your rules put odds on your side.

Guess what, trading with no rules is like jumping into a river infested with crocodiles unable to swim and hoping and praying you will get out alive. Well, you may once survive miraculously, but soon the crocodiles' prayers will also be answered and they will have a tasty meal.

Our overall main objective is to become better traders every single week and make money monthly. One of the sure gauging ways is in our discipline and patience i.e the ability to follow our trading rules. Only and only then can we get a growing positive equity curve

Your rules should be as simple and precise as possible. No room for second guessing yourself or your system. So, lets use one of my trading systems: Shock wave trading system, as an example to show and explain how a simple rules check list should look like.

Shock wave trading system checklist

This checklist is the summary of the shock wave trading rules. Of course you can grow the table to fit the trades you take in a week.

So here is the thing, Summarise your trading system into a simple checklist just like one above. One that even a 5 year old can just check through.Very short and precise to help check your discipline and keep you on track weekly.

Let us look at a few rules in detail;

Just as i mentioned before, your rules should protect your acc and also be able to grow it consistently. In the shock wave system above, Maximum risk is 2%, assuming above acc is $1000, maximum risk on any trade is $20 and since minimum risk reward is 1:2, then minimum profit of any trade on the above acc would be $40. You can adjust the figures to match your account size.

 123.., represents the trades taken on a particular day, so every trade, check to see if you followed all the rules.

The entry rule is clear and emphasized with the word 'ONLY'. This is to protect you from entering too early or too late. Trade what you see not what you are thinking.

Stop Loss (SL) must be objective and technical. Shock wave is momentum strategy and its SL is on the previous congestion high(short)/low(buy). All am saying, is you must have a level where the market invalidates your trade and close out your position with your specified dollar risk.

Rules are there to enforce positive habits required for peak performance as trader. Forexample, journaling every trade is must rule and should be done immediately. Keeping records is one of least attended to yet one most important habits for profitable trading. Therefore making it a rule with help you grow it as a habit. The successful trader you want to become is engraved in your ability to set and religiously follow trading rules.

Its normal not be able to follow the rules all at once in the start weeks but with conscious deliberate effort, the boxes will all be checked right.

Aha, So what do you do every week?

• ·  Thank yourself first for the rules you have so far managed to follow consistently.
• ·   Check the rules where you are inconsistent.
• ·  Pick a rule among the inconsistent ones that you will must follow deliberately the next week until you have managed to follow all the rules.

It can take about 20 to 90 days of trading to be consistent depending on your level of commitment

The main aim of this trader enhancement series, Is to make our trading rules a part of us, just like driving or cooking.

The competition in the market arena is fierce, your only competitive edge are your rules.

Happy trading!

EURJPY WEEKLY TECHNICAL ANALYSIS

MULTI-TIME FRAME ANALYSIS

From our previous analysis here, we can see price ran up as anticipated. Currently price is into the resistance zone and we can clearly see a shift in momentum on the daily chart as it tries to reach for higher highs. The momentum shift can clearly be seen in the channel on the 4- hour time frame as we will see later.

DAILY

The daily price is in small channel, break and close above the channel is likely to land price into an immediate strong resistance zone around 133.600. Daily candle close below the channel may lead price to retest the recent lows around 128.500. Preferably the candle should close below that 21 Simple Moving Average to confirm the recent lows retest.

4-HOUR

The price is into the channel marked by blue trendlines as shown below.  Wait confirmation of candle close above the mid channel trendline to complete the swing to upper end or else it could fail and fall back and gets you trapped. Keep day trading on the lower time frames WITHIN the channel as we wait for a daily candle confirmation for a swing trade move.

GOLD, WEEKLY 

TECHNICAL ANALYSIS

SUPPORT AND RESISTANCE LEVELS

From our previous daily gold analysis here, the price movement was technically beautiful. Being a 4th touch on the daily trendline in our previous article, the trendline break was likely as it fell into the weekly support channel.

Currently we can see a clear congestion zone on the weekly chart, held by horizontal lines R and S. The momentum in the channel is still strong either way, meaning that keeping the trading within the congestion zone now is most logical. 

Whats within the congestion?

Break of that blue trendline to retest the lower weekly support showed some bearish bias. This bias can only be maintained if the price fails to close above the blue horizontal resistance around 1264.8 and falls back strongly back to S or otherwise we will still see indecision. But the momentum too of the bounce off S for the last 2 weeks doesnt agree so much to above statement, it still shows chances of going higher to retest R getting back to the indecision mode.

After congestion...

Depending on the reaction and momentum in the R and S zones holding the congestion, weekly candle close above R may lead to retest of the larger resistance zone marked R1 around 1375.00 which corresponds to the larger monthly congestion resistance.  

Weekly candle close below S may lead to retest of the previous lows support zone around 1129.00 marked S1

GBPNZD DAILY

SUPPORT AND RESISTANCE

TECHNICAL ANALYSIS

The price is now into a congestion held horizontal support S and red trendline R. 

Close below S may lead to first test of major support trendline T before it can fall  S1 support zone around 1.72571. Close below S1 zone may to retest of previous lows suppot zone marked S2. 

On the other hand, Close above R can lead to test of first major daily resistance around 1.82314 marked R1. Close above R1 zone may lead to retest of the previous high zones around 1.85891 marked R2

NB: On each zone, price has been pausing for a minimum of 5 days before it breaks to new levels. Keep that in mind to avoid false break outs and early/late entries

Is a Robust Position sizing Model achievable and will it prevent us from being stopped out by whipsaws?

For the past few days that I haven't been actively trading or probing charts, my belief about position sizing has been completely shattered. All along, my position sizing model has been based on rigid rules that gave me the illusion of being in control yet I was not. It is quite surprising when all of a sudden you realize that you have unknowingly been deceiving yourself by thinking that you are all about the process of trading and not the money making aspect of it only to find out that some aspects when it comes to not being too concerned about the P&L, have gradually been achieved but not all. my recent discovery has made me introspect further and therefore cast more doubt in my mind. a mind full of thoughts which are merely deceptive illusions and nothing more. What a terrible derangement!

Position sizing to a beginner, (I can't talk about pros since I haven't interrogated them on position sizing ) is all about ensuring that your risk amount is in accordance with the percentage amount of Capital that one wants to allocate to a single trade, whether it's a buy or a sell. No folks, position sizing shouldn't be exclusively about the money. In fact when position sizing I would prefer a model that does not make money the first priority. I shall explain why.

To me a good position sizing model and a possibly robust one for that matter, (it has to be aggressively tested in order to conclusively determine it's robustness. But for now, I would suggest that a system's expectancy is a good indicator of the model's robustness ) should fundamentally assess risk from a psychological point of view. And by psychological I mean market psychology (primarily greed and fear) premised on one's Technical analysis method and market sentiment. in short, one ought to first ask themselves; at what point will the market prove that my hypothesis is wrong? But this is often not the case, we Amatures size our positions from an emotional point of view. we assess risk as a form of pain threshold. 

We ask ourselves how much pain do I have to endure (moneywise) before my stop loss is hit? and further delude ourselves by thinking,"...well, as long as my loss is within my  accepted margin (whether as a percentage or Cash), it's okay" I have news for you: YOU ARE NOT FOCUSSING ON THE TRADING PROCESS  fellow Amateur, so your emotions, and in this instance pain, weakens the percentage of objectivity in your technical analysis method (yes technical analysis is not 100% objective. No form of analysis is thus far). Pain is an emotion. Unknowingly, you have just mixed your trading with an emotion but deceiving your mind that you are in full control of your bottom line! hence setting yourself to fail in the long-run.  I can confidently assume that it is impossible to become a successful trader if one has not managed to control his or her emotions (I can only assume because I don't know every successful trader out there maybe there are some who are uncontrollably emotional in their trading and are successful ).

I am not a risk analyst, neither am I a pro trader but I  find this paragraph in Taleb's book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets vindicating my opinion on position sizing as a tool for determining risk;

"... it is a fact that that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease with which they come to mind. In addition to such problems with the perception of risk, it is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the 'thinking part' of the Brain but largely in the emotional one (the 'risk as feelings' theory). The consequences are not trivial: it means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is to rationalize one's actions by fitting some logic to them..." (The mental delusions we found ourselves in when we justify our positions sizing model that has totally been anchored on emotion).

To me a good position sizing model should be able to combine Probability and Risk. I say probability because the market is inherently uncertain and therefore prone to improbable price movements hence triggering the question; At what point will the market invalidate my analysis? and Risk coz with Risk we can calculate the odds of winning or losing (remember Mark Douglas's self-evident lesson: There is a random distribution between wins and losses, all you have to do is to play the odds in your favor by having an edge? If you have not read Mark Douglas's work and fully grasped concepts therein, stop that nonsense you are participating in called 'learning a strategy or system').

If you actively trade, you have experienced situations in which your perfect 2% rule following stop loss has been hit only for the market to later turn around (and often aggressively) and play out as you had anticipated in your analysis, but by then it is too late and if you are not careful you end up chasing price and getting burned.

Therefore, a  robust position sizing model should dictate where you put stops and the model should be based on analysis that answers the fundamental question; at what point will the market prove my analysis is wrong?. The next challenge is to merge this approach with the concept of risk to reward ratio. Interesting.

How I will Trade this week's volatility. My GOLD, AUD, USD, EUR and GBP intraday plays

Gold began a parabolic decline in October 2016 but bounced back late in the same year leading to a parabolic rally for the Two Quarters of 2017 ending last week. One can safely say that this rally has been a Powerful pullback that blew up major ceilings(38% and 50% Fib levels ) and now Gold is at a critical point. why critical? if you plot the Fibonacci tool  the rally that begun in early 2017, price is now resting at the 38% level. This cluster (of a level  that was  previously a fib support now turned resistance and the 38% support level) forms a very strong floor and to add more concrete to it, currently the 200 day moving average acts as support too. That said, the rally has really propped up the Aussie for the last 2 quarters This Technical uptrend has also been supported by good data coming out of Australia (Latest GDP data -Dec Qtr 2016 to Mar Qtr 2017 up to 0.3% from a previous 0.2%), precipitated a booming mining sector and China. But despite the impeccable performance of the Aussie and the Australian Economy in general  the RBA has seen no need to hike interest Rates since inflation is well within its targeted levels (2.5%-3.5%). The market also does not expect it to do so tomorrow. But we'll find out.

Despite the interest rate hikes by the FED that have tried to at least prop up the US10yr bond yield but not yet trading above the 200day MA, the Dollar has been depreciating. Seems to me that few investors have appetite for the bond yields and preferring to invest in US Equities which have been performing quite well as per the S&P 500. Adding onto this, the recent hawkish comments by key ECB Officials doesn't make things better for the dollar because investors will further be attracted to the high yielding European Bonds.

*Kindly read the rules at the end of this post before proceeding 

GLD- I'll be looking to go long after a confirmed break of resistance at  1260.00 on a 4hr setup , above both the 200MA and 100MA. In my rule book, I look for trends that are above these MA's  on the the long term chart and the Short term Timeframes as a confirmation of the trend and also as a way of finding a reasonable price to place my stop loss. Preferably below one MA or both.

4hrAUDUSD- the parabolic rally seems to be pulling back as we head toward s NY open. I will watching key support levels in anticipation of tomorrow’s economic releases and after the releases in order to find good risk reward levels. watch for breakouts after the releases and the support levels. bad data might further drive the pair down but if support at 0.7602 if broken and the break confirmed my short-term bias will change. 

 

4hr EURUSD the pair is currently pulling back. Also, be on the lookout for those support levels and resistance level breakouts after the barrage of US Data is released. A confirmed breakdown below 1.1200 invalidates my short-term bias.

 4hr USDX(Dollar Index). will upcoming Data give us pullbacks or will they change the short-term trend. I will be keeping an eye on the resistance levels, confirmed Breakouts above the 200ma will invalidate my short-term bias.

4hrGBPUSD the pound is pulling back after the parabolic rallies last week. The BOE governor has a lot of speaking engagements this week. The pair might react because this since traders are anticipating on how hawkish he'll be regarding a rate hike given that UK's inflation data has so far made a case for a hike. Good data from the US might  precipitate nice  pullbacks. For now, looks like the bullish pennant has failed and we might see a further pullback .

 

4hrGBPJPY- expecting a good pull back here for a long setup. breakout below 144.36 will change my bias.

1hrGBPCHF- This pair has a good risk reward setup as I write this. A confirmed break  of 1.2477 should justify a long.

 

 P.s

Kindly take notice of this Blog's Disclaimer.

-Thick horizontal Lines represent weekly Resisitance,Extra thick-Monthly and Thin, the Daily 

- Anticipated Trades are in the direction of the short-term and long-term Trend

- Trades are taken In accordance with the order of the two moving averages.If price falls between the two Moving Averages setups become invalid

AUDCAD  WEEKLY AND INTRA-DAY TRADING

TECHNICAL ANALYSIS

WEEKLY CHART

The price already shows strong signs of bearishness as it is being held by support zone marked T. Confirmation of fall of the price will be close of the weekly candle below support zone marked by red horizontal line marked T around 0.99164. This may lead lead price into a larger pivotal support zone marked S around 0.97464.

As we wait for weekly candle confirmation, lets us see what we can be playing intra-day.

HOURLY CHART

Intra-day trading on the hourly chart is more logical to be done between the zone marked by the red horizontal lines R and T shown on the chart below, as we wait for larger timeframe confirmations. 

Currently price is held in a congestion marked by small yellow trendlines r and t. Close above r can lead price to retest the R resistance zone and close above t can lead price to retest the previous lows support zone marked T which is the same zone on the weekly chart above.

Since momentum on the downside looks strong and there was just a break of a blue trendline support P, a break below t is highly probable for a downside continuation. But nevertheless, wait for confirmations either way.