Marc Walton on August 11, 2013
Hi Folks!!I’m baaaaaaaccckk!! I hope everyone had a FANTASTIC week trading last week!! I’m SOO RELIEVED my weekly analysis and update didn’t lead us into a bunch of losing trades (just a few), because it’s tough to put yourself out there and make “predictions” when the market can very well do whatever it wants at any time. But that doesn’t mean for a second we just throw our hands up and take positions at random with good trade management (although with great trade management, one traders loss could be another traders win). What it DOES mean though is there is no way to be right all the time and losses are absolutely inevitable. Sooooo……….how right do you have to be?? Traders that have a very high win percentage make more than those with a low one right??? Easy answer?? Of course the trader that wins a bigger % of the trades they take makes more $$$. THINK AGAIN!
Back to the two traders with the win % question. Let’s say Trader #1 wins 90% of his trades. Bravo trader #1!! What a sharp chap right? And trader #2 by comparison only wins 30% of his trades. What a loser!! Which one would you invest in?? If you can answer right away and say #1, please pay VERY CLOSE attention to the rest of this post. For those of you who answered “you can’t tell”. Bravo! The question I posed was actually very much a trick question. It’s like asking “if someone jumps off a ledge will they die?”. Right away you know there is a BIG piece of information missing: HOW BIG IS THE LEDGE?? In our two trader’s case, there was some important data we would need before making the decision. Most importantly is average win vs. average loss SIZE, aka R/R (reward/risk ratio). Let’s see how that might work:
Trader #1 (our smart guy) wins 90% of his trades, BUT his losses are 100 pips and his wins are 5 pips.
Trader #2 “don’t quit your day job” only wins 30% of his trades, BUT his losses are only 5 pips whilst his wins are 100 pips…………See where I’m going with this??
Trader #1 after 100 trades: (95 wins X 5 pips)= +475 pips PLUS (5 losses X -100 pips)= -500 pips for a grand total of —- NEGATIVE 25 PIPS!! (huh?? He won most of the time!!)
Trader #2 after 100 trades: (30 wins x 100 pips)= +3000 pips PLUS (70 losses x -5 pips)= -350 pips for a grand total of —— POSITIVE 2650 PIPS!! (yes, A HUGE gain!!)
Same number of trades, GIGANTIC DIFFERENCE IN GAIN/LOSS. So the guy that barely ever won laughed all the way to the bank with his “losing” strategy and the guy who bragged about how accurate he was almost all the time, had to find a day job outside of trading to support his “habit” of losing money in forex.
So you see, win % is only important in regards to how big the gains and losses are along the way. When I started trading, I used to believe that my whole goal was to be right all the time and never lose. The longer I trade, I care less about the wins and more about the “structure” of the trades. Because even someone who is wrong most of the time can gain very large $$$ in their account as long as they are going after bigger trades pipwise than they are risking. And that new EA/system that promises you a 95% win rate just might not be the system you think it is when you see what the big losses are like compared to the tiny wins (we have all seen plenty of these). In our own trading we must think about the quality of trades we are going after and what the potential for gains versus losses there are. The closer your entry is to a major area that has a lot of protection behind it, will usually allow a smaller stop than entries based on momentum that may take place in between areas of protection. The M2 system in particular many times offers you a great R/R as long as we look for trades that fit the bill. A couple tips to better R/R:
- Look for trades that have MULTIPLE areas of “protection” close to the entry point, rather than spread out a ways behind it. Sure it takes longer to find a trade that fits this model, but the smaller stop makes it much easier to grab a win that is double or triple the size of that stop.
- Look for trades without much in the way of the trade. Trying to “squeeze” a trade into the face of a major s/r can restrict gain sizes. Try to look for trades with “open space” in the direction you want to trade (no major EMAs, Fibs, S/R etc.. close to entry in the direction of trade)
Forex Weekly Analysis for Week Beginning August 12, 2013
After a successful foray into the market last week, I’m hoping we continue with good movement on pairs and of course, more wins!! Although not as much as the first week of the month, this week brings more “red impact” news than last week. Be mindful of this and don’t take new trades right before a major announcement and wait 10-15 minutes after for the “dust to settle”. Many of the same areas on many pairs from last week are still in effect this week. Please check the video for closer details. New trends may be forming on some pairs as important areas were broken, BUT it IS August so we have to be prepared for our “breakouts” to really be “fakeouts” and for those pairs that made moves outside triangles or price channels to come back inside like nothing happened. Make sure you are moving your stops after only 20-25 pips (10-15 pips on Eur/Gbp) of movement to ensure you don’t get a small winner turn into a full stop loss.Euro/$: 1.3400 stopped this pair dead in its tracks and again becomes an area to look for a short. A break above this area would DEFINITELY have me interested in longing this pair on a pullback. Of course, good ol’ 1.3300 comes into play again if price continues to fall from its first rejection of 1.3400. Keep in mind there is a trendline at 1.3325 and a 55 EMA shortly below that, so price may not pullback that far before making another run at 34. A break below 1.3300 would have me looking to short the pullback to that area.
Gbp/$: After making a champion move Wednesday for more than 300 pips, this pair blew through our area of interest, BUT may now pull back to it after stopping at the trendline. That area is 1.5425 which I will be interested in taking a long if price falls to this level. Alternative longs would be a break of the longstanding weekly trendline to the upside. A further fall and we are looking at 1.5270 AGAIN for a long. Counter-trend traders will be looking to short the same areas if they are broken with a pullback, with the exception of the trendline at 1.5530ish area which would be a simple bounce trade.
Aud: . Is our big bear run over?? After the strong snapback above .9000, maybe. But I wouldn’t count on it. We are sitting right below .9200 which is a good place to look for a short, but wait for the market to react before diving in. A pullback to .9300 and finally .9325 will DEFINITELY have me looking for a short. Of course, if you think the Aud/Usd is headed higher, look for a fall to .9040 for a long and potentially .9000 as the market retests the whole number again. Breaks above .9200 with pullbacks could also interest someone looking for a long trade up to .9300 area. Check the video for all the details.
Euro/Gbp: Usually easy to trade and mellow, this pair has gotten tougher lately. We have finished last week at .8600 and that was where I wanted to long. Now that it is there, I will look to smaller timeframes to give me clues whether I want to dive into this trade or not. More conservative traders will look for a break of the recent 4-hour range to make that decision. Shorts below, longs above, considering breaks and pullbacks of the range. All explained in the video.
$/Yen: Normally a pair I love trading, looks a little trickier now. Broke it’s daily price channel to the downside below 97.00 and there were trades to be had at that area short. Now a pullback to 97.00 for a short is a possibility, but the pair might be reversing back up after it touches a little lower and meets a bigger weekly trendline and a 200 EMA. There seems to be lots in the way of this pair both up and down but a short below the weekly trendline is a possibility. All orders on this pair should be managed till we find some clearer water to trade in. Other JPY crosses look better at moment. Check video for details.
Euro/Yen: Perfect example last week of why R/R is important. After initially losing my long at 130.70, I more than made up for it with a strong short below this line. Price continued to fall and it seems that it broke through the MONTHLY 200 EMA. This is precisely the location I would look for a pullback to short in the 129.30-129.50 area. Keep in mind there is a daily 55 EMA for protection as well above this area. A continued fall could lead to a bounce trade at 127.50 which has been a VERY important area on this pair for you counter-trend enthusiasts. A break below this area and I would very much favor an M2 short of 127.50.
Aud Yen: The pullback to 90.00 never materialized, BUT the bounce from 86.30 area did. I would again look for a pullback to 90.00 for a short, but it may only pull back to 89.00 before heading lower. Use smaller timeframes if you want to trade this area, otherwise wait for 90.00 86.30-86.40 all the way down to 86.00 should be again a strong place to look for a counter-trend long. Check video out for more details.
Cad: Loonie, loony, it’s the Loonie. Price bounced off the trendline after manhandling the 1.0400 area I spoke of last week. Cut through it, then dipped below it. Same areas are in effect this week as the last. 1.0275 seems to be a good area for a long with the weekly 200 EMA and trendline, while 1.0400 could provide another short, assuming your stop is behind the previous high of 1.0445. I would personally use extreme caution on this pair until either area is broken an a bigger trend can continue.
New members please note: If I am looking to take a trade long, at for example 1.5000 , I place my order 10 pips above & 10 pips below for a short. This is because price often does not quite reach a major line and you need to allow for spreads.
We are NOT a “tipping service” our aim is to teach you how to trade for yourself. For more up to the minute updates do not forget to drop by the forum
Hope you enjoy the analysis!! See you Wednesday for an update!! Best wishes and happy trading to all!!!
To view the video, click on the link http://youtu.be/_10F0E_1xuY