How to Build and Trade Strategies

Talking Points:

• We look at the history and background of the mathematical concept known as ‘The Fibonacci Sequence’
• We show you how traders can apply these mathematical studies to their trading.

In this article, we’re going to look at a more subjective form of Support and Resistance analysis: We’re going to investigate Fibonacci. In our next three pieces, we’ll take all of these support and resistance mechanisms and we’ll show you how traders can actually put them to use.

Fibonacci

This is one of the more in-depth support and resistance methods out there, and there are a lot of different ways that traders look to integrate Fibonacci in their trading.

Taking a step back, Fibonacci is named after the 12th century mathematician, Leonardo of Pisa. In 1202 AD, Leonardo published a composition with the name of Liber Abaci that consisted of a numerical sequence that eventually became named after him. Leonardo of Pisa didn’t discover the sequence; he merely used it as an example in his composition.

The sequence is thought to have been originally used by Indian mathematicians as early as the 6th century; and in Liber Abaci, this numerical sequence was introduced the western world. The sequence introduced by Leonardo of Pisa was a system that found the next value in the sequence by adding the two previous numbers. The sequence shared in Liber Abaci was as follows:


Today these values are called ‘Fibonacci numbers’ and are used by many traders as input values for indicators along with a slew of other purposes.

But input values on trading indicators aren’t the only place that we’ll see this system at work. The Fibonacci sequence has excited mathematicians and scientists for thousands of years because of its numerous applications in the world around us. One of the initial applications that Leonardo of Pisa investigated in his original manuscript was the population growth of rabbits. He found that as an isolated population of rabbits grew, the population would grow according the Fibonacci sequence. Starting with one pair of rabbits, the population would then grow to two; which would become three, and then five, eight, thirteen, etc. The sequence is also prominent in population growth within honeybees, the number of petals on a flower, and the formation of pine cones just to name a few.

Many believe the Fibonacci sequence to be the language of nature itself. If you want to see more on this topic, Fibonacci was prominently featured as part of the movie Pi; the fictional movie released in 1998 that follows a mathematician’s quest in predicting the future based on mathematics. But even outside of fictional movies, the numerous manners with which the sequence appears in the world around us is fascinating and definitely worthy of a google-search.

But that’s not the only exciting aspect of the Fibonacci sequence. More fascinating is what we can see if we look just a little bit below the surface. If you take the ratio of any two successive numbers, such as 144 and 233 and divide the second number (233) by the first (144), you’ll eventually move towards a very special number of 1.618 (61.8%). In this specific example, the exact value would be ‘1.6180555…’ The deeper we get in the sequence, the closer this ratio moves towards 1.618 until eventually the ratio stands at exactly 1.618. This number is the prize behind Fibonacci, and it has fascinated mathematicians and scientists for thousands of years.

The number of 1.618 is called ‘The Golden Ratio,’ and can be found in numerous applications within nature ranging from the spirals of a sea shell to leaf arrangements of a houseplant.


Trading with Fibonacci (and the Golden Ratio)

Traders will often employ Fibonacci when looking to trade retracements in a trend, centering support and resistance levels around intervals defined by the Golden Ratio of 1.618.

The center of Fibonacci analysis is at the .618 interval of the trend, taken directly from the golden ratio. But we can take this a step further by dividing a number in the sequence by the number located two figures to further. If we take 34 and divide that number by 89; or if we take 133 and divide that by 377, we consistently receive values of ~.382 (38.2%). This is the next value that traders will plot via Fibonacci analysis.

We can then do the same thing with by dividing any number in the sequence with the digit located two places further. So, for example, if we divide 34 by 144; or if we divide 55 by 233, we consistently receive values of ~.236 (23.6%). Traders have taken this a step further to examine the mid-line of the move (.50, or 50%), and .786 (78.6% - or the reciprocal of .236). The finished result is what we have below using the weekly GBPUSD chart:

Fibonacci retracement on GBPUSD weekly chart



As you can see in the above chart, these price levels on a chart can exhibit phenomenal examples of support and/or resistance coming in the market place. And luckily for us, using Fibonacci as a trader is significantly easier than proving any ‘magical’ components behind it as mathematicians have attempted to do for the past couple thousand years.

To use Fibonacci, a trader needs to merely identify a most recent ‘major move.’ This is where subjectivity comes in to play. This major move can be on the 5-minute chart, the hourly chart, or the weekly chart (as we had done with GBPUSD above). But like we saw with Pivot Points, longer-terms and more data generally brings more value to the analysis simply because more traders may be seeing it. If we draw a Fibonacci retracement on a 5-minute chart; it might be seen by a few other traders whereas a retracement taken from the weekly chart will likely generate more interest from traders simply because it encapsulates significantly more data.

Traders can use the Fibonacci tool available in most trading platforms to define the move, and then levels at the proper intervals of .236, .382, .500, .618, and .786 can be drawn in. So, when prices move down to the .236 line, we can say that 23.6% of that trend has been retraced. Or if prices move down the .618 level, 61.8% of the trend has been re-traced.

Fib can be applied very easily with most modern trading platforms





--- Written by James Stanley

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Talking Points:

• This article discusses using Support and Resistance levels for risk management.
• Traders can incorporate Support/Resistance from a variety of studies to find ‘confluent’ levels.
• These levels offer traders an opportunity to look for strong risk-reward ratios in their setups.

Using Support and Resistance

The inherently risky part about trading support or resistance is that the prospect of buying support or selling resistance is, by nature, a counter-trend type of operation.
Think about it for a moment – if you’re going to go long in a market after support has been met, prices have recently come down to get to that support level, right?




So, the very act of you buying is going against the grain; at least the most recent grain as prices have been coming down and you’re looking for prices to move up (in the opposite direction of the recent price action).
This is, by nature, risky because you’re expecting something to change. If that change doesn’t happen, and if the trend continues in the way that it has been moving (lower), then you’ll be wrong and you’ll have a losing position on your hands.

This is, in-and-of-itself, not all that much of a bad thing. But the way many traders, especially new traders approach the situation can bring massively damaging consequences. And that is entering the trade without a stop and expecting that change to just take place. So if the change in direction (trend) doesn’t take happen, the trader sits on a losing position that just continues to eat away at their equity until they get to a point with which they can’t allow it to bleed any longer.

This is a major mistake in planning. Price action is unpredictable, and a trader should have their exits plotted before ever even thinking of the entry; and this is where Support and Resistance can bring significant value.

Support and Resistance with Risk Management

At its very root, support and resistance analysis shows us areas where prices may reverse. As mentioned, price action is unpredictable; but this provides a theory or idea that traders may be able to look for price direction to change.

It’s when prices don’t respond by moving higher off of support, or lower off of resistance that this prospect becomes especially costly.

If a trader places an order to buy after a currency pair has hit support, and if prices continue trending lower; the trader is in a losing position. But if this trader hadn’t placed a stop, the loss on the trade can become especially outsized as the trend continues moving against them.

This can lead to massive losses when one is wrong. And just a few of these massive losses can lead to the downward spiral of The Number One Mistake that Forex Traders Make; which is averaging enormous losses relative to smaller wins, so that even if the trader is, on average, winning 2 out of 3 positions (66.6% success ratio), they can still be losing money.

The thesis of The Number One Mistake that Forex Traders Make is to look for a profit target or reward that is at least as large as the risk amount on the trade. So, if the trader is risking 1% of their account equity on a given trade idea, they should look for at least 1% on the reward side should that trade idea work out properly. Or if the trader is risking $150 on the entry, they should look for at least $150 if they are right.

With a strong system of support or resistance in the trader’s arsenal, risk management can be made very simple by placing a stop on the opposing side of the price level.




So, if a trader is buying off of support, they can place a stop underneath that support level so that if prices continue trending lower and do not reverse, the trade can exit the position quickly. This enables the trader to avoid those situations in which the near-term trend continues to bleed away their precious equity.

Or, conversely: If a trader is selling at resistance, they can place the stop just above resistance so that should prices continue trending higher (and not reverse), the trader can close out the trade and look for greener pastures elsewhere.

Place the Stop that’s Best Suited for You

So if a trader is looking to buy, their stop should be below support; and if a trader is looking to sell their stop should be above resistance.

This way, if prices don’t react in the manner anticipated by the trader – the position can be closed with a minimum of damage. But is that to mean that if support is a mere 3 pips away that the trader should place a stop 3 pips away upon entry?

Probably not – as just a slight move lower to test support could trigger the loss on the position.

Traders are often best-served by placing the stop on the other sideof support so that the stop isn’t triggered unless the actual support level becomes violated. I call this ‘wiggle room’ but there are a ton of other names for it: Think of it as a cushion that requires support to be legitimately broken before closing out the trade.

This can be a few pips below support on short-term ideas, or 10-15 pips below support on longer-term setups.
But this begs a bigger question, as traders usually have more than just one support or resistance level to use in their analysis, especially if they’re looking at static levels such as pivot points along with Fibonacci and Price Action. That question is which level should be used for stop placement?

There isn’t one ‘right’ answer to this question. Conservative traders usually want to allow the trade more room to ‘work’ and would likely look at wider stops and levels that are further away from current price action; while more aggressive traders will usually opt for tighter stops placed around closer support and resistance levels.

There isn’t one ‘right’ answer because each trade idea is going to work out differently and price action is always unpredictable.

By placing the wider stop and taking a more conservative approach, the trader can look for a larger winning percentage since more ‘wiggle room’ is being given to each entry. These trades simply have more room to oscillate before the position is closed.

The tighter stop means that the trader will likely lose more often than the conservative trader; but because each loss is smaller than what the conservative trader might see – they can still be more profitable with the smaller winning percentage.

As I said, there isn’t one ‘right’ answer because each trade idea will work out differently and there are so many factors to account for that the probabilities of success are simply incalculable with only these few variables given.
Most important is placing stops and managing risk in a manner that is comfortable and conducive for you: Because if you’re a conservative trader/investor and attempting to use aggressive risk management, you’ll likely see adverse results that won’t feel very comfortable while trying to improve your trading plan/strategy/approach.

--- Written by James Stanley

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Talking Points:

• Many successful strategies scale in and scale out of positions.
• We should only add-to or partially close winning positions.
• We should place these scaling orders at key levels, not hard set “X” amount of pips.

We spend a lot of time as traders figuring out the best time to get in to and get out of trades, but I'd argue that how we get into trades is just as important. Today we look at scaling in and scaling out of positions, and how it can benefit your current trading strategy.

Why Do Traders Scale-In and Scale-Out?

There are many reasons why profitable traders turn to scaling into a position over time. More advanced reasons include to reduce the amount of slippage received when opening a large trade or to hide a large position that you don't want others to know about. But, the most important reason why traders scale into a trade is to enhance their gains on a trade that has already begun to show promise.

It is very obvious that larger trade sizes will result in larger profits when the trade moves in our favor. That makes complete sense. But when we have the ability to start off our trade with a smaller trade size and only add to a trade when its winning, we are able to start off our trade by risking a little and end our trade with the chance to make a lot. So not only to do we enhance our profit potential, we can also reduce our risk by starting with a smaller trade. Only adding to the trade after its profitable.

Scaling out of the trade is a similar idea to scaling in, but in reverse. Rather than letting a trade hit a profit target and close out the entire position, we instead partially close the trade, and let the rest have the opportunity to move further into profitable territory. This secures a profit but also leaves the door open for further gains. It is also common to move your stop loss to break even or beyond when an initial profit target is hit. That way the remaining position you have open is almost "risk-free."

What Type of Trades Can This Method Be Used?

So now that we understand the benefits of scaling in and scaling out of trades, in what situations should we consider it? Well, for starters, we should only look to add to positions that are in profitable territory. We don't want to throw good money after bad if the trade is already proving us wrong. It's best to cut losers short, lest we add fuel to the fire.

Learn Forex: Don't Add to Losing Positions




We also only want to scale out of positions only when they are profitable as well. There is no reason (other than hope) to partially close out a trade once its proven us wrong. So rather than setting a single profit target for the entire trade, we can set 2 or 3. It's also possible to leave a part of our trade open without a limit at all, and letting an indicator or a trailing stop decide when it should be closed.

Where Do We Add-To or Partially Close Trades?

Using this method is actually much easier than many traders try to make it. The way I look at scaling in is the same way I would look at opening up a single trade, but locating several times where opening up a trade is warranted. Stay away from setting "blind" entries 50, 100, or 200 pips away from our original entry. We want to have just as much reason to add to a trade as we did when we initially opened it.

Take the simple CCI strategy below where we decided to take a buy trade when CCI crossed above -100. This is a classic trade that found itself in a pretty tight range for the next 20-25 bars. There were times when price ran up in our favor; but never a definitive price move that would catch the attention of AUD/USD bulls, until the range was broken and price closed above resistance. This breakout would justify buying the Aussie in its own right. But since we already had a trade, we can simply add to our existing trade.

After we added to our position, we witnessed another "top" creating another resistance level. When the AUD/USD broke this 2nd resistance level, that was another time where we could add to this trade. So it isn't anything too difficult. We just look for opportunities where buy trades look good, and allow those entries to add to our existing trade.

Learn Forex: Adding to an AUD/USD Trade Using Resistance Line Breaks




As for scaling out, we want to use the same method as we would normally use to exit trades, but pick multiple levels that fit that criteria. So for the chart below, we can see that we bought on an initial break of a previous high. We then targeted a profit just below the next potential resistance level and then targeted an exit just below the resistance level after that. So rather than taking a quick profit on our entire trade at the first resistance level, we were able to let part of the trade run and obtain greater profits.

Learn Forex: Scaling Out With Multiple Limit Orders



Scaling for Success

So we understand that our strategies' trading logic is important, but so is how we enter and exit our trades. Scaling in and scaling out can enhance our gains but also at times reduce our risk. Using the methods above can improve your strategy, but remember to perform your own due diligence before placing any trades on your own account.

Good trading!
---Written by Rob Pasche

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Talking Points:

• This article is a capstone on the topic of support and resistance.
• Below we discuss multiple subjects within the field of support and resistance, many of which offer more detailed information by clicking on the relevant link.

Identifying Support and Resistance

Before we can use support and resistance in our trading, we have to know how to first find it, right?
This is where support and resistance identification comes in; and what makes this rather difficult for most traders is that there are a lot of ways to do it.

If a trader learns to use, let’s say pivot points; and keeps those pivot points on their charts expecting support or resistance to come in at these levels when market prices move there; they may be disappointed to find the market ignoring that level and instead looking at a more-relevant level from a Fibonacci retracement or psychological number.
So, rather than trying to learn the ‘best’ way to identify support and resistance levels – traders are best served by learning as many forms of this analysis as they can so that they can look at all of them as ‘areas of interest,’ to get trade ideas and setups.

The easiest type of support and resistance analysis is often considered to be ‘Static’ Support and Resistance in the Forex Market. These are levels that are objective and non-negotiable, so it makes it really easy for new traders to learn how to identify these prices because it’s as simple as adding an indicator, or drawing a line on the chart.

Psychological whole numbers can regularly highlight tops and bottoms in a market




More complex support and resistance analysis can be found with Fibonacci studies.
With Fibonacci analysis, traders can examine a recent ‘major move’ in a market to see potential levels of future support or resistance. The levels looked at are ratios derived from the mathematical Fibonacci sequence, and can potentially have a massive bearing on longer-term price movements.

Fibonacci can exhibit support and resistance in numerous manners



Validating Support and Resistance

But after we’ve identified support and resistance levels, we need to be able to ascertain which of these prices may be relevant in the future. This is where price action comes into play, and traders can use this type of analysis to locate price action swings in the market to see the prices that traders had reacted to in the past.

After all, the chart is a depiction of supply and demand at any one point-in-time… so by noticing the exact price level with which prices reversed or reacted, traders can see the exact price level with which that supply/demand scenario had changed.

Price action swings can not only show us additional levels of support and resistance – but they can help us validate price levels from other support and resistance methods by showing us where traders had reacted in the past.

Price action shows when and where the supply/demand flow changed in the past



Using Support and Resistance

This is the important stuff: Because what good is support and resistance if it doesn’t/isn’t bringing value to your approach?

This is the reason that support and resistance analysis is so utterly important – it has numerous applications to a trader’s approach or strategy.

In the opinion of many professionals – risk management is the most important part of trading. To make this rationale as simple as possible – no human being will ever be able to tell the future… so every trader is going to be wrong at least some of the time. And as long as the risk is out there that one time being wrong can wipe away the gains from 10 or 20 winners, the trader is likely looking at negative long-term expected value.

Because what happens when you lose 3 or 4 trades in a row? Eventually you’ll have no capital left, all over 3 or 4 incorrect trade idea.

Support and/or Resistance can help traders manage their risk



The reason support and resistance is so utterly important with risk management is because of the most basic price action relationship that observes that up-trending markets will often make series of ‘higher-highs’ and ‘higher lows’ and down-trending markets will be accented with ‘lower-lows’ and ‘lower-highs.’

So, if you’re buying and looking for prices to move up – it’s logical to place your stop underneath support. Because if prices break support (thereby making a new low) – it may go on to break more support levels (and make even ‘lower-lows’).

So, why would you want to stay in a long position in a down-trending market? Even if you think prices are going to trend higher eventually – you can stop the trade out at support and re-enter after a lower support level is made as prices begin trending higher.

This would be using price action analysis to enter trades based on support and resistance, and this brings up the next usage of support and resistance analysis in the entry of trading positions.

We discussed two different manners of entry in the article: Price action, as alluded to previously; and indicator-based entries. This would be like observing a strong level of support in a market, but waiting for an indicator signal to appropriately trigger a position in that direction. This can be done with numerous indicators such as RSI, MACD, CCI, Stochastics, and moving averages. This way, the trader can still use support and resistance in the risk management of their strategy and can continue to look to avoid trading mistake; and still rely on the simplicity of an indicator to decide when to buy and when to sell.

Traders can integrate support/resistance analysis with an indicator-based entry



After the trade is initiated, the trader’s job is to then to appropriately manage the position and once again, support and resistance can provide value. And this is a field that most professional traders will spend their careers attempting to master. Because just like we can’t tell the future before we enter a trade, being long or short isn’t going to help us do so any better.

So even after the trade is triggered, the trader’s job is to navigate a certain approach in an uncertain environment.
This is why trade management tactics such as the break-even stop can be such a huge part of a trader’s approach. It allows them to move their stop up to their original entry price so that, worst-case scenario, if prices reverse the trader can avoid losing any of their precious risk capital on the position. And if prices do continue, the trader can look to reap even more gains and even bigger profits.

But we can’t just move our stops to break-even and hope for the best, right? To make profits in markets we have to close our positions at some point; but the big question is ‘when?’

Well – you’re never going to be able to perfectly forecast the future, and the very act of you having a position has a strong tendency to taint your analysis by having a bias. Too often new traders will quickly close out winners for fear of prices turning around against them; while they’ll also usually keep losing trades open far too long in the hope that prices will move towards profitability.

This is pretty much the opposite of what most professionals look to do by cutting their losses quickly, and letting their winners run.

But as we explained, traders can look to ‘scale out’ of positions so that they can realize some profits in winning positions while still keeping a portion of the position running. Support and resistance can help in this approach because traders can use these levels to continually manage risk, initiate entries, and adjust stops at and around these price levels.

--- Written by James Stanley

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Talking Points:

• The AUDUSD is trading in an ascending triangle
• With the absence of a new high, traders can wait for a breakout
• The triangle low and high can be used to extrapolate price targets

At some point, market trends will come to an end. These market transitions can be difficult for those that are used to using a directional market to make trading decisions. These market conditions don’t have to spell disaster for traders however. Those traders that can properly identify consolidating trading patterns will have a head start on adjusting their trading strategy accordingly. Today we will review trading one of the markets popular patterns, the ascending triangle. So let’s get started!

So, what exactly is an ascending triangle? An ascending triangle is a consolidating charting pattern, that can be identified by locating a currency pairs support and resistance levels. Below we can see what is known as an ascending triangle forming on the AUDUSD 4Hour chart. Resistance in this instance is seen as a horizontal line created due to the absence of a new high. At the same time, a line of support can be seen ascending as our lows increase in value. As price pressure builds in the triangle, traders can then begin to consider trading in anticipation of a market breakout.

Learn Forex –AUDUSD Ascending Triangle



Breakouts Using Entry Orders

Once a triangle pattern is found, we can then begin setting orders in preparation for a breakout. By using an entry order, a buy order can be placed over resistance in anticipation of the market moving through this value. The order will remain pending, and in the event that the market breaks through this selected point, an order to buy the AUDUSD will be triggered. Conversely, if price does not break resistance or price continues to consolidate, the order will not execute. In these instances, traders will have the option of deleting the order, and then proceeding to look for other market opportunities.

Learn Forex – AUDUSD Triangle Breakout



Managing Risk

Lastly, traders need to find a profit target and manage risk. Traditionally, most traders look to use a 1:2 Risk/Reward ratio or better when trading breakouts. This can be extrapolated by looking for twice as many pips in profit as we are risking with our stop. One useful tip is to extrapolate a profit target from the triangle. Traders can measure the distance from the bottom support mark to the top of current resistance. This value can then be added to the point of the breakout to develop a profit target.

---Written by Walker England, Trading Instructor

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Talking Points:

• Trading Forex is not a shortcut to instant wealth.
• Excessive leverage can turning winning strategies into losers.
• Retail sentiment can act as a powerful trading filter.

Everyone comes to the Forex market for a reason, ranging between solely for entertainment to becoming a professional trader. I started out aspiring to be a full-time, self sufficient Forex trader. I had been taught the 'perfect' strategy. I spent months testing it and backtests showed how I could make $25,000-$35,000 a year off of a $10,000 account. My plan was to let my account compound until I was so well off, I wouldn't have to work again in my life. I was dedicated and I committed myself to the plan 100%.

Sparing you the details, my plan failed. It turns out that trading 300k lots on a $10,000 account is not very forgiving. I lost 20% of my account in a 3 weeks. I didn't know what hit me. Something was wrong. Luckily, I stopped trading at that point and was fortunate enough to land a job at a Forex broker, FXCM. I spent the next couple of years working with traders around the world and continued to educate myself about the Forex market. It played a huge role in my development to be the trader I am today. 3 years of profitable trading later, it's been my pleasure to join the team at DailyFX and help people become successful or more successful traders.

The point of me telling this story is because I think many traders can relate to starting off in this market, not seeing the results that they expected and not understanding why. These are the 3 things I wish I knew when I started trading Forex.

#1 – Forex is Not a Get Rich Quick Opportunity

Contrary to what you’ve read on many websites across the web, Forex trading is not going to take your $10,000 account and turn it into $1 million. The amount we can earn is determined more by the amount of money we are risking rather than how good our strategy is. The old saying “It takes money to make money” is an accurate one, Forex trading included.

But that doesn’t mean it is not a worthwhile endeavor; after all, there are many successful Forex traders out there that trade for a living. The difference is that they have slowly developed over time and increased their account to a level that can create sustainable income.

I hear about traders all the time targeting 50%, 60% or 100% profit per year, or even per month, but the risk they are taking on is going to be pretty similar to the profit they are targeting. In other words, in order to attempt to make 60% profit in a year, it's not unreasonable to see a loss of around 60% of your account in a given year.

"But Rob, I am trading with an edge, so I am not risking as much as I could potentially earn" you might say. That's a true statement if you have a strategy with a trading edge. Your expected return should be positive, but without leverage, it is going to be a relatively tiny amount. And during times of bad luck, we can still have losing streaks. When we throw leverage into the mix, that's how traders attempt to target those excessive gains. Which in turn is how traders can produce excessive losses. Leverage is beneficial up to point, but not when it can turn a winning strategy into a loser.

#2 Leverage Can Cause a Winning Strategy to Lose Money

This is a lesson I wish I had learned earlier. Excessive leverage can ruin an otherwise profitable strategy.
Let's say I had a coin that when heads was hit, you would earn $2, but when tails was hit, you would lose $1. Would you flip that coin? My guess is absolutely you would flip that coin. You'd want to flip it over and over. When you have a 50/50 chance between making $2 or losing $1, it's a no-brainer opportunity that you'd accept.

Now let's say I have the same coin, but this time if heads is hit, you would triple your net worth; but when tails was hit, you would lose every possession you own. Would you flip that coin? My guess is you would not because one bad flip of the coin would ruin your life. Even though you have the exact same percentage advantage in this example as the example above, no one in their right mind would flip this coin.

The second example is how many Forex traders view their trading account. They go "all-in" on one or two trades and end up losing their entire account. Even if their trades had an edge like our coin flipping example, it only takes one or two unlucky trades to wipe them out completely. This is how leverage can cause a winning strategy to lose money.

So how can we fix this? A good start is by using no more than 10x effective leverage.

#3 Using Sentiment as a Guide Can Tilt the Odds in Your Favor

The 3rd lesson I've learned should come as no surprise to those that follow my articles... using the Speculative Sentiment Index (SSI). I've written many articles about this topic and have given many examples of its uses on Google+. It's the best tool I've ever used and is still a part of almost every trading strategy I am using, present day.

SSI is a free tool that can be found here that tells us how many traders are long compared to how many traders are short each major currency pair. It's meant to be used as a contrarian index where we want to do the opposite of what everyone else is doing. Using it as a direction filter for my trades has turned my trading career completely around.


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Talking Points

• Lack of volatility can provide range trading opportunities
• Traders can look for market turns at support & resistance values
• Traders can use an oscillator, like CCI, to time market entries

The idea of trading short term market reversals is a popular one, especially in low volatility environments. Traders that are aware of the current market conditions can take advantage of the absence of any distinguishable trend by first identifying key levels of support and resistance and then trading accordingly. Today, we will review how to scalp intraday reversals and ranges using Camarilla pivot points.

Learn Forex – USDCHF Pricing Range




Find Support & Resistance

Markets are prone to turn at existing points of support and resistance, so identifying these points is critical. One easy way to identify support and resistance for scalping is with the use of Camarilla Pivot Points. Camarilla Pivots are calculated using percentages of the previous day’s trading range and when added to the graph creates a clear idea of where price may be supported or resisted.

As seen above, Camarilla Pivots label resistance lines R1-R4, and support lines S1-S4. R4 and S4 are considered extremities in price denoting a breakout in price. Traders looking for short term reversals should primarily focus on price moving between the S3 and R3 pivots. This is known as the trading range, and can afford traders short term day trading possibilities if price stays between these values. Let’s look at how a short term turn in the market can be traded.

Learn Forex – USDCHF Range Entry and Target



Trading Price Reversals

Now that support and resistance has been labeled on the chart, traders can begin planning their market entries. The key to trading price reversals is to sell the market as close to a value of resistance as possible. Conversely traders should look to buy the market as price approaches support. Traders can select to use market orders, entry orders, or even employ the use of oscillators to facilitate their entries. Regardless of the methodology employed, the key isto remember that the market can continue ranging and turning, as long as the R3 and S3 pivots remain valid.

Next, traders must plan to exit the market. Stop orders can be placed outside of the S4 and R4 values. Since price would be reaching a breakout at that point, traders should no longer be looking for price reversals at these points. Conversely, traders should also prepare to take profit. This can be done in accordance with traditional range trading strategy. Traders buying support can look to take profit at resistance and vice versa for a sell based position.

---Written by Walker England, Trading Instructor


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Talking Points:

• Trade size can destroy an otherwise profitable strategy.
• Controlling leverage to under 10:1 gets us part of the way there.
• Using the Risk Management Calculator make trade size selection easy.

Trade size is not talked about very often. It isn’t as flashy or as exciting as talking about strategy or talking about a juicy trade setup, but trade size is something that every trader has to think about before placing every single trade. Today’s article discusses the importance of trade size, what can happen if you ignore its importance, and a free tool that can select our trade size for us.

Improper Trade Size Can Cause a Winning Strategy to Lose Money

It’s true. A strategy that has an edge can be rendered unprofitable if we use improper trade size. This phenomenon occurs when we risk so much on a single trade that random market moves can cause it to lose, and lose big. Rather than trying to hit a home run on large trades, we need to give our strategy room to have bad streaks and still have capital left over to continue to trading.

When we trade using too large a trade size, we are relying more on luck than on our actual strategy. But when we trade using reasonable trade sizes with a profitable strategy, our edge should translate to profits earned over time.

How Much Leverage Should We Use?

We never want to use more than 10x effective leverage. 10x effective leverage means having trades equal to 10x our account equity.

We found out there was an inverse relationship between leverage and profitability. Meaning the more leverage traders use, the less likely they were to be profitable FX traders.

Learn Forex: Equity Size, Effective Leverage, and Profitability Ratio



The chart above clearly explains this relationship. Traders with higher account balances (using less leverage) were more likely to be profitable than traders that use more leverage.

Following the 10x leverage rule is very simple. Here are some examples with different account sizes.

• $1,000 account equity x 10 = 10k or less in open trades
• $5,000 account equity x 10 = 50k or less in open trades
• $25,000 account equity x 10 = 250k or less in open trades
• $100,000 account equity x 10 = 1,000k (1M) or less in open trades

But even following this 10x leverage rule won’t get us where we need to be as far as money management goes. We need to be able to calculate how much money we are risking on each specific trade.

After we input the percent of our account we are willing to risk on the trade, our profit target in pips, and our stop loss in pips, it will tell us the ideal trade size for our account.

Personally, I don't like to risk more than 1% of my account on any given trade. But many traders opt for a higher 2% risk per trade maximum. Whichever you decide, it's nice knowing we are risking X amount of dollars per trade.

Reducing Risk for Long Term Profits

Trade size is not the most exciting topic in the world, but it is one that needs to be learned. Trading proper trade size is a key component in trading success, so don't ignore it.

Good trading!
---Written by Rob Pasche

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Talking Points:

• Trend Strategies can use a 200-period MA filter
• Range Strategies can use the ADX
• All other strategies can use the SSI filter

Filtering a Trend Trading Strategy

We’ve all heard the saying, “the trend is your friend” or “trade the path of least resistance.” These phrases are used by traders that want to trade in the same direction as the overall trend. But what if we have a difficult time locating the trend? What do we do if we are uncertain about our direction bias?

An excellent tool to add to a trend-based strategy is the 200-period Simple Moving Average. By averaging the closing price over the last 200 bars, we can see if the current price action is above or below the average.

The 200-Period Simple Moving Average



Anytime we see price above the 200-period moving average line, we should look for buying opportunities. Anytime we see price below the moving average line, we should look for selling opportunities. This ensures we are trading in the same direction as the prevailing trend.

We can also take note of the strength of an existing trend by how far price has moved away from the 200-period MA. The further the price is away from the average, the stronger the trend. This can be seen in the chart above. A strong downtrend followed by a more tame uptrend.

Filtering a Range Trading Strategy

With the current drop in Forex volatility, many traders have migrated over to using range-bound strategies. A range strategy attempts to buy low and sell high when price is moving primarily sideways. The only problem is that sometimes market dynamics can change, turning ranging pairs into pairs that may begin trending.

To mitigate range trading during these transition times, we can use a technical indicator called the Average Directional Index or ADX. The ADX is not a direction filter. It is a filter that tells us if a currency pair is currently in a trend our not. The higher the ADX, the stronger the trend is either up or down. The lower the ADX, the more the currency pair has been moving sideways.

The chart below shows a period of time where price was trending and later changed to ranging. The key level for ADX is 25. Whenever the ADX is below 25, we should focus on trading range bound strategies. Any reading above 25 is not as suitable for range trading, and could actually be suitable for trend trading if ADX moves high enough.

Range Bound when ADX is Under 25



By eliminating our range trades when ADX is above 25, we have a better chance at turning a profit.

Hopefully this article has given you ideas on ways to improve your own strategy, whether you are trading trends, ranges, or something entirely different.

Good trading!
---Written by Rob Pasche


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Talking Points

• CCI is a Classic Oscillator
• Traders Can use Overbought / Oversold Values
• Time Entries with Camarilla Pivots Levels

Timing entries is an important step to consider when developing a trading strategy. This is especially true for scalpers and day traders looking to take advantage of intraday market price swings and reversals. Normally, technical oscillators such as CCI (Commodity Channel Index) can be used in tandem with support and resistance to identify potential areas to enter the market. To do so, today we will review using CCI with camarilla pivots.

Overbought / Oversold CCI



CCI (Commodity Channel Index)

If you are already familiar with RSI, Rate of Change, or other oscillators you are one step closer to trading with CCI. Like many oscillators, CCI uses a mathematical equation to depict overbought and oversold levels for traders. Pictured below is CCI, which uses a +100 reading to indicator overbought conditions, while a reading below -100 represents an oversold level.
Normally 70-80% of the readings printed by CCI fall between overbought and oversold levels. Traditionally traders will wait for the market to move to an extreme and then use these values for buy or sell signals with momentum returning to the market. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative price levels over time. Knowing this, reversal traders will wait for the indicator to move outside of one of these points before reverting back in the direction a support and resistance value. Now that you are familiarized with CCI, let’s look at an example using the indicator in conjuncture with pivot points.

AUDUSD & CCI




Reversals & CCI

The use of support and resistance lines, such as camarilla pivots, can also be used in conjuncture with oscillators like CCI. The benefit of this, is that camarilla pivots outlines an area for traders to plan for a market reversal. Intraday resistance is typically found at the R3 resistance pivot, while support for the day’s range is found at the S3 pivot point.

The key to using CCI with camarilla pivots is to line an entry signal near support and resistance, along with an overbought or oversold reading of CCI.

Looking at the example above, we can see resistance formed at the R3 pivot near .9315. Instead of immediately entering into the market, traders can wait to take an entry signal when the indicator closes back below the +100 overbought area. The same can be said of price testing support. In the event that price bounces, traders can use the indicator to signal momentum of the market heading back up towards resistance.

---Written by Walker England, Trading Instructor


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