Rules of Engagement:
1.
The range of your last few high/low points
is more than 20 pips. High/Low points on our charts are indicated
by the red (high) and blue (low) circles. (also called “Mouteki 2 bar high/low
points”) These are a high or low point with two bars on each side of them that
didn’t make a new high or new low. We
don’t use all red and blue circles when deciding if 20+ pips has been reached,
we mainly use the points that have shown very little retracement. The exception to this rule is only if your
potential trade is in the direction of the overall trend. If so, less than a 20 pip range could still
be acceptable, provided the other variables match.
2.
Trade the right side of the range. If
you are planning to go long, your entry would be in the bottom half of the range
between your last few high/low points-closer to the low of the range. When shorting a currency, it would be the top
end of the range. If you are in the
direction of the overall trend then this rule is less important.
3.
Before
placing a trade, wait for a breakthrough
of any decent support or resistance that’s nearby. Ideally, we like to see
double confirmations. If there is a
break of the trend line, we like to wait for a break of the nearest support or
resistance as well. We do this to avoid
reversing our position on what is likely a small retracement. On our chart we have two examples of
this. The first trade breaks the low
price point, and then the trend line. The
second trade breaks the trend line, and then the higher price point. During the upward move, we also have
retracements that break the trend line, but not the support line, therefore we
never reversed our trade.
4.
Draw smooth trend lines-use clean points with
no previous breakthrough. This
is important because we think that once the price passes through it, the
integrity of the trend line has been weakened. Once a price breaks through our
trend line, we modify our trend line according to the previous break. We take our original point and use the high
or low of the violation bar as our next point.
We then draw a trend line between the old line and the new line, because
we would still consider entering that trade on a double confirmation. If the trend line is strong, and the price
pulls away from it, only to come back and pass through it, we don’t need a
double confirmation. We would consider
entering the trade without it, if there are no support or resistance points in
the area around the breakthrough.
5.
If our trade is going really well, and the
trend line looks pretty steep, we often change our strategy a little. We would not be looking to stop and reverse
as usual, but be more concerned with not giving back all of our profits. If your price targets have been reached or
you feel you are coming up on a strong support or resistance, then feel free to
exit the trade. We like to give the
trade a chance, usually waiting for a trend line violation or an opposite
support or resistance break though.
Sometimes there will be no mouteki price points or trend lines in the
immediate area, so we look for technical reversal points to exit our trades
with still a decent profit while at the same time giving our trade room to
breathe.
6.
Be conservative on choppy days or days when
bars have consistent long shadows. The Forex usually follows some
daily pattern, until, of course, it is broken.
Because of that some days will be very easy to trade and profitable, and
others will be difficult. For the most
part the market will be fairly easy to trade and profit from because of the
very large daily pip range. The
sooner we recognize the type of market we are in the sooner we can adapt our
trading strategy to it. One way we can “adapt” is by utilizing smaller stops
when the market is trending tightly, and using better positioned stops when the
market is more volatile. If we see a
ranging market, then we can look to enter on a single confirmation closer to
the top or bottom the range. It is easy
to trade according to rules, however it is more difficult to recognize and
adapt to the current market conditions.
By using adaptive rules we can better play specific market conditions.
7.
Use technical points for stops. There
is no need to risk more than 15 pips on a trade when using a 5 minute chart. If you decide the risk is worth the reward
then virtually any stop can be justified, but be aware of the next major
support or resistance, as that will likely be your first target or obstacle. Ideally, our stops will be on the opposite
side of the top/bottom range point nearest to our trade. If this is not possible then we will try and
place our stops just beyond the nearest support or resistance levels that we
can find that are within reason.
Remember to add your spread (2 pips) and a buffer zone (1-3 pips) to the
support or resistance you chose to put your stop behind. The basic idea is that our trades have 3
possible scenarios, 2 of them going our way. The trade could move against us and break out
past our technical point; we lose. The trade could move against us, hit our technical
point and reverse back, moving our way; we win.
The trade could move in our direction; we win.
8.
Managing stops can be the biggest
determinate between making money and losing money. If we trail
our trade tightly, we increase the chance of making a small profit, but reduce
the likeliness of making a big profit.
Small profits are good, however, if we consistently get stopped out at
+5 or so, and are willing to risk 15 pips on the downside, it will be tough to
make decent money. More often than not
we would miss the big runs. With that
said, we need to be intelligent about our stops, both in placing them as well
as managing them. Ideally, we just close
our trade and take a position the other way.
If we are using a trailing stop loss, we need to keep our distance and
always place stops behind strong support/resistance points. We trail our stops if we think our stop is in
a weak position. The stronger we feel
our stop is, the less likely we are to move it (unless the trade moves into
good profit.) One strategy that makes stops easier to manage is trading two
lots. The first lot we look to exit at
the first likely reversal point, thereby locking in profit, (or at least
offsetting any potential moves that stop you out.) Trading two positions can free you up
mentally by satisfying your need for locked in profits, but also allowing you
an opportunity to see your trade run as well.
9.
Trading bigger ranges and trading with the
overall trend will reduce your risk and dramatically increase the probability
of a successful trade. Like we stated earlier trading two or more
positions also increases your chance of success. Remember that the trend is more likely to
continue than it is to reverse.
10.
Do not force or create trades. Wait
for the market to dictate when you trade. This rule is the difference between
following a strategy and “just winging it”.
Modifications can be great, but entering early, really late, or placing
large stop losses are recipes for disaster if not thought through.
These Rules of Engagement
are based on the results of one lot trading with a few adaptive variables,
(e.g. stops and limits.) We have NOT
tested trading only with the trend, or trading only large movements. If you decide to do so, please share your
results with us.
Additional Information:
Q:
When using a 5 minute chart are we not just giving spreads to our
broker?
A:
That depends on the currency pair.
For the EUR/USD, our spread is around 1.5-3 pips, which is a fraction of
our allowed stop loss. We want to
position ourselves for the larger moves, but even with smaller moves we can
overcome a 2-3 pip spread easily. We don’t enjoy paying a spread, but it is a
factor that most intraday trading strategies must deal with and overcome.
Q:
Why use such a small chart; wouldn’t the 15 or 30 min be better?
A:
The 5 minute chart is both the
15 and the 30 minute chart it’s just a matter of how you look at it. Three 5
minute bars are a 15 minute bar, and six 5 minute bars are a 30 minute
bar. The 15-30-60 minute charts can’t
tell you about a 5 minute chart, and a 5 minute chart can tell you what the
15/30/60 minute charts tell you. That’s why we use it.
Q:
Why don’t you use any technical indicators along with your charts?
A: We
would be happy to if you know some that would correlate with the strategy that
we are trading, and that would act as a confirmation of when to enter or exit a
trade. We are trying to keep trading relatively
simple; “if this, then that”
Q: Why do you use trend lines along with
supports and resistance points?
A:
Trend lines give us a glimpse of the possible future, and supports and
resistances open or close certain actions within that possible future. The idea isn’t to use a moving average to
tell us what we already know; rather the point is to gather information on what
we don’t currently know and using that information to predict probable
directions of the market.
Final Note:
The point and goal of all of this is to
simply make pips, individually and collectively. How we get to that point
doesn’t matter, what does is that we make it there. Please
test, tweak, develop, and create towards our goal of group success. It is difficult to put onto paper a set of
rules that work, because often the market gives us hints on what’s going to
happen and opportunities that we could seize but our rules don’t allow
for us to do it. It is for that reason
that we are working on two other strategies to fill the voids that this one
leaves. Our other strategies in
progress are for trading supports & resistances and trading range
breakouts. You will see that sometimes
we miss big trades because we followed our rules, so utilizing multiple strategies
just makes sense. We will revise and
update these strategy rules in the near future, but for now, please look over
this strategy. Test it. Modify it.
Do whatever you wish with it! We
look forward to any constructive criticism or suggestions or how to make it
better. Feel free to stop by our group
site or shoot us an email. Thank you for
taking the time to read this, have a fantastic Holiday and we wish you the best
of luck in 2007.
Galvestone Forex Group
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