HTTP 200 OK
Allow: GET, HEAD, OPTIONS
Content-Type: application/json
Vary: Accept
{
"count": 17,
"next": null,
"previous": "https://www.pagoolabs.com/stories/api/?format=api&ordering=-content",
"results": [
{
"url": "https://www.pagoolabs.com/stories/api/49/?format=api",
"id": 49,
"title": "Building an Oil Futures Trading System Using Heikin Ashi Candlesticks",
"slug": "oil-futures-using-heikin-ashi",
"status": 2,
"publication_date": "2017-11-06T06:18:03Z",
"lead": "I show how to convert the Heikin Ashi reversal method into a simple trading system to profit in the oil futures market.",
"excerpt": "Teaches how to convert the Heikin Ashi reversal method into a simple trading system to profit in the oil futures market.",
"poster": "SeanManefield",
"content": "---\r\n\r\nOil has been consolidating since 2016 in the $40-$55 range after having fallen steeply from the $147 a barrel high set in 2008. At the end of last week it had just peeked above the previous consolidation high posted in early December 2016. On the longer timeframe *Bigger Picture* weekly chart below, oil is still in a downtrend, as indicated by the falling moving averages.\r\n\r\n![Weekly WTI Oil Chart](/media/uploads/2017/20171106_Oil/2017-11-06_Oil-W1.jpg \"Weekly WTI Oil Chart\"):C100!\r\n\r\nBased on the recent breakout above the trading range, either the downtrend is ending or a bigger upward correction is underway. We don't know which at this stage. And we do not have to know because we will not be trading against the weekly trend until any uptrend, if it exists, reveals itself in the market.\r\n\r\nOn the fundamental side, we have a steadily improving world economy, stronger than expected numbers coming out of the USA and a renewal of tensions with Iran. It's interesting to note that Iranian tensions were also flying high during the last peak in 2008. Of greater concern, some unexpected turmoil is emerging from [Saudi Arabia](https://news.yahoo.com/round-saudi-princes-businessmen-widens-travel-curbs-imposed-083251967--finance.html), a key oil producer. It's early days yet but it appears that any Saudi policy that might have existed of depressing oil prices to drive USA frackers out of business, has come to an end.\r\n\r\nEach of these developments is oil positive, but should we trade *against* the longer term falling prices?\r\n\r\nThe answer is to never trade against the trend. Instead I will pull back to a shorter timeframe that concentrates more chart space around these recent developments. I am going to drop down two standard timeframes from the weekly to explore the effects of applying [our simple system method](/stories/43/2017/10/24/trading-systems-part-1-introduction/) to the four hour (H4) chart. In this shorter timeframe, shown below, oil is showing a distinct uptrend, in line with recent fundamentals. We should be cautious here because the longer term chart is still considered a downtrend until at least the $63 high from May 2015 is taken out and the MAs trend up or cross.\r\n\r\nTo demonstrate this sample system in the oil market, I will be using the [Heikin Ashi reversal technique](/stories/46/2017/10/24/trading-systems-part-4-examples-of-signals/#HA-signals) (HA). However, as in our earlier stories, I am not wedded to any one signaling technique. Feel free to use MACD, crossing moving averages or your own favorite indicator if you wish. You can follow along with our discussion here as you apply your custom signals to the same charts. Everything presented here is done as simply as possible for learning purposes only. I encourage you to go out and apply these general techniques to developing your *own* system.\r\n\r\n\r\n#### <a id=\"The-H4-Oil-Chart\"></a>**The H4 Oil Chart **\r\n\r\nIn the earlier series on Systems I used a moving average cross of the MA(100) and MA(200) to mark the start of a trend. There are better trend methods but I will stick to the MA cross here both because I have [already explained how they work](/stories/43/2017/10/24/trading-systems-part-1-introduction#Moving-Averages) and because crosses are easy to demonstrate. Once a trend has started we will open a position whenever our [signal](/stories/45/2017/10/24/trading-systems-part-3-signals/) fires, as long as our system's [conditions or filters](/stories/45/2017/10/24/trading-systems-part-3-signals/#Rules-and-Filters) are met.\r\n\r\nTo signal our entry into a trade I will use the [Heikin Ashi reversal technique](/stories/46/2017/10/24/trading-systems-part-4-examples-of-signals#HA-signals) which we discussed in the earlier series. The HA method is an easy signal to show on a chart because of the changing color of the candles.\r\n\r\nThe HA bars are really just averages of today's and earlier prices so they smooth over the little period to period wiggles in the standard bars. As a result, they differ from the more standard candlesticks so, to help you become familiar with them, I present two charts below. The first has standard candlesticks and the second, which is marked up with setups, has the HA bars.\r\n\r\n![H4 WTI Oil Chart](/media/uploads/2017/20171106_Oil/2017-11-06_Oil1.jpg \"H4 WTI Oil Chart\"):C100!\r\n\r\n![H4 WTI Oil HA Chart](/media/uploads/2017/20171106_Oil/2017-11-06_Oil-HA1.jpg \"H4 WTI Oil HA Chart\"):C100!\r\n\r\nThe **signals emitted** when a HA bar changes color are marked on the above H4 Oil chart. I have filtered out HA reversals that did not come after a countertrend retracement of at least two bars. Also excluded are reversals where the retracement did not move back against the prevailing trend. We are only interested in HA signals where we can say the market appears to have *rejected* lower prices, so inside bars don't count. These signals are marked 1 to 7 on this first set of charts, shown above. They are further annotated with an **x** if the setup fails, a **✓** if it wins or a **?** if it's unclear for whatever reason.\r\n\r\nThe rules for calculating how much of your funds to allocate and the number of contracts to open were discussed in the series on [The Basic Setup](/stories/38/2017/10/24/basic-trade-setup-part-1-introduction/) and if you haven't yet read that series, now is a good time to have at least a quick look. The math is presented in tabular form [here](/stories/42/2017/10/24/the-basic-setup-part-5-manage-that-trade/#Profit-in-the-Sample-Gold-Trade) if you need a reference.\r\n\r\nI will keep this presentation simple by assuming we are allocating **1%** risk capital to this trade and expecting a risk-reward multiplier of four (**RR=4**). So any loss would be -1% and a win +4%. Scale up accordingly if you are an experienced trader risking 2%.\r\n\r\nWe will start mechanically trading our system at the time period where the [faster MA(100) crosses](/stories/43/2017/10/24/trading-systems-part-1-introduction#Moving-Averages) above the slower MA(200), or point A in the charts above.\r\n\r\nThe first thing to note is there was a string of losses until the end of the period shown on the chart. However, the beauty of the systems approach is about to reveal itself, so don't give up just yet!\r\n\r\nAlthough the first trade does not look like a confident setup, a system will require you to open it anyway. That's because you are following a mechanical program that you designed in the earlier [systems and simulation step](/stories/47/2017/10/24/trading-systems-part-5-systems/). In this case here, we have decided the trend is up after point A, the MA cross, and we are taking every signal (HA reversal) that follows the rules we have set ourselves.\r\n\r\nIn your case you may have different criteria for establishing the beginning of a trend and a different signaling method, such as MACD. In addition you will have [filters that ignore certain poor setups](/stories/45/2017/10/24/trading-systems-part-3-signals/#Rules-and-Filters). In our case, our filters will be:\r\n\r\n- the retrace must include at least 2 bars of the opposite color\r\n- the retrace must involve the market *falling* and not simply a sequence of inside bars\r\n- we must not expose ourselves to more than 1% risk in the trade, so once fully invested, we open no new positions until it's closed.\r\n\r\n#### <a id=\"Setup1\"></a>Setup #1\r\n\r\nUnfortunately for us, the setup #1 in the chart above meets those criteria so, weak or not, we open it. The consequence though is that until that first position is stopped out in the price fall down to setup #7, we conveniently miss the other failed setups. That is, we are already fully invested from setup #1 and we don't want to take on more than 1% risk in this trade. What looks like a string of losses becomes just one loss.\r\n\r\nBut was it really a loss? Let's look at the setup in detail:\r\n\r\n Setup #1\r\n SL = 49.70\t\t\t\tStop Loss\r\n OP = 50.40\t\t\t\tOpen Price\r\n Contract Risk = CR\r\n CR = TP - SL\t\t\tContract Risk\r\n = 50.40 - 49.70\r\n = 0.70\t\t\t\tRisk per contract\r\n Target Price = TP\r\n TP = OP + RR x CR\t\twin of 4 x Risk\r\n = 50.40 + 4 x 0.70\r\n = 53.20\r\n\tHighest price (bid) before stopped:\r\n\tMax = 52.93\r\n\tCumulative win (-loss)\r\n\tWin = -1%\r\n\r\nThe trade climbed $2.53 from the open, falling just shy of the $2.80 we set as our TP based on a four times risk-reward. Depending on the price you opened in the market and your broker's bid-ask spread, these numbers could be a little different in your case. All our calculations here take into account a wide bid-ask spread, although wider ones exist. Don't worry yourself over those differences, just print your own charts and use the prices and the specific oil contract that is relevant to you. You may find though with the tighter bid-ask spreads you face that this trade actually hit the TP.\r\n\r\nIn this story, however, we want to be as sceptical as possible toward the system so we are marking it down as a failure. Had it worked, the system would require that we take the next three failed trades but we would approach setup #7 being 1% up instead of 1% down.\r\n\r\nYou will come across well-meaning advice criticizing you for not selling with so much profit already in the trade. The reality is you do not know the future and you do not know at any point whether the trade will work out favorably or not. You should already have determined the appropriate RR multiplier to use from the earlier systems simulation step.\r\n\r\nClearly, the lower you set RR the more likely you are to win. But you will still face losses of 1% for every failure and those losses have to be overcome for the system as a whole to win. Winning one setup with 1.5% but losing the next two at -1% each will steadily empty your account. Also, choosing an RR that keeps you out of other failed trades so that you only lose one instead of many, as we did here, is an advantage in itself.\r\n\r\nYour best approach is to calculate the relevant SL and the optimal RR to use for each trade and stick to them.\r\n\r\nIf you feel tempted to move your stops or target price during the trade, try it first in a demo account and watch your system fail. Don't try it with real money. Never forget you are competing in the market with a huge number of very competent and determined traders. It is their *job* to shake you out of your trade. You will only win by taking on risk and part of that risk is to hold on to your plan and stay in the trade even while the market is delivering you a drubbing. Ride that bucking bronco and don't get shaken off. No one likes to lose but here you need to put each trade aside and focus instead on whether the *system* wins, not the individual setup you open.\r\n\r\n#### <a id=\"Setup7\"></a>Setup #7\r\n\r\nAfter being stopped out the next signal emitted, as the Heikin Ashi bars reverse from red to green, is on the far right of the charts above, marked **7?**. So let's move to more recent charts to see how this and the following trades fared:\r\n\r\n\r\n![H4 WTI Oil Chart #2](/media/uploads/2017/20171106_Oil/2017-11-06_Oil2.jpg \"H4 WTI Oil Chart #2\"):C100!\r\n\r\n![H4 WTI Oil HA Chart #2](/media/uploads/2017/20171106_Oil/2017-11-06_Oil-HA2.jpg \"H4 WTI Oil HA Chart #2\"):C100!\r\n\r\nIn tabular form, here is the setup for the next signal at setup **7✓**:\r\n\r\n Setup #7\r\n SL = 49.31\t\t\t\tStop Loss\r\n OP = 49.83\t\t\t\tOpen Price\r\n CR = TP - SL\t\t\tContract Risk\r\n = 0.52\t\t\t\tRisk per contract\r\n TP = OP + RR x CR\t\tTP of 4 x Risk\r\n = 49.83 + 4 x 0.52\r\n = 51.91\r\n Add a little for Bid-Ask at close:\r\n = 51.95\r\n\tCumulative win (-loss)\r\n\tWin = 3%\t\t\t\t-1% + 4%\r\n\r\nAs you can see, the trade was successful and the target price is hit at the point indicated by the blue dotted line extending from the trade open bar. The system is now winning 3%, including the first loss.\r\n\r\nThe next series of HA reversals up to **11✓** do not meet our filtering criteria. They are either one bar reversals or the retracements are all inside bars. We insist on a minimum retracement of two bars, preferably a few more.\r\n\r\n#### <a id=\"Setup11\"></a>Setup #11\r\n\r\nHere's the setup for trade marked **11✓** which also wins:\r\n\r\n Setup #7\r\n SL = 50.88\t\t\t\tStop Loss\r\n OP = 51.58\t\t\t\tOpen Price\r\n CR = TP - SL\t\t\tContract Risk\r\n = 0.70\t\t\t\tRisk per contract\r\n TP = OP + RR x CR\t\tTP of 4 x Risk\r\n = 51.58 + 4 x 0.70\r\n = 54.38\r\n Add a little for Bid-Ask at close:\r\n = 54.42\r\n\tCumulative win\r\n\tWin = 7%\t\t\t\t3% + 4%\r\n\r\nSoon after this winning position closes, there is a little inside bar reversal which is filtered out in this system. Inside bars are widely known continuation patterns and another system might include them after testing, but it's filtered out here.\r\n\r\n#### <a id=\"Setup11\"></a>Setup #14\r\n\r\nThat brings us to the last setup on the charts, **14?**. I annotate it with a question mark to indicate that the trade has yet to complete.\r\n\r\n Setup #7\r\n SL = 53.95\t\t\t\tStop Loss\r\n OP = 54.60\t\t\t\tOpen Price\r\n CR = TP - SL\t\t\tContract Risk\r\n = 0.65\t\t\t\tRisk per contract\r\n TP = OP + RR x CR\t\tTP of 4 x Risk\r\n = 54.60 + 4 x 0.65\r\n = 57.20\r\n Add a little for Bid-Ask at close:\r\n = 57.25\r\n\tCumulative win\r\n\tWin = ?\t\t\t\t\t7% + ?\r\n\r\nThis has not yet closed so to be as sceptical as possible let's assume it's a loss. We are left with two wins and two losses but the wins are four times each loss, leaving us with a 6% (2 x 4 - 2 x 1) win for the system so far.\r\n\r\n#### Conclusion\r\n\r\nEven though the chart had a rocky start with a string of losing setups threateningly lined up, the system itself proved stronger than individual trades.\r\n\r\nMany novice traders make the mistake of opening a position like one of those above and then, if it fails, walking away entirely to play another instrument or trying another indicator. When they later revisit that market they are often dismayed to discover they had been right all along and prices had moved in the anticipated direction. With a string of such failures under their belt it is no wonder they often feel the world is against them. In fact they were staring success in the face, and they blinked.\r\n\r\nIn future stories I will continue to apply the systems approach to tricky situations where every trade does not necessarily win. In the real world of trading you have to approach losses as the cost of playing the game. Never imagine a win proves you are clever or a loss shows you are flawed. Wins and losses prove no such thing, but the work you put into designing and testing your system is everything. Just play the game of odds and become better at it than your opponents.\r\n\r\n![Update WTI Oil Chart](/media/uploads/2017/20171106_Oil/2017-11-06_Oil-HA3.png \"Update WTI Oil Chart\"):R40\r\n\r\n**`UPDATE: the final trade above did indeed go on to win on November 6th, after the weekend. The system thus wins 11% (3 x 4 - 1 x 1). The success of the system did not depend on winning the final trade, but it's certainly a pleasant bonus. Experienced traders who risk 2% per trade can walk away with over 20% of their risk portfolio in winnings. Congratulations.`**\r\n\r\n\r\n<br>\r\n<br>\r\n<br>\r\n<br>\r\n<br>\r\n\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n*[SL]: stop loss\r\n*[TP]: target price\r\n*[OP]: open price\r\n*[CR]: Contract Risk\r\n*[CS]: contract size\r\n*[CO]: number of contracts opened\r\n*[forex]: Foreign Exchange including markets and trading\r\n*[signal]: a price pattern in the market triggering the opening of a position\r\n*[setup]: An instance of a signal ready for trading with values for the number of contracts and the Open, Stop and Target prices\r\n*[instrument]: A particular traded forex or futures contract such as gold or USDJPY\r\n*[instruments]: Particular traded forex or futures contracts such as gold or USDJPY\r\n*[indicator]: A calculated line, such as a Moving Average drawn on a chart, that is separate from the OHLC prices but often calculated from them\r\n*[indicators]: Calculated lines, such as Moving Averages drawn on a chart, that are separate from the OHLC prices but often calculated from them\r\n*[H4]: Chart of the four hour timeframe",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/setups/?format=api",
"title": "Setups"
}
],
"replies": 3
},
{
"url": "https://www.pagoolabs.com/stories/api/40/?format=api",
"id": 40,
"title": "How Much Should you Risk on a Futures or Forex Trade?",
"slug": "the-basic-setup-part-3-risky-trades",
"status": 2,
"publication_date": "2017-10-24T03:29:31Z",
"lead": "How do we calculate the risk on each forex or futures trade? You will learn about risk management and how position size helps contain your risk.",
"excerpt": "Learn how to calculate the risk on each forex or futures trade. Explains risk management and position size.",
"poster": "SeanManefield",
"content": "---\r\n\r\n#### **How risky is a trade - Basic Setups Part 3**\r\n\r\nIn [earlier stories](/stories/38/2017/10/24/basic-trade-setup-part-1-introduction/) in this series on \"The Basic Setup\", I presented an example gold trade along with the open, stop loss and target prices for a potential bullish setup. In this third part of the series, we discuss the risk we face should the gold price trigger our stop and cause us to exit the position for a loss. We will use this risk calculation to determine the number of contracts we will open in Gold.\r\n\r\nThis is what we have so far for our important **setup variables**:![Setup Variables](/media/uploads/2017/a_basic_trade_setup/20171008-Gold-setup4.png \"Setup Variables\"):R40\r\n\r\nKey variables | Price\r\n-------------------------------------------------------| ----------------------------------------\r\n<span style=\"color: #009;\">**Target price**</span> | <span style=\"color: #009;\">**1295.00**</span>\r\n<span style=\"color: #090;\">**Open price**</span> | <span style=\"color: #090;\">**1260.75**</span>\r\n<span style=\"color: #900;\">**Stop loss**</span> | <span style=\"color: #900;\">**1251.40**</span>\r\n\r\n\r\nWith this information we are almost ready to calculate the number of contracts to open. The math is fairly easy although it may seem unfamiliar at first. If you trade only a few markets (or **`instruments`**) you will soon be doing the calculations in your head. You can even write out a little table of risk amounts and contract sizes and keep it close at hand when examining a new setup.\r\n\r\n**Step one** is to determine how much money you have available to trade risky currencies and futures. Most of the extra risk compared to trading equities comes from the leverage that is available to you via your **`margin account`** with your broker. I will show you how to limit that risk, but these markets will always be subject to unexpected and sometimes extraordinary price movements. You need to protect yourself.\r\n\r\nSegregate the funds you have available for trading. You cannot reasonably expect to cover your living expenses until you are a successful trader and that may be months or years away. Keep your day job, keep your real estate separate and preferably maintain a bond and equity portfolio with another broker. On top of that you should allocate enough spare cash for emergencies over the next year at least. Whatever is left over, you might choose to allocate to your futures and **`forex`** trading.\r\n\r\nIf you are in any doubt, consult a licensed professional. They deal with issues like this all the time. Nobody online can know all the factors you face in assessing your risk profile: your age, your health, your sources of income, your need for emergency funds, etc.\r\n\r\nSo now you have an amount you can allocate to trading. It needs to be at least $10,000 to get started and preferably much more because you will only be risking a tiny amount of those funds on each trade. Since the probability of losing any one trade is greater than 50%, you cannot risk most of your funds on one trade or you will be wiped out very early in the game.\r\n\r\nIf all you can spare is $10K after following all these safety rules, you may find the forex market flexible enough for your needs. Even one mini S&P contract in the futures market requires US$4,500 margin just to get started. The forex market is less regulated and allows a smaller margin and a wider range of contract sizes. Carefully assess the risk first before committing funds because a higher margin protects both the brokerage and you.\r\n\r\nIf USD is not your currency, just substitute your own adjusted numbers below. The calculations are independent of the actual account currency you use until you get to market quotes and your available risk funds. Similarly if you are trading in USD, you will need to make adjustments when trading foreign markets where markets contracts are quoted in Japanese Yen or Euros. For example in forex trading, profits and losses may accrue in units of the **`quote currency`**. I will go into this in greater depth in a later story on forex trading.\r\n\r\n**Step two** is to determine how much to risk per trade or your **`position size`**. We calculated above the amount you can allocate to trading. There are many ways of approaching position sizing but the following lists common amounts to risk per trade given the trader's situation:\r\n\r\n- **Zero** - for an absolute beginner - please start a demo account and test everything first!\r\n- **1%** - after you have mastered the demo, and hopefully grappled with your own personality quirks\r\n- **2%** - after you have successfully survived several market shocks and have acted rationally and not emotionally to developments in the market\r\n- **5%** - only for experts with many years successful trading experience and a trading system that has proven itself through good markets and bad.\r\n\r\nIn general, proficient traders will risk no more than 2% of their **`available risk capital`** on each trade. That allows 50 losing trades in a row before you are wiped out (as long as you stick to 2% of the original sum and not 2% of what is left over - we can discuss that later).\r\n\r\nBut is it possible to lose 50 times in a row?\r\n\r\nWhile unlikely, it's not impossible and could happen purely by chance alone, just like throwing 50 heads in a row. Mostly such a low probability outcome would only occur if you trade against the trend, or panic, or trade low probability situations. A more likely outcome is to win more often than you lose but to not win enough to cover losses. Only a systems approach with proper money management could work to prevent that happening but that's the subject of the [next series](/stories/43/2017/10/24/trading-systems-part-1-introduction/).\r\n\r\nIf you find yourself losing more than 10 times in a row, stop what you are doing and investigate why. What trading rules are you breaking or what is really happening in the market? Perhaps the trend has reversed and you are stuck in the earlier way of thinking? Time for a sobre reassessment.\r\n\r\nThe difficulty is that you do not know the probability of a trade's success. You may see from a chart that some trades appear more probable than others, but you cannot see *how* probable. You cannot say for example, a certain trade is 50% likely to succeed. We can test historical patterns but the future is free to follow its own path. **`Black swans`** happen regularly enough that we should approach every trade with caution and humility.\r\n\r\nThere is no rule of nature that requires future prices to follow the same path as in the past. You must set up rules for your preferred strategy and stick to those rules. Following a system while those around you are losing their heads will help you score more wins than losses.\r\n\r\nWe can make our calculations easier here by assuming a trading portfolio of **$100,000** and using a trade risk of **2%**. That allows us up to $2000 to risk on one trade. Just divide by 10 if you have allocated $10,000 or multiply by 10 for each $1 million.\r\n\r\nIf we knew the risk on each contract, we could calculate how many contracts to open by dividing our total risk on the whole trade, $2000 in this example, by that risk per contract. It's like having $10 when apples cost $2 each and asking how many apples can we buy. That will be the subject of [Part 4](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/) coming up next.\r\n\r\n---\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n*[SL]: stop loss\r\n*[TP]: target price\r\n*[OP]: open price\r\n*[CR]: Contract Risk\r\n*[CS]: contract size\r\n*[CO]: number of contracts opened\r\n*[USD]: United States Dollar\r\n*[AUD]: Australian Dollar\r\n*[Yen]: The Japanese currency\r\n*[Euro]: The European currency\r\n*[forex]: Foreign Exchange including markets and trading\r\n*[signal]: a price pattern in the market triggering the opening of a position\r\n*[instrument]: a particular traded forex or futures contract such as gold or USDJPY\r\n*[instruments]: a particular traded forex or futures contract such as gold or USDJPY",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 0
},
{
"url": "https://www.pagoolabs.com/stories/api/41/?format=api",
"id": 41,
"title": "How Many Contracts to Open in a Futures or Forex Trade",
"slug": "the-basic-setup-part-4-risky-contracts",
"status": 2,
"publication_date": "2017-10-24T03:31:45Z",
"lead": "How do we calculate the risk per contract and how does that lead to position sizing?",
"excerpt": "Learn how to trade Futures and Forex markets. Calculate how much to risk per contract and learn about position sizing.",
"poster": "SeanManefield",
"content": "---\r\n\r\n#### **How much to risk on each contract - Basic setups Part 4**\r\n\r\n\r\nLet's return to our [earlier trade](/stories/40/2017/10/24/the-basic-setup-part-3-risky-trades/) where we are now ready to allocate $2000 toward a long gold trade. How many contracts can we buy for $2000? To calculate this we need to determine the amount we risk losing per contract, and then divide that into our $2000. The amount we risk per contract is the amount we would lose by opening one contract at OP and getting stopped out at SL.\r\n\r\n\r\n##### A simple stock market example: MSFT\r\n\r\nIn order to see more clearly the direction these calculations are going, let's consider a typical example you might be more familiar with from the world of stocks. The usual contract size for stocks is 100, so at today's price of around $76 per share for Microsoft (MSFT), a full lot of 100 shares would cost $7,600.\r\n\r\nIf we only had $10,000 to invest in this trade then we could only buy one 'contract' of 100 shares. Two contracts would cost more than $10K (I am ignoring **`odd lots`** for this example). The only difference in futures and forex markets is that the contract size varies between different instruments. Also, to keep things simple I ignore **`margin`** rules here.\r\n\r\n Example of a simple trade in the stock market: MSFT\r\n OP = 76 (Open Price)\r\n CS = 100 (Contract Size)\r\n Cost of 1 'contract' = OP x CS\r\n = 76 x 100\r\n = $7,600\r\n Amount to invest = $10,000\r\n Number of 'contracts' = Funds / contract cost\r\n = 10,000 / 7,600\r\n = 1.3\r\n Contracts rounded down = 1 (Ignore odd lots)\r\n\r\n\r\nEvery financial contract traded on an exchange will specify the contract size. You must be familiar with the contract sizes of the instruments you trade. The following table lists just a few of the contract sizes for common instruments:<a id=\"common-contract-sizes\"></a>\r\n\r\nInstrument code | Description | Contract Size\r\n-----------------|:-------------------:|---------------\r\nGC | Gold | 100 ounces\r\nQO | Gold mini | 50 ounces\r\nMGC | Gold micro | 10 ounces\r\nSI | Silver | 5,000 ounces\r\nHG | Copper | 25,000 pounds\r\nCL | Crude oil | 1,000 barrels\r\nHO | Heating Oil | 42,000 US gallons\r\nSP | S&P 500 | $250 x S&P500 index\r\nES | S&P mini | $50 x S&P500 index\r\nEURUSD | Euro FX | 100,000 euros priced in USD\r\nUSDJPY | Yen FX | 100,000 USD priced in Yen\r\nAUDUSD | AUD FX | 100,000 AUD priced in USD\r\nZW | Wheat | 5,000 bushels\r\nPB | Pork Bellies | 40,000 pounds\r\nZT | 2 yr Treasury Note | 2,000\r\n\r\nAs you can see from this small selection of futures and forex instruments, there are wide variations in contract sizes.\r\n\r\nNote that the forex contracts listed above are traded in the very liquid 24 hour interbank market. There are similar contracts with different symbols and sizes traded on the [CME](https://institute.cmegroup.com/markets/fx). For example the Australian dollar futures contract is traded on the CME under the base symbol AD.\r\n\r\nWhat is important from the table above for our example trade in gold is that one contract of gold specifies 100 ounces with one ounce costing about 1260.75 at the open. So the price quote from an exchange that you see reported in the media is for one unit, but you will need to calculate the value or risk of a whole contract. For example, when the gold price moves up or down $1, an open contract has changed in value by $100 ($1 x 100 ounces).\r\n\r\n<a id=\"Dollar-risk-of-one-contract\"></a>\r\n#### **Dollar risk of one contract**\r\n\r\nTo calculate the dollar risk of one contract, simply subtract the SL from the OP and multiply that answer by the contract size, because that's how many units we will need for one contract. If you are shorting, the SL will be higher than the OP and you will need to subtract the OP from the SL. In other words, calculate the absolute difference between the open and stop loss prices. For our example above:\r\n\r\n Risk per Gold Contract for the Sample Trade\r\n OP = 1260.75 Open Price\r\n SL = 1251.40 Stop Loss\r\n CS = 100 Contract Size\r\n CR = (OP - SL) x CS Contract Risk (absolute value)\r\n = (1260.75 - 1251.40) x 100\r\n CR = $935\r\n\r\n\r\nEarlier we calculated the amount we could invest in the trade without risking more than 2% of our available risk capital. Given $100K to invest, we have $2,000 available for this trade. Finally we can readily calculate the number of contracts to buy:\r\n\r\n Number of contracts = ($ at risk) / (risk per contract)\r\n = 2000 / 935\r\n = 2 contracts\r\n Cost of position = $1870 from: 2 contracts x $935\r\n\r\nWe cannot buy a partial contract so we need to round the final result down to a whole number. Rounding up will cost more than the $2K we are prepared to risk. It is important to stay close to the $2,000 and two contracts only risks $1870. That's not bad but if we lose this trade and the next one rounded down to only 1 contract then it becomes that much harder to regain a profitable position: we need to consistently win more than double the amount we lose. Consider buying more mini contracts, where available, if they help you stay closer to the $2,000 risk limit.\r\n\r\nWhile the numbers above apply to trading gold, the calculations are almost identical for most futures and forex instruments. You will need to insert the proper contract size and adjust for the quote currency if it is not your local currency. For example, the USDJPY contract opens a position in 100,000 USD and is priced in Yen. I will discuss these differences in a separate story on forex trading.\r\n\r\nWe now have all the elements in place to make the trade: the open, stop loss, target price and the number of contracts. All of these elements ensure the trade never risks more than 2% of our risk funds. To place the trade you will need to be familiar with the software your broker provides. Trading software from MetaTrader, which is widely used, accepts all the key variables in one panel.\r\n\r\nSoftware from Interactive Brokers on the other hand provides greater flexibility for those who want it, breaking the trade up into the three constituent orders:\r\n\r\n- a limit or market order for x number of contracts, representing the main trade\r\n- a stop order at your SL, bracketed as a ONO (One Cancels the Other) with:\r\n- a limit order at your TP.\r\n\r\nIf either the limit or the stop gets triggered, the order executes and immediately cancels the other pending close order. With this method, you can have trailing stops, partial enters, partial exits, and almost any other combination you prefer. For example, you can have the stop trigger but only to then place the close order with a limit attached to help you get a better price. Of course, it may then fail to protect you if the limit is outside the market. The software your broker provides is a major tool and you must become familiar with how to enter and exit trades smoothly and proficiently before you risk any of your capital in a live trade. Practice in a demo account until you are 100% comfortable.\r\n\r\nIn the [final story](/stories/42/2017/10/24/the-basic-setup-part-5-manage-that-trade/) in this series, I discuss some important considerations about margin calculation. I will also make a few points about managing the above gold trade.\r\n\r\n---\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n*[SL]: stop loss\r\n*[TP]: target price\r\n*[OP]: open price\r\n*[CR]: Contract Risk\r\n*[CS]: contract size\r\n*[CO]: number of contracts opened\r\n*[USD]: United States Dollar\r\n*[AUD]: Australian Dollar\r\n*[Yen]: The Japanese currency\r\n*[Euro]: The European currency\r\n*[forex]: Foreign Exchange including markets and trading\r\n*[signal]: a price pattern in the market triggering the opening of a position\r\n*[instrument]: a particular traded forex or futures contract such as gold or USDJPY\r\n*[instruments]: a particular traded forex or futures contract such as gold or USDJPY",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 2
},
{
"url": "https://www.pagoolabs.com/stories/api/51/?format=api",
"id": 51,
"title": "How to Manage Risk in a Forex Trade",
"slug": "trading-audjpy-in-a-heikin-ashi-forex-system",
"status": 2,
"publication_date": "2017-11-27T23:46:40Z",
"lead": "How do we manage a Forex trade so that the risk is fixed and we know the risk-reward of the trade in advance?",
"excerpt": "How to manage a Forex trade so that the risk is fixed and you know the risk-reward of the trade in advance. Trading AUDJPY in a Heikin Ashi Forex System.",
"poster": "SeanManefield",
"content": "---\r\n\r\nForex trading is only a little different to trading any other type of security. In this story I show you the main differences so you can apply a systems method to trading currencies. To illustrate, in the next story I will apply the method described below to <small><strong>AUD.JPY</strong></small>, the cross between the Australian Dollar and the Japanese Yen.\r\n\r\nForex trading is conducted in the relatively unregulated interbank market where individual banks conduct foreign currency business over the phone or via networked quote entry systems. These quotes are accumulated by several vendors and distributed back to the banks as well as via trading systems to worldwide forex traders. A very common platform for individual traders is Metatrader which is widely available for free once you've opened a trading or a demo account.\r\n\r\nIn an earlier story on [how to set up a trade in the futures market](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/), I showed the [different sizes for various futures contracts](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/#common-contract-sizes). To recap, forex contracts are typically 100,000 units of the base currency and the price for each unit of the base is displayed in units of the quote currency. Currencies are displayed here in the format:\r\n\r\n BaseFX.QuoteFX\t\t\t\t\r\n where:\r\n BaseFX is the currency which is being bought or sold.\r\n QuoteFX is the currency the contract is priced or quoted in.\r\n The Quote currency is also called the Counter currency.\r\n\r\nFor example, we write <small><strong>AUD.JPY</strong></small> for the purchase of contracts of AUD valued in JPY or Japanese Yen. Other common ways you will see <small><strong>BaseFX.QuoteFX</strong></small> pairs displayed are <small><strong>AUDJPY</strong></small> and <small><strong>AUD/JPY</strong></small>.\r\n\r\nOften the joining dot or period is replaced with a division symbol or omitted altogether. In the text below I use a period to help make the relation clearer.\r\n\r\n<a id=\"common-contract-sizes\"></a>\r\n\r\nBASE.QUOTE | Contract Size | Priced In\r\n-------------|:-----------------:|---------------------\r\n <small><strong>AUD.JPY</strong></small> | 100K Australian Dollars | Japanese Yen\r\n <small><strong>AUD.USD</strong></small> | 100K Australian Dollars | US Dollars\r\n <small><strong>USD.CAD</strong></small> | 100K US Dollars | Canadian Dollars\r\n <small><strong>USD.JPY</strong></small> | 100K US Dollars | Japanese Yen\r\n <small><strong>EUR.USD</strong></small> | 100K Euros | US Dollars\r\n\r\nAlthough the *normal* contract size is 100,000 units (100K), many brokers allow fractional quantities served up in mini sized contracts of 10K or even 1K units.\r\n\r\n<a id=\"<a id=\"how-do-base-and-quote-currencies-work\"></a>\r\n#### How do Base and Quote Currencies Work\r\n\r\nWhat makes Forex a little confusing is that there are at least two currencies involved, and often a third - your **account currency**. Let's walk through them one at a time.\r\n\r\nThe **base currency** sounds like a price but it is actually a commodity you can buy or sell, like an apple. And just like an apple, this commodity has a price quoted, but in another currency called, naturally enough, the **quote currency**. Just as an apple costs, say $0.50c, a unit of AUD costs a given amount determined by the current market. For the <small><strong>AUD.JPY</strong></small> contract, at the time of writing, one AUD costs 84.50 Japanese Yen. It is priced in Yen because Yen is the *quote* currency that follows after the period.\r\n\r\nIf you have a trading account, it will be set up in at least one currency called the account currency. When you make a trade, your profits and losses usually accumulate in the quote currency and are converted via a separate transaction to your account currency.\r\n\r\nThat's different to the case where you set out to buy or sell a foreign currency for its own sake, either to purchase from or sell an item to a foreign entity. In this latter case you would take delivery of the foreign currency, the AUD. Your trading account may or may not allow delivery. In the same way, trading futures usually resolves as a cash transfer, not the delivery of wheat or pork bellies.\r\n\r\nSince your trading account is probably a margin account, to open a long position in <small><strong>AUD.JPY</strong></small>, you will be borrowing the Yen to sell in order to buy the AUD. You will pay interest on the Yen and receive interest on the AUD until you close the long position.\r\n\r\nThe <small><strong>AUD.USD</strong></small> contract, on the other hand, quotes the price of one unit of AUD in US Dollars. The current price of one AUD is US$0.7602. Notice the extra decimal places after the usual cents ($0.76**02**)? Each currency has a standard number of decimal places for every market price quote. These are called pips, from *Point In Percentage*. For the AUD four decimal places are displayed in every price quote. If the AUD increases from US$0.7600 to 0.7602 we say that it increased by two pips. That is, the AUD has become slightly more expensive to a US buyer, just as an increase in the price of an apple makes it more costly.\r\n\r\nQuote currencies that do not trade in the street with decimals, such as the Yen and formerly the Italian Lira, will probably only have two decimals places reserved to display pips. For example, the <small><strong>AUD.JPY</strong></small> is quoted as 84.50.\r\n\r\nDepending on your quote platform, you will probably see an extra 5th (and 3rd for Yen) decimal place quoted along with the above four because many vendors provide half pips and smaller. These are sometimes called *pipettes*, or more commonly just \"half a pip\", and written as 0.7602**5**.\r\n\r\nWe will need to go through these numbers in depth so that we can place a trade, but first let's look at the obvious question here:\r\n\r\n<a id=\"which-currency-is-the-quote\">\r\n##### **What Determines Which Currency is the Base and Which is the Quote?**\r\n\r\nWhy is the AUD contract expressed as <small><strong>AUD.USD</strong></small> but the Japanese and Canadian contracts written in terms of the non USA currency, <small><strong>USD.CAD</strong></small> and <small><strong>USD.JPY</strong></small>? Why is the Euro written as <small><strong>EUR.USD</strong></small> and not <small><strong>USD.EUR</strong></small>? Well the short answer is that you can write them any way you like providing there is a market and your broker supports those reverse contracts. However, most if not all quote vendors express the contracts in the same ratios I use here.\r\n\r\nBASE.QUOTE | Quoted in\r\n-------------|-------------\r\n <small><strong>AUD.JPY</strong></small> | Yen\r\n <small><strong>AUD.USD</strong></small> | US$\r\n <small><strong>USD.CAD</strong></small> | Canadian $\r\n <small><strong>USD.JPY</strong></small> | Yen\r\n <small><strong>EUR.USD</strong></small> | US$\r\n <small><strong>EUR.CHF</strong></small> | Swiss Francs\r\n <small><strong>USD.CHF</strong></small> | Swiss Francs\r\n <small><strong>USD.MXN</strong></small> | Mexican pesos\r\n <small><strong>USD.CNH</strong></small> | Chinese Renminbi or Yuan (offshore)\r\n\r\nThe long answer is murkier and almost lost in the history of forex markets. Given my four decades or more working with Forex, I describe my own beliefs on the origin of the currency ratios [here](/stories/56/2017/11/29/what-determines-which-currency-is-the-base-and-which-is-the-quote/), but I am by no means 100% certain. TL;DR I suggest it's because of the ratio of one currency to the other. If a currency back in the 1970s traded consistently under one US$, especially the Italian Lira or the Yen, it was designated the quote currency and vice versa. Today we just keep using the established contract tickers for historical reasons.\r\n\r\n\r\n<a id=\"significance-of-the-quote-currency\">\r\n#### **The Significance of the Quote Currency**\r\n\r\nThe quote currency is the currency of the trade. It is the amount paid or received for buying or selling one unit of the base currency. If you are based in the USA and the quote currency is also the USD, such as <small><strong>AUD.USD</strong></small>, then you can value the contract in the same way as any US futures or equity position. You will receive USD if a long postion rises in value or pay out USD from your account if the position falls.\r\n\r\nYou are simply buying or selling units of AUD like any other commodity. In the special case of USD as the quote currency for US accounts, currencies do not really enter into the calculations!\r\n\r\nYour local currency is your account currency, the currency in which you add up your profits and losses. It might or might not be the quote currency.\r\n\r\nNone of this matters if you are simply looking for signals on the chart because then you are only concerned with the open, stop and target prices and the RR multiplier between risk (OP - SL) and reward (TP - OP). However as soon as you want to open a position, you will need to know the number of contracts. That's when the calculations below come in handy.\r\n\r\nIf the quote currency is not your account currency then the trade will lead to a certain amount of foreign currency flowing into or leaving your account each day as the position is marked to market. Your broker may automatically convert those winnings or losses into your account currency for a fee, but the mechanism remains the same.\r\n\r\nWhen you calculate the trade setup, you must take into account the conversion of the amount at risk to your account currency so that you can compute the number of contracts to open. You will remember from the first series on [The Basic Setup](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/) that the value of the risk per contract is divided into funds at risk in order to calculate the position size:\r\n\r\n Number of contracts = ($Funds at risk) / ($risk per contract)\r\n\r\nThe funds at risk are normally 1% to 2% of your risk capital.\r\n\r\nSince the funds at risk are in your account currency, you must convert the amount at risk in the trade into that same currency. This step was not required when you were [buying futures](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/#Dollar-risk-of-one-contract) because there I only discussed futures priced in your local currency. Here we have to convert the risk value back to your local currency. None of this arithmetic is hard but because of the multiple currencies it is no doubt tricky to get your head around. To help, I will do a couple of examples below.\r\n\r\nKeep in mind what I wrote above about how the currencies are quoted - we need to know which currency is used to value the contract whenever we discuss a forex pair. It is always the quote currency on the right hand side.\r\n\r\nI will take the example of <small><strong>AUD.JPY</strong></small> and consider our account currency to be the USD. This works just as well for anyone whose account currency is not JPY. Just replace the conversion from Yen to US$ with your Yen/local rate. I will show you how to do that below. For JPY account holders, this position is just like any other domestic Japanese security priced in Yen except it has a contract size of 100K. Yen account holders should refer below to the <small><strong>AUD.USD</strong></small> example 2.\r\n\r\nAUD account holders could take a short cut and use the inverse of the market price of <small><strong>AUD.JPY</strong></small> at OP and SL to calculate the risk in AUD.\r\n\r\n\r\nLet's look at those examples now in our next story [Examples of how to Manage Risk in a Forex Trade](/stories/57/2017/11/27/examples-of-how-to-manage-risk-in-a-forex-trade/).\r\n\r\n\r\n\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 0
},
{
"url": "https://www.pagoolabs.com/stories/api/58/?format=api",
"id": 58,
"title": "Trading AUD.JPY Using Heikin Ashi on the Four Hour Timeframe",
"slug": "trading-audjpy-using-heikin-ashi-on-the-four-hour-timeframe",
"status": 2,
"publication_date": "2018-01-08T05:11:16Z",
"lead": "Here is a very simple forex trading system using the example of AUD.JPY and Heikin Ashi to determine entry signals. This is meant only as an exercise to aid in implementing your own system, with or without Heikin Ashi (HA).",
"excerpt": "A forex trading system using the example of AUD.JPY and Heikin Ashi to determine entry signals.",
"poster": "SeanManefield",
"content": "---\r\nFirst let's take a look at the long term chart of AUDJPY, going back to before the 2008 financial crisis.\r\n![AUDJPY MN1](/media/uploads/2017/Forex_Setups/2017-11-27_AUDJPY_MN1.jpg \"AUDJPY MN1\"):C90\r\n\r\nThe first thing that stands out is the lack of any meaningful trend. All the price action has been contained within the extremes of the 2008 event. [In an earlier story](/stories/44/2017/10/24/trading-systems-part-2-timeframes-fundamentals-reversals-and-retracements/#shorter-timeframes) I discussed how to move to a shorter timeframe when no trend was clear on the current one.\r\n\r\nThe weekly is just as aimless, while the daily timeframe has been sideways throughout 2017 with distinct legs up and down. From mid September we saw a good run down on the daily but not enough for the 100 and 200 period moving averages to confirm any down trend.\r\n![AUDJPY D1](/media/uploads/2017/Forex_Setups/2017-11-27_AUDJPY_D1.jpg \"AUDJPY D1\"):C80\r\n\r\n\r\nIf we focus just on the daily chart and the leg down that started mid September 2017, marked **A** above, we could say that we have some evidence that a down trend is underway. Now, obviously, this is not enough evidence to short this daily AUDJPY, but it may be supporting evidence for a shorter timeframe. By the time the chart ends in early January 2018, it becomes clear there was no down trend, just a continuation of the sideways behavior noted above.\r\n\r\nHowever on October 24th the market stamped out a lower high and an HA reversal. As I have pointed out in earlier stories, reversals only make trading sense in the presence of a trend. On October 24th, we did not know the future so the question was, what were the consequences of using this information on a shorter timeframe, say the H4?\r\n\r\nThe supporting evidence is not strong enough to support a trade placed here but given that our earlier stories written around this time used the AUDJPY pair as an example, let's investigate further.\r\n\r\nTo be consistent we would have to close out any short trades still open in our *system* as soon as the daily HA reverses upward (turns green). That happened on November 30th. So we are looking to trade short in the period October 24th until November 30th inclusive.\r\n![AUDJPY H4](/media/uploads/2017/Forex_Setups/2017-11-27_AUDJPY_H4_HA.jpg \"AUDJPY H4\"):C100\r\n\r\nHere, as in the earlier stories, I am assuming a risk-return multiplier of four. This means we automatically close winning trades when they reach four times risk. Whichever method you use to calculate TP, it should emerge from the [simulation step](/stories/48/2017/10/24/trading-systems-part-6-simulations-on-systems/) where it is the optimum multiplier for a large number of simulations in your market of interest. In the cases I have examined using Heikin-Ashi reversals in a trending forex market, that key risk multiplier is a little less than four. I will continue using four below, but your optimal multiplier will depend on your precise strategy. Calculating the risk multiplier is discussed [here](/stories/48/2017/10/24/trading-systems-part-6-simulations-on-systems/).\r\n\r\nLooking at the H4 Heikin Ashi above, we can see the shorting period extracted from the daily. The first thing to note is that the period critically satisfies some of the basic down trend characteristics we have seen in a number of our earlier stories:\r\n\r\n* the MA100 has already crossed below the MA200, indicating a down trend\r\n* both MAs are sloping down\r\n* the longer timeframe, as mentioned above, is in a Heikin-Ashi down trend.\r\n\r\nLooking over all the Heikin Ashi reversals around the shorting period, we have 8 possible trade setups to consider. Not all of them will result in a trade:\r\n\r\nSetup number | Trade Comments\r\n-------------| ----------------------------------------\r\n1 | Not opened - before the short period starts\r\n2 | Not opened - before the short period starts\r\n3 | Not opened - red bar is not after a retrace\r\n4 | Not opened - red bar is not after a retrace\r\n5 | Not opened - red bar is not after a retrace\r\n6 | Opened - results in a win of 4 x risk\r\n7 | Opened after #6 closes - loss after failing to trigger TP\r\n8 | Not opened - after the short period ends\r\n\r\nIf some of these comments are confusing, you might like to look back on [earlier stories where the basic trade setup filters](/stories/45/2017/10/24/trading-systems-part-3-signals/edit/#Rules-and-Filters) are covered. Remember that while #6 is open, no other trades can be simultaneously opened otherwise the trade risk will be greater than 2% of our funds.\r\n\r\nBecause the daily HA reversal does not finish until close of trading on November 30th, all open shorts should be closed at the open on December 1st. Following this rule, the final trade would be a gain of about 1.5 times risk rather than a loss but I will count it as a loss so as not to inflate the success of the strategy and also because until now I have always advocated holding until the SL or the TP has been triggered. I have not yet discussed any other reason to close early because, quite frankly, getting into the habit of closing open trades for any other reason is a killer of trading profits.\r\n\r\nAlthough the longer timeframe indicated a down trend, the H4 only allowed two trades to open, one win and one loss. However, and this is a key to successful trading, the win was greater than the loss. In this case the win was four times the only loss, resulting in the strategy winning three times your allocated risk. If you allocated 2% of your funds at risk to this strategy, you just made 6%. Not bad for five weeks.\r\n\r\nNowhere here do I advocate you follow such a naive Heikin Ashi reversal system. The point is to show you how to construct your own without relying on expensive, black-box Expert Advisors which often times simply drain your account.\r\n\r\nSo what happens after the daily reverses up, do we continue the strategy by trading longs on the H4? I leave that as an exercise for you. However, while you may be able to eke out a trading profit doing this, trading the AUDJPY at the H4 timeframe will remain hampered by the fact that this currency pair is not trending at longer timeframes.\r\n\r\nAs you can see, this systems approach depends on the trend and highlights the importance of correctly identifying which direction the market is trading. It is an important clue that successful trading requires putting more effort into trend analysis than jumping from one indicator to another. The Heikin Ashi signal used here is not a required indicator. You could almost use any other. All that is required is that you open each trade *consistently* and follow all the rules you have already established in the [simulation testing stage.](/stories/48/2017/10/24/trading-systems-part-6-simulations-on-systems/)\r\n\r\nCopyright (C) PagooLABS 2018. All Rights Reserved.\r\n\r\n\r\n*[SL]: stop loss\r\n*[TP]: target price\r\n*[OP]: open price\r\n*[HA]: Heikin Ashi\r\n*[H4]: Chart of the four hour timeframe",
"image": null,
"forums": "Not linked to a forum",
"replies": 9
},
{
"url": "https://www.pagoolabs.com/stories/api/38/?format=api",
"id": 38,
"title": "Setting up a Trade in the Futures or Forex Market - Part 1",
"slug": "basic-trade-setup-part-1-introduction",
"status": 2,
"publication_date": "2017-10-24T03:05:48Z",
"lead": "How do you set up a trade in either the forex or futures markets? You will learn how to measure the risk and potential reward of a trade before you open it and you will minimize the risk to just a small percentage of your portfolio.",
"excerpt": "Learn how to trade Futures and Forex markets. Understand contract size, stop loss, target, take profit, margin, basic trade setup, risk management, position size.",
"poster": "SeanManefield",
"content": "---\r\n\r\n#### **Basic Trade Setup Part 1 - Introduction**\r\n<div style=\"padding: 0 0 .1rem 0\"></div>\r\n\r\nA trade setup describes how to take a position in a market in order to profit from that market rising or falling. If for some reason (discussed later) you expect the market price to rise then you would open **`long`** by buying a number of contracts. If instead you expect the price to fall then you would open **`short`** by selling some contracts.\r\n\r\nIt may seem strange to sell first and buy later but it is just the symmetrical opposite of buying first and selling later. **`Short selling`** is also an important part of keeping **`futures`** markets liquid: how could you buy if someone else is not willing to sell? Also, a prime purpose of these derivative markets is to enable **`hedging`** and the offsetting of risks from other markets. Half the time that will require short selling.\r\n\r\nFor our purposes here, a trade setup is just a description of how you open that contract. It answers the following questions:\r\n\r\n- What is the **`open price`**?\r\n- Where is the **`target price`**, the price where you will automatically close out your position for a win?\r\n- Where is the **`stop loss`**, the price where you will automatically close out your position for a loss?\r\n- How many **`contracts`**?\r\n- What is the **`margin`** your broker requires from you to open and maintain your position?\r\n\r\nWhen you have finished this series of stories you will know how to only risk a specific percentage of your funds in each trade and how to calculate the number of contracts you need to do so. The material we discuss here is fairly basic, however it assumes a level of knowledge about charts, trading software and jargon that may be unfamiliar. Do not be discouraged by this, we all have to start somewhere. Most of the terms are common enough that a quick internet search should yield all the information you need.\r\n\r\nIf not, turn for help to our forums or the comment section under each story. If you want a special article on a topic you believe is important but not yet covered, make a post below and argue your case. If you can convince us the problem deserves its own story, we will be happy to oblige.\r\n\r\n\r\n#### **A Gold Trade Example**\r\n\r\nTo describe a setup, I am going to choose a reasonably simple example in a popular market: gold. Consider the following recent daily gold chart from April to August 2017. ![Gold daily chart](/media/uploads/2017/a_basic_trade_setup/20171008-Gold-setup1.png \"Basic setup\"):C90\r\n\r\nIf you remember the news at that time, there were ominous rumblings coming out of the Korean peninsula through July. War drums are usually bullish for gold because paper money often does not survive long when central governments are in turmoil.\r\n\r\nThe month long upswing from point B on the chart to O (for **O**pen) was followed by a six day downward **`retrace`**. Then, as the last trading session on the chart closed we can see that the **`candlestick`** of the day's trading was an **`outside bar`** enclosing the previous day's trading, and ending positively. Summarizing these developments to get a feel for market direction, we have:\r\n\r\n- The market is overall sideways, but currently trading in the middle of the range.\r\n- Since point A, the faster moving average (MA100) has crossed above the slower 200 day MA.\r\n- The current swing is up since point B.\r\n- the market has completed a week long retrace down.\r\n- The top of the sideways market is near points C and D, above the current price.\r\n- External global risk factors lean bullish on gold.\r\n- The previous trading session ended with a bullish reversal.\r\n\r\nI will get into all of these points more fully in a later story but for now I just want to walk through a basic trade setup with you. For our purposes here, let's just assume we have a bullish **`signal`**.\r\n\r\nWe will not be discussing **`brokers`** as your options vary widely by country. However there are many possibilities, from full service all the way through computer based online trading. Recently, since the 2008 financial crisis, many regulations have been tightened. Check the advertisements in your region and review the stories from other traders on the many social media platforms available to you.\r\n\r\nIn this story, I have presented a bullish signal in an example from the gold market. In the [next story](/stories/39/2017/10/24/the-basic-setup-part-2-stop-loss-and-open-price/) we will discuss *how* we will open a long position in gold. I will show you the key data you need to lock down the potential risk and reward before opening the trade.\r\n\r\n---\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n*[SL]: stop loss\r\n*[TP]: target price\r\n*[OP]: open price\r\n*[CR]: Contract Risk\r\n*[CS]: contract size\r\n*[CO]: number of contracts opened\r\n*[USD]: United States Dollar\r\n*[AUD]: Australian Dollar\r\n*[Yen]: The Japanese currency\r\n*[Euro]: The European currency\r\n*[forex]: Foreign Exchange including markets and trading\r\n*[signal]: a price pattern in the market triggering the opening of a position\r\n*[instrument]: a particular traded forex or futures contract such as gold or USDJPY\r\n*[instruments]: a particular traded forex or futures contract such as gold or USDJPY",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 2
},
{
"url": "https://www.pagoolabs.com/stories/api/54/?format=api",
"id": 54,
"title": "What Determines Which Currency is the Base and Which is the Quote?",
"slug": "what-determines-which-currency-is-the-base-and-which-is-the-quote",
"status": 2,
"publication_date": "2017-11-27T04:10:34Z",
"lead": "What do the Forex ticker symbols mean in foreign currency trading and how to understand Base Currency, Quote Currency and Account Currency.",
"excerpt": "We explain what the Forex ticker symbols mean in foreign currency trading and how to understand Base Currency, Quote Currency and Account Currency",
"poster": "SeanManefield",
"content": "---\r\n\r\n<a id=\"base-vs-quote\">\r\n##### **Base vs Quote**\r\n\r\n\r\nForex contracts are expressed as a pair of foreign currencies such as <small><strong>AUD.JPY</strong></small> where the first currency is the Base currency and the second is the Quote currency. The base describes the commodity itself, just like oil, gold or Intel stock (INTC). The forex contract is priced in units of the quote currency.\r\n\r\nFor example, an ask price of 84.75 for <small><strong>AUD.JPY</strong></small> tells you that one Australian Dollar will cost you 84.75 Japanese Yen to buy.\r\n\r\nIf your accounts are in Euros or USD then neither the base nor the quote of <small><strong>AUD.JPY</strong></small> is the same as your account currency. Your account currency would be Euros or USD in this case. A trading account will normally stipulate which currency your trading is based in and realized wins and losses from trading <small><strong>AUD.JPY</strong></small> will need to be converted to it.\r\n\r\n![Typical Forex Contracts](/media/uploads/2017/Forex_Setups/Typical_FX_contracts.jpg \"Typical Forex Contracts\"):R28\r\n\r\n BASE.QUOTE | Quoted in:\r\n-------------|-----------\r\n <small><strong>AUD.JPY</strong></small> | Yen\r\n <small><strong>AUD.USD</strong></small> | US$\r\n <small><strong>USD.CAD</strong></small> | Canadian $\r\n <small><strong>USD.JPY</strong></small> | Yen\r\n <small><strong>EUR.USD</strong></small> | US$\r\n <small><strong>EUR.CHF</strong></small> | Swiss Francs\r\n <small><strong>USD.CHF</strong></small> | Swiss Francs\r\n <small><strong>USD.MXN</strong></small> | Mexican Pesos\r\n <small><strong>USD.CNH</strong></small> | Chinese Renminbi or Yuan\r\n\r\nHave you ever wondered why the AUD contract is expressed as <small><strong>AUD.USD</strong></small> but the Japanese and Canadian contracts are defined in terms of the non USA currency, <small><strong>USD.CAD</strong></small> and <small><strong>USD.JPY</strong></small>? Why is the Euro written as <small><strong>EUR.USD</strong></small> and not <small><strong>USD.EUR</strong></small>?\r\n\r\nThe short answer is that you could write them any way you like providing there is a market and your broker supports those reverse contracts. However, most if not all quote vendors express the contracts in the same ratio we use here.\r\n\r\nThe long answer is that, except for the recent Euro, the reasons are many and fuzzily recalled. I have my version of the story to tell based on my own experience working with foreign currencies since the 1970s.\r\n\r\nBack in the dark ages, when researchers would enter data into mainframe computers using stacked decks of cards, there were many more European currencies than today. There were French and Belgian Francs, German DMarks, Italian Lira and many more. Some currency crosses were quoted in one fashion on one side of an international border but quoted in the reverse direction on the other side.\r\n\r\nThe preferred way to quote a currency for US traders or tourists should be just like the <small><strong>AUD.USD</strong></small>. When expressed this way, it gives the price of an Australian Dollar in the same way as the price of an apple: in the locally used US currency. On the other hand, it is less transparent for Australians who see a price quote that is slightly more confusing: how many US$ they get for one A$. That's like seeing how many apples you can buy for $1 instead of the price of one apple.\r\n\r\nBut the real problem was that currencies are rarely related by the same order of magnitude. So there might have been five Francs to the USD, three DMarks or 200 Yen but much more rarely 1.1 or 0.9 units of foreign currency. My memory is that the issue was resolved partially by aesthetics alone: it was never convenient to enter error prone numbers onto punched cards when the forex quote looked like a fractional 0.00512 US Dollars for one Japanese Yen.\r\n\r\nI remember handling currencies using both the normal and the reverse ratio but I and those around me mostly favored the quote where a digit other than zero was on the left hand side of the decimal point. It just felt better, and it was easier to check on the old printouts where decimals were hard to read. No doubt, the older traders around us felt the same way, although it was never discussed, as far as I can recall.\r\n\r\nUp until the early 1980s, one Australian Dollar cost more than one US Dollar. Other than the name, the two currencies developed independently of each other. There is no requirement for the two to trade at parity or any level other than what's determined in the market. The Australian Dollar derived from the Australian Pound (two dollars for every one Pound in 1966) which in turn had earlier derived from the British Pound. The British Pound in turn cost about US$5 through the 19th century until the turmoil of the First World War. Today each Pound costs roughly US$1.33 and is quoted as <small><strong>GBP.USD</strong></small>.\r\n\r\nThe Canadian Dollar traded around parity in the 1970s but closed out that decade around C$1.20 to US$1 so the quote was reversed to look like <small><strong>USD.CAD</strong></small>, with a quote something like 1.20. Had it been the other way around <small><strong>CAD.USD</strong></small> would have been 0.83, less aesthetically pleasing on the old printouts and terminals and slightly more error prone, although not as bad as the Yen or Italian Lira would have been.\r\n\r\nIf you follow all the currencies back to the 1970s you will notice a pattern where the currency with the greater number of units in comparison is usually placed on the right hand side as the quote currency. So the Yen is expressed as <small><strong>USD.JPY</strong></small> where there are today over 110 Yen to one USD.\r\n\r\nI believe we inherit today whichever pattern was common up to the 1970s when computer databases froze the prevailing ratios. This is true even for currencies like the AUD which have more since fallen below one US$. Modern computers with clear screens easily displaying the decimal point or comma mean we don't need to worry about those old punched card concerns anymore, but we do continue to use the ratios that were convenient in earlier times.\r\n\r\n<a id=\"what-about-the-euro\">\r\n\r\n##### **What About the Euro?**\r\n\r\nWhen the single currency was introduced the European Union insisted it had to be quoted <small><strong>EUR.USD</strong></small> and not the reverse. It could be that they hoped the USD would be worth less than the Euro, as a matter of pride perhaps, but I don't think so. For Europeans, the natural way of expressing the currency if you had a choice about it or, as in this case, if you were imposing the ratio by fiat, would be to set <small><strong>USD.EUR</strong></small> as the standard. That would mean European tourists and traders would approach a foreign exchange counter and purchase US$ priced in their local Euro currency, just as they would apples or anything else.\r\n\r\nIn the same way as Europeans express a desire to price oil in Euros, they would price USD in Euros. It would make the most sense and be easier for them to discern value. But they didn't.\r\n\r\nI believe the decision was poorly thought through. I think some Europeans saw the <small><strong>GBP.USD</strong></small> and compared that to their own French Francs (<small><strong>USD.FRF</strong></small>) or Deutsche Marks (<small><strong>USD.DEM</strong></small>) and decided they'd be the big boys on the block by insisting the Euro goes first in the ticker symbol, resulting in <small><strong>EUR.USD</strong></small>.\r\n\r\nHistory is littered with accidents rather than plans. Correct me with a better story in the comments if you have one. I am less interested in the official narrative than what the real intention was, if indeed there was one.\r\n\r\nSo that's where we are today - organically grown currency ratios for the most part with the Euro thrown in by fiat.\r\n\r\n\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 1
}
]
}