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"url": "https://www.pagoolabs.com/stories/api/42/?format=api",
"id": 42,
"title": "Managing a Futures or Forex Trade with Margin and Target Price",
"slug": "the-basic-setup-part-5-manage-that-trade",
"status": 2,
"publication_date": "2017-10-24T03:35:01Z",
"lead": "What is the role of margin and how do we manage the trade setup so we can then sit back and let the trade work for us?",
"excerpt": "Learn how to trade Futures and Forex markets. Understand margin, trade management and position sizing.",
"poster": "SeanManefield",
"content": "---\r\n\r\n#### **Part 5 - The Conclusion of The Basic Setup**\r\n\r\n##### **Margin**\r\n\r\nBefore concluding our discussion of the basic trade setup I need to say a few words about margin. The stop loss being triggered is not the only reason your broker may close out your position. You will also be closed out if the remaining funds in your account, less the marked to market losses from a losing position, fall below a given amount. This amount is called the **`maintenance margin`** and it varies by contract as well as changing over time.\r\n\r\nEach day your broker will mark-to-market your open positions. It is as if you closed the position, recognized any gains or losses at the day's closing price, and then immediately reopened a fresh position at the same price without paying commissions. Those gains and losses accumulate in your account and, if negative, your account will fall in value. Each open contract has a maintenance margin requirement and you must keep at least that amount of funds in your account.\r\n\r\nThe exchanges and regulatory authorities set the minimum margin but your broker may set a higher percentage to protect itself and its other clients from losses arising from your account. It is your job to familiarize yourself with the **`initial and maintenance margins`** of all the instruments you trade.\r\n\r\nAt the current price of gold at around $1280/oz, a contract of 100 ozs would cost $128,000 if you paid the full price. However the current initial margin requirement per contract is only $4,300, or just under 3.5%. That means you need $4,300 in your account for every gold contract you open. The maintenance margin, which applies after you have opened the position, is around $3250 or 2.5%. Your broker may set a higher amount. If you only had two open contracts then you would not fall afoul of the margin requirement since you would have $98K still in your account even at the SL price. That's more than enough to cover the $6,500 maintenance margin (2 x $3250).\r\n\r\nHowever if you opened 20 contracts and your risk was $2000 per contract then at the SL price you would be losing $40,000 from your account leaving only $60,000. Since that is not enough to cover the $65,000 maintenance margin ($3,250 x 20 contracts) you would have already received a **`margin call`** from your broker. In many cases, they would automatically close the position in order to protect their firm and customers from losses occurring in your account.\r\n\r\nIt is important to recognize that your broker does not take into account your stop loss since the market may blow straight through it without pause. While you might think in terms of your risk being capped by the stop loss, your broker will instead be watching your available funds and the current value of your equity in the open position. This is more likely to cause a problem if the original dollar risk was small and you opened a large number of contracts.\r\n\r\nThe dollar risk gets smaller as you trade shorter timeframes. A typical setup on a 15 minute chart will almost certainly result in many more contracts than a setup from the daily chart. Those extra contracts may increase the risk of a margin call if there is a strong adverse price movement.\r\n\r\nAnother issue to be aware of is that if you trade frequently, the funds from your last trade may not yet have been settled. Although your account balance looks healthy, the funds from your previous trade are not yet available to cover the margin of a new position and the remaining available funds may not be enough to ward off a margin call.\r\n\r\nKeep a watchful eye on margin and avoid opening any position where your available funds only barely cover the initial margin. Your broker probably has tools to help you calculate initial margin so stay alert to ensuring a margin call will never trigger before your stop loss.\r\n\r\n\r\n##### **Managing the Trade**\r\n\r\n![Successful Gold Trade](/media/uploads/2017/a_basic_trade_setup/20171008-Gold-setup3.png \"Successful Gold Trade\"):R50\r\nAfter all our hard work in coming this far, how did the trade work out?\r\n\r\nThe trade was a winner! To the right you can see that the market blew straight up through our TP level and continued rising for quite some time before running out of steam. That's why we have TP levels. We don't know where the top of the market might be.\r\n\r\nThis trade was very profitable and the following table lays out the arithmetic that you can apply to any setup.\r\n\r\n<div class=\"clear-floating-cols-above\"></div>\r\n<a id=\"Profit-in-the-Sample-Gold-Trade\"></a>\r\n\r\n Profit in the Sample Gold Trade\r\n Maximum Risk:\r\n TF = $100,000 Total Funds (fixed)\r\n MR = TF x 2% Maximum Risk\r\n = $100,000 X 2%\r\n = $2,000 Maximum Risk\r\n Setup:\r\n TP = 1295.00 Target Price\r\n OP = 1260.75 Open Price (fixed)\r\n SL = 1251.40 Stop Loss\r\n CS = 100 Contract Size (fixed)\r\n Trade Risk:\r\n TR = OP - SL Trade Risk\r\n Contract Risk:\r\n CR = (OP - SL) x CS Contract Risk\r\n = (1260.75 - 1251.40) x 100\r\n = $935\r\n Contract Potential Win (CW):\r\n CW = (TP - OP) x CS Contract Win\r\n = (1295.00 - 1260.75) x 100\r\n = 34.25 x 100\r\n = $3,425\r\n Number of Contracts to Open = Max Risk / Contract Risk\r\n CO = MR / CR Contracts to open\r\n = $2000 / $935 Max Risk / Contract Risk\r\n = 2.14\r\n = 2 Contracts rounded down\r\n Total Trade Risk:\r\n TR = ContractRisk x Contracts=Total Risk of the trade\r\n TR = CR * CO\r\n = $935 x 2\r\n = $1870\r\n Total Potential Trade Win:\r\n TW = CW x CO Total Potential Trade Win\r\n = Win per Contract x Number of Contracts\r\n = $3,425 x 2\r\n = $6,850\r\n Risk/Reward (Win) Ratio:\r\n RRR = $1870 : $6850\r\n = 1 : $6850 / $1870\r\n = 1 : 3.66 Risk Reward Ratio\r\n RR = 3.66 Risk Reward Multiplier\r\n\r\nThe risk/reward multiplier (RR) of the trade was 3.66, meaning the potential win was 3.66 times the size of the risk. That's considerably better than the double I hinted at earlier in this series. Most important, we knew the risk and the potential win *before* we entered the trade. We are $6,850 richer for each $100,000 of available funds, ignoring minor carrying costs for the eight days until the target was reached. We achieved that win without risking more than 2% of the funds we allocated toward futures and forex trading. When you manage your setups and position sizing as I outlined above, futures and forex markets can be no more risky than the way many investors trade equity markets.\r\n\r\nSince the market continued to climb in a favorable direction, I appear to have left a lot on the table in this trade. You might have better ideas where to exit or you might observe another entry possibility following almost immediately, but that is not the purpose of this series of stories on basic setups.\r\n<br>\r\n\r\n#### **Summary**\r\n\r\nThis series of stories on the basic setup has covered a lot of territory and I will have more to say in future articles on many of the sub-topics mentioned above. For now you should have a good understanding of how to open a position and limit your risk while setting a target price compatible with your overall risk/reward ratio. You have learned:\r\n\r\n- How to limit the size of your trades to 2% of your risk funds or less.\r\n- How to only choose trades that have target prices that will result in wins greater than losses.\r\n- How to calculate the number of contracts you can open without risking more than 2%.\r\n- How to pay attention to your margin levels.\r\n- How to define a trade setup.\r\n\r\nWhat I have not yet described how to do in these stories is:\r\n\r\n- calculate the TP\r\n- identify a proper trade signal\r\n- [build a system](/stories/43/2017/10/24/trading-systems-part-1-introduction/) out of individual signals\r\n- lay out a setup in a forex instrument.\r\n\r\nI will be writing about these topics in the coming weeks, so stay tuned.\r\n\r\nTraders cannot guess the future. All we can hope for is to make sensible judgements about the trend and where support and resistance lie. Once we are comfortable with these important details, the next step is to adopt a strategy or system that is more likely to win over time. The [following stories](/stories/43/2017/10/24/trading-systems-part-1-introduction/) will lay out some of the elements of such a system.\r\n\r\n---\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n\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",
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"url": "https://www.pagoolabs.com/stories/api/39/?format=api",
"id": 39,
"title": "The Open Price, Stop Loss and Target Price of a Futures or Forex Trade",
"slug": "the-basic-setup-part-2-stop-loss-and-open-price",
"status": 2,
"publication_date": "2017-10-24T03:20:02Z",
"lead": "What are the key variables you need to know for each futures or forex trade? You will learn about the Open, Stop Loss and Target Price of the trade, along with how many contracts to open.",
"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#### **Where to Open, Where to Close - Basic Setups Part 2**\r\n\r\nIn this story I will show you how to open a long position in gold. You will learn the key data you need to lock down the potential risk and reward *before* opening the trade. Instead of opening a contract at today's price and then hoping for the best, we will dispassionately look over the chart of gold and determine our entry, a defensible location to place our stop loss and a reasonable target price given gold's recent **`price action`**.\r\n\r\nBy doing so we will have a trade with a defined risk (the difference between the open and the stop loss prices) and a defined reward (the difference between the open and target prices). Once the trade is opened, we will rarely revisit these key setup prices because to constantly second guess every price movement in the market will wear you out emotionally. You will be in no state to make a rational decision to either close out this position or open a new one. Instead, all this work must be done beforehand.\r\n\r\nIgnore price movements in open positions and instead focus your efforts on analyzing the longer term trends that drive the current price action you see in the charts. These trends arise from either longer timeframe charts or the fundamentals driving the market you are trading. For example, in gold the relevant fundamentals are the global risk environment, price inflation and movements in interest rates. There is enough there to keep you busy without becoming exhausted following minor price wriggles.\r\n\r\n####<span style=\"color: #090;\">The Open Price</span>\r\n\r\nThe current price at the close of the most recent trading on the chart was **$1260.75** in **`USD`** (United States Dollars). In general we will attempt to open at the start of trading of the next period immediately following the signal. We might set a limit order to ensure there is no huge gap but we have to be careful about trying to get a better price or we risk missing out on the trade altogether. The worst scenario is that we find ourselves 'chasing' the price as it pulls away from us. Never chase a price - walk away instead.\r\n\r\nIn this case we will accept the open price (OP) as set by the market on the next day. We hope to open our position at that price or lower. But before we commit our funds we need to know our target price, the stop loss and how many contracts to open.\r\n\r\n####<span style=\"color: #009;\">The Target Price</span>\r\n\r\nThe target price (TP), sometimes called the \"take profit\" price (and conveniently the same initials, TP), must be based on something more than your optimistic hopes for a successful trade. The first target appears to be the top of the range, about **$1295**. You will have to accept that for now but I have much more to say on this topic in a later story in this series. Later on, I will show how to derive the TP by applying a **`risk/reward multiplier`** to the risk of each trade, but for now I suggest we use *discretion* and set an appropriate TP from the chart alone.\r\n\r\nIt is essential to recognize that all traders have losing trades and your winners must at least compensate you for the losses. Some writers argue that because you have a 50% chance of the market going either up or down then you will win half the time. If that were correct you would need to target at least twice the amount you stand to lose.\r\n\r\nUnfortunately it is not so simple. We do not know the future so it may be true there is a 50% chance of the market going either way. However the market takes many paths to go up or down. Even in the 50% of cases where the market goes your way, there is also the possibility that before the market goes up it first falls enough to trigger the stop. Since the stop is closer than the TP, it is more likely that the SL gets triggered first. Afterwards the price might recover and hit your target, but without you along for the happy ride.\r\n\r\nFor this reason we should require more from a potential win than only double the risk. You must avoid any trade with a potential win less than double if you have only a 50% chance of winning. More on that later.\r\n\r\n![Gold daily chart](/media/uploads/2017/a_basic_trade_setup/20171008-Gold-setup2.png \"Stop Loss and Open Price\"):C90\r\n\r\n####<span style=\"color: #900;\">The Stop Loss</span>\r\n\r\nInstead of holding on to a losing position, with all the resulting emotional and financial distress, we are going to set a price where we will automatically close our position should the market go the wrong direction. By placing a stop loss (SL) on our trade we effectively limit the risk of the overall position.\r\n\r\nUnfortunately the SL is not a contract with your broker - why should they take a position off your hands that you no longer want? Instead the SL price being triggered will result in your position being placed into the market and other market participants will determine the price you receive for closing it out. In normal market conditions there is a mild amount of **`slippage`** and you may get closed out at a worse level than the SL you set. You should allow for that in the calculations below.\r\n\r\nHowever, occasionally the market may be **`illiquid`** as an unexpected dramatic event begins to unfold. In such circumstances there may be no one willing to take over your position at anything like the SL price you set when you opened. Although thankfully rare, such events happen often enough that you should heed the advice below about the maximum percentage of your funds that you invest in any one position. Although such a loss might be painful, if you follow this advice you will survive while all around you other traders are being wiped out.\r\n\r\nNow we are ready to discuss where to place our SL for this simple gold trade example. The key to choosing an SL is to locate an area where the market has recently tested a price and found **`support`** (or **`resistance`** if opening short). By choosing an area of support to place a stop in a long trade, you are raising the probability that your trade will also survive any renewed test from other traders. Note this does not provide any proof your trade will survive, it just raises the probability. As you will see, consistently trading higher probability scenarios will bring you out ahead of the game.\r\n\r\nFor our SL we could choose the low at point B, 1204.75, but that is far below our current open at point 'O'. It would be better to use the low of the retracement at about **1251.40**.\r\n\r\nAlthough this closer area is more likely to be stopped than the lower SL at point B, there is always the possibility of the market falling and triggering both stops. In the unfortunate event a stop at 1251.40 gets triggered we can sit out the potential fall in price back down to B. If a buy signal occurs there then we can open a new position without any of the additional risk of sitting in a losing trade, unable to take advantage of new market developments and unable to go short. There are other advantages to choosing the closer stop to do with **`leverage`** which I discuss below.\r\n\r\nMore to the point, you are not trying to be *right* about the market, you are just trying to win. To win you need to be opening positions in the same direction as the traders who are moving the market. If the market goes the wrong way for your trade then you chose incorrectly and you need to be out of that position as fast as possible. The nearby support area where you placed your SL is the only flexibility you allow the trade. Once breached, you should immediately cut your losses.\r\n\r\nNow that we have specified our open, stop loss and target prices for the sample gold trade, we need to turn our attention to the number of contracts to open. We will look at risk and contract sizes in the next story.\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",
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"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",
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"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",
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"forums": [
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"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
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{
"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",
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"forums": [
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"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
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"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.",
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"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
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"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,
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"replies": 9
}
]
}