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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/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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"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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"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",
"image": null,
"forums": [
{
"url": "https://www.pagoolabs.com/forums/api/trading-education/?format=api",
"title": "Trading Education"
}
],
"replies": 6
},
{
"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"
}
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"replies": 3
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{
"url": "https://www.pagoolabs.com/stories/api/57/?format=api",
"id": 57,
"title": "Examples of how to Manage Risk in a Forex Trade Using AUD.JPY and AUD.USD",
"slug": "examples-of-how-to-manage-risk-in-a-forex-trade",
"status": 2,
"publication_date": "2017-11-27T23:56:40Z",
"lead": "How to manage a forex trade so that the risk and the risk-reward of the trade is set in advance, using the examples of AUD.JPY and AUD.USD.",
"excerpt": "Managing a Forex trade using the examples of AUD.JPY and AUD.USD that set the risk and the risk-reward of the trade in advance.",
"poster": "SeanManefield",
"content": "---\r\nOur [previous story](/stories/51/2017/11/27/trading-audjpy-in-a-heikin-ashi-forex-system/) on risk in forex markets went over the definitions of the <small><strong>base.quote</strong></small> currency ticker format and how the quote defines the currency the contract is valued in. In this story I will go through a couple of specific examples to show how to correctly value any forex contract and have it priced in the same currency you use for your accounts.\r\n\r\nTo begin, imagine you are a United States Dollar (USD) account holder and you want to value a contract to sell <small><strong>AUD.JPY</strong></small>. I am extending the work we went through in an earlier story on the [dollar risk of one futures contract](/stories/41/2017/10/24/the-basic-setup-part-4-risky-contracts/#Dollar-risk-of-one-contract) by adding the currency conversion rate and converting the quoted currency back to the account currency.\r\n\r\nWe will use the trade data indicated in the following H4 chart of the AUDJPY:\r\n![AUDJPY H4](/media/uploads/2017/Forex_Setups/2017-11-27_AUDJPY_H4_HA_zoom1.jpg \"AUDJPY 4H\"):C90\r\n\r\nHere is the trade from the highlighted setup, with the actual open price and stop loss:\r\n\r\n<a id=\"basic-setup-for-audjpy\">\r\n#### **Example 1. The Basic Setup for AUD.JPY**\r\n\r\n Risk per AUD.JPY Contract for a Sample Trade\r\n OP = 87.605 Open Price in Yen\r\n SL = 88.115 Stop Loss in Yen\r\n CS = 100,000 Contract Size\r\n CR = |OP - SL| x CS ¥Contract Risk (absolute value)\r\n = |87.605 - 88.115| x 100K\r\n ¥CR = ¥51,000 Risk in Yen\r\n $CR = ¥51,000 x JPY.USD Risk in USD\r\n\r\nThis last statement says that the risk in dollar terms is equal to the risk in yen multiplied by the cost of each yen. Because there is normally no traded <small><strong>JPY.USD</strong></small>, we have to *synthesize* it from:\r\n\r\n JPY.USD = 1 / USD.JPY\r\n\r\nThis simply says if the market for <small><strong>USD.JPY</strong></small> is currently trading at 100 then 1000 Yen is worth exactly $10 when valued in US$:\r\n\r\n $value = ¥1,000 x (1 / 100) Where 100 is the USD.JPY rate.\r\n = $10 In USD\r\n\r\nThese calculations are good enough here, but programmers will have to adjust the equations further by swapping the bid/ask rates:\r\n\r\n JPY.USD(bid) = 1 / USD.JPY(ask)\r\n JPY.USD(ask) = 1 / USD.JPY(bid)\r\n\r\nand applying each one correctly depending on whether the adjustment is for a buy (use the ask) or a sell (use the bid). That's a little too much detail for a non-programming article like this so let's just abstract away from the bid/ask for now to stay focused on the general idea.\r\n\r\nAt the time of the trade above from 2017-11-03 00:00 (written in [24 hour time](/stories/50/2017/11/09/where-does-the-day-begin-in-24-hour-trading/), the <small><strong>USD.JPY</strong></small> mid close price was 113.95. Using this to value the contract in US$, gives us:\r\n\r\n JPY.USD = 1 / 113.95\r\n = 0.0088\r\n $CR = ¥CR x JPY.USD Risk in USD\r\n = ¥51,000 x 0.0088\r\n = US$448.80 Risk per contract in US$\r\n\r\nWhat if your account is based in a currency other than US$? In this example so far we have used the inverse of <small><strong>USD.JPY</strong></small> to convert the Yen profits and losses to US$. If you are in another currency, say <small><strong>XYZ</strong></small>, you have two choices. The simple method is to find a direct currency pair from Yen to your currency, such as <small><strong>EUR.JPY</strong></small>, and replace the <small><strong>JPY.USD</strong></small> in the formula above with 1/<small><strong>EUR.JPY</strong></small>. In general you are looking for either <small><strong>XYZ.JPY</strong></small> or <small><strong>JPY.XYZ</strong></small>. In the case of the latter, there is no need to invert it beforehand.\r\n\r\nThe second method, useful when no direct cross exists between Yen and your account currency XYZ, is to add an extra step above after calculating the US$ contract risk. This step converts the US$ amount into your local currency. Every currency in the world should have a forex pair linking its currency to the USD, either <small><strong>XYZ.USD</strong></small> or <small><strong>USD.XYZ</strong></small>. If it is the former than invert it to arrive at the rate that converts US$ values into your account currency: <small><strong>USD.XYZ</strong></small>.\r\n\r\n ¥CR = ¥51,000 Risk in Yen\r\n $CR = ¥51,000 x JPY.USD Risk in USD\r\n CR = $CR x USD.XYZ New: Risk in your XYZ currency\r\n\r\nYou now have the value of one contract in the same currency as your account. Just continue on below, but substitute your currency symbol for the $ sign.\r\n\r\nWe now have enough information to calculate the number of contracts to open.\r\n\r\nAn [earlier story](/stories/40/2017/10/24/the-basic-setup-part-3-risky-trades/) showed how to calculate the amount we could invest in a trade without risking more than 2% of our available risk capital. Assuming $100K to invest, we therefore have $2,000 available for this trade. Now finally we can calculate the number of contracts to buy:\r\n\r\n Number of contracts = ($Funds at risk) / ($risk per contract)\r\n = 2000 / 448.80\r\n = 4 contracts\r\n Cost of position = $1795.20 from: 4 contracts x $448.80\r\n\r\n\r\n<a id=\"basic-setup-for-audusd\">\r\n#### **Example 2. The Basic Setup for AUD.USD**\r\n\r\nIn this example, because <small><strong>AUD.USD</strong></small> is priced in US$, US account holders can view the entire setup as a normal US$ futures contract with a contract size of 100K. But non-US traders will need to convert the US$ contract risk back to their own account currency. Here we consider the case of a trader with Yen accounts, but you could just as easily substitute Euros or any other account currency.\r\n\r\n Risk per AUDUSD Contract for a Sample Trade\r\n OP = 0.76910 Open Price in US$\r\n SL = 0.77310 Stop Loss in US$\r\n CS = 100,000 Contract Size\r\n $CR = |OP - SL| x CS $Contract Risk (absolute value)\r\n = |0.76910 - 0.77310| x 100K\r\n $CR = US$400 Risk in USD\r\n ¥CR = US$400 x USD.JPY Risk in Yen\r\n = US$400 x 113.95\r\n = ¥45,580\r\n\r\nThe second last statement says that the risk in yen terms is equal to the risk in US$ multiplied by the cost of each US$ valued in yen. So in this case we have US$400 and each US$ costs ¥113.95.\r\n\r\nNow assume the Japanese trader has ¥10,000,000 worth of risk funds in a Yen account to invest, of which only 1% or ¥100,000 can be invested in any one trade.\r\n\r\n Calculate the Number of Contracts From Funds Held In Yen:\r\n Number of contracts = ¥Funds at risk / ¥risk per contract\r\n = ¥100,000 / ¥45,580\r\n = 2 contracts\r\n Cost of position = ¥91,160 from 2 contracts x ¥45,580\r\n\r\n\r\n#### **The Account Currency Conversion is Only Needed to Calculate Position Size **\r\n\r\nTo determine whether the trade hits the target or is stopped out, we only need the contract risk which is provided by the SL and open price. The RR multiplier provides a simple way of getting a TP. So we do not need to mess with quote or account currencies. However whenever we need to calculate the number of contracts in order to open a trade, we need to go through the calculations above.\r\n\r\nAnother way of doing this is to calculate the value of one pip per contract in the forex rate you are opening. Then multiply that by the number of pips at risk and calculate the number of contracts to be opened. It's the same formula, just executed in a slightly different order.\r\n\r\nIt is very important to know what you are doing if you want to limit your risk, hence the calculations above. However, you can save yourself a lot of hassle by using one of the many free online calculators. Just search on \"forex calculator\" when you need one. Here are two to get you started:\r\n\r\n**Forex Calculators:**\r\n\r\n- [IC Markets](https://www.icmarkets.com/advanced-trading-tools/forex-calculators/)\r\n- [OANDA](https://www.oanda.com/forex-trading/analysis/profit-calculator/)\r\n\r\n#### **Conclusion**\r\n\r\nI have explained the general format of a currency pair, <small><strong>Base.Quote</strong></small>, and how to assess it as units of the base priced in the quote currency. We walked through how to convert the risk from the quote currency into your local account currency. Finally we were able to calculate the number of contracts to open while at the same time limiting our risk to a small percentage of our risk funds.\r\n\r\nWith this background in forex contracts we are now ready to consider how we might go about building a simple forex system. That will be the subject of our next story. Stay tuned.\r\n\r\n\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.",
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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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