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"url": "https://www.pagoolabs.com/stories/api/44/?format=api",
"id": 44,
"title": "What you Need to Know About Timeframes, Fundamentals and Reversals in Forex and Futures Systems",
"slug": "trading-systems-part-2-timeframes-fundamentals-reversals-and-retracements",
"status": 2,
"publication_date": "2017-10-24T03:47:29Z",
"lead": "This second story in the series \"Introduction to Trading Systems\" investigates how timeframes and fundamentals affect the trend. We also look at how to distinguish retracements from trend reversals.",
"excerpt": "This second story in the series on Trading Systems investigates how timeframes and fundamentals affect the trend. We also look at how to distinguish retracements from trend reversals.",
"poster": "SeanManefield",
"content": "---\r\n#### **Trading Systems Part 2**\r\n\r\nThe [previous story](/stories/43/2017/10/24/trading-systems-part-1-introduction/) introduced trends and showed how to recognize them using higher-high and higher-low cycles, (HH-HL, or LH-LL in downtrends) and moving averages. Here we will look further into timeframes and fundamentals to see how they affect the trend.\r\n\r\nIn some cases a trend can be almost indistinguishable from a sideways pattern. Cases like this are to be avoided because if other traders in the market lack conviction why should you be so convinced? Trade another market and come back to this one when the trend is more obvious.\r\n\r\n<a id=\"shorter-timeframes\">\r\n#### Shorter Timeframes\r\n\r\nAnother alternative is to move your trading to a shorter time frame: what looks like a series of whipsaws going nowhere on the weekly, may look like a strong trend on the latest section of the H4 chart. Equally, you could move to a longer timeframe: what looks like a sideways market on the H4 may be just a small retrace forming in a steady trend on the weekly. Favor longer over shorter timeframes if you can.\r\n\r\nYour charting software usually allows you to choose between various timeframes. The common ones include:\r\n\r\n- one minute\r\n- 5 minutes\r\n- 15 minutes\r\n- one hour\r\n- 4 hours (H4)\r\n- one day (D1)\r\n- one week (W1) and\r\n- one month\r\n\r\nEach timeframe collapses all the trades for that period into one bar on the chart. The open and the close are the prices where the time period began and ended respectively, and the high and low are the trading extremes over the duration of the period.\r\n\r\nIn general you should aim to trade the daily. This allows you 24 hours to digest a single candlestick, which is often enough time to review the news. You will have several days at least between trades, enough time to recover from a failed trade as well as time to remind yourself after a successful trade that you are very much human. In ancient Rome a slave would whisper in Caesar's ear that he should *\"Remember, you are only a mortal!\"* while enjoying the adolation of the crowd during a victory triumph. A win is often a lot of money so never let success carry you away. It's just a trading system and sometimes it wins, sometimes it loses. A level head helps.\r\n\r\nHowever if the markets are trendless on the daily or weekly charts, you might consider trading shorter timeframes where a tradable trend may be easier to see. Consider the Gold futures contract where gold has been consolidating sideways on the weekly chart after falling from its 2011 European crisis highs.\r\n\r\nHere is how a longer timeframe (weekly) looks for the Gold continuous futures contract:\r\n![Gold Futures - no trend on the weekly](/media/uploads/2017/basic_system_trading/Gold-Wk-NoT-20171015.png \"Gold Futures - no trend on the weekly\"):C90\r\n\r\nThose little wiggles in the chart look insignificant on the weekly but on the H4 they display a tradable trend:![Gold Futures - H4 trending](/media/uploads/2017/basic_system_trading/Gold-H4-T-20171015.png \"Gold Futures - H4 trending\"):C90\r\n\r\nIn terms of the basic operation of your system, nothing much changes in your setup, signals and system as you move to a shorter timeframe, other than the points I discussed above about analysis and recovery time. But there are some notable differences with shorter timeframes you must be aware of:\r\n\r\n- Unless the system is automated or you have trading partners scattered across timezones trading the same system on the same portfolio, no human can trade 24 hours continuously without sleeping.\r\n- You cannot assume the best signals occur while you are awake.\r\n- You will therefore miss many signals.\r\n- News that shocks the daily charts will so overwhelm the shorter timeframe that your stops can slip disastrously. Your system could be thrown into deep losses. Of course, the opposite may happen as well and you win, but then you are limited to a four fold win. Except for the very best, many brokers will force you to carry all losses but will turn on a dime to share in any gains should you win more than you expected.\r\n- Bid/ask spreads and commissions become a bigger percentage of the trade.\r\n- Margin comes into play because you will be buying more contracts given the closer stops and therefore the lower risk - see the series on [\"The Basic Setup\"](/stories/38/2017/10/24/basic-trade-setup-part-1-introduction/) for an explanation.\r\n\r\nChoose a timeframe that most suits your style, favoring longer over shorter timeframes where possible.\r\n\r\n\r\n#### The Fundamentals and Trend\r\n\r\nIf you trade a market you owe it to yourself to become familiar with its news and the fundamental influences that drive it. If the instrument is trading in a bull market you should know why. As it changes direction, ask what fundamentals have now changed? Are they likely to last long enough for a trade? Ask yourself the same question every day. This is your best early clue to a change in trend.\r\n\r\nIn a very important sense, the trend *is* the longer term fundamentals. If prices in the economy are inflating, gold, oil and other commodities will be rising in price. Currencies of countries with prices rising faster will fall against the currencies of countries with more stable prices. At present (2017), inflation is low and lower than many observers expected a decade ago. In consequence, prices for gold and oil are lower than their peaks set at a time when prices were expected to rebound. Of course, there are other reasons for the fall in some commodity prices but keep your eye out for if and when inflation starts to re-enter the system.\r\n\r\nThe fundamentals and the trend should be in sync, and if they are not then you should be cautious about trading that market until they are. Also, different timeframes have different fundamentals. A minor news conference or statement from the Bank of Japan might send the Yen in a new direction on the M5 chart but result in less than a blip on the daily.\r\n\r\nAs technical traders we are accustomed to the rubric that all news is already in the prices. There is a lot of truth to that but we should still be aware of the *major* fundamentals driving the trend, not the day to day press conferences or occasional burst pipe line. When the trend changes, the prices will reverse direction but it may just look like a deep retracement in the early stages. Knowing the major fundamentals and how that affects the markets you follow will help you spot a changed trend or paradigm shift sooner.\r\n\r\n\r\n#### Trend Reversals\r\n\r\n![Trend Reversal](/media/uploads/2017/basic_system_trading/UpT-Rev-EG-20171015.png \"Is the Trend Reversing?\"):R40\r\nIt is rarely clear when a previous trend is coming to an end and has begun to reverse direction. You could wait for a pattern of HH-HL or LH-LL to assert itself. Or you might wait for the faster (short timeframe) moving average to cross the slower. If you trade these markets you should have a good idea of the news in this area. What has changed in the fundamentals to cause this new market behavior? Does it look like these new fundamentals will be market drivers over the time horizen of your trades?\r\n\r\nIf you wait until a new trend is well and truly established, it may be too late to trade. These are normal issues that every trader has to grapple with. Follow rules that are consistent so that you can measure your performance and adjust if necessary.\r\n\r\n![Gold Short Pin Bar](/media/uploads/2017/basic_system_trading/Gold-D1-NG-Rev1-20171019.png \"Gold Short Pin Bar\"):C80!\r\nThere is a tendency for some traders to trade reversals because in looking at the charts, that's where the biggest gains cluster. ![Gold Short Pin Bar](/media/uploads/2017/basic_system_trading/Gold-D1-NG-Rev2-20171019.png \"Gold Short Pin Bar: Whoops!\"):R30 However, for long periods in a row, a trend can progress relentlessly in one direction. Based on probability alone, a series of smaller trades in line with the trend would be far more likely to succeed than guessing that one place where the trend finally ends. If you trade the trend then that last trade where the reversal triggered your stop would be a loss but all the earlier wins should offset that nicely. As you can see here above and to the right, what looked like a prominent pin bar in the Gold continuous futures contract, turned out to be one more bar continuing in the direction of the trend.\r\n\r\nThe one exception to this rule about not trading reversals should be those trading sideways markets, which I do not cover here.\r\n\r\nWhile it may not be clear for some time that a trend has reversed, evidence nonetheless accumulates pointing to that conclusion:\r\n\r\n- the fundamentals have changed\r\n- coming out of a previous downtrend the market puts in a higher low and a higher high\r\n- the moving averages cross, and\r\n- possibly a candlestick reversal pattern is evident at the low.\r\n\r\nAny one of these may not mean much but when several occur then its probably time to change over to a bullish strategy of buying the retracements. Evidence for a trend change applies equally at the start and at the end of a trend. Look to the much longer timeframe to see whether the new trend is likely to be a real trend reversal or a retracement.\r\n\r\n\r\n#### Retracements against the trend\r\n\r\nWithin the trend, retracements occur regularly. On the charts above you can see these retracements between each HH and HL. There are many reasons for why prices do not move steadily in one direction but it's apparent that traders have widely divergent views about the interpretation of events as they occur in markets. Perhaps you are yourself conflicted about which way a particular item of news will send prices. There are two views right there! Profit taking by traders on their winning positions could itself reverse prices for a time.\r\n\r\nEventually whatever was fundamentally driving the trend will reassert itself, the short term profit taking will stop and stronger hands will hold on. The net effect is more buying pressure than selling within a bull market. The retracement comes to an end and the trend resumes.\r\n\r\n![Setup after retracement](/media/uploads/2017/basic_system_trading/Ret-MA-EG-20171015.png \"Setup after retracement\"):R45\r\nAs you can see, this area where prices resume in the direction of the trend is an excellent place to enter a new position. We have a clear area where the market tested further price falls and for now rejected them. Retracements that signal a resumption in trend are valuable sources of the location of support and resistance areas. I will return to explore this area further in the next section on signals in Part 3.\r\n\r\nWhen a trend reverses, it is not clear until much later when prices cut through previous areas of support or resistance. However when a retracement reverses it is from a higher low in a bull market (or lower high in a bear market) and you continue to trade with the trend. The more time you spend with charts the less chance of getting the two confused.\r\n\r\n#### Summary\r\n\r\nTrade the longer timeframes whenever possible. They give you plenty of time to analyze the market and make the necessary pyschological adjustments you need to risk your money on a trade.\r\n\r\nEven technical traders should pay attention to the fundamentals as a guide to understanding the trend.\r\n\r\nDo not confuse reversals of trend with a retracement coming to an end. Check the history of the chart to see if the market is setting a higher low in what was a downtrend (or lower high in a previous uptrend).\r\n\r\nIn the [next story](/stories/45/2017/10/24/trading-systems-part-3-signals/) we will discuss how to receive a signal from the market. Signals are the heart of trading and typically include any special market price behavior that you have previously determined will trigger you to open a position. To do so, you will use the setup tools we have already discussed.\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\r\n*[HA]: Heikin Ashi\r\n*[MA]: Moving Average over a specified period - 100 periods for eg\r\n*[EMA]: Exponential Moving Average - has a long 'memory'\r\n*[OHLC]: Open, High, Low, Close: the 4 key values for any bar on a chart\r\n*[bull]: An uptrending or rising market\r\n*[bear]: A downtrending or falling market\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*[MR]: Maximum Risk\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*[EURJPY]: The Euro - Yen cross currency: buying Euros priced in Yen\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*[underlined text]: Congratulations! You have successfully hovered over text\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\r\n*[M5]: Chart of the five minute timeframe\r\n*[H1]: Chart of the one hour timeframe",
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"title": "Trading Education"
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"url": "https://www.pagoolabs.com/stories/api/43/?format=api",
"id": 43,
"title": "Building a Futures or Forex Trading System Using Trends",
"slug": "trading-systems-part-1-introduction",
"status": 2,
"publication_date": "2017-10-24T03:44:35Z",
"lead": "This first story in the series \"Introduction to Trading Systems\" explains what a system is and what you need to know about trends and signals so you will be able to build your own custom trading system.",
"excerpt": "This Introduction to Trading Systems explains what you need to know about trends and signals to help you build your own custom trading system.",
"poster": "SeanManefield",
"content": "---\r\n\r\n#### **Trading Systems Part 1**\r\n\r\nThis series shows you how to build a trading system. Within a system there is an almost limitless variety of buy and sell signals we could use, but here I purposely avoid advocating any particular method. That's because for many traders it's the system that is missing, not the ability to recognize a valid signal.\r\n\r\nBy learning how to build your own system you will have a trading method unique enough that you will be able to enter profitable positions hopefully before any advantage is arbitraged away by others. When enough traders play the same system, your entries, stops and targets would be discovered. Bigger players may find it profitable to bet against you, knowing that triggering your stops would allow them to enter in the same direction as you at a better price. By trading against you, the bigger players can reduce the profitability of your system and may even cause it to fail.\r\n\r\nFor that reason, I do not advocate you using any simple system outlined here. That's also true of just about any publically known system. It helps that there are so many systems out there, but what really helps is that so many beginning traders don't use systems at all. Instead, they make regular 'donations' to those who do, until their accounts are empty.\r\n\r\nWhat I present below is just for learning purposes. It should be easy to adapt this material to your particular trading style and favorite indicators, and I show you how.\r\n\r\nA system is simply a sequence of trades, all based on the same or similar **`signals`**. It is designed by carefully evaluating the historic data and the longer term charts. Any one trade might fail leaving you with a loss however a system covers multiple trades and the designer of a system looks for an approach where wins consistently beat losses.\r\n\r\n![Sample MA Cross System](/media/uploads/2017/basic_system_trading/SPX-D1-UpT-MACross-EG-20171019.png \"Sample MA Cross System\"):C100\r\n\r\nAbove is an example of a system, although it makes little sense at this point. Nonetheless, you can see that we have six setups on this chart where we could place an open trade based on the crossing of two **`moving averages`** (MAs). They are marked by little crosses below where the MA cross occurred, green for success and red for failure. I will explain this in detail later on but for now it just means that whenever the five period MA, MA(5), crosses above the MA(14) we will open a long position. There is nothing significant in these MA periods, they are just to illustrate a simple system. There is also a pair of longer term MAs, the MA(100) and MA(200), which are only shown to emphasize the trend since point A.\r\n\r\nThe point here is that our first setup failed, as did the 3rd and 4th. However, three of the six trades here were successful. If the TP were twice the risk then this simplistic system would generate three times the risk in wins (2 x 3 wins - 1 x 3 losses = 3), and therefore 6% of our risk funds (2% x 3). Of course, I have to explain why we should be long and not short after point A, why I chose twice the risk for the TP, what's this crossing MA all about and what happened to the right of the chart. I hope this series on systems will answer all these questions and more.\r\n\r\nIn many of the examples I deliberately use a simple MA cross to determine when the trend starts and sometimes even the triggers that prompt us into a trade. Although simple, if we can make a system work well with MAs then imagine what you can do with all your favorite indicators. Also, MA crosses are easy to explain and draw, so just what I need.\r\n\r\nDon't expect a system to be anything complicated. A system is *consistent*, and the easier to understand the better. A consistent system applies the rules in the same way on every trade setup. By being consistent, a system becomes testable. If we subtly change the conditions whenever we feel the normal human emotions of fear or greed, the system could fail but we won't know why.\r\n\r\nIf you have not used a system before it brings a major improvement for very little extra work.\r\n\r\nBefore we can discuss a trading system, I have some ground to cover on a few very important concepts. I have already posted a series on [**setups**](/stories/38/2017/10/24/basic-trade-setup-part-1-introduction/) but we also need to discuss **trends** and **signals**. These two key topics will make up parts 1 to 4 of this series.\r\n\r\nWhile I have tried to keep this presentation simple, I imagine most readers would have already thought about many of these issues. Perhaps you have been trading a while but have become frustrated how often you are stopped out of trades that afterward move in your anticipated direction. For this reason, much of the jargon of trading is not covered here, or when it is covered, perhaps I pass over it too quickly. If you hover over underlined text, a brief explanation will pop up on many uncommon terms. Please alert us via a post in the comments section whenever something is unclear.\r\n\r\nAs you design your own systems I hope you will discuss your experiences on our forums. The best way to learn is to put your own ideas out there for discussion, get help and hopefully have your system improved by other members. Feel free to post replies to existing stories and, when you have enough points earned from posts, you will be able to post your own stories. Eventually you will be able to start and moderate your own forums when you have accumulated enough reputation.\r\n\r\nIf you have not done so already, I recommend that you first read through the series on [\"The Basic Setup\"](/stories/38/2017/10/24/basic-trade-setup-part-1-introduction/). This current series on Systems relies heavily on material discussed there on the Open Price (OP), Stop Loss (SL), Target Price (TP) and Contracts Opened (CO).\r\n\r\nFrom [\"The Basic Setup\"](/stories/40/2017/10/24/the-basic-setup-part-3-risky-trades/) we will assume in what follows a risk capital of $100,000 and a risk per trade of $2000. Because your risk capital is almost certainly different, just divide or multiply the per trade amounts depending on your available funds.\r\n\r\nAfter reading this series on systems, you should know:\r\n\r\n- how to spot a trend\r\n- the difference between a setup, a signal and a system\r\n- how to use your preferred signaling method in a full system\r\n- how to measure the number of wins and losses and\r\n- how to test whether your system has worked in the past.\r\n\r\nEverything I have to say here on trading applies equally whether short or long. However the descriptions become tedious to read when every sentence has to be qualified with something like \"or sell if short\". For this reason, in most of what follows unless otherwise stated, I will assume an uptrend (or bull market) and long positions. This is just for convenience and does not imply that being long is preferable to being short.\r\n\r\n#### <a id=\"The-Trend\"></a>The Trend\r\n\r\nMarkets spend most of their time consolidating sideways. You could build a system around this fact alone but it's not what we will do here. Instead we will focus on trending markets because those are more likely to result in a winning trade. Also the market is more likely to move to a TP that is a greater distance from the open price than the SL.\r\n\r\n![Uptrend then Consolidate](/media/uploads/2017/basic_system_trading/consolidating-trend.png \"Uptrend then Consolidate\"):R40\r\nWhen favorable information first hits the market, prices start to rise to some higher level. The prices then either consolidate, or fall back if the rise was too high or too fast. But if the asset such as gold, oil, the S&P or some currency is now worth more to the market, why doesn't the market immediately jump to that new higher level? After all, who would sell below that level and who would not be buying? Both of those factors should push the price up to the new level immediately.\r\n\r\nSometimes markets *do* adjust quickly and when that happens politicians and traders on the losing side howl that something has gone terribly wrong. But in general prices adjust slowly for several reasons:\r\n\r\n- it's rarely clear at the time prices begin to move where that higher or lower stable price range lies\r\n- funds have to be moved out of other markets first and perhaps now is not the best time\r\n- the price rising is itself confirmation to other traders that the news is in fact bullish, so the initial price rise accelerates, sometimes overshooting\r\n- some traders may think that the initial price rise was sufficient for this piece of news and either take profits or short it.\r\n\r\nThere are many different players in every market each with their own competing perspectives. Some players are central banks with a policy to push, others are major corporations hedging against a product they have committed to deliver. Still other players may have misinterpreted the significance of the news.\r\n\r\nAll of these factors combine to slow down the movement in market prices as they adjust from the previous stable trading range to the new higher one. During that period of adjustment we have a trend.\r\n\r\n![Uptrend in SPX futures](/media/uploads/2017/basic_system_trading/SPX-D1-UpT-20171012.png \"Uptrend in SPX futures\"):C85!\r\nSome trends are obvious, such as the recent behavior of the S&P500 on the daily or weekly timeframe from 2009 to 2017, arguably longer (see above). Obvious trends display a clear rise or fall in prices as you look across the chart from left to right. Within a trend, retraces or cycles may occur but they should exhibit a reasonably clear pattern of higher highs (HH) and higher lows (HL) in a bull trend, and lower highs (LH) and lower lows (LL) when the market is bearish.\r\n<div class=\"clear-floating-cols-above\"></div>\r\n![Uptrend showing HH-HL](/media/uploads/2017/basic_system_trading/UpT-EG-20171015.png \"Uptrend showing HH-HL\"):R45\r\n![Downtrend showing LH-LL](/media/uploads/2017/basic_system_trading/DnT-EG-20171015.png \"Downtrend showing LH-LL\"):R45\r\n\r\n#### <a id=\"Moving-Averages\"></a>Moving Averages\r\n\r\nMoving averages (MA) are useful to help you visualize the trend. They work well in computerized systems that need a numeric computation in the absence of being able to visualize a chart.\r\n\r\nA moving average simply takes the current price in each period and averages it with the prices from a given *number* of previous periods. That number is called its **`period`** and represents an *historic* average. The MA cannot take into account the future because that is not known in the current period. As each new period trades, its price is added into the calculation of the average while the oldest price is dropped.\r\n\r\nIn that sense, the average *moves* along from oldest to newer prices. Exponential moving averages are similar but give greater weight to more recent prices and typically have a lower weighted memory of *all* previous prices.\r\n\r\nAlthough not necessary in a trading system, it is common for charts to have at least two MAs, a longer term one and another that's shorter and therefore faster reacting. Even price action traders who have no other indicators on their charts, often have a couple of MAs.\r\n\r\n![MAs below prices in uptrend](/media/uploads/2017/basic_system_trading/UpT-MA-EG-20171015.png \"MA Uptrend\"):R45\r\n\r\nAn MA averages out today's prices with prices from the past. In a bull market, the most current price will tend to be higher than in the recent past so the MA should be below where prices are trading. An MA that averages back over a longer period will tend to be further below and slower to react to changes in current prices because it is averaging over a larger number of earlier, lower prices. The latest, higher price has less effect on a longer average.\r\n\r\nTherefore we can refer to the longer one as the **slow** MA and the shorter as the **fast** MA.\r\n\r\n![MA Cross on USDJPY](/media/uploads/2017/basic_system_trading/USDJPY-MA-Cross-20171017.png \"MA Cross on USDJPY\"):R45\r\nIf a market is moving up smoothly, the shorter MA will lie above the longer. In a bear market the pattern is reversed with the MAs lying above the prices and the longer above the shorter. If the trend changes direction from bear to bull or recovers from a severe retracement (a correction), the faster MA will move up first and may cross the slower MA.\r\n\r\nThis is shown above on the chart for USDJPY. Whether they cross or not will depend on the period used for both MAs. For some traders, this triggers a signal to enter the market. There are many ways to trigger the opening of a market position, and crossing MAs is just one.\r\n\r\n#### Summary\r\n\r\nThe trend is an essential component of a trading system because trading against the trend is more hazardous and trades aligned with the trend have a greater probability of success.\r\n\r\nMoving averages are one tool that can help you identify trends and MA crosses help recognize trend reversals.\r\n\r\nIn the [next story](/stories/44/2017/10/24/trading-systems-part-2-timeframes-fundamentals-reversals-and-retracements/) I will discuss several aspects of trend following such as timeframes and fundamentals.\r\n<br>\r\n<br>\r\n<br>\r\n<br>\r\n<br>\r\n#### Disclaimers\r\n\r\nAlthough the PagooLABS site is educational and does not advocate any position in a futures or forex contract, it is important to present the following disclaimers as additional information. Trading these markets can be risky and you must be aware of the following:\r\n\r\n**U.S. Government Required Disclaimer**\r\nCommodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.\r\n\r\n** CFTC RULE 4.41 **\r\n\"These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.\"\r\n\r\nCopyright (C) PagooLABS 2017. All Rights Reserved.\r\n\r\n\r\n*[HA]: Heikin Ashi\r\n*[MA]: Moving Average over a specified period - 100 periods for eg\r\n*[EMA]: Exponential Moving Average - has a long 'memory'\r\n*[OHLC]: Open, High, Low, Close: the 4 key values for any bar on a chart\r\n*[bull]: An uptrending or rising market\r\n*[bear]: A downtrending or falling market\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*[MR]: Maximum Risk\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*[EURJPY]: The Euro - Yen cross currency: buying Euros priced in Yen\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*[underlined text]: Congratulations! You have successfully hovered over text\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\r\n*[M5]: Chart of the five minute timeframe\r\n*[H1]: Chart of the one hour timeframe",
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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",
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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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