Position management

I still have the tendency to close my winning position too early therefore I start trading two lots. I will exit one lot with my discretion and I will set a trailing stop for the other half of the position. With this method I try to stay with the winning trades that has a good run and hopefully can achieve bigger gains.

Change in my trading

I have to employ some changes in my trading. I’m still having problems finding the correct timeframes to match my trading strategy. Even though I have a better feeling with the current set (4h for trend, 1h price action, 15 tactical) I still often rush the entrys and/or the exits of my trades. This is obviously quite a bit of a problem. It deteriorates my trade performace by damaging both the wining/losing ratio and the gain/loss rate.
To improve my discipline (i.e. patience) I try to monitor the tactical charts as less as possible. However due to my daytime job as a trader I am looking at intraday charts all-day long and it is quite a challenge to hold back when receiving so much impulsive information.
Therefore I will focus on the DAX index to keep myself busy with intraday trading and to improve my timing and tactics. I will post my trades on a daily basis and evaluate my decisions. Unfortunately the trading platform that I use to trade the DAX cannot be connected to mt4pips.

Breakout Entry Techniques

I have found this article in the Nov, 2010 online issue of the Futures Magazine. Part of the article (on Page 2) explains the Breakout Pullback entry method which is crucial part of my trading strategy.

Basic breakout methods

The schematic “Breakout entry techniques” (right) depicts two different means of trading breakouts. Both are short entries. Entry one makes use of a sell stop market order with a price just outside (below) the breakout level. Some traders prefer this type of entry because it places them in the market when it moves in the direction of the breakout. However, it requires a somewhat larger initial stop-loss because of the breakout pullback phenomenon. Often, the trader will need to set an initial stop loss above the most recent swing high (labeled “A” in the schematic). Placing the initial stop just inside the breakout level (above it in the case of a short), puts the position at risk of being stopped out from normal market jitters.
Entry two in the schematic uses a sell limit order with a price determined to be at the maximum extent of the breakout pullback. In real-time, this level is not easy to determine. A 20-period EMA reference can be used or the trader can closely watch price action and when the market appears to have exhausted its pullback, a limit order entry can be placed close to the market.
The breakout pullback trade is attractive because the initial stop loss can be set just outside the entry price. This can be the previous swing high (“A”) or the 20-period EMA level.

Click here to read the full article on futuresmag.com

Notes and changes of my trading strategy

Timeframes and screen time
The biggest change I had to make recently is that I started to watch the 1h and 5m charts for taking intraday positions. (1h for trend, 5m for entry/exit tactics) The reason for this is that due to my job I cannot limit my screen time since I’m in front of my trading screens more than 10 hours a day.
I know it sounds like failure at patience but I had to accept the fact that I need to keep myself entertained in order to endure the provocation of the charts.

FX pairs
Another change is that I reduce the number of pairs that I’m monitoring to EUR/USD, EUR/CHF and EUR/GBP. It doesn’t mean that I would not take a position in GBP/USD or USD/CHF if I see a good signal.

Keltner Channels (KC)
I put up Keltner channels on the trend charts for trend filter. I still aim to use as few indicators as possible. Keltner channels are constructed by a central line (typically an EMA) and upper and lower bands are that are drawn at an equal distance defined as a specified multiple of the ATR. I use EMA20 for the central line and 1 x ATR(10) to calculate the bands. I will not use KC to generate buy/sell signal just seeking visual feedback that the underlying trend is valid.

Trading trendline breaks

My trading strategy aims to capture ‘with trend’ trades against countertrend pullbacks. The method that I try to employ is to enter on the break of the trendline of the pullback. There are numerous trading sites describing the technique how a trendline break should be traded. In a previous post I quoted Al Brooks, the writer of the book ‘Reading Price Charts Bar By Bar’, how he interprets countertrend pullbacks. Another representation of trendline breaks was described by Vic Sperandeo in his book ‘Methods of a Wall Street Master’ and known as the 1-2-3 reversal.

There are several ways that the price can break a trendline. The tricky part is to be patient and endure the provocation to jump straight into action when the price is forcing its way through the trendline. The best way is to wait until a minor pullback (in the direction of the countertrend pullback that we are trading against) tests and confirms the breakout. Both of the above mentioned methods emphasise the key element of a pullback testing the trendbreak.

On the above chart I marked the trendlines of three pullbacks against a bullish trend. The breakouts show different types of trendline breaks. The first breakout did not retest the breakout and the only way it could have been traded was the breakout above the small doji just before the break of the trendline. The second trendline breakout had a retest of the level of the breakout while the third retested the trendline itself with a higher low. In fact both latter examples formed 1-2-3 reversals. I also marked a fourth trendline which was tested but not broken. The sharp selloff that followed was a clear example why it is important to wait for break of the trendline.
These examples also show how deep the pullbacks were on the fibonacci scale. The first two pullbacks reached and exceeded the 61.8% fibo retracement level. The third didn’t even scratch the 38.2% level. It is worth note that the angle of the pullback trendlines are also different which suggests that the momentum of the pullback does not necessarily provide any clue about the quality of the breakout.

The second chart shows two reversals after trendline breaks which tested the extreme of the prior trend. The aggressive way to enter is to place a stop entry order below the low of the bearish pin bar testing the prior high. A more conservative entry method is a stop order below the swing low prior to the test of the extreme. In case of the second example – which was a perfect pullback trade – the price retested the conservative entry level as well offering a second entry for the conservative traders.

Al Brooks on trading countertrend pullbacks

“The single most reliable Countertrend trade is entering Countertrend to a pullback, which is a small trend in the opposite direction of the major trend. Once the pullback traders have exhausted themselves and the trend traders have again demonstrated their resolve by breaking the trendline that contained the pullback, any small pullback to test this breakout is a great Breakout Pullback entry. This entry is counter to the trend of the pullback, but in the direction of the major trend, and will usually lead to at least a test of the major trend’s extreme. The more momentum that is present in the trendline break, the more likely it is that trade will be profitable.”

Al Brooks is writing about two breakouts in this method. The first is a larger countertrend move against the underlying trend. This can be a few bars on the 5 minutes timeframe that he is trading. The second is a small pullback when the trend resumes and the countertrend move’s trendline is broken. This minor pullback can happen within one bar and in my experience rarely happens more than three bars later than the breakout. If it does than the break is likely to be a false one.
It all sounds clear and easy but when trading in real time at the hard right edge it is not so simple.

Why am I quoting Al Brooks when his focus is 5 minutes timeframe? Because due to the fractal nature of the financial price movements (self-similar in scale), the same method can be traded on longer timeframes as well.

Change in strategy

I change my strategy with switching to lower timeframes to speed up my strategy a bit. I will update the Trading plan page this weekend.

1-2-3 reversals

It seems that 1-2-3 reversal patterns have enough power to be played against the underlying trend with consideration to the corrective/impulsive manner of current trend phase.

European ‘native’ currency pairs comparison

According to the latest change in my trading strategy I have replaced forex majors with European currency pairs. The reason for this was that the trading in European currencies is focused in the EU trading hours (i.e. from 8am to 4pm GMT) therefore there is less chance to get stopped out in the AM and US sessions. To backup my decision I did a little research to see if the above statement is valid. The attached table shows how much the given trading session covers relative to the 24 hours ending with that session.

Based on the data presented in this table, only the Sterling (GBP) and the Canadian (CAD) are satisfying for trading in European trading hours. All the European currency pairs show better trading range distributions meaning wide high-low range in the EU trading with relatively narrow range in the AM session.
The EURGBP, GBPCHF and GBPNOK may suit my trading style the best with the EU trading hours covering more than 80% of the previous two session while the AM hours covering less than half of the range of the preceding EU and US sessions.
I will do a similar comparison of the volatility and trendiness of the there sessions.

Change in strategy

Based on the trading experience in the past few weeks I change my strategy as it follows:

1. Instead of the forex majors I will focus on currency pairs that are ‘native’ for the European trading hours. The reason for this is that due to the 24-hour market trading in currencies I often get stopped out in the Asian trading hours just to see that the price continues in the trade’s direction. I am still doing some analysis which European currency pairs I should put on my watchlist.

2. After analyzing my trades I noticed that after I enter into a position I keep monitoring the trade in the lowest timeframe which results an early exit on both sides. Either the stop level is too tight knocking me out too early or the profit taking is too soon leaving me out from the bulk of a profitable price movement.

3. Even though my trading strategy is discretionary I’m still handling my exits too much like a system. I change for more ‘loose’ stop exits to see if I can improve my gain/loss ratio.