Does Your Forex Trading Plan Encourage You To Overtrade?
Welcome Ryan, the author of this Forex Project guest post. Ryan trades from a quiet country lake house and helps traders through his blog at http://www.ryanokeefe.com.
Does your trading plan encourage you to over trade?
Recently I started a survey on my website asking traders to answer this question:
“What is holding you back from trading successfully?”
Currently the number one answer is “I make some money, and then I give it all back.”
Multiple factors contribute to this result however over trading is the most frequent concern struggling traders email me with. I have some thoughts to avoid over trading I hope you’ll find useful.
Consider Your Trading Plan
Over trading may be baked into your trading plan without you realizing it. I received an email from a concerned trader who struggled with taking too many trades although they were following their trading plan. I asked to look at their trading plan and found it was built around the 60 minute chart, the opening of each trading session, support and resistance levels plus the MACD indicator. How many opportunities do you think their trading plan generated on a daily or weekly basis?
I’m a big fan of slowing things down with longer time frames. Using a longer time frame automatically reduces the number of trades you will consider which reduces your trading plan’s built in propensity for over trading. You won’t be tempted to take a “valid signal” 10 times a day trading a daily chart. The vast majority of my trades are planned on the daily chart with the entry taken on a four hour chart.
Consider a Weekly Goal
In my trading plan I have a weekly goal of 50 to 100 points. This is a realistic goal for me to achieve and having the number written down reminds me that once I’ve made my weekly goal there is no reason to place it at risk. When the goal is achieved it is time to do anything other than trade. If you’re trading a lower time frame I think setting a weekly goal is even more critical because as we have discussed, shorter time frames offer more “trading opportunities” which place your profit at risk. I’ve had this weekly goal established for years and it works well against over trading.
Some traders may think a goal of 50 to 100 points a week is too low but keep in mind there are as many ways to configure a trading account as there are ways to trade it. With the right mix of leverage, lot size and risk capital you can do a lot with a goal of 400 points a month. Most important is to set your goal according to your personality; whatever you believe you can achieve and doesn’t stress you out in the process is best.
Do you really need to take that trade?
Before I open a trade I ask myself this question every time without fail. It seems obvious but so is lowering the landing gear before landing yet some pilots still manage to land with the gear up. Consider your emotions before you take a trade. Are you tired? Are you angry? Did you miss a good trade and now desperate to make some pips? Have you made your weekly or monthly goals? If you have met your goals you don’t need to trade, period. If you can honestly answer this question with a “yes” then pull the trigger but if not, don’t put your capital at risk.
Be accountable to somebody other than yourself.
Rob Booker pitched this idea in a presentation I watched online and I believe it is the strongest action you can take to eliminate any propensity you have to over trade. Whoever you report to should have a basic understanding of your trading plan and be able to question you on each trade in a constructive setting. This is a full disclosure exercise so find somebody you can trust.
I report to my Wife every Friday morning with a print out of our account statement. We go through every trade while I explain what system I used, why I took the trade, what mistakes I made and what I could do better next time. We also discuss what I should be doing during the upcoming week if goals are already exceeded.
If knowing you need to explain why you put hard earned profit at risk for an unnecessary trade at the end of the week can’t keep you from pulling the trigger, nothing will.
Popularity: 77% [?]
The MACD Is Overrated
I read a pretty enlightening article on the MACD today and how this indicator has been elevated to mystical status. Is this deserving? According to the author, no. The MACD is an indicator based on moving averages; that's it. "In the end, the performance of moving averages and indicators based on moving averages will always be, well, average." I personally use the MACD and I'll admit that I've been guilty of elevating this indicator to mystical status as well. I predominantly use it to identify divergence between price, but I also use it to identify momentum.
I've talked in the past about my avoidance of lagging indicators and the author of this article says that if this is the route that you want to go (I do), then here is what your toolbox should and should not be.
Your toolbox if you want to perform technical analysis in a lagging manner:
- Moving averages
- MACD
- Stochastics
- Parabolic SARs
- Bollinger Bands
Your toolbox if you want to know where price "is likely to go next… as often as 80% of the time."
- Trendlines
- Pivot Points
- Candlestick
This article presents far from revolutionary information but it goes against from the norm and states why you would be best served by using something other than the MACD. That is why I like this article. There are just so many articles on how to use the MACD to your advantage.
The author also mentions some candlestick patterns (hammer, star) that when identifying them when price is near pivot points or trend lines, can be more powerful.
Article: http://www.investopedia.com/articles/trading/06/AgainstMACD.asp
Popularity: 7% [?]
FOMC Day
I looked into the past at the price action 12-24 hours prior to an FOMC release and as expected, consolidation appears more times than not. What this means is that I could very well be sidelined until Thursday because I won't attempt to trade the FOMC tomorrow. Of course, I could change my mind if the GBP/USD continues its ascent.
I'm feeling good about sticking to the H-system even with the loss today. The first thing I did when I got home from work today was open up my charts to look for a possible filters that I may be able to incorporate. One such filter that looks promising is divergence between price and MACD. I've heard that in general divergence fails more than it succeeds but my experiences with it have shown that as long as you don't use it as a standalone system, it could be useful.
Popularity: 2% [?]
The Only Seven Indicators You Will Ever Need
I was reading an article today that talks about the top 7 indicators that can be incorporated into your trading style. I tend to agree with most of them. I have gone through that stage of jumping from indicator to indicator with the illusion that the previous indicator I was using was broke. There is no perfect indicator but I feel that if you stick to those that lag least, you will be getting out of positions when lagging indicator followers are just getting in. And now for the list….
The Top 7 Indicators
- Candlesticks - I use these the least, probably because the can vary so much depending on your broker or charting provider. As you increase your time frame though, the variations are less of a factor and I believe the candlesticks can be more valuable. (Daily charts)
- Trendlines - I use these often as do a lot of you, I'm sure. Need I say more.
- MACD – This is on every one of my charts. I use it to spot divergences in price. I'm constantly referencing http://www.forexproject.com/technical_analysis/divergence.html to do so.
- 200 EMA – I have been through so many moving averages. I always seem to have at least 3 on my chart though. If anything, I glance at them to spot the trend. The article states that this is an all time favorite for traders across the board. Take note whether price is above or below to give you a sense of price direction.
- Pivot Points – I use these often but mainly for exiting positions. I'm still doing a lot of experimentation with data to understand them better. All of this experimentation will be posted on the http://www.allpivotpoints.com site.
- Fibonacci - I've used these many times in the past but currently I don't use them at all. They are very subjective but can be quite powerful especially at the 62% retracement level.
- PRICE - Probably the most important of indicators but the hardest to master. It takes lots of experience to do so. The articles makes a good point by stating that "let price prove to you where it wants to go by setting entry order rather than market orders when entering a trade."
Top 7 Indicators For Developing Your Own Trading Style
Popularity: 5% [?]
17 Pips Last Week
I have not been posting regularly because I just haven't had the time. I've said this many times before but this is only temporary and I have not lost my dedication to trading.
Last week, I only made 1 trade and profited 17 pips. It's not much but I've been using a new system that has been in the works for a year that pretty much kept me out of the market. I really don't want to get into much detail about it because I don't know how it will turn out and I'm still trying to see what works and what doesn't. It's really nothing new; it incorporates moving averages, MACD, RSI, the Ichimoku Cloud, and 3 time frames (60-minute, 240-minute, Daily) I don't use the Ichimoku as it was designed. I just use the Cloud. This is not a system that generates automated signals for me. It is a lot more discretionary.
So I'll continue to use this going forward and see if I can develop some sense of consistency. I'll try to come around my blog more regularly as I feel bad when it's neglected. I hope everyone is doing well.
Popularity: 5% [?]
Regular vs. Hidden Divergence
I realized today that unbeknownst to me, regular divergence and hidden divergence are absolutely and totally different beasts. In fact, I'm not even sure if I knew about hidden divergence. What this means is that I may have been classifying regular divergence as hidden divergence and vice versa. This is my mistake, one in which I don't want you to make too. So I am going to reference some material to give an overview of both types.
Divergence happens when price makes one pattern and a corresponding indicator makes the opposite pattern. You can use any indicator but the most commonly used are RSI, MACD, CCI, or Momentum. I'm going to go through the process of identifying 4 types of divergence.
The first type is Regular Bullish Divergence.
Characteristics:
- Occurs in a downtrend
- Possibly signals the end of a downtrend
- Possible bullish correction
- Lower lows in price
- High lows in indicator
#1
The second type is Regular Bearish Divergence.
Characteristics:
- Occurs in an uptrend
- Possibly signals the end of an uptrend
- Possible bearish correction
- Higher highs in price
- Lower highs in indicator
#2
The third type is Bullish Hidden Divergence.
I would have simply called this next type of divergence regular bearish divergence in the past and I would have also expected it to have the regular bearish divergence characteristics above. Let's first look at a chart of Bullish Hidden Divergence.
#3
As you can see, the price continues its ascent because Bullish Hidden Divergence is a continuation pattern. You have to look closely but look at the MACD in the chart #3 above as opposed to the MACD in chart #2. In chart #3, the price is making higher highs and the indicator is making lower lows and the MACD in chart #3 IS ALREADY IN OVERSOLD TERRITORY. This is quite different than chart #2 as MACD is still in positive territory.
Characteristics:
- Trend continuation
- Higher highs in price
- Lower lows in indicator
The fourth type is Bearish Hidden Divergence.
This too is a continuation pattern as the bearish trend is expected to continue.
#4
You also have to look closely at the MACD in chart #4 above. The MACD is already in overbought territory and the indicator is making higher highs.
Characteristics:
- Trend continuation
- Lower highs in price
- Higher highs in indicator
This isn't the easiest thing to explain. Just look closely at the four charts above and the four different types of divergences shouldn't be hard to see.
Popularity: 6% [?]
Trading Results Are Bad
Looking at my trading results for the month of July doesn't leave me feeling any sense of accomplishment. My results are actually embarrasing as they show that my trading is getting worse. I'm down 401 pips this month and looking at all of my trades makes me wonder if I can make any money doing this no matter what side of the price action I'm on. Looking more closely also makes me wonder if something is psychologically wrong with me as my habitude of shorting looks not to be coincidence. Out of 15 trades this month, 14 were short. Last month I made 8 trades and all 8 were short. This is just strange and something I had not noticed until yesterday. Performing a search on Google for this habit turns up nothing.
Another thing that I cannot fully explain is that even though I've had a terrible month, I am still optimistic. When I first started trading, one thing that I heard a lot of was, "The Trend is Your Friend." I remain optimistic because I realize that I've lost sight of this saying. A lot of my trades have been counter-trend in nature and I've been trying to pick tops and bottoms. Trying to do so is difficult if not impossible for even the most seasoned traders.
Next week I will remain cognizant of the trend as I try to recover from this deficit.
I am finding that the setup of my charts are reverting back to their previous state and I think that my attempt to analyze with a limited number of indicators may be a mistake. For instance, more advanced traders can see momentum increasing or decreasing by price alone but I know that I just cannot do so with my limited experience. I've been trying to get by with mainly support and resistance lines but I'm going to start using MACD and moving averages more.
Popularity: 4% [?]
The Best Traders on Oanda Forums
I know it isn't easy to define who are the best forex traders because really, you only know how good you are. Knowing this, I posted to the Oanda forum asking the more informed and experienced users who the most "successful" or experienced traders were.
www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi
I received a response with traders whose member names were
~chaffcombe , blueingreen, oldhand, craigatk, altman, Airoekhion, and danielgsx. I wanted this information because I really want to concentrate on reading posts by them with the hope of learning more.
The post that caught my eye asked the question, "Right tools for trends and ranges?" The post is located here: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=15;t=004808;p=1
There are a lot of recommendations but I was watching what oldhand had to say:
While I agree with the "eyeball" indicator, I'd have to disagree about
the value of "indicators" taken by many. For example, s/r lines,
whether horizontal or angled are probably used by all traders to
greater or lesser degree and they are just as much "indicators" as
MACD/RSI/CCI etc. Trend lines and channels in my experience being the
strongest of all devices to suggest high probability directional clues.
What about moving averages? The 100/200 SMAs in virtually all time
frames are a must for any trader to track. The 200 SMA especially on
weeklies and dailies is a must and to ignore such an indicator or be
oblivious to it is guaranteed to lead to mis-steps on trades. Not
knowing Fib levels for your price analysis is likewise operating with
one eye closed.
Whether
"indicators" inform about some objective underlying reality about price
patterns or simply are self-fullfilling reations of various trading
segments is a question that can never be answered one way or another.
But, the fact that the majority of traders rely upon the variety of
indicators to make decisions is not in doubt. Your best trades are
always going to be when a variety of indicators, whether moving
averages, Fib levels, trend lines etc all line up at certain points and
within different time frames. For example, if you see price touch a
channel line on the daily and let's say the 3 hour, and RSI is in over
sold/bought territory, and a Fib level is at the same point, and MACD
or Momemtum paint a divergence, price is going to react in a major way
and predictably. Why? Simple really. The different trader segments,
some weekly or daily players relying lets say on channel lines, and
another segment relying on Fib levels, and another on RSI levels and so
on, are going to all react at that point causing a counter price
movement. How far price will move is very difficult to predict but
direction is not.
So, I'd say a study and attention to indicators is a must for any trader and well worth the effort.
Popularity: 60% [?]
May 2nd NY Session #2
Funny how I was able to squeeze out a 11 pip profit on a trade that was absolutely discretionary. I was watching the GBP/USD and it was highly overvalued on the short-term charts with solid resistance at 1.8400. Even though the pair had reached a new high today, the MACD histogram failed to reach new highs (negative divergence on the 5 minute, not shown below). The I shorted the pair at 1.8380 with a stop 30 pips above at 1.8410. Once the pair ran up 15 pips, I set my stop to breakeven. It ran up as high as 26 pips but started losing momentum. I was watching for an exit on the 5 minute charts and once I noticed momentum and inertia decreasing, I exited.
15 minute chart below:
Popularity: 4% [?]
Rob Booker 1 on 1 Day 2
I was pretty busy at work yesterday so I only had a little bit of time to go through the MACD training lesson. Not much to report with this lesson.
I have made a decision to start waking up at 3:50 a.m. EST 3-4 days a week to see what this does for my trading. Rob has told me to apply New York Session rules during this time frame which requires boxing in the price action. Instead of using the NY time period, the box in will occur between 00:00 GMT and 07:00 GMT which is 8:00 p.m. EST – 3:00 a.m. EST.
Rob has said that it is important to do the audio/video stuff daily. At the end of the NY trading session, Rob posts multiple videos for multiple pairs with his trading commentary which I find very beneficial. He calls this Charting School. Since he will be back at his home base next week, I believe he posts charting school before the session also which may give me some ideas on setups.
During the first few days of 1 on 1 trading, I am already very satisfied with the direction. Though Rob has some generic trading strategies and rules that he wants you to learn, he is responsive to your emails and tries to work his strategies around your interests and style. He even told me that as soon as next week, he will start to post some Euro review session like he does for the New York session. Now I don't know if this is just for me or if others have requested this but since I will be trading the Euro session in the upcoming weeks, this can only help my trading.
Rob was away this week writing his book which I think we will be getting a pre-release preview of.
I will try to post as much as possible regarding my 1 on 1 trading going forward. My posts in the upcoming weeks will give you a pretty good idea of what I've been learning so keep tuned.
Popularity: 3% [?]
