Forex Trading Plan: 2010-July-10
The new plan is in essence based upon the old plan in that it attempts to capitalize upon the strength of the London session. Where it differs is that it attempts to create more trading opportunities. So in effect it moves the trading sessions into the background as context. In particular the session boundaries are places to expect significant trend changes. The focus is on entry, exit signals and trade direction.
Background Problem.
Having tried a few different ideas, I decided to trade a stochastic overbought and oversold strategy. It seemed to make sense. Nearly every move up or down was preceded by the stochastic being oversold or overbought. In practice I found myself stopping out all the time. So how could I have consistently been on the wrong side of the trade? What would have happened if I had made the exact opposite trade? What could I use to suggest a different trading direction?
The answer turns out to flow from another error with the previous plan. I mentioned in the update below that if you change time scales you will see that an entry signal on one time scale may well be an exit signal on another.
So how can that make any sense. Does it mean that technical indicators are simply a steaming pile of bullshit that provides a perfect 20/20 in hindsight view of the market?
What I was doing was trading on the 2 or 5 minute time scale, ignoring the context of the 15 minute time scale. I was for example entering long on a stochastic oversold that would in fact go up a little, but then turn around and come down further.
I also was holding past the end of the cycle. When the stochastic had moved from oversold to overbought I was holding through the next half of the cycle from overbought down to oversold “hoping” it would just be a retracement. In fact what I was trading was the retracement against a background opposite trend….
Solution: Entry and Exit.
To beat this problem use two charts. One on fifteen minutes and one on five or two minute.
The fifteen minute chart provides context. If the market on a fifteen minute time scale is moving from stochastic oversold to overbought then it is reasonable to expect the market to continue in that direction. Care as usual on major support and resistance levels indicated by moving averages, pivot levels etc. Care also on major market “mood” changes that occur on session boundaries.
The two or five minute chart provides your entry and exit signals. Trade in the direction suggested by the fifteen using the shorter time frame chart to signal your entry and exit. When the fifteen is overbought or oversold use the hourly to provide a bit of context as to whether it will keep trending or reverse.
It is important not to hold the trade past the half of the cycle of the short term time frame you are trading on. It might simply stall and continue if the trend is strong. It most likely will retrace at least a little which will provide you with a better entry. In any case you must make a decision to exit and reenter or hold it through that point. You can’t just ignore it and hope.
So far this is working. My success rate has turned around dramatically. But early days yet. We will see in a month how it pans out.
Indicators: I use a slower than normal stochastic set on 12 and 6 rather than 14 and 3. It is a a lot smoother but otherwise reliable. For context on the chart I use Pivot levels and 25, 50 , 100 and 200 moving averages to let me know if there are resistance/support levels the price may bounce or slow down on. I also have the background of the chart coloured differently for each of the Tokyo, Hong Kong, London, New York sessions and the period when all markets closed. In fact I change session colours about 15 minutes before the actual start as a heads up that a big change may be imminent.
Stop Loss: 10 pips when using a two minute chart. Limit initially at 20 pips and then move it to around a likely resistance level as required.
July 10 2010 02:47 pm | Trading
