This past week I came to an important realization regarding trading the Forex market. Up to now I have been convinced that we can approach Forex trading as a science. In other words, we can apply a set of algorithms and indicators to the Forex market and pull steady profits from the markets while we go about whatever else we do for a living.
What I have realized instead is that if we want to make our daily bread in Forex we have to treat it as a practice. What I mean is that doctors, dentists, electricians, plumbers and computer programmers go about their business on a daily basis. At the end of a day's work, hopefully they have something to show for their efforts. Very few people in those professions expect their work to go out and produce profits without their direct intervention with the possible exception of business owners.
Put another way, I don't know anyone making a living based on the profits from Automated Forex Trading, I'm sure someone somewhere in the world of high-frequency trading is doing so, but those people are not about to include us in their efforts. Taking it down to a practical level, here's what I propose:
- Trade only during active market hours say from 6AM to 12 noon Eastern time
- Stick with highly active, low spread pairs such as EUR/USD, USD/CHF and AUD/USD. Avoid higher spread pairs such as GBP/USD and GBP/JPY.
- Run an Expert Advisor which take entries on 5-minute bars using the moving average cluster indicator configuration discussed a few weeks back.
- Stop out of a position once it breaks below of the low of the signal bar for longs, or below the high of the signal bar for shorts. This means you should never lose more that the range of the signal bar, plus the spread plus slippage. Make no exceptions and cut losses without hesitation.
- Do not consider taking profits until the position moves at least 2X the height of the signal bar plus spread. Ideally, we are looking for a "runner" where the position moves many times the height of the signal bar.
- Generally speaking, stay with a position as long as it in profit and the MA5 stays above the MA 20 for longs or below the MA 20 for shorts.. Also consider taking profits once they exceed 2-3X the size of the signal bar, or by 11AM since day traders are looking to unload profits for the day by that time.
Following such rules, I had a decent week trading a demo account with dime pips or 0.01 lot size. Should this method further prove to be successful, I will switch to a live account with low lot size and move up based on further results.
What I like about this method is that it usually enters positions automatically several times early in the day and often in the direction of a major break. The losses take care of themselves, but more often than not, the winners run and run big until later in the morning. Also, I have found that they markets sometimes make a false break in one direction or the other, the real move of the day does not get under way until after 9:30 AM EST.
The trade in the screenshot above above is an excellent example in AUD/USD on Friday. First we had a sell signal which got stopped out for a loss of 78 cents. Next, we had a buy signal where the range of the signal bar was 6.5 pips and it turned out to be a "runner" and was closed for a 42.1 pip profit or 7 times the height of the signal bar!
Once noon eastern time comes, shut down your Meta-Trader program and turn on CNBC's Fast Money Halftime report to see what's going on in equities.
Note that much of this system can be automated, and I already have an EA which handles the entries and the stops, and leaves the take profits to the operator. The EA needs further refinement, and will be free to my blog readers of course so stay tuned for that.
As for our other Forex accounts, things are looking up and I dare say we are on a bit of a winning streak in the Atipaq Full Portfolio and Atinalla #3 accounts. On the negative side, a system system which I started trading back in August called System-U (which I haven't talked about yet) has been stopped for the year since it exceeded at -10% equity stop loss. I will likely restart that system in in early 2013 since it has an excellent historical track record.
That's all, have a great week and stay tuned for further results.