Trading strategies

Invariably, the motivation to look at adding another technical indicator is a belief that your trading results, and the system that creates these, could be improved. As traders, we are bombarded with information relating to the use of technical indicators to guide decision making in our entry and exit decisions. Such information can be “persuasive” in making a change but as you are responsible for your trading decisions and subsequent results, it seems logical to start the process by asking the question “is it the right time for me to explore the use of another indicator?”.

The aim of this article is to highlight the FOUR critical questions you should ask of yourself first. 1. Am I REALLY trading my existing system NOW? As previously referenced, the major impetus for considering adding an indicator is to improve results when trading an existing system.

You can only make the judgement of any improvement if you both have a comprehensive system that specifies entry/exit/position sizing as a minimum AND are actually trading this. Potential trading actions The reality for most traders is that they fall down on one or both of these two CRUCIAL factors. Honesty with what you are doing now backed up with the evidence of journaling will give you the answer to this.

If these resonate with you, logically addressing these should be your priority. Without this, you are not able to make that judgement and hence adding another indicator is far less likely to impact positively on results. 2. Is adding another indicator the ONE major thing that is going to make the most difference to my trading results NOW or is there something else I should invest my energy on?

We have already specified two potential priorities in the previous point with reference to your trading plan and adherence to it. Also, we referenced the issue of evidence through journaling. As this is not only crucial for the above point, it is a vital part of your review process should you choose to investigate the use of a new indicator.

So again, could be viewed as a priority. Finally, addressing your knowledge relating to trading may be more important for you now. Not only are we referring to general trading learning but an in-depth understanding of what indicators including the ones you are using now, do and do not tell you about market sentiment.

This learning is again important in your judgement as to which NEW indicator could be useful. Therefore, again we would suggest this could be a priority over adding another indicator right now for you. Potential trading actions Prioritise your trading plan, discipline, journaling and learning, making sure these are at an appropriate level for you to invest time in exploring new indicators. 3.

Have I got absolute clarity about what another indicator should do to enhance my existing system? Previous points relating to journaling and learning should give you the ability to more ably identify what it is that a new indicator could add to your trading. The first decision in this process is to identify whether your focus is on improving entry or exit.

Once you have clarified this and If you have ticked other boxes so far, the other potential area for exploration is to look at the perimeters of the indicators/systems you are currently using as it may be that this could simply be the answer to create potentially better outcomes. For example, let’s assume you are using a price/10 EMA cross as an exit signal. You have found that one of the areas you wish to improve has not been taken out early on a regular basis by “market noise”.

It may be a simple case of testing a change e.g. to a price 20EMA cross that may make the difference you are seeking. Potential trading actions • Learn about the indicator you are using and make sure it is a fit for any gap you have identified in your existing system. • Don’t forget it may serve your purpose to look at a simple adjustment of perimeters of existing indicators you are using. This STILL needs testing before implementation. 4.

Have I got a formal process for testing an additional indicator in place that will produce the evidence to decide whether to include it within your trading plan? Ok so you have got this far, and so are ready to look at your new indicator. So briefly here are three process components you need to have in place. i.

Perform a back-test on previous trades to determine any change in dollar outcome across a critical mass of trades, Remember the purpose of any back-test is to justify the need for a forward or prospective test, NOT to change your system at this point. ii. Perform a prospective test (again deciding what critical mass of trades are enough on which to make a judgement) on a demo account using the indicator as you intend to do so in live trading. This may not only reinforce information from your back-test but adds the reality of new data coming into the market live and the tests the trades you may not have taken (if your previous entry indicators would have blocked action).

It is important that you keep ALL other trading plan perimeters the same to be able to confirm that it is your new indicator that is making any difference observed. iii. If your test produces a positive outcome, then articulate within your trading plan how you are going to use your new indicator. It is important that you ensure any statements are sufficiently specific (see an article on this HERE ) to guide action and measurement, and this should include under what market circumstances you would use it. iv.

Set a review date (e.g. 3 months) to determine how beneficial its continued use has been. Potential trading actions Ensure your process is not only clear but one you adhere to. You may use the above as a start point to developing you on process but remember to specify how many trades YOU think is a critical mass on which to make decisions.

Traditionally, one of the long-lasting market clichés is that the “amateurs open the market the professionals close it”. Although this may be a little simplistic, there is no doubt that commonly trading volume in equity markets is at it’s highest at the beginning and the end of the day, but of course there are active market participants throughout. However, it is worth perhaps exploring this thinking in a little more detail, and look at the two key reasons why many experienced traders choose to do the majority of their entries into new positions (and potentially exit) in the last hour of a trading session.

Full candle and chart picture The majority of traders who use some sort of technical analysis for trading, ideally would like as complete information as is possible before taking action. Without exception, we have all seen volatility within a specific incomplete price bar/candle where it appears to start in one direction only to close in the opposite. It is generally desirable that entry is early in the beginning of a new technical trend but you are balancing this with having the optimum chance of that new trend being confirmed (i.e. by closing price in a time period) or your willingness to accept the risk that if intra-bar then the price may move from its current point to a place which would have failed to meet entry criteria.

Logically, if one accepts the general market belief the closing price of a particular time period is the most important (and its relationship to opening price), then if trading a daily timeframe the end of the session is the time where you are closest to that complete information, when the candle is almost matured in formation. Additionally, the majority of technical indicators have price as part of their calculation, again one could term this a mature price (i.e. towards the end of the session). Consequently, logically this will give the optimum chance of a ‘complete” technical picture being formed.

Let’s give a couple of examples to help illustrate this further. Imagine one of the entry strategies you use is a breakthrough a key price point (e.g. support/resistance). A close price above this can be more assured towards the end of a trading period than towards the beginning where there is still significant time before candle maturity.

Alternatively, you have a moving average cross as one of your strategies. This is of course based on an average of prices over a specific time period. At the point of cross many traders with this strategy would choose to act, but again prior to a mature price within that daily session there is a chance of a price move which would not demonstrate a cross.

End of day clues as to what may happen next Clearly with set open and close times of equity markets, the next day’s open will be determined by what happens in Europe and more commonly more so in the US overnight.Much of this is unpredictable of course with the market response to any released economic data and events unknown. However, if one accepts that decision-making regarding risk and opportunity is best made with as much information as possible. We know already what data points are to be released overnight and this can indicate, to some degree, potential risks that may exist to any existing market trend.

This is no different irrespective of what time within a trading session you take action. Additionally, other variables such as the VIX index and current market trends are known. However, towards the end of the equity trading day in Australia it is possible to get a more tangible “update” as to what may happen as” a.

European markets are close to opening time b. US equity market futures are beginning to mature in light of Asian market action. c. Commodity price movements are establishing which of course is relevant should you hold stocks in this sector.

Again, let’s use a practical example to illustrate meaning. If towards the end of the session, you see a potential long technical trading opportunity on a materials stock e.g. BHP If you are position sizing with risk in mind consider the these two scenarios: Scenario 1 a.

The European futures are indicating a strong positive open. b. US futures are positive and have moved higher during the Asian session. c. The economic data due is not strongly market sensitive. d.

Copper futures re also positive. Scenario 2 a. European and US futures are near neutral. b.

There is an interest rate decision from the US Federal reserve due overnight. c. Copper futures are negative. Of course, you can also compare this with a potential trade earlier in the day where: a.

There is an interest rate decision from the Fed due overnight. b. As it is early in the Asian session there is no obvious movement in US/European or commodity futures yet. Clearly there is a different risk profile between scenarios 1 and 2 which may logically lead you to position size differently or even wait until the overnight action has passed and then act on the following day if scenario 2 is the case.

Additionally of course, if looking at the level of information you have (or rather don’t have) if traded early in the session, you can see how these extra clues can offer some extra guidance as to what may be the optimum decision for you. What this means to you? Ultimately, of course you have choices to make.

You could choose to restrict your trading activity to the last hour, or not. If you are to follow the thinking that towards the end of the session is right for you right now, than you need to make the decision as to what “clues” are going to be part of your decision making and what they mean in terms of entry, and if so position sizing. If you are going to delay entry in light of potential overnight action, does this mean that if you do get confirmation at the beginning of the next trading day do you then take action.

And then of course, our focus here has been on entries, logically do you adopt the same philosophy when looking at exits from any open positions (note: if you have set a profit target the majority of traders would adopt and anytime “hit” of that target). And finally, what ever you choose, the reality is that you need to “plant your flag” right now and articulate it within your trading plan. Follow through and trade it, and then you can start to test the alternatives.

Many traders recognise the positive nature of the theoretical philosophy of treating your trading as you would a business, and yet the majority are unsure about what this may mean in practical terms and fail to move beyond the “hobby trader” in their trading activity. Recognising the potential wisdom of a “trading business approach”, this article attempts to differentiate between these business and hobby approaches through looking at eight key attributes. The aim has been to offer a checklist for the reader to: Make a judgement about where they are now in the business V hobby concept; and Facilitate decision making about what potentially to work on to move towards trading as a business.

We have organised the thinking in a table for ease of use. This is of course not an exhaustive list and offers overview information rather than major detail, but should be sufficient to encourage individual thinking of where you are. So, your eight attributes are as follows: Attribute Trading as a business Trading as a hobby Level of commitment Significant planning and follow through for trading activity.

Recognises the need to work hard at the front end to obtain sustainable results Likes the "idea" of trading, believes that can succeed with minimal effort Trading plan Comprehensive, specific statements relating to entry, exit, position sizing, strategy outlines and IS dynamic and IS used. May have some entry indictors and loose exit guidance, ambiguous statements that do not facilitate consistency and measurement. Measurement and testing Knows key trading numbers and journals trades.

Review system in place which involves action planning to revise trading plan based on evidence. Focus on limited trade information often restricted to P/L of individual trades. Changes to trading plan often based on a whim or the next new indicator.

No study of decision making. Time management Has a clear plan for all aspects of trading activity. Optimises the limited time for trading based on lifestyle and objectives No time planning evident.

Often uses time inefficiently or may have a distorted trading/life balance. Learning approach Develops and implements a trading development plan based on identifying and filling gaps in knowledge/skills that may most impact on results. No systemised approach to learning.

May attend webinars/seminars without follow through. Unaware of/ignores gaps in knowledge/skills and often trades what others trade. System changes Based on evidence gained from measurement.

Has the information to compare and adjust indictor perimeters and add new criteria for entry/exit. Based on a whim or the hope that a new indictor (usually entry only) may produce better results without rigour in forward testing. Purpose Has a clear purpose for trading based on creating additional lifestyle choices and views trading as a potential vehicle to get there.

Purpose is to profit without obvious reason beyond making money. May like to trade as it "feels good” to be a trader. Discipline Religiously follows a plan for the majority of time as recognises that this is the ONLY way to determine whether a system works or needs adjustment.

Fails to execute according to plan. May more commonly miss entries/optimum exit points or enter/exit earlier than plan states. So, assuming you may have a desire towards the trading as a business idea, your mission should be clear.

Take the information in this article and make a judgement as to what you could work on next.

There are few times when the market (irrespective of trading vehicle) is more likely to move in price quickly than on the release of some economic data. Judging potential market response can be complex as often many data points are released in quick succession but is an important component of overall risk management relating to your trading positions and account generally. This article aims to provide you with some things to consider in your trading development and systems.

As a trader you need to: Understand the basics of why markets move in response to data. Have an indication not only as to when data is due but its potential impact on financial instruments you may be trading, to make some judgement on risk. Have articulated within your trading plan how you are to manage both potential entries and open positions when sensitive economic news is due.

So, your major five factors are: 1. Data type Obviously, not all economic data has the same level of impact. The way data is perceived in terms of importance has a general relationship to how it either: a.

Indicates the health of a specific economy (and in some cases a global indication). b. Is likely to impact on central bank decision making e.g. with interest rates decisions. To give an example, automobile sales data is unlikely to have a major impact on many trading positions and instruments except for transport related share CFDs, whereas employment data can significantly not only relate currency pairs but Index CFDs and share CFD positions.

The general “impact level” is illustrated commonly on economic calendars. On the GO Markets’ economic calendar on the website this is shown as a colour coded volatility measure (see image below). Please note that this measure relates to the potential impact on currency pairs only.

For potential impact on other instruments, this should be a planned part of learning to trade. 2. Data versus instrument You may currently trade, or plan to in the future a one or more different financial instruments on your trading account. These may include: • Forex, • Index CFDs • Commodity CFDs • Share CFDs As well as the country of origin with an impact on relevant forex pairs, as previously referenced some data (particularly from the US, China or Eurozone) often has a broader “whole market” influence.

The “whole market” extends beyond Forex and for major data news will impact on all instruments. Your challenge is to identify what this impact and as importantly the direction of price move may be. For example, major jobs data such as the US non-farm payrolls (monthly employment), may alter the perception of timing of any interest rate change by the US Federal Reserve.

Let us use the example of a weak number that the market takes as making a rate reduction more likely. This may weaken the USD (for Forex traders ), and so be positive on other currencies with USD within any pair. Also due to the inverse relationship with some commodities and USD, there may be a rise in precious metal CFDs.

The inference that a rate cut will put more money into the pocket of “Joe Public” could be bullish for oil CFDs. Additionally, this may be positive for US equity (and subsequently other global indices) which will have a positive price impact on non-US Index CFDs. Also, of course, if there is a positive price move in indices, related Share CFDs could generally rise with a positive price move on indices.

Your challenge therefore is to learn through observation the impact of certain data points on different instruments. 3. Overall market sensitivities Some potential market responses are dependent on general state on local and global economic outlook. This may influence the more likely scenarios for the impending data release.

An obvious example of this would be interest rate decisions. In this case there are 3 possible options for a central i.e. to pause, raise or reduce interest rates. Although theoretically all three could be possible, it is usually a pause or EITHER of the other two not both.

To use this example further, in times when the market is uncertain about timing of rate changes, it could be “interest rate sensitive”. As central banks utilise jobs and CPI (inflation) data as key part of their decision making, at such sensitive times, the impact of these data points may be more acute than in other times where there is no expectation of potential change in the next few months. To give another example, if the financial markets are concerned about global economic growth then GDP, industrial production and PMI data is likely to illicit more of a response than if such concerns didn’t exist.

Although this may be sometimes difficult to gauge and so legislate for in your overall market risk assessment, keeping abreast of general financial news and market opinion often will provide a consensus view as to what scenarios are more likely. 4. How you are positioned If you have more than one trading position open (and potentially across several different trading instruments) it is important to note that a single data point can influence positions similarly or have counter effects on different positions. Firstly, let’s give an example of three trades you could have open… Long AUDUSD Short USDJPY Long EURUSD With a data point that may have a large general impact on USD this will have a potential 3 times risk on your account equity If you have positioned sized with a 2% per trade risk for each.

Then add to that a Long GOLD CFD (XAUUSD) perhaps. You have added another “anti-USD” position that is likely to move in the same direction as the above. Let’s say that the data will have a negative impact on the US equity markets also, make the assumption that the ASX often is led by what happens in the US overnight and if you have a couple of long CFD positions, these could also move against you at the same time as other open positions as described.

One last point on number of positions, there is no doubt that the more positions you have open, the more complex it is to make “whole” accounts decisions. So, what this means for you is: a. Set a maximum number of positions to have open at any one time. b.

Know the potential impact on all instruments you are trading at any specific data point. c. Consider your risk level you are exposed to across all positions and plan stop/trail stop levels or potential closing of some positions accordingly. 5. Timeframe Although it is difficult to accurately quantify and even more so when considering multiple data releases, some awareness of the longevity of a market response, including whether a trend change is likely, will be different depending on what timeframe you are trading.

Commonly, economic data release and types are likely to have more “acute” impact on shorter timeframes than longer. If trading daily charts, with a smaller position and wider stop, there may be less implication on relative price movement and account position with an often a short-term market move which doesn’t impact long term trend. The reverse could be the case than for example due to CPI or PMI data, if trading a 15-minute larger position with a tighter stop, where short term price and the trend may be impacted upon quickly.

Experience is a good teacher in this case as to creating general rules, and like many aspects of your trading planning and action, merits considering lower position exposure until you are at a point where creating individual “rules” for you can be established with some confidence. In summary, as with many aspects of trading, at a beginner trading level, learning that data does have impact and having a ‘check in’ and basic plan to manage risk and opportunity is undoubtedly important as you find your “trading legs”. Even knowledge of some of the things discussed in this article will be useful in terms of increasing understanding.

As you develop some experience considering what we have covered above, is next level refinement (and we know that details often DO matter when trading) of your plan and actions you choose to take could, and arguably should, be part of your thinking going forward. We are always here to help. Our on-going education of the ‘Inner Circle’ programme that we offer will help not only in seeing the practical implications of the content above but also give opportunities for you to ask questions and gain clarity of this and other aspects of your trading live.

In our previous articles we introduced the SIX steps to improving your trading discipline, offered some guidance on developing “awareness” and explored how to prioritise the trading discipline areas. If you haven’t yet read these articles, perhaps it is worth checking them out before moving onto this one. Step 1 - Awareness Step 2 - Prioritise and Identify your cause This third step aims to take those prioritised areas and create as many compelling reasons to change the thinking from “It would be good to work on” to an “I MUST work on…”.

Why is this necessary? We all recognise that working on anything to do with your trading, be it a knowledge gap, developing a new system or the on-going commitment of keeping a journal for example will require effort and time. In our busy lives it is sometimes difficult to create this without a compelling reason to do so.

We need a perceived level of necessity to enable us to push through and act.Hence the more motivation we can create that this IS a necessity will serve us well in follow through. Adults are invariably motivated to consider change based on perceived level of pleasure or pain of taking action/inaction. If we are comfortable in what we are doing or haven’t got an obvious reason to make this effort and invest the time we will tend to be less motivated to change anything to do with our trading.

Hence, what is being suggested is through identifying the pleasure (or in other words a potential positive impact on trading results or the potential pain (or in other words possible negative outcomes of not acting), this may assist in creating this motivation. And so, onto the practical So, this practical step involves this process of quite simply identifying the implications of what you are doing and creating that impetus to act. Let’s use an example to help get you started.

You have identified previously that your “trail stop strategy” within the exit component of your trading plan needs to be written and followed. Now you have a simple statement suggesting “I will trail my stop when a trade goes in my desired direction”. You have recognised that although the idea of trailing a stop is referenced there is a lack of specific instruction as to how you are going to do this.

So, get time to get busy and create that motivation to amend this to better serve you. Get a piece of paper (or get on your PC and open a word document) and create two sections. In section one you list the potential positive trading outcomes (pleasure) that could result if you DO act.

In section two the potential negative trading outcomes (pain) that could result from NOT acting. So, it could look something like the table below: It is worth note that the last statement essentially in a summary statement which references results. This was your impetus for choosing this as a potential priority area and reinforces this psychologically helping you to lock in the importance of addressing this.

Now remember, the purpose of this approach is to get you to take initial action, to ‘press the button: on doing something. Your next challenge which we will address in the next "discipline steps" article, is about turning this theoretical reason to act into actual execution, and in some cases, with areas that require on-going input, to maintain your required motivation through creating an effective trading habit.

Warning: Turn your sensitivity meter down a little. This is a no sugar-coating, tell-it-how-it-is article (but rest assured it comes from a nurturing place). All over the globe, trading gurus attempt to sell their wares (software, the ‘holy grail’ of trade set ups etc) using retrospective charting examples.

Such powerful visual “evidence” is often used to persuade prospective FX clients that this vehicle is ‘easy’ to make profit with. With little work, little time, or whatever marketing buttons they are using to press to get a response. So, hours of energy invested, often cash is exchanged and yet more often than not, with an off the shelf system in place (often just an entry system which we know is never going to offer a complete trading solution) traders are left feeling more than a little disappointed that such “guaranteed, easy riches” are not showing up in their trading account.

On an individual level we see similar. Much airplay is given to the merits of back-testing and yet as with the aforementioned guru approach, you can just about find examples, if you look hard enough, of chart examples that mean this “next new indicator thing” is now the answer to replenish your now depleted finds. So, what happens, we have a system change, and yet results still often fall short of expectations.

There are 3 common dangers of the retrospective approach to creating (if you haven’t a trading plan already) or altering an existing plan that are worth highlighting. #1 – Overstating the function of back-testing. Let us be completely blunt. The purpose of back-testing is NOT, nor should ever be viewed as evidence that a trading plan, based on what ever system you are exploring, will work for you in the reality of live trading.

Back-testing does not generally consider: a. The impact of economic data releases and revisions, b. The political and general climate both globally and specifically in the countries that currency pairs relate to, c.

Individual investor behaviour re. timeframes, time of day that they trade, nor their ability (or otherwise) to act or inaction on a change of sentiment, d. Unplanned events such as escalating conflict (or the threat of such), e. The relationship and impact of other financial instruments of FX pairs e.g. equity and bond markets, commodities So, why back-test at all if the evidence could be so flawed?

The answer is simple, back-testing creates evidence, not that a system will definitely work for you as a trader, but ONLY as evidence that a forward (or prospective) test may be worthwhile. So, the bottom line is the function of back-testing is to justify the time and effort to prospectively test. It is after such a prospective test that system changes can be made/developed. #2 – Failure to gather a critical mass of evidence There are two issues here. a.

What constitutes enough evidence to move to the next stage of system testing. Quite often traders will make decisions on a limited amount of data e.g. one timeframe and one currency pair, over the last couple of months on which to make system decisions. Now you have read this it may seem obvious and may not need pointing out (but we will anyway) why this is insufficient information on which to base a “cross the board’ entry and exit system. b.

The second issue here is one of selective evidence gathering. A natural human response when excited by an idea is search for evidence to back up that idea. The potential danger with this is that we often tend in this search, to ignore information that refutes our idea. #3 – The reason behind doing this may not be that your system is failing rather it could be a YOU issue.

System skipping is common amongst many traders and is invariably motivated by results that are not as desired. Here is the danger. As much of what goes into creating trader results (some would suggest up to 80%) is due to behavioural issues (we have waxed lyrical about trading discipline previously) unless you: a.

Have a trading plan that is specific, measurable and comprehensive AND b. Follow it religiously ‘to the letter” then you are not really in a position to make a judgement on whether system could serve you well or is likely not to produce desired results. AND to add to this, as such behavioural issues have not been either acknowledged or addressed whatever system (based or retrospective charts or not) is more likely to produce equally disappointing results.

So, before you start on the journey of altering a system you should logically make every effort to have, follow and measure the impact of any system before you even consider changing it (or looking into what you may change it to). This MUST be your #1 priority before going down any path of system alterations. So there you have it.

You have a choice to take action of course on what you have read, If so, your missions going forward are: a. Make sure you have a comprehensive plan that you follow. Then, and only then, should you begin to explore further development including the use of retrospective charts (or back-testing) b.

Recognise the SOLE PURPOSE of back-testing is to create evidence that a forward (or prospective) live test is justified. c. Make sure you are basing any potential system change on a enough “balanced” data.