News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
EUR/USD
Mixed
Oil - US Crude
Bullish
Wall Street
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bullish
GBP/USD
Mixed
USD/JPY
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
More View more
Real Time News
  • The continuity seen across these volatility cycles is a good thing. Historical precedence offer a blueprint for identifying conditions supportive for a vol-event to occur, and how they may unfold. Deepen your knowledge of historical volatility here: https://t.co/vg7w10la3j https://t.co/POsnWwTmER
  • Speculative stubbornness continues to hold back emergent fears like inflation and central bank moderation, but no certain of progress on that battle this week. While $NDX, $BTCUSD and Pound are on my radar, #Dollar tops my watch list: https://www.dailyfx.com/forex/video/daily_news_report/2021/05/15/Dollar-Outlook-Throttled-by-Both-Risk-Rebound-and-Curbed-Inflation-Concerns.html https://t.co/aYjyvQzhIA
  • AUD/USD remains range-bound but trend potential exists elsewhere in pairs such as AUD/JPY or AUD/CAD. Get your market update from @JStanleyFX here: https://t.co/bppORO1NEg https://t.co/6mXqAOrl9H
  • What are some technical and fundamental factors affecting the equities market? Get your free forecast here: https://t.co/YQG1aaIT8C #DailyFXGuides https://t.co/oOyN7fUaC6
  • The Federal Open Market Committee (FOMC) Minutes may drag on the price of gold as the central bank appears to be in no rush to switch gears. Get your market update from @DavidJSong here: https://t.co/2EvNplObIk https://t.co/hhEAnqhAEu
  • There’s a strong correlation between interest rates and forex trading. Forex is ruled by many variables, but the interest rate of the currency is the fundamental factor that prevails above them all. Learn how interest rates impact currency markets here: https://t.co/J0EPMD2Cfi https://t.co/gNiVpWrd1p
  • Many people are attracted to forex trading due to the amount of leverage that brokers provide. Leverage allows traders to gain more exposure in financial markets than what they are required to pay for. Learn about FX leverage here: https://t.co/BdgFmkRxVw https://t.co/4zEwS7mFJE
  • GDP (Gross Domestic Product) economic data is deemed highly significant in the forex market. GDP figures are used as an indicator by fundamentalists to gauge the overall health and potential growth of a country. Learn use GDP data to your advantage here: https://t.co/Yl9vM7kO6a https://t.co/nB2f5m56nq
  • Traders utilize varying time frames to speculate in the forex market. The two most common are long- and short-term-time frames which transmits through to trend and trigger charts. Learn more about time-frame analysis here: https://t.co/9S5tXIs3SX https://t.co/Q0yRRpMpPX
  • Emotions are often a key driving force behind FOMO. If left unchecked, they can lead traders to neglect trading plans and exceed comfortable levels of risk. Read on and get your emotions in check here: https://t.co/eILWbFgHRE https://t.co/pSeSiNnmHe
Trade the Market and Not Your Account

Trade the Market and Not Your Account

Alejandro Zambrano, Market Analyst

Talking Points:

  • Traders will often base trading decisions on their accounts instead of on the needs of the markets
  • We want to align the market’s need and the needs of our account.
  • We want to reduce our stop when the market gives its go-ahead, thus showing a simple yet powerful way of reducing risk based on breakouts.

While it’s usually good to reduce the risk on a position, it’s easy for new traders to get overprotective and reduce the stop loss as soon as the position starts to gain. Yet if there is no clear technical or fundamental reason, we would probably be better off leaving the stop at the original level.

Other traders will consistently trade with a 20 pips stop loss as it is the only amount of drawdown that their account will allow before they get into trouble. The issue in both of these examples is that trading decisions are based on the equity of the account and not on the markets. The same holds true for the trader that only books gains after he has accumulated a certain percentage return or a certain amount of pips.

What they are forgetting is that the market does not care about the individual trader, but rather only cares about discovering the next price equilibrium, a level where demand and supply will be equal, or in trader terms, support/resistance. The search for the next price equilibrium can take price substantially higher or lower than our entry. Trading should therefore be based foremost on the markets. If the market conditions meet the demand of our account, we can trade.

We want to align the markets needs and the needs of our account.

Then when is it ok to reduce the stop?

We can reduce the stop when we get a fundamental or technical signal, which indicates that the trading range will be skewed away from our entry.

A simple technical rule is to reduce the stop when we get a breakout in line with the trend.

How does this visually look on a chart?

Starting with the entry, one of the most classic ways of going long in a bullish market is to enter when we attain a breakout.

Figure 1:

Trade the Market and Not Your Account

Charts created using Marketscope – prepared by Alejandro Zambrano

In figure 1, we can see that price is creating higher and higher highs, and at one point takes out the prior high, this is the entry for a trend following breakout trader.

The initial stop loss on such a trade could be the nearest major swing low on the chart. The reason for this is because as long as the price remains above this level, the trend will be bullish, and in a bullish trend, we want to be long. If the price trades under the swing low, the trend will not be bullish, and we do not want to be long in a market that is not bullish. See figure 1.

As the price trades higher, it will be tempting to reduce the stop to reduce the risk, yet with an entry on a breakout, the entry will usually be in the middle of the short term trading range. Hence reducing the stop to breakeven at this point in time will make little sense.

For us to reduce the stop loss in a way that reflects the true nature of the definition of an uptrend, we need a new higher low, and we would place our stop loss just under the newly created higher low.

How are new lows confirmed?

A new low is confirmed if we get a new breakout in line with the trend. Hence the same type of signal that got us into the market initially. Figure 2 shows a new breakout after a shallow pullback in price. We can place our stop loss under this newly created low after we get the breakout, not before.

Figure 2:

Trade the Market and Not Your Account

Charts created using Marketscope – prepared by Alejandro Zambrano

As we spend more time in front of the screens, we start to pick up these breakouts naturally, and our job as traders is to make sure that we focus on the breakouts and lows that matter for our time frame and investment horizon.

If we combine the charts above into one chart, we get figure 3, as seen below. At this point we can see that original entry level and the new stop loss level is more or less the same.

It is at this point that we would be having our risk reduced to zero as the entry and the new low are more or less at the same level. We would also stay true to the market because if this is a genuine uptrend, then there is no reason for price to trade under the newly created low.

Suggested Reading - Benefits of Trend Trading

Figure 3

Trade the Market and Not Your Account

Charts created using Marketscope – prepared by Alejandro Zambrano

Testing a new strategy is preferably done in a safe environment – test this strategy using a practice account.

Suggested Reading: Using Price Action to Catch Swings in the Forex Market

---Written by Alejandro Zambrano, FX Analyst.

To contact Alejandro, tweet him on @AlexFX00

Alejandro hosts our London session outlook webinar every day at 9:30 AM London time. He also hosts educational seminars in London each month, and you could join him for an evening seminar or morning seminar, where he shows you how to setup trading ideas before the London session kicks off. E-mail him at azambrano@dailyfx.com for more info.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES