Exiting The Trade: Profit Targets
February 8th, 2009 by adminProfit targets are similar to stoploss orders, but in the opposite direction. They’re pending
orders that automate the exiting process when we hit out profit goal.
Why would you want to exit a profitable trade? Because as we already established, the Pound
is volatile. We can judge with a fair degree of success when it will go in our direction, but we
have to be aware it will always go the other direction sooner or later. Setting profit targets
allows us to close a profitable trade at the point where we’re satisfied with the profits we’ve
already made – and exit before volatility takes us the wrong direction.
Remember, the London Forex Rush system aims to capitalize on two things: 1) The
correlation between the Tokyo range breakout and the likely trend for the London session,
and 2) the high volume in the first two hours of trading. So we aim to make most of our profits
fast and early, then get out. History shows this is the most sensible plan to give us the best
chance to build long term profits.
Just as we saw with our stoploss placements, our exits also allow both aggressive and
conservative approaches.
So, how do we set them? Let’s elaborate on this topic in detail:
Different currency crosses pour in different average daily moves. That means that while some
might move 150 pips per day as an average (such as GBPUSD), others might move over 300
pips per day (such as GBPNZD). By averaging how many pips any particular currency pair
has moved per day over the last X number of days (14 days is a commonly used number), we
can arrive at the “average daily range”.
We use the average daily range to determine our target profits. Here are the two ways of
setting our targets:
1. Aggressive target placement: the aggressive approach seeks to exploit the full
amount of the average daily range. Imagine we were seeking to enter a long (BUY)
trade: we would calculate the average daily range (in pips) for a particular currency
cross for the last 14 days; then we add that number to the Tokyo low for that day (or
Tokyo high is it was a SELL trade). The resulting figure gives a potential point where,
as a statistical average, that currency pair might be expected to run out of steam. So,
by setting our target aggressively, we’ll want to place our exit point just a little before
that point, to be on the safe side.
2. Conservative target placement: the conservative approach is also based on the
average daily range, but considers a psychological factor as well. It takes into
consideration the “round number phenomenon”. Round numbers are those price levels
ending in “00” or “50” (for example: round numbers for GBP/USD would be 1.9700,
1.9750, 1.9800, 1.9850, etc). The “round number phenomenon” suggests that once the
price has broken a round number, it tends to gravitate towards the next one. Moreover,
if price can not break through a round number, chances are that it will fall back to the
round number immediately below. Well, the conservative approach of placing our
targets takes them into consideration so we exit the trade few pips before hitting a
nearby round number in case price does bounce off that level.
Let’s look at an example.
Let’s say we take a long entry on GBPUSD at 1.9715 - that’s our starting point. Now, let’s say
we calculated the average daily range, and by adding it to our Tokyo low, it takes us, in theory,
all the way up to 1.9815 – which would be a gain of 100 pips.
The aggressive way of placing your profit target would be to set it just shy of 1.9815, at a
number like 1.9810.
The conservative approach would suggest we exit the trade few pips before 1.9800 just in
case the price does indeed finds resistance there and falls back.
I am a firm believer in the round number phenomenon. The markets are run by humans and
are susceptible to group psychology. Therefore, I recommend using the conservative
approach to setting your exit levels. I feel that in the long run, they will grow your account
further than an overly aggressive approach will.
To see the round number phenomenon in effect, have a look at the GBPNZD chart below:
As you can see, the entry was taken as the price broke out of the Tokyo range in the direction
of the down-trend. Now, the average daily move for this currency pair indicated that price
might drop all the way down to a level a bit below 2.5000.
By setting the profit target conservatively – in this case, 5 pips before hitting the 2.5000 round
number at 2.5005 – we can see how a potential loss was turned into a gain. Notice that the
price did in fact find support and bounce back up from the 2.5000 level. Psychology can be a
stronger market force than momentum so it’s best to take that into consideration.
One last point of clarification: even though we’re only looking for entries when a breakout
occurs in the first two hours of the London market, don’t expect your profit target or stoploss
to be hit within that time span. Usually, the trade will remain open for few hours after the two
hour entry window closes. This is normal and furthermore acceptable. Remember, we were
using that window of high volume only as a predictor of the overall daily trend, not as a profit
target time frame.
Controlling The Risk: Stop Losses
February 8th, 2009 by adminAs you may know, a stoploss is a pending order in the direction opposite your trade. For
example, if you buy GBPUSD at 1.9800, you might place a sell stop order at 1.9750. That
way, if price heads south, your maximum loss will be limited to 50 pips. Basically, once the
price hits your stoploss, you’re automatically exited out of the trade. Stoplosses are crucial in
order to avoid unnecessary large losses. That’s why every successful trader uses them
religiously.
There are two ways you can set your stoploss in the London Forex Rush system, depending
on your personal aversion to risk: an aggressive way and a conservative way.
1. Aggressive stop loss placement: the stoploss is placed 5 pips behind the Tokyo
range mid-band. That is, you take the Tokyo range’s high, subtract its low, divide the
result by two, and set your stoploss 5 pips behind that figure.
2. Conservative stop loss placement: to take a more conservative approach, you can
place your stoploss 5 pips behind the opposite Tokyo band from the breakout band. For
example: if you buy the breakout of the Tokyo high, place your stoploss 5 pips below
the Tokyo low.
So which is better? There’s no right or wrong answer to that question. It depends entirely on
how much risk you’re willing to take as a trader.
We personally use the aggressive stoploss positioning. My reasoning goes like this: the London
Forex Rush is a momentum-based technique. When the breakout we’re looking for comes,
we want the price to be moving away from the Tokyo trading range rather quickly.
If, once it breaks out and we have entered a trade, price comes back within the Tokyo range
again, it may well mean that we were lacking the momentum we thought we had in the first
place. Without that momentum, I don’t feel the need to wait for the price to reach the opposite
band of the Tokyo range in order to exit the trade.
In essence, I feel momentum is important enough an ingredient for our success that in its
absence, seeing price returning to a level midway through the Tokyo band (plus 5 pips) is
more than enough to get me to drop the position.
The Trading Instrument: GBP-CROSSES
February 8th, 2009 by adminThe London Forex Rush system trades exclusively GBP-crosses. Once again, this is due to
both their high volatility, and the typical massive early-session volume influx. These are the
two factors this system is designed to exploit.
We’ll be following six of the major GBP-crosses: GBPUSD (Pound against the US Dollar),
GBPJPY (Pound against the Japanese Yen), GBPCHF (Pound against the Swiss Franc),
GBPCAD (Pound against the Canadian Dollar), GBPAUD (Pound against the Australian
Dollar) and GBPNZD (Pound against the New Zealand Dollar). These six pairs are all a
skilled London Forex Rush trader needs to build up his trading account.
You’ll note we’re excluding EURGBP (Pound against the Euro) as it simply lacks the volatility
we require.
Now, be aware that many brokers don’t offer certain of these trades. In particular: GBPCAD,
GBPAUD and especially GBPNZD. But it’s worth it to search for a broker who offers as many
of these pairs as possible. The more pairs you can find, the more daily trading opportunities
you will have. I personally recommend MIG FX: they offer all the currency pairs we need, their
spreads are among the lowest for MT4-brokers and they are a secure and honest broker.
Better still, MIG Forex features the very powerful (and free!) MetaTrader 4 charting platform
which is the trading platform my custom indicators are coded for (more on my custom
indicators in the following chapter).
I recommend you download their free demo here to test the waters. This will allow you to
download their full charting platform immediately, with no risk involved.
This is what my charting screen looks like with MIG Forex:
What’s The Market Bias: Buy, Sell or Flat?
January 26th, 2009 by adminThe market bias, or “the trend,” will help us determine whether we want to search for long
entries (meaning we’re looking to buy), short entries (looking to sell), or even if we simply
don’t want to search for entries at all.
It’s an established fact that trading in the direction of the trend increases a trader’s win-to-loss
ratio. This helps our overall scoring performance since we have the market inertia pushing our
trade forward. That’s why we will only be interested in trading breakouts that take place in the
direction of the market bias.
For example, if the market has been uptrending throughout the last few days, we will only be
interested in breakouts of the upper band of the Tokyo range. In this case, should price drive
through the lower band of the Tokyo range, we will simply pass on taking any trade on that
currency pair for the time being.
Moreover, if the chart shows no clear bias through the last few days, it means the market has
been fluctuating sideways, which makes it is too difficult to position ourselves to best take
advantage of market momentum. Our best bet in a fluctuating market is to not search for any
entry at all.
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