One handy way which can be used to capture upcoming trends is to make use of a long-term EMA together with a shorter-term EMA on a 4-hour chart. A 4-hour chart tends to give less “noise” in the predictability of an upcoming trend. The profit achieved is often in excess of 100 pips; the stop-loss should be placed at about 40-50 pips away. One could confirm the trend by referring also to the 1-hour chart, and a couple of indicators, e.g. Stochastic Oscillator or %R.

Trading using a 4-hour chart involves capturing larger trends, and thus often entails holding the trade for many hours; in many cases the position is held over one or two days.

On 26 Nov I did a long trade that was entered when the 5-period EMA had just crossed above the 50-period EMA. A profit of 96 pips (after factoring in the 4-pip spread) was readily achieved after about 1 day.  

If 10 traders are armed with the same powerful trading strategy, one of the most important things that distinguishes the successful traders from the unsuccessful is their money management in trading.

Money management is concerned with how you systematically decide how many lots to trade in any single trade. This decision must not be based on impulse or instincts or emotions! If it is, you will find yourself exposed to a deadly risk of ruin.

Sometimes we hear of a trader who, after making a huge killing based on a fluke, feel so emotionally charged-up and confident that he decides to place a large position in his next trade, exposing his trading account to obscene risk. Trading like this means it’s just a matter of time before huge losses dwarf the wins, and the trader is devastated emotionally and financially.

When placing a trade, I always ask myself: how many percent of my account am I prepared to lose if I get stopped out of this trade?

As a rule, I risk no more than 3 % of my account size in any one trade.

For example, my trading account is now $20,000. This means that if the stop-loss for this trade is triggered, I am prepared to lose 3% of $20,000 = $600.

If my stop-loss is 30 pips, and the $value per pip is $10, then the number of lots I place for this trade is

$600 divided by 30, and then divided by 10 => 2 lots!

In this way, I systematically decide how many lots I trade, based on the Stop-loss level of my trading strategy, and also based on my existing account size. Such a decision must never be based on how good or confident you feel, i.e. you must not suddenly decide to trade 10 lots just because you feel very confident.  Rather, money management is always based on

1)     How many percent of your account you are prepared to risk per trade

2)     Current account size

3)     Stop-loss level (how many pips away from entry price)

Strictly maintaining this discipline has served me very well and helped me compound my trading account several times over!

Every trader must guard himself against the drawdown, which refers to the percentage drop in his account size after one losing trade or consecutive losing trades.

For example, imagine that after losing a few trades in a row, your $20,000 account is reduced to $12,000; that would be a drawdown of 8,000/20,000 = 40%.

If I were to ask some new traders, “In order to be back up to $20,000, what percentage return do you need to generate?”, many would answer, “Since I lost 40%, I have to make back 40%!”

This couldn’t be more wrong! Note that after losing 40%, the trader now starts with a lower base, i.e. to undo the $8,000 loss, the return he needs to generate is 8,000/12,000 = 67%!

The more severe the drawdown, the harder it becomes to undo the damage, as shown in the attached chart.

A severe drawdown causes you to have to start with a much smaller base, thereby having to take higher risks to undo the damage. This is why many undisciplined traders, who do not systematically plan their trade sizes, find themselves going into a “downward spiral” when they suffer severe losses.

This is why I risk no more than 3 % of my account size per trade. In fact, new traders might want to risk no more than 1.5% to 2 % of the account size in any one trade. Sometimes, even with good trading strategies, you might suffer 3 or 4 consecutive losses. You need to ensure that the emotional impact of the resulting drawdown doesn’t damage you too much, so that you can recover (emotionally and financially) from the losing streak. This cannot be over-emphasized, for it distinguishes the profitable traders from the losing ones!

Trading the GBP/USD can be very exciting, especially in such volatile conditions. Just a couple of days ago, after doing some of my Elliott Wave analysis, I saw that the GBP/USD should make a strong upward move in the coming days, shooting towards levels near 2.1160! I made that call on 16 Nov (Friday) when the GBP/USD was at 2.0410, conceding that there would likely be further consolidation and a little more downside. I placed a long trade at 2.0394, expecting it to last over the weekend. Although I believe that the larger trend will bring the price to levels near 2.1160, I aimed for a 150-pip profit, with a 50-pip stop-loss. Indeed, we saw a very nice uptrend that closed out my trade with a 150-pip profit at about 9 pm GMT (5 am on 17 Nov, Singapore time). This trade was more aggressive than my usual trades because of the rare confidence that I had in the upcoming bullish trend!  

As I write, the GBP/USD is now experiencing some consolidation, and I’m expecting the short-term goal is to exceed 2.0655 (up from last Friday’s low of 2.0352). In the meantime, support should be somewhere near or slightly below 2.0450. I might be going in soon for the kill again with another long trade …

Lately, the forex markets have been very volatile. These are times where extraordinary news events may cause you to be stopped out more frequently than in normal market conditions. Seasoned traders will just consider this phenomenon as part of the business of trading. Some people might choose to stay away if they don’t feel comfortable with the volatility, especially of the GBP/USD.

Incidentally, the GBP/USD has dropped by about 700 pips within 4 trading days - from 2.1160 (on 9 Nov) to a low of 2.0410! Based on some of my Elliott Wave analysis, I’m expecting it to shoot for levels near 2.1160 in the coming days, allowing for possible consolidation and slight further downside! Such is the volatilty of the GBP/USD!!! Any trader who has the guts can make hundreds of pips within days!! I think it’s a rare opportunity! Let’s see what happens!!

To me, these are the basic ingredients for every trader to be consistently profitable!

1) A Method/Strategy

Any time you place an entry or exit trade, it must be based on certain pre-tested rules that you will consistenly apply in future trades.

2) Discipline

If you lack discipline in following your strategy, you don’t really have a strategy in the first place!

3) Live Experience

The real way to become a master trader is to learn through mistakes in the real markets! Only then do you master the emotional aspects of trading and investing.

4) Taking Personal Responsibility

Never blame the news, the broker, the “insider traders”, the economy, or friends’ advice. As you take personal responsibility, you retain control of your ultimate success. You will then be able to review and overcome certain behavioral patterns that you will discover in your trading.

5) Accommodating losses

Any trading method will have losses. Never allow the emotional impact of any loss affect you too much; focus on the big picture - no single trade is important. Review you losses cool-headedly, and resolve to overcome any bad trading habits you discover about yourself.

6) Accepting gains

As you find yourself making consecutive profitable trades, you need the self-esteem and confidence to take them in a “matter-of-fact” way, without allowing pride to get you carried away - all the time maintaining discipliine in following the trading methods and money management rules.

Fibonacci trading is a huge topic. I have relied on it very much in my years of successful forex trading, although not in isloation. It helps me reinforce my trading signals. To me, it’s most useful in anticipating where retracements will likely find support and resistance.

First off, let me talk about a simple application. See the attached charts.

First, we must identify a “Swing Low” and a “Swing High” before we can generate Fibonacci retracement levels.

a) A Swing High is a short term high bar with at least two lower highs on both the left and right of the high bar.

b) A Swing Low is a short term low bar with at least two higher lows on both the left and right of the low bar.

The attached chart should make these 2 points quite clear.

After that, you can generate Fibonacci retracement levels by clicking on a significant Swing High and dragging the cursor down to the most recent potential Swing Low, as illustrated below. The displayed Fibonacci levels are potential resistance levels where you could potentially place short trades.

If the dominant trend is up, we generate Fibonacci Support levels, where downward retracements are likely to find support.

As a trader, I have relied on technical analysis more than 95% of the time! This is what has allowed me to compound my trading capital many times over the last 5 years as a self-directed trader!

What technical analysis measures is investor psychology, which is the real engine behind markets. When people are optimistic about the future of a given issue, they bid the price up. When they are pessimistic, they bid it down. Price movements in any liquid market (forex being the most liquid of all) reflect aggregate social mood about the markets.

There are two observations about financial market history:

First, studies of centuries of market data reveal that events external to the market seem to have no consistent effect on the market’s progress. The same news that today seems to drive the market up is just as likely to drive it down tomorrow. The only reasonable conclusion is that the markets simply do not react consistently to outside events.

Second, when you study historical charts, you see that markets are not random, i.e. there is a certain measure of predictability in price trends, because collective human psychology is patterned.

Once you understand these two points, you begin to realise that good technical analysis allows you to anticipate trends. The market has a life of its own and the best way to predict its direction is not to rely on news, but to objectively apply proven technical analysis rules.

Using news to forecast market direction is futile. Your goal is to predict the behavior of people. Good technical analysis measures trends in the behavior of market participants. Relying on news and publc opinoin makes you at least one step removed from reality.

Of course, even the best technical analysis method is an exercise in probability, because the market is not a machine to which a formula can apply perfectly. Nevertheless, a successful trader is one who is able to apply proven methods with a success rate of about 70%. In fact, some successful traders are very profitable even with a 60% success rate. The key is mastering the psychology of your trading, together with strict money management rules.