Using ‘On-Stop’ Orders to Maximize Trading Profits

 

There’s an abundant amount of trading opportunities each month in the market, but we don’t always have the time or desire to sit around staring at our charts waiting for the market to hit our pre-determined entry level. Also, I should mention that sitting around waiting for the market to trigger an entry is an unnecessary waste of time and can tempt us into entering a trade prematurely or to enter a trade that we otherwise might not. Fortunately, with the knowledge of how to use ‘on-stop’ entry orders, we can eliminate the need to sit in front of our computers waiting for the market to trigger a trade entry.
I get a lot of emails from traders asking me about different trade entry order types and how to use their Meta Trader 4 (MT4) trading platform. Thus, in today’s lesson I thought I would answer both of these questions by discussing how to use ‘on-stop’ entries properly and some of the advantages they provide.

Advantages of ‘on-stop’ entries

Let’s discuss some of the ways that ‘on-stop’ entry orders can improve your trading and the major advantages they provide:
• Momentum confirmation – When you enter the market on a stop entry, the market moves into your order on momentum that is in-line with the direction you want to trade. This has the added advantage that price is already moving in the direction that you are trading at the time of entry and often results in your trade moving into profit quickly. If you were to use the other two popular entry orders; a market or limit entry, you do not necessarily have this advantage.
For example, if you are entering on a ‘buy stop’, it means you are buying the market and in order for your buy stop to get filled the market has to be moving higher and move up into your buy stop entry, and that means it has bullish momentum behind it. Conversely, if you enter on a ‘sell stop’ entry, the market will need to be moving lower, down into your sell order. It doesn’t “guarantee” that the trade will continue in your favor, but at least at the time of entry the market is moving in your favor.
• You don’t have to be at your computer – Many of you have read my set and forget trading lesson, but what I don’t get into in that lesson is that the stop entry order allows you to set up your trade and ‘forget’ about it (stop entries allow you to ‘set and forget’). Also, unlike a limit entry, with a stop entry order you have the added peace of mind of knowing that if your trade does get filled after you set and forget it, you will get filled with ‘momentum confirmation’ as we discussed above.
Many of us (myself included), don’t have all day to sit around waiting for the market to move to our desired entry level. If you use an on-stop entry, you do not need to sit there watching and waiting; once you spot a price action trade setup you can simply enter your stop entry order, stop loss and target, and then walk away for a while.
• Eliminate trade ‘obsession’ – If you are trading an inside bar setup for example, you do not need to sit there waiting for the market to break past the mother bar high or low to enter. Instead, you can simply place a buy stop or sell stop just above the high or low of the inside bar and then go do something else. Traders who obsess over trades and are glued to their screens tend to lose money, you need to be interested and passionate about trading but not “in love” with it, I discussed this in last week’s article in which I talked about the differences between amateur and professional traders.
• Reinforce discipline – If you set an on-stop entry order and then walk away and let the trade play out, you are trading with discipline. There is something to be said for “letting the market come to you” as opposed to just jumping in with ‘at-market’ orders all the time. A stop entry allows you to set the exact level you want to enter at; if the market breaks past a certain level you will get filled, if it doesn’t, then you won’t. Many traders get into trades too early, before they really start moving, and this causes all kinds of psychological problems for them like second-guessing their entry, over-analyzing and closing out trades prematurely; if you enter with a stop order as the market moves into your desired entry level, it can help you avoid these mistakes.
Also, by setting your order and then going and doing something else, letting the market ‘do the work’, you are getting into the habit of not ‘forcing’ trades and of trading in a relaxed manner, instead of over-trading and (or) getting in prematurely. Once you start to see success trading in this manner it will begin to reinforce the discipline you had to put forth to set your order up and walk away.

Examples of effective use of ‘on-stop’ trade entry orders

Using stop entries to enter the market in-line with fresh market momentum is an excellent way to take advantage of this entry type. The idea here is, after a surge of momentum opposite to a recent trend, a stop entry on a price action signal can help “confirm” that the fresh momentum will continue at least for a while after filling your entry order.
In the chart image below, we see a EURUSD pin bar sell signal that formed shortly after a down move in the market that followed a strong up trend. The most logical entry order on this pin bar sell signal was a sell stop, because this gives us some more “confirmation” (not 100%) that more bearish momentum might be in store. In this case, the pin bar signal actually kicked off a very large move lower and formed very early in the new downtrend.
Using on-stop entry orders can help get you into new trends early. By taking you into the market in-line with the near-term momentum, you get a little extra “confirmation” that the move you are entering on is more than just a temporary counter-trend retrace:
The on-stop entry is the only entry type to use for an inside bar trading strategy. An inside setup is a ‘breakout’ play by definition, so you need to enter in-line with momentum by waiting for price to break either above or below the mother bar high or low.
 Note that using the sell-stop entry allowed us to have a little extra “confirmation” that the downtrend might continue by bringing us into the trade as bearish momentum pushed price down into our stop entry which would be placed just (typically 1 pip below) below the mother bar low of the inside bar setup:
The recent sell-off in the spot Gold market has been widely discussed on our site and if you knew how to use sell-stop entry orders properly you did not have to waste time waiting for the big moves to trigger. You could have simply placed a sell stop entry order below the lows of two recent price action sell signals on the daily spot Gold chart and then literally walked away, and you would still (at the time of this writing) be up a very large profit. This truly shows the power of using on-stop entry orders in trending markets.
In the chart image below, we can see two recent price action sell signals in the Gold market that you could have entered on sell-stop orders. The first one was a fakey sell signal that formed back on May 3^rd, note how the market consolidated and ‘chopped’ sideways for four days after the signal formed. If you had placed a sell stop just below the fakey’s mother bar low, you would not have gotten filled until price finally broke lower, triggering the fakey sell entry on May 10^th. Had you entered “at market” or on a limit retrace entry before price broke the mother bar low, you would have had to endure 4 days of price chopping sideways, including one big up day against your position. Many traders struggle with the emotions that get stirred up when they enter a trade early like this and have to wait for it to come off, and they end up closing trades out prematurely for no real reason as a result, then the trade comes off without then on board; this can mostly be avoided by using on-stop entry orders.

How to place an ‘on-stop’ entry order… What good is knowing the advantages of on-stop entry orders if you don’t know HOW to place them?
Let’s do a quick walk-through of how to place pending on-stop entry orders on the Meta Trader 4 trading platform:
Step 1. There are three easy ways to open the order entry screen in MT4. The first one is to simply right click on the chart of the market you want to trade and then slide your mouse over “trading” and then “new order”, click on it and then you should see this box appear:



An even easier way to make the order window appear is to simply push the ‘F9’ button on your computer when you have the MT4 platform open, doing so will also open up the above order entry window.
The third way to get the order entry window open is to go to “Tools” at the top of the platform and then select “new order”. These are the three main ways to open up the order entry window in MT4.
Step 2. The next step is to select “Pending Order” from the order “Type” drop down menu. Then, you will select Buy Stop or Sell Stop, depending of course on which direction you are trading (Buy Stop for buy entry, Sell Stop for sell entry).



Step 3. Next, you need to select the price you want to enter the market at and the expiry date of the entry order; the expiry date means if the market hasn’t filled your order by that date, the order will automatically be cancelled. You also need to decide the volume you will trade (lot size) and put in your stop loss level and profit target, for more on this, checkout this article on how to place stop losses and targets.



After you place your stop entry order you can see it in the “Terminal” window at the bottom of the MT4 platform. Be sure to either set an “expiry” as explained above, or cancel your pending stop entry order if it doesn’t get filled by the day you want. Forgetting about a pending order with no expiry can cause you to enter the market when you aren’t expecting to or don’t want to, this obviously can result in an unplanned loss.

5 Money Management Secrets for Successful Trading

Money management is like the “elephant in the room” that most traders don’t want to talk about. It can be boring, embarrassing, or even emotionally painful for some traders to talk about risk and capital management, because they know they aren’t doing it right.
However, as with anything in life, talking about the “elephant in the room” is usually the best thing you can do to improve your Forex trading. This means, being honest with yourself and focusing on the “hardest” or most boring things first and as often as necessary. If you ignore these things they will typically grow into huge problems that you can no longer control.
In today’s lesson, I’m going to help you understand some of the more important aspects of managing your risk and capital as you trade the markets. This lesson will answer many questions I get from traders asking about breakeven stops, trailing stop losses, and more. So let’s get started…

Keep risk consistent

The first “secret” I’m going to tell you about is to keep your risk consistent. As Marty Schwartz said in the the market wizards article that I quoted him in, “Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is a quick way to get wiped out.”
Why do I consider this a “secret”? Well, since most traders have a tendency to increase their risk size after a winning trade or after a series of winners, this is typically something you want to avoid. Basically, doing the opposite of whatever “most traders” do can be considered a “secret” of trading…and when it comes to money management there are quite a few of these “secrets”.
I’m a strong proponent of keeping risk consistent not only because it’s how other professional traders operate, but because of lessons learned from my own personal experience as well. Earlier in my career, I was the guy cranking up my risk after a winner…and finally after realizing that this was not the right thing to do, I stopped. Also, from my observations of traders that I help, I know that many traders increase risk after a winner, and this is a big reason they lose…
After you win a few trades you have a tendency to become over-confident…and I should stress that there’s nothing inherently wrong with you if you do this or have done it; it’s actually human nature to become less risk averse after winning a trade or multiple trades. However, it is something you’ll need to put an end to if you want to make money trading the markets. If you’ve read my article about the one thing you need to know about trading, you would know that even if you’re following your trading strategy to the T, your winners and losers are still randomly distributed. This means, after a winning trade there is no logic-based reason to think the next trade will also be a winner….thus no reason to increase your risk size. But, as humans, we like to gamble….and it can be really hard to ignore the feelings of euphoria and confidence after hitting a nice winner…but you HAVE TO if you want to manage your money effectively and make a living in the market.

Withdraw profits

As we discussed above, keeping your risk consistent or “fixed” is one of the keys to successful Forex money management. Professional traders do not jack up their risk exponentially after every winner…this is not a logical or real-world way to manage your risk. Professional traders who make their living in the markets withdraw money from their accounts each month and most will keep their accounts funded to around the same level each month. If you’re withdrawing profits every month then you would not keep increasing your risk amount over time.
What you need to do is build your account up to a level your comfortable with, and then you can start withdrawing profit each month to live off of…thus the amount you risk on each trade would not keep increasing because eventually your trading capital will reach an “equilibrium” level.

Moving a stop loss to ‘breakeven’ can kill your account

The big secret regarding breakeven stop losses is that you should not move your stop loss to breakeven unless there’s a real price-action based, logical reason to do so. Moving your stop loss to the same level that you just entered at doesn’t make sense if there’s no reason to do so. Moving to breakeven arbitrarily or because you have some pre-decided “rule” to do so is simply not an effective way to manage your trades. How many times have you moved to breakeven only to see the market come back and stop you out and then move on in your favor? You have to give your trades “room to breathe”, and if there’s no reason to tighten your stop or move to breakeven, then don’t.
What you might not realize, is that messing around with your stop loss or manually closing trades out before they’ve had a chance to move, is voluntarily reducing the ability of your trading edge to work in your favor. In short, if you don’t have a logic-based reason to move to breakeven, then you’re moving to breakeven based on emotion; mainly fear. You need to overcome your fear of losing money, because losing is part of being a successful trader, and until you learn how to let a trade breathe and move without your constant interference, you will not make money.
Now, I’m not saying that you should never move to breakeven, because there certainly are times when you should. Below are some logical reasons to move your stop loss to breakeven:
• If an opposing signal causes caution and changes market conditions you can take that as a logic-based reason to move to breakeven.
• If the market approaches a key chart level and then starts to show signs of reversing, you should take that as a signal that the market might indeed reverse and then trail your stop to breakeven.
• If you’ve been in a trade over a few days and nothing is happening, you might exit the trade or move to breakeven…this is known as a “time stop”, or using the element of time to manage your trades. Generally speaking, the best trades do tend to work out in your favor soon after you enter.
• If a big news announcement like Non-Farm Payrolls is coming out and you’re up a nice profit, you might want to move to breakeven or monitor the trade. Volatile news announcements like this can often change market conditions.

Don’t be greedy: don’t aim for big targets all the time

Another “secret” of money management is that you have to actually take profits. This might not really seem like a “secret” to you, but I consider it a secret since most traders simply don’t take profits as often as they should…and many traders almost never take profits. Why do you have trouble with taking profits? It’s simple really; it’s hard to take a profit when a trade is in your favor because your natural tendency is to want to leave a trade open that’s in your favor. Whilst it is important to “let your winners run”…you have to pick and choose when you do this; you certainly should not try to let every winning trader run. The market ebbs and flows, and the majority of the time it’s not going to make a really strong directional move without retracing a lot of it. Thus, it makes much more sense as a short-term swing trader to take a solid 2 to 1 or 3 to 1 profit when the market is offering it to you…rather than waiting until the market retraces against your position and moves all the way back towards your entry point or beyond, at which point you will probably exit emotionally since you’re mad you let all that open profit go.
Especially for traders with smaller accounts, you have to be happy taking “bread and butter” rewards of 1 to 1 or 2 to 1 often….there’s nothing wrong with hitting those “singles” and “doubles” to build your trading account as well as your confidence. You have to avoid the temptation of trying to hit a “home run” on every trade.

Knowing when to let a profit run

Every now and then the market will be just ripe for a 10 bagger….a home-run trade. Whilst these trades are rare, they do indeed occur, however you have to avoid the mistake that many traders often make; aiming for a “home-run” on every trade. Most of the time, the market is only going to move a certain range each week and month. For example, the average weekly range on the EURUSD is around 250 pips.
Knowing when to try and let a trade run and when to take the more certain 1 to 1, 2 to 1 or 3 to 1 reward is really where your discretionary price action trading skill comes into play. I’ll be honest here because I do get a lot of emails asking about when to let trades run versus taking a set risk reward ratio, there’s no “concrete” rule I can give you except to say that training, screen time, and “gut” feel for reading the charts are things that you need in order to improve your skill at exiting trades.
I can however give you some simple filters that you can use to assess trades on a case by case basis to help determine whether or not they are good candidates to try and run into a bigger winner:
1. Strong breakout patterns – When the market has spent a while consolidating it will typically lead to a strong breakout up or down. These strong breakouts can often be good candidates for “home-run” trades. However, not every breakout is equal; some are weaker than others and sometimes the market makes a false break before the real breakout occurs. So, we need to exercise caution when trading breakouts, the safest ways to enter a breakout are the following two scenarios:
The chart image below shows us an example of entering the market on a price action setup in “anticipation” of a breakout. This is a more advanced way to enter a breakout but it can provide a tight stop and a very large risk reward potential on the trade. There are usually price action “clues” just before this type of breakout; note the bullish tails on the bars that preceded the inside bar setup in the chart below. This indicated that momentum was building just below resistance for a potential upside breakout, then we got the little inside bar setup just below the breakout level that provided a nice “anticipation” entry into the market.
The chart image below shows an “anticipation” entry on a price action signal just before the breakout:




The next way to enter a breakout that could lead to the type of trade that you can let run into a bigger winner, is to wait for the market to “confirm” the breakout after a retrace back to resistance or support. Once price breaks above or below a key level it will typically come back and retest it before pushing off again in the direction of the breakout. These types of “confirmed” breakouts from key levels can also be very good opportunities to try and trail your stop to let the trade run.
The chart image below shows a price action signal that formed on a retrace back to the breakout level:





2. Obvious trend continuation signals
Strong trending markets can obviously be good candidates to try and let your trade run into a big winner. We sometimes see very large potential winners in strong trends like the GBPJPY chart below shows. Note, in this example below, the trend was clearly up and so any price action signal that formed in this strong trend would have been a good candidate for a larger gain, we can see the pin bar signal and inside bar setup in the chart below could have been very large winners for anyone who traded them.
The chart image below shows a good example of trading price action trend-continuation signals which can be good candidates for trailing your stop to let the trade grow into a bigger winner:




3. Price action signal at a key level in strong trending market
Another good scenario to look for potential “home-run” trades is after the market retraces to a key level within a trending market. In the chart below we can see a clear example of this when a fakey setup formed recently in the spot Gold market within the structure of the downtrend. We actually discussed this fakey in our February 5^th commentary and we can see the market fell significantly lower after forming that signal from resistance. When a market is clearly trending and then it retraces back to a key level and forms an obvious price action signal in-line with the underlying trend, it can often be a good opportunity to look for a larger than average winner.
The chart image below shows a fakey signal that formed after the market had retraced back to a key resistance level within the down-trending market:
The above scenarios can be good for letting your profit run. You would want to begin the trailing process by moving your stop to breakeven once the market clearly shows you that the trend is taking off in your favor. I like to wait until I am up at least 1 times my risk before moving my stop to breakeven. After that, how you trail your stop and exit the trade is something you will have to use discretion to decide; there are many different trailing techniques but none of them are “perfect”. Over time and through training and practice, you will develop a better sense for determining whether or not to trail a stop and how to do it.

Final note

The strategy we trade with is obviously important, but in reality, that should not be the “be all and end all” of your trading plan. The way that you manage your risk and your overall capital is the true “secret” to trading. Most of you reading this already know you are not paying enough attention to how you think about capital preservation and risk management, you’re not taking it seriously because it’s the more boring part of the game. It’s time to wake up and face the reality; not paying attention to risk management and capital preservation will lead you to a path of financial pain and personal stress. Managing your risk properly while trading with a simple yet effective trading strategy is the basis of what I teach in my trading course and members’ area. Once you combine these two critical pieces of the trading puzzle, you will be ready to start making consistent money in the markets."learntotradethemarket"

Set and Forget Forex Trading – Keep Your Day Job

‘Set and Forget Forex Trading’ is as simple as its name implies; you simply “set” the trade up and then “forget” about it for a period of time. This has two major benefits: it makes it far easier to stay emotionally disciplined and it also allows you to go about your life as you normally would, because you will not be spending hours in front of your computer over-analyzing the markets…

Often, aspiring Forex traders become lost in a web of confusion with the amount of data that the various financial media outlets plaster all over the internet and television. It is extremely easy to experience “analysis paralysis” while trying to trade forex or any market for that matter. There are so many competing ideas and trading methods along with more fundamental data coming out every day than you could ever hope to digest, it can be overwhelming to even try and make sense of it all and develop a forex trading plan based off this amount of information. One of the biggest psychological mistakes that almost every aspiring trader makes on their journey to success is firmly believing that the amount of economic data analyzed and (or) having a technically complicated or expensive trading method will help them profit in the market. In reality, as most professional traders will attest to, these factors usually have the opposite effect on trading profits, at least after certain point. This essentially means that once you do a certain amount of analyzing market data, any further time spent analyzing this data is likely to have a negative effect on your trading; it causes you to lose money.

Why it’s Counter Productive to Analyze too Much Market Data

It may seem confusing or counter intuitive to the aspiring Forex trader when they first hear the fact that analyzing too much market data can actually cause you to lose money faster than you other wise would. The believe that “more  is better”, is a psychological trap that often keeps aspiring traders from consistently profiting in the Forex market and is the reason why many of them blow out their trading accounts and eventually give up all together.
The main reason why this occurs is because human beings have an innate need to feel in control of their life and of their surroundings, it is an evolutionary trait that has allowed our species to perpetuate its existence and ultimately arrive at our current modern day level of civilization. Unfortunately, for the aspiring Forex trader, this genetic trait of all human beings works against those trying to succeed at Forex trading. In fact, most of our normal feelings of wanting to work harder than the next guy or spend extra time studying and researching for our jobs or for school are feelings that are really not beneficial to success in the Forex market.
The problem with trying to apply the idea of “hard work” to Forex trading, is that beyond a certain level of technical chart reading ability and awareness, there really is no beneficial aspect to spending more time on tweaking a trading system or analyzing more economic reports. The bottom line here is that there are literally millions of variables involved in trading the Forex market; each person trading the market is a variable and every one of their thoughts about the market is a variable because these are all things that can cause price to move. So, unless you are somehow able to keep track of every trader in the market and all of their thoughts, in addition to the hundreds of news and economic reports that come out each day, you essentially have no control over price movement. Trying to analyze numerous pieces of economic data each day or trying to come up with an overly complicated trading method is essentially just a futile attempt to control something that simply cannot be controlled; the market.
Thus, the underlying cause of Forex trading failure begins with the idea that traders feel a psychological need to control their surroundings and when this emotional state meets the uncontrollable world of Forex trading it almost always has negative consequences. This problem works to snow-ball itself as well because once a trader loses a few trades he or she begins to get angry and wants to “get back” at the market. The way they do this is by reading another trading book or buying a different trading system that seems more “likely to work” or by analyzing the inner workings of every economic report they can find and trying to predict how it will affect the market’s price movement. Once this process has begun it is very difficult to stop because it makes logical sense to us that if we put more time in and do more work we will eventually figure out how to make more money faster in the Forex market. The difficult truth to all of this is that, as stated earlier, after you reach a certain degree of technical and fundamental understanding, any further research or system “tweaking” beyond that point will actually work against you and the rate at which you study more and do more research is probably about the rate at which you will lose your money in the market.

Less is more in Forex: ‘Set it and Forget it’

So how does the aspiring trader achieve consistent profitability trading the Forex market if we are genetically primed to over-complicate it? The very first step in this process is just accepting the fact that you cannot control the uncontrollable Forex market and checking your ego at the door. The Forex market does not care what you have done in your life before; it has no emotion and is not a living entity. It is an arena where human beings act out their beliefs about the exchange rate of a certain currency pair. These beliefs are a result of emotions, and human emotion is very predictable when it comes to money. The point here is that the people mentioned in the previous section who are doing extensive amounts of research and trying to find the “holy grail” trading system are the ones who are trying to control the market and thus trading based off emotion. These people are providing the predictability for the professionals to take advantage of.
The paradox here is that professional traders may actually do less technical and fundamental “homework” than amateur / struggling traders; pro traders have mastered their trading strategy and they simply stick to their daily trading routine and see if their edge is there. If there edge is not present, then they just walk away for a while because they know that the Forex market is a continuous stream of self-generating opportunities, thus they do not feel pressured or anxious to trade. If their edge does show up then they set their orders and walk away, accepting the fact that any further action will probably work against them because it will be a vain attempt to control the uncontrollable and would not be an objective action.
The logic of set and forget forex trading is this; if your trading edge is present then you execute your edge and do not involve yourself further in the process unless you have a valid price action-based reason to do so. Traders that decide to mess with or tweak their trade once they enter it almost always kick start an emotional roller coaster that leads to over-trading, increasing position size, moving their stop loss further from their entry, or moving their profit target further out for no logical reason. These actions almost always cause the trader to lose money because they were not objectively thought out, but were instead influenced by an emotional reaction that was caused by trying to control the uncontrollable.
In the chart below, we see an example of how many traders get into trouble by being too involved with their trades. As the market retraced back toward the entry point of the pin bar sell signal, emotional traders would have probably exited for a very small profit or near breakeven because they felt “scared” or “nervous” that they might lose money on the trade.



In the chart below, we can see that just as the market got to about the low of the pin bar sell signal where most traders would have entered, it stalled and then fell significantly lower back in-line with the downtrend. Disciplined traders who do not “meddle” in their trades for no reason would probably have still been short and would have clearly made a very nice gain. Note how a traders could have waited for an opposing obvious price action buy signal to exit the trade…this is exiting on logic and price action rather than emotions like fear or greed.

Make Money and Save Time by Doing…Less?

It is a well-studied fact that traders who trade off higher time frames such as 4 hour, daily, and weekly charts and hold their positions for multiple days, make more money in the long run that traders who “day trade” off intra-day charts. The reason many people are attracted to day trading is because they feel more in control of the market by looking at smaller time frames and jumping in and out of positions frequently. Unfortunately for them, they have not figured out that they have the same amount of control as the swing trader who holds positions for a week or more and only looks at the market for twenty minutes a day or even less. That is to say, neither trader has any control over the market, but day-trading and scalping gives traders the illusion of more control. The only thing we really have control over in trading, is ourselves.



The ironic fact about Forex trading is that spending less time analyzing data and finding the “perfect trading system” will actually cause you to make more money

faster because you will be more relaxed, less emotional, and thus less likely to over-trade or over-leverage your trading account. Many people are attracted to speculative trading because they want a way to make money that is “less difficult” than their current job, but they soon forget about that and start spending countless hours digging themselves into a huge psychological trap that most of them never dig out of. All you basically need to do to consistently make money in Forex is master an effecting trading method, develop a written out trading plan based on this method and have a solid risk management strategy, you can then check the market one to three times a day for ten to twenty minutes each time. If your edge (price action strategies) is showing up than you set up your entry, stop loss, and target and walk away until the next scheduled time to check your trades.
Trading in this manner actually elicits a snowball of positive habits that work to further perpetuate your trading success. This entire article can be summarized by the following two sentenes: People who spend more time analyzing market data and trying to perfect their trading system inevitably induce a cycle of emotional mistakes that work to increase their trading failures and eventually result in lost money and lost time. People who realize that the market is uncontrollable and build their trading plan around this fact will inevitably arrive at a “set and forget” type mentality that induces an emotional state that is conducive to on-going market success and consistent profitability. The trading method used is not as important as the psychological or risk management aspects of trading, but generally speaking, a method that offers a simple high-probability edge such as the price action trading method that I teach in my price action trading course, is the best method to use to maintain your “set and forget” mindset."learntotradethemarket"

A Money Management Strategy To Increase Profits

In today’s lesson I am going to teach you guys how to “trade with the market’s money”. That’s right, I am going to show you how to scale in or “pyramid” into a winning trade, without taking on more risk. This essentially means you will add to an open winning position without taking on more risk and possibly even creating a risk-free trade, all while dramatically increasing your potential profit. It’s not too good to be true, but there are certain times when scaling into a trade works better than others, which we will discuss in today’s lesson. (Note: scaling in is the same thing as adding to a position or pyramiding in)
You’ve probably heard the saying “Cut your losers short and let your winners run”, but how do you actually do that? Today’s Forex trading training lesson is going to teach you how to properly scale into an open trade that’s in profit, so that you get the most out of your winning trades. You probably know that many of the major Forex pairs have been trending quite nicely recently, if not, then check out my recent Forex market update to learn more. With all these strong trends that are taking place recently, I thought it would be good a idea to chuck out an article to you guys about how best to maximize your winning trades. So, let’s get started….
Note: When you finish reading today’s lesson, please leave me a comment and let me know if you found this information helpful!
How to safely scale in or “pyramid” into a winning trade
Note that I have “safely” in italics above, that’s because there are basically two ways that you can add to a winning open position:
1) The stupid way – Scaling into your position but not trailing your stop up or down to reduce risk on the previous position(s), thereby voluntarily taking on more risk (something you should NEVER do).
2) The smart way – Scaling into your position at predetermined levels and trailing your stop up or down each time you add a new position so that you never risk more than you are comfortable with losing, or more than what you have predetermined is a good 1R value for you (1R = the amount you risk per trade).
I am going to teach you guys how to safely pyramid into your trades today, but before we get started I need to stress one thing:
WARNING: Just because you can scale into an open position that is in profit doesn’t mean you SHOULD. There are certain times when the strategies you are about to learn will work well and certain times when they won’t. In general, you can try to scale into a winning position when a market is in a strong trend or during strong intra-day moves. You should not try scaling in when the market is range-bound or trending in a choppy manner with a lot of back and filling.
Now, because you are adding a new position each time your current trade moves a certain distance in your favor, your breakeven point on the whole position moves closer to the market price. This means the market doesn’t have to move as far to put you into negative territory. Now, this won’t be a problem if you have trailed your stop loss on the previous position(s) so that you maintain your overall 1R risk, but where traders get into trouble is scaling into positions and not moving their stop losses to reduce risk. If this all seems a little confusing right now I promise the diagrams below will clarify…
Example scenario:
Let’s say the EURUSD is trending lower like it has been recently. You see a solid pin bar entry strategy that formed showing rejection of the 1.2625 resistance level. You decide that since price has respected this level and it’s obviously a “key” level, it’s a good place to set your stop loss just above. So you decide to put your stop loss for the trade at 1.2650….we ALWAYS set our stop loss BEFORE deciding on a potential profit target. This is because risk management in Forex trading is the most important aspect of the whole thing…if you don’t properly manage your risk on EVERY trade you WILL NOT make money.
Next, there is no obvious / significant support that you can see until about 1.1900, so you decide to aim for a larger profit on this trade and see if the trend won’t run in your favor a bit. Your pre-defined risk on the trade is going to be $200, to keep the math simple let’s say you sold at 2 mini-lots at 1.2550; 100 pip stop loss x 2 mini-lots (1 mini-lot = $1 per pip) = $200 risk
You decide to aim for a risk reward of 1:3 on this trade, so you set your initial target at 1.2250 and you plan on adding two positions to this trade, 1 when you are up 100 pips and another when you’re up 200 pips. You plan on doing this because the market is trending strongly and you have decided based on your discretionary price action trading skills that there’s a good chance the trend will continue.
Here is a diagram of what your trade looks like at the beginning:
The trade pushes on in your favor and you decide to scale in with another 20k units at 1.2450. Your overall position size is now 40k or $4 per pip on the EURUSD, this increases your potential reward to $1,000 if price hits your target at 1.2250. Since you trailed down the stop on your initial position to 1.2550, that position is now at breakeven, the stop on your new position is also at 1.2550, meaning your overall risk on the trade stays the same at $200.



Next, the trade continues on in your favor and you decide to pyramid in with another 20k units at 1.2350. This means your overall position is at 60k or $6 per pip on the EURUSD. Your overall reward potential is now $1,200 if your target of 1.2250 gets hit; note that your reward is now double what it was when you started whilst your overall risk is now at $0 as you’ll see now…
You trail down the stops on both previous positions to 1.2450 thereby locking in a profit of $200 on the first position, reducing the second position to breakeven and offsetting the $200 risk on your new position to $0…you now have a breakeven trade. The catch here is that the market is only 100 pips from your breakeven point on the whole trade, so there’s a bigger potential of the whole position getting stopped at breakeven…the good part is you have increased your potential for profit without taking on any more risk.

The trade continues on in your favor and hits your target at 1.2250, all three positions are now closed and you’ve netted a 1:6 risk : reward. You never risked more than $200, which was your predefined 1R risk amount, and you gained $1,200. This is an example of how to take advantage of a strong trending market like we have seen recently in the EURUSD and other markets.

Why I don’t scale out
I am sure that some of you are probably wondering about scaling out. I am not going to get into it too deep in today’s lesson, but if you want to read a previous lesson I wrote that discusses scaling out, check out my article on forex trade management.
I will say this: I don’t scale out, and I don’t recommend you do either. But, obviously what you do in the markets is up to you, however, I will briefly explain to you why I personally believe scaling out makes no sense. When you scale out of a trade you take partial profits on your full position as the market moves in your favor. Sounds good on the surface right? Well, the problem with it is that you are limiting your gains on a winning trade. We want to maximize winning trades, not minimize them. What I am saying is that by scaling out you are purposely limiting a winning trade.
You see, when you scale out of a trade you are cutting down your position size as the trade becomes more profitable by moving further in your favor. What this means is that as the trade moves in your favor you’re going to be holding the smallest portion of your position at the MOST profitable part of the trade…doesn’t seem like the best way to let your winners run does it? Remember…trading is about maximizing your winning trades and limiting your losers…I only see scaling out as minimizing a winner, and THAT is why I don’t scale out.
I prefer to either take a predetermined 1:2 or 1:3 profit on a full position or IF the market is trending strongly like I discussed above in the diagrams, I will try to scale in. Either way I am not minimizing my winning trade like I would be if I were to scale out. So, to be clear, I either take profit on my full position at my predetermine target level, or I scale into a trade that’s in the context of a strong market trend….what I don’t ever voluntarily do is minimize a winner by scaling out!
Final word on adding to winners…


Finally, I just want to stress again that you should not try to scale into EVERY trade that goes into profit. You need to decide BEFORE you enter a trade if you think it has the potential to run in your favor; you need to decide before you enter if you are going to add positions to a trade by scaling in. You don’t want to leave anything to chance, and you want to make as many decisions as possible before you enter the market, since that’s when you’ll be the most objective and logical.
Take note of the EURUSD and some of the other major Fx pairs over the last 3 to 4 weeks (as of May 31st 2012)…these are the types of market conditions that give us good potential to try and add to a winning trade. Note that these market conditions don’t happen extremely often, but I wanted to teach you guys that you can add to a trade without taking on any more risk…and that was the point of today’s lesson."learntotradethemarket"

How To Start Profiting With Price Action Trading Strategies

One thing I have realized over years of helping people learn how to trade, is that most traders tend to try and tackle too many variables at one time, especially traders in the beginning stages of learning how to trade. They often want to trade 10 or 20 different setups with numerous indicators on their charts whilst looking at every time frame available on their trading platform in 30 different markets. This is in a word, ineffective. Traders often come into the markets with good intentions but their focus is too broad, this causes over-analysis, confusion and usually frustration.
The concept I am going to introduce in today’s lesson that will help you become a profitable price action trader is “specializing”. Your new goal is to think of yourself as a “specialist” trader, and to actually become one. If you look around at most professions, it’s the most specialized people that make the most money. For example, a family doctor makes a good income, but a neurosurgeon most certainly commands more money because he or she is a specialized doctor who has “mastered” the skill of performing complicated brain surgeries, amongst other things.
There’s an old saying that you may have heard: “Jack of all trades, master of none” and according to Wikipedia it is “…used in reference to a person that is competent with many skills but is not necessarily outstanding in any particular one.” As specialist price action traders, we want to take the opposite approach, our aim is to become “outstanding” at one particular price action setup at a time; this is perhaps the most powerful thing you can do to start profiting as a price action trader. What I am going to share with you guys today is something that’s as close to a “secret” to trading success as you will find, and I hope after reading today’s lesson you guys have a sense of confidence and direction about how best to proceed in becoming a “master price action trader”…

The “secret” to profiting as a price action trader

As price action traders, we have a distinct advantage over traders who might use indicators or trading software, that advantage lies in the simplicity of price action trading strategies. The fact that we can simply focus on a market’s raw price action and its support and resistance is something that easily allows us to specialize in mastering one setup at a time. This is in direct contrast to many other trading strategies or systems out there that might require a trader to trade with numerous different indicators while trying to trade the news at the same time…it’s pretty hard to become a “specialist” of such a messy and haphazard trading style.
Basically, what I want to really drive-home today is the point that focusing on one price action setup on one time frame and in one market, will allow you to become a master of that “strategy”. For example, if we choose to trade the pin bar strategy from key levels on the 4 hour chart and in the EURUSD market…that would be considered “one strategy”…the goal is to really MASTER that strategy…trade only that strategy until you feel like you are ‘Jedi master’ of it…(yes I made a cheesy Star Wars reference there).
However, I want you to go even further, I want you to master one setup at a time, on one time frame, and in one market and with one very specific set of entry parameters. For example, you might decide you want to look only for inside bars on the daily chart time frame of the GBPUSD that occur in the context of a trend….that would be one strategy and you would stick with it until you are successful with it, which could take 1 month, 3 months or even more…the point of this exercise is that if you really stick with this method of trading, after a year goes by you will be one potent “badass” of a price action trader. Those feelings of looking at a chart and being afraid to pull the trigger will be completely gone, and with mastery of such a sniper-like trading approach, your success in the markets will only be a matter of time.

An example of “specialist” price action trading:

Now let’s go over an example of what would be considered one specific price action trading strategy that you could focus on until you’ve mastered it. Keep in mind, this is just an example and you can come up with your own strategy if you want, this is to get you thinking and to get you on the track to becoming a “specialist” price action trader…
Find your market first: The first thing to do is pick the market you want to trade. I suggest sticking with one of the major currency pairs or one of the more popular crosses as they are the most liquid, have the tightest spreads and will generally behave more “predictably” than the more exotic pairs. We are picking the EURJPY for today’s lesson.
Next, zoom out on your chart to get an overall view of longer-term trend and draw the levels on the daily chart, you can also do this on the weekly chart too if you want. Below we see a zoomed out daily EURJPY chart and we can clearly see that an uptrend was in place as marked by the higher highs and higher lows which we can see by the red circles. So, the first two parts of our “specialist” trading strategy are in place: we are looking at the daily chart EURJPY and we are looking for an obvious directional bias to be in place, in this case the bias is up:

After determining trend and overall market condition, we draw in the key “obvious” levels:

 
 
You will then pick the particular price action setup you want to trade. You can learn all my setups in my trading course, but for today’s lesson we are going to focus on just one, the fakey setup. This is also what you will do when you try this approach for yourself; stick with ONE setup at a time…you have to ignore the temptations to add setups right now, you can add setups to your toolbox later on as you master one at a time. Now, after about 4 days went by, a very obvious fakey / pin bar combo setup formed showing rejection of the 8 day EMA support level and implying that price might continue pushing higher in-line with the uptrend. We now have the next two parts of our “specialist” trading strategy: we are looking for a fakey setup which creates a false-break of either a dynamic EMA support or resistance level or a horizontal support or resistance level within a trending market:

 

The specific factors of confluence supporting our price action setup are actually part of the setup itself and are necessary for us to consider the setup as being valid. Many traders make the mistake of trading any old fakey or pin bar, etc, when in reality the location and placement of the price bar within the broader market structure is just as important as the price bar itself.
Now, the next part of our specialist trading strategy is how we will enter and exit it. Let’s say we choose to stick to an entry above or below the inside bar high or low after the false-break of the mother bar has occurred. Let’s also say for this strategy we will place our stop at or near the high or low of the false-break bar. So, we will enter on a buy-stop entry 1 pip above the inside bar high and our stop loss is a sell-stop placed 1 pip below the false-break low, now let’s see what that looks like:

Next, you will decide your risk reward and money management scenarios. We aren’t going to get into money management very much in this article but I have discussed it extensively in other articles, specifically my risk reward ‘Holy Grail’ article and risk reward and money management article, so be sure to check those out.
For this particular “specialist” strategy we are simply aiming for a risk reward of 1:2 on every trade with little to no interference. Let’s take a look at our trade now and see what that 1:2 risk reward looks like:

Note: When first implementing this “specialist” trading approach it might be best to just aim for a strict 1:1 risk reward ratio just to build a little confidence and build your trading account up a little. Then, after you’ve gained some confidence trading your strategy and beefed up your account a bit, you can start to aim for 1:1.5 and then 1:2. Doing this will give you ample time to gain screen time and over time you will get better at managing your exits, eventually you can try trailing stop methods in trending markets and looking for larger risk rewards like 1:3, 1:4 etc.
Now it’s time to tie this all together and make a visual “check list” out of the above elements that you will use to check for your trading strategy each day and to help keep you on track. It’s one thing to have your trading strategy in your head, but it’s best to have it tangible and visible so that you are reminded of what you are trying to do…

Here is an example of the above “specialist” trading strategy summed up very concisely in a visual check list:

In closing:

You have to have the patience and discipline to make this work. I can almost promise you this “specialist” approach will improve your trading results, but you have to give it time and you have to learn to be OK with not trading. If you’re only trading one market at a time and one time frame / one setup…you aren’t going to have a lot of setups each week. But that’s part of the point of this, it’s to show you that if you just really learn when to trade and when not to trade, you can be a profitable trader. Remember, as you master one particular strategy you can then move on to another, then after a while you might have 3 or 4 different but very specific trading strategies that you can quickly look for on the charts each day. In my opinion, this is the fastest route to profitable price action trading."learntotradethemarket"

The ‘False Break’ Trading Strategy

When was the last time you entered a trade and it immediately moved against you even though you felt confident the market was going to move in your favor? When was the last time you traded a breakout and got stopped out? I’m willing to bet you’ve experienced one or both of these things recently in your own trading, and I’m also willing to bet that me or one of my students probably took the opposite side of one of these trades that seemed to ‘fake you out’ of your position…
You see, false-breaks happen all the time in the markets; they are a result of the ‘herd mentality’ that causes people to buy the top of a move or sell the bottom. As price action traders, we are in a unique position to take advantage of false-breaks and of the weak ‘herd mentality’ that so many amateur traders possess.
I have made most of my money as a trader by using contrarian trading approaches like false-breaks and my proprietary fakey trading strategy. It is the power of contrarian trading and using false-break patterns and fakey setups that allows myself and other savvy price action traders to profit from other traders’ misfortunes. This may sound a little harsh, but it’s the reality of trading that the majority of traders lose money, informed and skilled traders make money, and the ‘pigs get slaughtered’, as the saying goes. I hope there are light bulbs going off in your head now, because this article is all about contrarian thinking, false-breaks, and how to take advantage of the ‘herd mentality’ that causes so many traders to enter right when the market is about to change direction…

So what exactly is a false-break?

I thought you’d never ask! Joking, I know you are probably thinking that right now, so here you go…
A false-break can be defined as a ‘deception’ by the market; a test of a level that results in a break of that level but the market then retracts and does not sustain itself above or below that level. In other words, the market does not close outside of the level being tested; rather it leaves behind a false-break of it. These false-breaks are huge pieces of evidence for impending market direction, and we need to learn to use them to our advantage instead of becoming their victim.
Here is a visual example of a false-break of a key market level:


Essentially, a false-break can be thought of as a contrarian move that ‘sucks’ the over-committed side of the market out. The concept is to wait for the price movement to clearly show that a market has committed to one side of a trade and that they would be ‘forced’ to liquidate their position(s) on a strong reversal in the other direction. Typically, we see these scenarios unfold as a trending market becomes extended and all the amateurs jump in right before the counter-trend retrace, or at key support and resistance levels or at consolidation breakout scenarios.
The herd mentality causes traders to enter the market typically only when it ‘feels’ safe. However, this is the deception; trading off feeling and emotion is exactly why most traders lose money in the markets. Many traders become deceived because the market looks very strong or very weak, so they think it’s a no-brainer to just jump in with that momentum. However, the truth of the matter is that markets ebb and flow and they never move in a straight line for very long. This is known as “reversion to the mean” and it’s something I expand on significantly in my advanced Forex trading course.
We really have to use logic and counter-intuitive or ‘contrarian’ thinking to profit off of the weak-minded herd mentality that dominates most traders’ minds. This is why it’s very important to remain disciplined in the area of trading false-breaks, rejections and failures, and why I love trading them so much.

Types of False Breaks

1. Classic Bull and Bear traps at key market levels
A bull or bar trap is typically a 1 to 4 bar pattern that is defined by a false-break of a key market level. These false-breaks occur after large directional moves and as a market approaches a key level. Most traders tend to think a level will break just because a market has approached it aggressively, they then buy or sell the breakout and then many times the market will ‘fake them out’ and form a bull or bear trap.
A bull trap forms after a move higher, the amateurs who were on the sidelines watching a recent strong move unfold cannot take the temptation anymore, and they jump in just above or at a key resistance level since they feel confident the market now has the momentum to break above it. The market then breaks slightly above the level and fills all breakout orders, and then falls lower as the big boys come in and push the market lower, leaving the amateurs ‘trapped’ in a losing long position.


2. False-break of consolidation
False breaks of consolidation or trading ranges are very common. It’s easy to fall into the trap of thinking a trading range is going to breakout, only to see it reverse back into the body of the range. The best way to avoid this trap is to simply wait until there is a clear close outside of the trading range on the daily chart, and then you can begin to look for price action trading signals in the direction of the breakout.


3. Fakey’s (inside bar false-breaks)
The Fakey setup is one of my all-time favorite price action setups and learning to trade it will do a lot for helping you to understand market dynamics. Essentially, the Fakey is a price action pattern that requires there to be a false-break of an inside bar setup. So, once you have an inside bar setup, you can watch for a false-break of the inside bar and the mother bar. Now, I am not going to get into all the different versions of the fakey trading strategy today or the different ways to trade it, but you can learn everything about my proprietary forex fakey trading strategy in my professional Forex trading course.
Here’s an image of two Fakey setups, note that one has a pin bar as the false-break and other does not, these are just two of the variations of the Fakey setup:

False-breaks can create long-term trend changes

As price action traders, we can use the price action of a market to anticipate false-breaks and look for them at key levels as they will often set off significant changes in price direction or even a change in trend from these key levels.
We need to pay attention to the ‘tails’ of candles that occur at or near key levels in the market. Ask yourself how prices reacted during each daily session…where did they close? The close is the most important level of the day, and often if a market fails to close beyond a key market level, it can signal a significant false-break. Often, prices will probe a level or attempt to break out, but by the close of the daily bar price has rejected that level and ‘tailed out’, showing a false-break or false-test of the level. A failure of the market to close beyond a key market level can lead to a large retracement or a change of trend. Thus, the close of a price bar is the most important level to watch, and the daily chart close is what I consider to be the most important.
Here’s an example of a false-break in the EURUSD daily chart that led to a top in the market and started a long-term downtrend:
History Teaches Us A Lesson
It’s worth noting that on the week famous trader George Soros shorted the British pound and ‘broke’ the Bank of England ( September 16, 1992) -  the chart had shown a massive false-break signal. The chart below shows the price breaking upwards to new highs and then crashing back down. To those who follow me regularly you will note that this was actually a classic fakey setup, and is clear evidence that this price action strategy has worked for decades.

Final word on false-breaks…

As traders, if we don’t learn to anticipate and identify deceptions or ‘false-breaks’ in the market, we will lose money to traders who do. If we pay attention to the price action at key levels on the daily chart time frame, the ‘writing’ is usually on the wall in regards to false-breaks.
If I had to leave you with one crucial piece of advice for your Forex trading career, it would be to drop everything right now and start studying false-breaks and contrarian trading approaches. By doing so, you will be ahead of 95% of traders who are stuck in a cycle of trading off mainstream misconceptions and ineffective trading methods. As a contrarian, I want to be trading when most other retail traders are committed to the wrong side of the market, and this is difficult to do if you don’t understand false-breaks and fakey patterns. Trading false-breaks and my proprietary ‘fakey setup’ is a core focus in my Forex price action trading course, and I expand on these topics in great detail in it. I teach my students a plethora of different price patterns to look out for when trading false-breaks and fakey setups. This ‘contrarian’ style of trading is something I strongly believe in, and it has proven itself time and time again. If you were to learn only one single trading strategy to apply in your Forex trading, false-breaks would be on top of the list."learntotradethemarket"

The Best Chart Time Frames To Trade

As price action traders, we primarily study charts and price bars, and the price bars in each time frame show us the ‘emotion’ of price for that specific period of time. Whether it’s a 1 hour, 4 hour or daily chart, each price bar on the chart shows the ‘emotion’ and sentiment for the period of time it reflects. For example, on a 1 hour chart we will be able to see the emotion and feeling of the market over the last hour by looking at the last price bar on that chart. That said, a 1 hour chart or a 4 hour chart is going to show us a lot more data, emotion and insight into the market than a 5 minute chart will, would you agree? Would you also agree that the daily chart will show us even more emotion than a 1 hour chart or 4 hour chart?

Today, I’m not just going to tell you what time frame to trade, but I’m going to explain to you why time frames influence the signal you’re trading, stop placement on a trade and the chances of winning and losing a trade. The implications of these points are profound, yet they are often over-looked or ignored by day-traders and scalpers. I am going to show you some evidence of why you need to take this stuff seriously and turn off your low time frame charts once and for all.

The connection between time and trustworthiness of a relationship

Think of the market like a personal relationship between two people; the longer you’ve known someone, the more you know whether or not you can trust them, right? If someone shows you they are a trustworthy person over time then you will probably trust them, however, if a person lies a lot you may actually trust them less as you get to know them…but the point is that until you’ve spent time getting to know a person, you really can’t make any judgments about them, one way or the other.
To give you a more specific example; when you meet someone for the first time, can you really get a good feel for their personality and character in just 5 minutes of talking to them? Or would it take a full day of conversation to get a more accurate feel for their personality and overall mood? The longer you’ve known someone, the better “feel” you have for who they really are.
It’s really very similar in trading; the more you study higher time frame charts like the 4 hour and daily, the better ‘feel’ you develop for the market because you are getting to know more about it and you can see the “bigger picture” a lot easier than you can on smaller time frames. The higher time frames carry more weight because they display more data and show more time than a smaller time frame does. If you are just studying 5 minute or 15 minute charts all the time, you are missing out on the bigger, more significant picture of the market. You’ve probably witnessed this with a long-time friend; you can almost figure out how they will react in any situation…whereas with a complete stranger whom you’ve known for only 5 or 10 minutes, this would almost be impossible; it’s obviously because you’ve had more time to study and learn about your friend.
Let’s look at a chart example of how a 5 minute chart really does not tell you much about the “bigger picture” of a market. Below, we see the 5 minute USDJPY chart, and from this data we really cannot tell if the overall trend is up or down, as the market appears to just be ebbing and flowing very quickly and without much underlying or consistent sentiment:

 

Next, let’s compare that 5 minute chart above to a daily chart time frame of the same market; USDJPY. From the chart below, even a 6 year old can tell that overall price is moving up; there’s an uptrend underway. Due to the simple fact that you are getting to know more about the market from looking at more data, you are learning some very very important things about it (that the trend is up!) that you cannot tell from just looking at the 5 minute chart.
 
Another example; if you are traveling and you stay in a town you’ve never been in before for one week, and it rained the whole week, would you tell everyone it “rains a lot in that town”? Or would you agree that you really need to stay in that town for longer and observe its longer-term weather patterns to make such a judgment? Most of us would agree that you need more than one week’s data to judge a town’s overall weather pattern…in other words, a week inside of a year is basically just noise. You can’t make an assumption about a town’s weather pattern unless you look over a longer period of time. Similarly, it’s nearly impossible to read a market’s underlying sentiment without analyzing higher time frame charts. Longer time periods = more data = more evidence / proof.

Why lower time frames are “noise”

Simply comparing a 5 minute chart to a 1 hour chart will show you how many more failed signals there are on lower time frames. The underlying reason as to why lower time frames (I consider anything under a 1 hour chart to be a “low time frame”) have more failed signals than their higher time frame counter parts, is because there will be a lot more meaningless price movement on a 5 minute chart than on a 1 hour. For example, if you were to just look at one price bar on a 1 hour chart, you would not see all the 5 minute incremental movements that made up that 1 hour period….you would instead see the collective picture of all those 5 minute movements.
You simply are not going to get a very strong directional movement out of a 5 minute or 15 minute chart signal, instead, you will get a lot of little meaningless movements. You’ll get a much stronger directional movement out of a 1 hour signal and even more out of a 4 hour signal and yet more out of a daily chart signal. You can expect more movement from a signal the higher up in time frame you go.
In the chart below, we are looking at some recent price action on the 5 minute EURUSD chart. You can see that there were a lot more pin bar signals that probably would have been losing trades than there were winning trades. This demonstrates clearly the fact that whilst there are more signals on lower time frames…more signals does not equal more money, in fact it usually means more losing trades and lost money.
Next, let’s look at the price action that occurred on the 1 hour EURUSD chart around the same time as the 5 minute image above. The first thing you should immediately notice is that there were a lot less losing trades and a lot more winning trades. It’s because there were less false-signals on the 1 hour chart since the 1 hour chart filters out a lot of that “noise” on the 5 minute chart.

Market noise and daily ranges

Markets move in statistical average ranges each day; meaning there’s a certain average range that the market is probably going to move within on any given day. These average ranges will change over time as markets become more or less volatile, but you need to be aware how they affect your trades. The thing about these average ranges that many day traders and scalpers are seemingly unaware of, is that if you’re trading a small time frame and you place a stop loss on that small time frame, the chances that you will get stopped out simply because your stop is within the average statistical range of the higher time frame, are quite high.
If you’re trading a higher time frame, your stop loss is likely to be outside of the average daily range of the market so you are unlikely to get stopped out from the random intra-day market noise that occurs each day. Now, that’s not to say I want you guys to place wider stops, I’m telling you to be aware that stop loss placement is a big factor in your success or failure as a trader and you need to be aware how time frames affect stop loss placement. It’s pretty obvious that if your stop loss is close to the current market price, as it is on lower-time frame trades, it’s more likely to get hit than if you’re trading the higher time frames.

Small time frames demand a lot of attention.

Would you like to check the market every 5 minutes or every 4 hours? The higher the time frame, the less you have to check the markets.  If you are like most people, you probably have a full-time job or full-time school, or maybe even both; most people simply don’t have the time to sit at their computers all day trying to trade a 5 minute chart. It’s also a lot more stressful, so it really just makes no sense to try and ‘force’ money out of the market by scalping or day-trading.
I am a huge proponent of ‘letting the trades come to me’. Meaning, I check the markets two or three times a day and look for obvious signals, primarily on the daily and 4 hour charts, and if nothing meets my criteria for a trade setup, I don’t trade…I go do something else instead. I don’t sit there ruminating over the market all day wishing and hoping for a trade like many beginning and struggling traders do. I really do not care if I am in the market or not on any given day, and this is the attitude and trading mindset that you need if you want to trade completely devoid of emotional attachment to the market. My point is simply this; focusing on higher time frames is much better for busy professionals as well as for people who don’t want to have the stress of being glued to their charts all day. It also allows you to employ my crocodile trading method which is a cornerstone of my overall trading theory and strategy.

Small time frames elicit over-trading

“Over-trading”, also known as trading when no obvious signal is present, or taking “stupid” trades, or “gambling”, is something I have discussed quite a bit in other articles, so I won’t get into it too much today. However, I will say that trading low time frames like the 5 minute and 15 minute charts, etc. is one of the biggest reasons why traders trade too frequently. The longer you park your ‘bottom’ in your computer chair watching the 5 minute chart tick up and down, the greater the chance you will rationalize a reason to be in the market.
If you sit there staring at a 5 minute chart all day, the odds of you actually not entering a trade are extremely low. As humans, we struggle with self-control and self-discipline, especially when we put ourselves directly in the realm of temptation, like when trading low time frames. However, one area that we are lucky in as humans, is that we can plan ahead and avoid temptation altogether if we put our minds to it. Just as not buying junk food at the supermarket is the easiest way to avoid eating it…not immersing yourself in low time frame charts is the best way to avoid the temptation to constantly be in the market.

Learn, change, grow…

I obviously cannot speak for everyone in the trading world, but the traders who contact me on a regular basis about struggling in the market and blowing out their accounts, are typically the ones who trade the lower time frames…that has to say something right? From these experiences that I’ve had with other traders over the years, it’s pretty safe to say that ‘social evidence’ suggests that a main cause of failure in the market is trading low time frame charts. However, don’t take my word for it, last year we had over 15,000 emails hit our inbox, and I can comfortably say that the majority of the struggling traders I’ve helped were trying to trade small time frames.
Thus, YOU should do something different…don’t be like the masses of failing traders who are constantly searching for trades on the low time frame charts. Have patience, trade only the higher time frames (1hr, 4hr, daily time frames are my favorites) and see if your trading doesn’t just slowly but steadily improve."learntotradethemarket"

How To Place A Stop Loss & Profit Target Like A Professional

 

Today’s article is going to give you guys a “sneak-peak” into exactly how I decide on my stop and profit target placements. I get a lot of emails asking how I decide where to place a stop or where to place a target, and while there is no one-size-fits all answer to this question, there are certain things that you should consider before entering a trade that will make determining the best stop and target placement much easier.

Before we get started, let me first say that this topic of stop loss and profit target placement is really a pretty broad topic that I could write quite a lot on. Whist today’s lesson doesn’t cover every detail of stop loss and target placement, it will give you a good general overview of the most important things that go through my mind as I decide where to place my stop loss and my profit target on any one trade.

Placing stop losses

I am starting with stop loss placement for a couple of important reasons. One, you always should think about risk before reward and you should be at least two times more focused on risk per trade than you are on reward. Two, we need to determine our stop loss to then determine our position size on the trade, potential dollar loss and gain, and our R multiples. This will all become clearer as you read on if you were confused by that last sentence.
General stop loss placement theory:
When placing stops, we want to place our stop loss at a logical level, that means a level that will both tell us when our trade signal is no longer valid and that makes sense in the context of the surrounding market structure.
I like to always start with the premise that I will ‘let the market take me out’, meaning, I want the market to show me that my trade is invalid by moving to a level that nullifies the setup or changes the near-term market bias. I always look at manually closing a trade as option number 2, my first option is always to ‘set and forget’ the trade and let the market do the ‘dirty work’ without my interference. The only time I manually exit a trade before my predetermined stop gets hit is if the market shows me some convincing price action against my position. This would be a logic-based reason to manually exit a trade, rather than an emotion-based reason that most traders use to exit on.
So to recap, there are basically two logic-based methods for exiting a trade:
1) Let the market hit your predetermined stop loss which you placed as you entered the trade.
2) Exit manually because the price action has formed a signal against your position.
Exits that are emotion-based:
1) Margin call because you didn’t use a stop and the market moved so far against your position that your broker automatically closed your trade.
2) Manually closing a trade because you ‘think’ the market is going to hit your stop loss. You feel emotional because the market is moving against your position. But, there is no price action based reason to manually exit.
The purpose of a stop loss is to help you stay in a trade until the trade setup and original near-term directional bias are no longer valid. The goal of a professional trader when placing their stop loss, is to place their stop at a level that both gives the trade room to move in their favor or room to ‘breathe’, but not unnecessarily so. Basically, when you are determining the best place to put your stop loss you want to think about the closest logical level that the market would have to hit to prove your trade signal wrong. So, we don’t want to put our stop loss unnecessarily far away, but we don’t want it to close to our entry point either. We want to give the market room to breathe but also keep our stop close enough so that we get taken out of the trade as soon as possible if the market doesn’t agree with our analysis. So, you can see there is a ‘fine line’ that we need to walk when determining stop placement, and indeed I consider stop placement one of the most important aspects of placing a trade and I give each stop loss placement a lot of time and thought before I pull the trigger.
Many traders cut themselves short by placing their stop loss too close to their entry point solely because they want to trade a bigger position size. This is what I call “trading account suicide” my friends. When you place your stop too close because you want to trade a bigger position size, you are basically nullifying your trading edge, because you need to place your stop loss based on your trading signal and the surrounding market conditions, not on how much money you want to make.
If you remember only one thing from today’s lesion, let it be this: always determine your stop loss placement before determining your position size, your stop loss placement should be determined by logic, not by greed. What that means, is that you shouldn’t purposely put a small stop loss on a trade just because you want to trade a big position size. May traders do this and it is basically like setting yourself up for a loss before the trade even starts.
Examples of placing a stop loss based on logic:
Now, let’s go through some examples of the most logical stop loss placements for some of my price action trading strategies. These stop placements are what I consider to be the ‘safest’ for the setups being discussed, that means they gave the trade the best chance of working out and that the market must move to a logical level against your position before stopping you out. Let’s take a look:
Pin bar trading strategy stop placement:
The most logical and safest place to put your stop loss on a pin bar setup is just beyond the high or low of the pin bar tail. So, in a downtrend like we see below, the stop loss would be just above the tail of the pin bar, when I say “just above” that can mean about 1 to 10 pips above the high of the pin bar tail. There are other pin bar stop loss placements discussed in my price action trading course but they are more advanced, the stop loss placement below is considered the ‘classic’ stop loss placement for a pin bar setup.
Inside bar trading strategy stop placement:
The most logical and safest place to put your stop loss on an inside bar trade setup is just beyond the mother bar high or low. If you don’t understand inside bars yet, please read this article on trading the inside bar strategy.
Counter-trend price action trade setup stop placement:
For a counter-trend trade setup, we want to place our stop just beyond the high or low made by the setup that signals a potential trend change. Look at the image below, we can see a downtrend was in place when we got a large bullish pin bar reversal signal. Naturally, we would want to place our stop loss just below the tail of that pin bar to make the market show us that we were wrong about a bottom being in place. This is the safest and most logical stop placement for this type of ‘bottom picking’ price action trade setup. For an uptrend reversal the stop would be placed just beyond the high of the counter-trend signal.
Trading range stop placement:
We often see high-probability price action setups forming at the boundary of a trading range. In situations like these, we always want to place our stop loss just above the trading range boundary or the high or low of the setup being traded…whichever is further out. For example, if we had a pin bar setup at the top of a trading range that was just slightly under the trading range resistance we would want to place our stop a little higher, just outside the resistance of the trading range, rather than just above the pin bar high. In the chart below, we didn’t have this issue; we had a nice large bearish pin bar protruding from the trading range resistance, so the best placement for the stop loss on that setup is obviously just above the pin bar high.
Stop placement in a trending market:
When a trending market pulls back or retraces to a level within the trend, we usually have two options. One is that we can place the stop loss just above the high or low of the pattern, as we have seen, or we can use the level and place our stop just beyond the level. We can see an example of this in the chart below with the fakey trading strategy protruding up past the resistance level in the downtrend. The most logical places for the stop would be just above the false-break high or just above the resistance level.
Trending market breakout play stop placement:
Often, in a trending market, we will see the market pause and consolidate in a sideways manner after the trend makes a strong move. These consolidation periods typically give rise to large breakouts in the direction of the trend, and these breakout trades can be very lucrative sometimes. There are basically two options for stop placement on a breakout trade with the trend. As we can see in the chart below, you can place your stop loss near the 50% level of the consolidation range or on the other side of the price action setup; in the example below it was a pin bar. The logic behind placing your stop loss near the 50% level of the consolidation range is that if the market comes all the way back down to that point the breakout is probably not very strong and likely to fail. This stop placement gives you a tighter stop distance which increases the potential risk reward on the trade.
Note on placing stops:
So, let’s say we have a price action trading strategy that’s very close to key level in the market. Ordinarily, the ideal stop placement for the price action setup is just above the high of the setup’s tail or the low of the setup’s tail, as we discussed above. However, since the price action setup tail high or low is very close to a key level in the market, logic would dictate that we make our stop loss a little bit larger and place it just beyond that key level, rather than at the high or low of the setup’s tail. This way, we make the market violate that key level before stopping us out, thus showing us that market sentiment has changed and that we should perhaps be looking for trades in the other direction. This is how you place your stops according to the market structure and logic, rather than from emotions like greed or fear.

Placing profit targets

Placing profit targets and exiting trades is perhaps the most technically and emotionally difficult aspect of trading. The trick is to exit a trade when you’re up a respectable profit, rather than waiting for the market to come crashing back against you and exiting out of fear. The difficulty of this is that it’s human nature to not want to exit a trade when it’s up a nice profit and moving in your favor, because it ‘feels’ like the trade will continue on in your favor and so you don’t’ want to exit at that point. The irony is that not exiting when the trade is significantly in your favor typically means you will make an emotional exit as the trade comes crashing back against your position. So, what you need to learn is that you have to take respectable profits of 1:2 risk:reward or greater when they are available, unless you have pre-determined before entering that you will try to let the trade run further.
General profit target placement theory:
After determining the most logical placement for our stop loss, our attention should then shift to finding a logical profit target placement and also to risk reward. We need to be sure a decent risk reward ratio is possible on a trade; otherwise it’s really not worth taking. Now, what I mean by that is this; you have to determine the most logical place for your stop loss, as we discussed above, and then determine the most logical place for your profit target. If after doing that, there is a decent risk reward ratio possible on the trade, it’s a trade that’s probably worth taking. However, you have to be honest with yourself here, don’t get into a game of ignoring key market levels or obvious obstacles that are in your way to achieving a decent risk reward just because you want to enter a trade.
So, what are some of the things I consider when deciding where to place my profit target? It’s really pretty simple, I am basically analyzing the overall market conditions and structure, things like support and resistance levels, major turning points in the market, bar highs and lows, etc. I try to determine if there is some key level that would make a logical profit target, or if there is some key level obstructing my trade’s path to making a decent profit.
First off, let’s look at an example of how to calculate profit targets based on multiple of risk:
In the image below, we can see a pin bar setup which formed after the market began moving higher after a reversal of its previous downtrend. The stop loss was placed just below the low of the pin bar. So, at that point we have what we call 1R, or simply the dollar amount we have at risk from our entry level to the stop loss level. We can then take this 1R amount (our risk) and extended it out to find multiples of it that we can use as profit targets. If you don’t understand risk reward you should read this article on the power of risk reward, it will explain to you why it’s critical to properly utilize risk reward and to aim for risk reward ratios of 1:2 or greater.

Now, let’s take this a step further and put everything we’ve learned in today’s lesson together. We are going to analyze a trade setup and discuss the stop placement on the trade, the target placement and the risk reward potential…
In the chart below, we can see an obvious pin bar reversal setup formed near a key market resistance level, indicating that a move lower was a strong possibility. The first thing I did was determine where best to place my stop loss. In this case, I elected to place it just above the pin bar high since I determined that I would no longer want to be short if the market moves up to that level.
Next, I noticed that there’s a key support a little ways down below my entry, but since the key support didn’t come in until almost 1.5 times my risk and beyond that there was no key support until much further below, I decided the trade was worth taking. Given there was a chance of a reversal after the market hit that first key support level, I pre-determined to trail my stop down to that R1 level and lock in that profit, if the market reached that level. That way I can at least make 1R whilst avoiding the potential reversal off that key support.
As it turned out, the market sailed right through the first key support and then continued moving lower to make 3R. Now, not every trade is going to work out this well, but I am trying to show you how to properly place your stop loss, calculate what your 1R risk amount is and then find the potential reward multiples of that risk whilst considering the overall surrounding market structure.  The key chart levels should be used as guides for our profit targets, and if you have a key chart level coming in before the trade can reach a 1R profit, then you might want to consider not taking that trade.
When we are trying to figure out if a potential price action trade setup is worth taking, we need to work backwards to some degree. We do this by first calculating the risk and then the reward and then we take a step back and objectively view the trading setup in the context of the market structure and decide whether or not the market has a real shot at hitting our desired target(s). It’s important to remember we are doing all of this analysis and preparation prior to entering our trade, when we are objective and unemotional.
Note: There are different entry possibilities that I didn’t get into here which can affect the potential risk reward of a particular trade setup. Today’s lesson was just meant as a general guide of how to logically and effectively place stop losses and targets on select price action trade setups, I discuss different entry scenarios and more trade setups in my trading course and members’ community.
Final note:
A trader is really a business person, and each trade is a business deal. Think about Donald Trump doing a big business deal to buy a new hotel development…he is carefully weighing the risk and the reward from the deal and deciding if it’s worth taking or not. As a trader, that’s what we do too; we first consider the risk on the trade and then we consider the potential reward, how we can obtain the reward, and if it’s realistically possible to obtain it given the surrounding market structure, and then we make our final decision about the trade. Whether you have a $100 account or a $100,000 account, the process of weighing the potential risk vs. the potential reward on a trade is exactly the same, and that also goes for stop and target placement; it’s the same no matter how big or small your account is.
Our number 1 concern as traders is capital preservation. That means getting the most ‘distance’ out of our trading capital. Professional traders do not waste their trading capital, they use it only when the risk reward profile of a trade setup makes sense and is logical. We always have to justify the risk we are taking on any one trade, that’s how you should think about every trade you take; justify the money you are laying on the line, and if you can’t make a good case for risking that money given the setup and market structure, then don’t take the trade. Each trade we take needs careful planning and consideration and we never want to rush to enter a trade because it’s far better to miss an opportunity than it is to jump to a conclusion that we came to emotionally rather than logically."learntotradethemarket"