Since we receive a lot of similar questions, from time to time we add the answer at this page, it will reduce our time answering similar questions and provide more trading support.

We divide the Q&A below into several sections:

A. COMMON QUESTIONS

1. My Forex Bling crashed when I attach the EA on the chart.
2. I don’t receive the login ID & password. How to get the new one ?
3. I saw the EA trades in your account. Why don’t I get any trades in my account ?
4. Why can’t I backtest Forex Bling ?
5. What is the current setting that you use in your forward testing ?
6. Why do the Thunderstorm EA and  Grid Specialist EA not in my package ?
7. Do you have suggestions which EA & currency pairs I should use ?
8. How do I set the correct Broker_OffsetHour ?
9. How many accounts can I  use using Forex Bling ? Can I use ForexBling in several demo account ?
10. I change broker. How to update my live account ? Do I need to subscribe again?
11. What is the latest Forex Bling version ? How do I update it ?

B. EVOLUTION EA

1. What is the best currency pairs for Evolution EA?
2. How to turn of other currency pairs in Evolution EA if I only want to run EURUSD ?

C. FREEDOM EA

1. Why do I receive message “Wrong TimeFrame please set on M15″ although I already change to M15 timeframe ?
2. Why do I receive message “No Optimized data for this pair, please refer to manual guide for correct setting” ?

D. FRACTALS-WIZARD EA

1. Why my Fractals-Wizard EA show losses but your account still show making profit ?
2. How do I run Fractals-Wizard EA at demo account ?

E. THUNDERBOLTS EA

1. Why does Thunderbolt EA open 5 positions at one time ?
2. Why does my Thunderbolt EA in my demo account open positions all the time (24 hours)  ?
3. What is the correct trading time for Thunderbolt EA ?

COMMON QUESTIONS:

1. My Forex Bling crashed when I attach the EA on the chart.

Almost of the crash problem has been solved with our new DLL. Please download the new DLL in our member area.
The zip file name is Forex_Bling_14Sep09.zip.

Downlod, unzip the file then replace all old files with the files (the EA, indicators and DLL).

First, you need to install your MT4 folder OUTSIDE Windows Program Files or Document and Settings folder.

You can install at new directory
i.e:  C:\MT4\Your MT4 folder\

Then you need to take attention to two new parameters:

Use_MT4Folder_Below set to TRUE then   Fill Your_MT4_Folder with your current MT4_Folder.
It should be something like C:\MT4\Metatrader 4 Alpari UK

You need to input the folder location without “   ” sign.

This is correct:  C:\MT4\Metatrader 4 Alpari UK
This is NOT correct: ” C:\MT4\Metatrader 4 Alpari UK” => do not include ” ” in the folder location
This is NOT correct:  C:\MT4\Metatrader 4 Alpari UK\terminal.exe   => do not include terminal.exe

If you specify the folder location correctly, you Metatrader platform should never crash again.

Also please download the FOREXBLING INSTALLATION CHECKLIST and follow the 6 check list. It will solve most of the crash problem.

2. I don’t receive the login ID & password. How to get a new one ?

The first thing you need to do is Check your SPAM Folder. We always send the login ID & password, but sometimes it arrived in your Spam box.
To issue a new login ID & password:
- Go to our member area locate at: http://www.forexhope.com and select Member Area Menu.
- At the login page, select Forget Password.
- Fill your email address (the one that you used to purchase Forex Bling).
- Check your email address and your spam box.
Note: Your login id is your email address.

3. I saw the EA trades in your account. Why don’t I get any trades in my account ?

Mostly this problem that we detect on many clients, because you have an ECN Broker (Market Order broker) like FXCM.
For ECN Broker, you need to enable parameter ECN_MarketOrder = TRUE before the EA can trade on your account.
If you don’t know if your broker is an ECN or not, please consult your broker first.
But if you do not get any trades for several days, try set the ECN_MarketOrder = TRUE first.

4. Why can’t I backtest Forex Bling ?

EA cannot be used to backtesting due to synchronizing process with our server.
We make adjustment through the parameters according to the market conditions, so the current parameters that being downloaded from our servers may not suitable with past market.

If you need to know Forex Bling result in the past, follow the link below:

http://forexbreakthrough.com/performance-review/forex-bling-ea-review/

5. What is the setting that you use in your forward testing ?

We will publish the settings for each EA inside our Forex Bling in our forward test, through the link below:

http://forexbreakthrough.com/performance-review/forex-bling-ea-review/

6. Why do the Thunderstorm EA and  Grid Specialist EA not in my package ?

If you read our sales page below point no3, we already wrote:

(*) Due to our schedule, Thunderstorm EA and Grid Specialist EA will be delivered in October 2009. Members who purchase before October 2009 will get additional
30-day subscription.

We need to focus to Forex Bling installation support to the current EAs, before we add more expert advisors into your package.

7. Do you have suggestions which EA & currency pairs I should use ?

Although you can run Thunderbolt EA in EURUSD and USDGBP;  Evolution EA in EURUSD , USDJPY and USDGBP; Freedom EA in 10 currency pairs.
Running too many currency pairs will not make additional profit and it will be difficult to monitor.

You can one of the following currency pairs for each EA:

SCLAPING (with Risk= 3 to 5) :
Thunderbolt EA: 1st choice: EURUSD – 2nd choice: GBPUSD

TREND FOLLOWING (with Risk= 0.2 to 0.5) :
Freedom  EA: 1st choice: AUDUSD – 2nd choice: EURJPY

BREAKOUT (with Risk= 0.2 to 0.5) :
Evolution EA: 1st choice: EURUSD – 2nd choice: GBPUSD
FractalsWizard EA: 1st choice: EURUSD – 2nd choice: EURGBP

If you run ForexBling at NFA broker (that prevent long and short positions from one currency pair being opened  together in 1 account), our recommendation currency pairs for each EA:

You can also combine Forex Bling with your own favorite EA.
For example if you like our Thunderbolt EA or Fractals Wizard EA, you can use these EA only with other EA’s that you already have.

8. How do I set the correct Broker_OffsetHour ?

To set parameter Broker_OffsetHour, you need to know how many hours the difference between GMT time and your broker time.

If you want to know what time the GMT right now:

http://wwp.greenwichmeantime.com/info/current-time.htm

If you want to  know what time your broker server time:

Open the Market Watch (Ctrl+M). At the corner above of Market Watch window you will see your Broker Server Time.

Example how to set Broker_OffsetHour for Thunderbolt EA:

The correct trading time for Thunderbolt EA is: two hours/day as soon as New York market closed.
New York’s market close at 20:00 (GMT)

For more information when New York market close, go to this link:
http://fxtradeinfocenter.oanda.com/market_news/fxmarkethours/

This is the example how to set Broker_OffsetHour at Alpari Broker:
The New York market close at Alpari server time at: 22:00 (2 hours ahead GMT).
So set: Broker_OffsetHour = 2

9. How many accounts can I  use using Forex Bling ? Can I use ForexBling in several demo account ?

You canuse ForexBling in 1 live account and several demo account. And you can change your live account number at any time.

To use ForexBling in demo account, first fill your Live account or any number at:

Your Active License [for SUBSCRIBER only]
FOREX BLING _________

Then when you run a demo account, fill the REGISTERED_ACCNUM parameter inside the EA with the number you filled at Your Active License[for SUBSCRIBER only] section.

10. I change broker. How to update my live account ? Do I need to subscribe again?

You do not need to subscribe again as long as you only use Forex Bling to one live account.

To change your live account number:
Login into Forex Hope Member Area locate at: http://www.forexhope.com
Select Member Area menu, and login using your email address and password

Then change your Live account at:

Your Active License [for SUBSCRIBER only]
FOREX BLING _________

11. What is the latest Forex Bling version ? How do I update it ?

The latest Forex Bling version is 909C (available in our member area).
The update contains fix on the error message box and additional Percentage_EquityUsed parameter.
You can save your setting first (.set and .tmp); before installing a new version.
Then download, unzip and replace all files (EA, directory and indicators) and restart your MT4.
If you have an open position, the EA will automatically continue to manage it.

EVOLUTION EA:

1. What is the best currency pairs for Evolution EA?

Based on our forward testing, the best currency pairs is EURUSD. Then follow by GBPUSD.

2. How to turn of other currency pairs in Evolution EA if I only want to run EURUSD ?

Open the EA properties then set FALSE to Trade_USDJPY and Trade_GBPUSD parameters.

FRACTALS WIZARD EA:

1. Why my Fractals-Wizard EA show losses but your account still show making profit ?

Based on the report that has been sent to use, most common problem is your broker allow the minimum lot-size is 0.1, not 0.01.
Please check your trading history and check if your trades show all trades using the same account size (i.e 1.0).

Fractals-Wizard should open two different lot-sizes using High Volatility trades and Low Volatility trades.

If your trades only show 1 lot-size for both High Volatility trades and Low Volatility trades will cause losses at your account.

You can open the Comment section at your trading history to know which ones are High Volatility trades (B-trade) and which one are Low Volatility trades (S-trade).

2. How do I run Fractals-Wizard EA at demo account ?

DO NOT fill your demo account at:
Your Active License [Only for Demo Account - by Invitation]

Instead fill your Live account or any number at:
Your Active License [for SUBSCRIBER only]
Then when you run a demo account, fill the REGISTERED_ACCNUM parameter inside the EA with the number you filled at Your Active License[for SUBSCRIBER only] section.

FREEDOM EA:

1. Why do I receive message “Wrong TimeFrame please set on M15″ although I already change to M15 timeframe ?

This problem has been solved in the new version (Sep 10, 2009).

Please download the new version from our member area.
The new zip file name is Forex_Bling_14Sep09.zip.

Downlod, unzip the file then replace all old files with the files (the EA, indicators and DLL).
Then restart your MT4 platform.

2. Why do I receive message “No Optimized data for this pair, please refer to manual guide for correct setting” ?

Freedom EA current version works with the following currency pairs:

EURUSD, GBPJPY, AUDJPY, EURJPY, GBPUSD, USDCAD, AUDUSD, USDCHF, USDJPY, NZDUSD

You DO NOT need run all currency pairs above. Running too many currency pairs is not effective.

We run our FREEDOM using 5 currency pairs below:
EURUSD, USDGBP, USDCHF, USDJPY, AUDUSD and EURJPY

Based on 6 months forward test, we found that the best 2 currency pairs are: AUDUSD and EURJPY

THUNDERBOLT EA:

1. Why does Thunderbolt EA open 5 positions at one time ?

Thunderbolt EA open 5 positions at one time but the closing method is different.

Consider it as a diversification. Other than open 1 position = 1.0 lot-size, the EA open 5 positions 0.2 lot-sizes.

If you don’t like the EA open too many positions, you can decrease it by setting the Agressive_Level (default=5) parameter to  lower value.
(i.e. Agressive_Level=3 if you want the EA open maximum 3 postions at one time).

2. Why does my Thunderbolt EA in my demo account open positions all the time (24 hours)  ?

The problem only happen in demo account at some broker, although it doesn’t happen in Live account.
This problem has been solved in the new version: Thunderbolt909b.ex4

Please download the new version from our member area.
The new zip file name is Forex_Bling_14Sep09.zip.

Downlod, unzip the file then replace all old files with the files (the EA, indicators and DLL). Then restart your MT4 platform.

3. What is the correct trading time for Thunderbolt EA ?

The correct trading time for Thunderbolt EA is: two hours/day as soon as New York market closed.

Right now New York’s market close at 20:00 (GMT)

For more information when New York market close, go to this link:
http://fxtradeinfocenter.oanda.com/market_news/fxmarkethours/

You need to set the Broker_OffestHour correctly.

This is the example how to set Broker_OffsetHour at Alpari Broker:

The New York market close at Alpari server time at: 22:00 (2 hours ahead GMT).
So set: Broker_OffsetHour = 2

Note:
If you want to know what time the GMT right now:
http://wwp.greenwichmeantime.com/info/current-time.htm

BASIC LOGIC

The idea behind this method has been around for a long time and we are not the creators of the logic. What we have done though is add some basic tweaks and personal ideas the general logic.

The system was developed with the understanding that the market goes where it wants to AND you and I as traders don’t know and can’t predict with long term accuracy which direction it will go. With this in mind, our goal is to go with the market. Pretty simple.

How do you take advantage of a market moving regardless of the direction? You add long positions as the market is moving higher, and as the market is moving lower, you add short positions. With the Forex, you can have both a long position and a short position in a currency at the same time from different levels. I’ll get to what this means later in the article. As a market is moving in one direction or the other, once the net profit from all longs and shorts equal some predetermined minimum, you exit all positions.

This logic is called pyramiding. It has been around for a long time, but is dramatically misapplied in most instances. Pyramiding is a popular technique of adding to positions as the market is moving in your favor based on technical analysis. Most of the time, protective stops are used with positions. For example:

Market is at 100. As it moves higher, you add a position every 10 points:

100 = 1 position
110 = 1 additional position
120 = 1 additional position
130 = 1 additional position

At 130, you have a total of 4 positions at an average cost of 115. If you use a protective stop at 100, you will lose 60 points. At 130, you have a profit of 60 points. If your profit objective (total) is 100 points, the market needs to hit 140 and instead of adding another position, you simply exit all 4 long positions. Here, the market moved higher by 40 points and you made 100. If you started with 1 position and a protective stop at 90, you were risking 10 points. But if that protective stop raises to 100 once the market hits 130, your risk is at 60 points, not 10.

So, there is power in the profit potential with pyramiding, but it also carries drawbacks as well. It isn’t long before the risk of holding become huge.

There is another scenario you have to think about too. What if the market hits 131 and then drops to 100, and then moves back up to 140? You were stopped out at 100 for a 60 point loss and the market moved back up to the initial profit target. How do you prevent that from happening? You don’t use protective stops. But, in this example, not using protective stops means that the risk balloons by 40 points for every 10 points the market moves below 100. At 60, the loss is at 220 points!

In other words, there are a lot of problems that are associated with pyramiding that must be addressed before a trader can properly potentially reap the benefits associated with this method.

The one absolute KEY element to any potential success with pyramiding is that you do NOT OVERTRADE! This is why this Pyramiding strategy  can only be traded on the Forex.

In order to do it properly, you must be able to continue to build a position and not use protective stops. With the Forex markets, you can trade very, very small. You can add many positions without adding huge risks. At some point, no matter how small the trade size, you can get to a position size that is too risky for your account size, so the key is to make that as unlikely as possible.

RULES

When a cycle is started, wherever the current price is will become the 0 line. It doesn’t matter where the 0 line is. The idea behind the concept is that the market will eventually move higher or lower from it’s current price.

A cycle is a series of trades that are placed and accumulated until the total net profit target from all trades combined is hit, exiting all trades at that level.

1. Inverted rule – A large percentage of the time – the market will trade 4-5 ticks above and 4-5 ticks below the 0 line. These are the only prices that will be inverted from the rules.

For each tick 1 – 4 above the -0- line, you will sell one position.

For each tick 1 – 4 below the -0- line, you will buy one position.

2. Pyramiding Rule – As the market begins to move beyond 4 ticks above or below the -0- line, you will begin to add positions in favor of the direction of the market. Accordingly, as the market moves down, you will sell one position for every point below the -0- line – 4 ticks (remember, the first 4 ticks below you are buying one position, not selling). Likewise, for each tick above the -0- line + 4 ticks, you will be buying one position.

3. Once all the trades that are open total a profit target that you set, all the trades will be closed out within seconds, thus locking in your profits.

Let’s take a look at how this works:

Buy 1 etc until profit is reached
Buy 1
Buy 1
Buy 1
Buy 1
Buy 1
Buy 1
Sell 1
Sell 1
Sell 1
Sell 1
Sell 1
0 LINE——————————
Buy 1
Buy 1
Buy 1
Buy 1
Buy 1
Sell 1
Sell 1
Sell 1
Sell 1
Sell 1
Sell 1
Sell etc until profit is reached.

In the example above – you can see the 0 line. This is the price at the time you start the system. Let’s assume for example sake that we are trading the EURO (EURUSD) and that the moment we start the system, the bid price on our chart is 1.2100

Since a large percentage of the time the price will oscillate 4 or 5 ticks above and below the 0 line before a profit target is hit, we can capitalize on this range. After those first 4 or 5 ticks, we want to join in the direction the market is moving in hopes that we catch a trend to get us to our profit target.

It doesn’t take a large move in one direction or the other to hit the profit target. Obviously the smaller the profit target, the smaller the required move.

For the EUR/USD, the suggested profit target can be 100 points (total from all positions). Assume for a minute that we are not using the inverted rule, and are instead simply buying for every tick above the -0- line and/or selling for every tick below the -0- line. Here is what it would look like if the market immediately moved lower without ever moving higher from the -0- line:

Without using the inverted rule of buying the first 4 ticks the market moves down and then selling, the market only has to move 15 ticks to pull the 100 points in total profit. If the profit target is set at 50 points, then the market only needs to move 11 points from the -0- line (again, without having moved above the -0- line).

If the market moves above the -0- line in the above scenario by 5 ticks first (again, not using the inverted rule), and then moves down by 15 ticks, the net profit will not be the same as above. That is because at -15 ticks (below the -0- line), the 5 long positions are losing (remember, you can be long and short positions at the same time in the Forex). At -15, this is what the 5 long positions are losing:

Buy 1 = (-16 points)
Buy 2 = (-17 points)
Buy 3 = (-18 points)
Buy 4 = (-19 points)
Buy 5 = (-20 points)
Total = (-90 points total)

Since the total short positions = 105 points profit, the net is only at 15 points profit. Therefore, the target price increases to 22 points to the downside. It looks like this:

The process is that for every opposite position, the target increases by a factor of greater than 1 to 1. There were 5 long positions that moved the profit target 7 points lower to reach the total 100 point net profit.

Below is the table that works, and it works in both directions:

Column 1 = positions in one side or the other.
Column 2 = positions on the other side.
Column 3 = total points with the combination of column 1 & 2

Notice that if you have 15 long positions and no short positions, the net profit is 105 points.

If you have 5 short positions (column 2), you need 22 long positions to exceed the 100 point net profit level (market needs to go 22 points above -0- line).

If you have 10 shorts and the market begins moving higher, you need the market to move 31 points above the 0 line to exceed the total 100 point profit. You get the idea.

Once the net profit from all positions exceeds 100 points, all positions are exited within seconds. This ends the cycle. Once the cycle ends, a new -0- line is immediately established and the cycle begins all over again. This goes on continuously until you turn the system off, or unless the range increases so large that you become at risk of being over-margined and forced out of positions. This will be discussed later on in this manual.

Remember, all of the above is without the inverted rule.

Recap of Rules –

As a market is moving higher above the -0- line, add long positions until the total net profit from all positions hits the target level. As the market moves below the -0- line, add short positions until the total net profit from all positions hits the target level.

Probabilities:

The key to this strategy is to not exit a cycle until the profit target is hit. Based on this theory, it can only work if you have the funds to hold onto the times where the market is in choppy action. Based on the size of the profit, the probability of this happening without a serious drawdown occurring is extremely good. However, there is one problem with this strategy that needs to be understood. It is possible that the drawdown becomes so big that the probability of hitting the profit level diminishes and the probability of the drawdown growing increases. It is this possibility, regardless of how small, that you must prepare for. You must prepare for it because it only has to happen once for the drawdown potential to hit 50% or more. At that point, the probabilities are not nearly as favorable of coming out of the drawdown. They are still favorable, but it is only by 58%.

To illustrate this, I have included an example of number of positions and size of drawdown. Below, the first column represents long positions and the second column represents short positions. The third column represents drawdown in points.

To make sure you understand, this is not a likely event. It is possible, but not likely. Further, this is just an example where the number of longs and shorts are the same. This is also very, very unlikely. By the time you hit 175 on either side, it is most likely will have hit the 100 point profit long before. But, should it happen, notice that you would be in a drawdown of 30,800 points.

(Note – this is why you must trade small with this strategy. With 1 micro mini, the drawdown exceeds $3,000 in this situation). Assume that you are in this position. You have 175 longs and 175 shorts. The drawdown is at 30,800 points. Just to make back this drawdown and hit the 100 point profit target, the market has to move beyond the -0- line by 425 points. This means that if you have 175 longs and 175 shorts and you are 175 points above the -0- line, you will continue adding longs as the market moves up. The market has to move up an additional 250 points to offset the shorts and hit the 100 point net profit.

There is a lot that can happen here. First, the market can move up another 100 points, adding 100 positions to the long side so that you are now 275 longs and 175 shorts. As soon as the market comes off the highs, the drawdown will resume and potentially increase if the market moves too much further down. If the market then makes a long- term move to the downside so that it reaches 175 points below the -0- line, the drawdown is at 70,000 points. Further, just to come out of that drawdown, the market would have to move an additional 500 points to the downside.

As you can see, the wider the range becomes, the less probable coming out of the drawdown becomes. This is the risk of this method.

I stated this part first because I did not want you to minimize it with the next section. You must prepare for the above scenario regardless of how small the probabilities are, an they are small.

To even get to 175 longs and 175 shorts, the market has to not just do one thing, but a combination of things that are just bizarre. Let me show you the probability of the range expanding beyond 22 points away from the -0- line with 5 longs and 5 shorts open (in other words, the cycle has just started).

At 5 longs and 5 shorts, the market has to move 22 points above or below the -0- line to hit the 100 point net profit. For the market to not hit the target level, it has to keep expanding that target level on a continual basis before making a nominal run to one side or the other.

The illustration above shows a sequence for an expanding range and the probability of the range to expand again. From the -0- line, the market moves down 5 points initiating 5 short positions (not using the inverted rule for this example). The market needs to continue moving to -15 in order to take the profit. Therefore, it has to move down an additional 10 points. If the market goes above the zero line at all, that level expands. If the market drop to -5 and then increases to +5, the market needs to continue moving up an additional 17 points to take the profit, or move down 11 points to expand the range. Accordingly, the probability is greater that the market will move back down and increase the range than hitting the profit point. The pure probability of hitting the target (not including any kind of momentum affect), is 39% compared to 61% probability that the market will drop back down to at least -6, thereby expanding the range.

This is the main reason for the inverted rule. If we are buying the first 4 ticks down, then the target level after the market moves back higher drops to +10. I’ll get to this illustration in a minute

Compare this with the market moving first from the -0- line down to -5. It needs to hit only -15 to take the profit, which is only 10 points away. In order to expand the range to +5 it needs to move up 10 points. Therefore, the probability of hitting the profit target at -15 is exactly the same as hitting +5.

If the market drops back down to -10, then it needs to continue dropping another 12 points down to hit the profit level which is now at -22 (we are only long 5). On the flip side, it only needs to increase 16 points to expand the range. It has a 57% probability of hitting the target level before it goes back up to expand the range (43% probability).

If the market then moves to +10, it needs to continue moving to +31 in order to take the profit target. This is an additional 21 points to the upside. Likewise, it can expand the range once again by moving down to -21 below the -0- line. Accordingly, there is an equal probability of seeing the target hit or seeing the range expand.

If it runs to the upside and expands the range to +15, the market needs to continue moving higher by an additional 21 points (+31 above -0- line) to hit the target (60% probability). The market would have to move down 31 points to expand the range again (40% probability).

Again, if the market drops to the downside to -20 to expand the range, it needs to continue dropping an additional 22 points (target now at -42 below -0- line) to hit the profit (62% probability). It would have to move up 36 points in order to expand the range again (38% probability).

Finally, If the market moves higher to +20 above the -0- line to expand the range yet again, the market would have to move an additional 33 points to the upside to hit the target (54% probability) verses 41 points to the downside to expand the range yet again (46% probability).

The drawdown at 20 longs and 20 shorts is approximately 420 points at the top or bottom of the range. This is approximately $42 on a micro mini.

If all were 50/50, there would be a 1 in 256 probability of the range expanding similar to above 8 different times without hitting the profit target. However, the odds are better than that because things are not 50/50. From -15 on, the probability is in favor of hitting the target.

Nonetheless, the probability of not hitting the profit target after 20 range expansions (based on a similar scenario as above) is better than 1 in 1,048,576.

At 20 range expansions based on a similar situation, there would be a minimum of 55 longs verses 55 shorts. The drawdown at 55 longs and 55 shorts is approximately 3,080 points. This means that trading 1 micro mini, the drawdown would be approximately $310.

There is one last scenario that I want to provide before moving on. Obviously, my goal is that you understand as fully as possible the probabilities in various circumstances. Below is the worst circumstance that can happen. This means that the market comes within 1 tick of hitting the profit target and then turning around and coming within 1 tick of hitting the other side of the profit target. If it continues to do this, losses mount up faster with fewer range expansions.

The first move is down. The market needs to hit -15 to take the profit. It only goes to -14 and then turns around. In order to take the profit from an up move, it now has to move all the way up to +40. If it hits 39 and turns around, the market then needs to drop to -100 below the -0- line to take the profit. If it hits 99 and turns around, it then needs to hit +241 to take the profit on the upside. If it hits 240 and turns around, it is going to have to travel all the way down to 581 to take the profit on the downside.

At 240 long positions and 99 shorts, as the market is moving down and hits the -99 level again, the drawdown is at 47,829 points. This is approximately $5,000 with a single micro mini.

The question is, what is the probability of the above scenario happening? Very, very slim. There is only a 1.8% chance that the market at -14 will not hit -15 before it hits +39.

There is only a .7% (as in 7/10ths of a percent) chance that the market at +39 will not hit +40 before it hits -99.

There is only a .4% (as in 4/10ths of a percent) chance that the market at -99 will not hit – 100 before hitting +240. There is only a .1% (as in 1/10th of a percent) chance that the market at +240 will not hit 241 before it travels down to 581.

If these were 50/50, there would only be a 6.25% chance that all four of the above moves would happen in a row. Obviously, the probability is closer to 99.99% that all four of the above moves will not happen because of the high, high probability of each single event not happening.

My point is that if it the range expansion happens slowly, creating many, many range expansions by a small amount, or if it happens based on the largest possible expansions without hitting the profit target, the probability of increasing to the point of knocking out more than $5,000 – $7,000 in the account based on a micro-mini is very, very, very small.

Again, not impossible, but show me another strategy that has a probability better than this of NOT hitting a $5,000 drawdown. I do not know of any system that has a better probability of not hitting the $5,000 drawdown (again, based on a single micro-mini).

It is based on the above probabilities that the maximum largest expected drawdown is about $3,000 with on micro mini. As explained above, it is not impossible to exceed this drawdown (and exceed it fast if it hits), it is simply very, very unlikely.

(Note – The probability of an event with the probability 60% NOT occurring 10 times in a row is 1/100th of 1%. The probability of an event with a probability of 99% of NOT occurring 4 times in a row is 1/100,000th of 1%)

Staggering Cycles

What you are about to read is probably one of the most important sections of this article.The above probabilities are based on indisputable mathematics. However, it is practically impossible to take into account every single possible scenario and assign a probability with it (and come to a finale conclusion as to the final overall probability of success). We know it is high.

There is a bit of a paradox with this system though. That paradox is that one the one hand, as the volatility of the underlying market increases, so does the potential number of closed out cycles and so does the potential profit. On the other hand, as the volatility increases, so does the probability of getting stuck in a larger drawdown with an expanding range cycle.

We have seen an increase in drawdowns around 10% or more during higher volatility time periods. Because this system will perform different over the short-term because of when you start a cycle, you may go into a drawdown when others are racking up closed out cycles. However, over the long-term, it is only a matter of time before you get stuck in one of these expanding range cycles that could last for weeks in bad situations.

Accordingly, if you have the ability run more than a single cycle at a time, but with different zero lines (starting times) so that while one is in a drawdown, the second one is closing out numerous cycles, you will be creating a probability of success that is many times greater than if you were to simply keep only one cycle running at a time.

For example, if you have a $20k account and you decide to trade 2-micro minis, you would start one cycle with 1 micro, wait for it to go into a bit of a drawdown and then start the second cycle with the second micro-mini. This way, the probability increases dramatically that the second cycle will start closing out profits if the first cycle gets caught into a bit of a loop. If both series of cycles end up closing relatively closely, then you start the process over again. Start one and wait for it to hit a bit of a drawdown, then start the second.

There may be times when the first cycle just keeps pumping out closed trade profits and doesn’t go into a drawdown, but it will only be a short period of time before it goes into some sort of drawdown.

This begs the question of when to start the second series of cycles. The long answer is based on the next section which is called “Cycles Within Cycles”. The short answer is anytime the max number of buys or sells reaches around 30, start a second cycle at about 2/3rds of where the max buys or sells exist.

For example, let’s say we have a loop of 30 buys and 20 sells. In order for the cycle to start another cycle at around the 20th out string of cycles if the first one moves higher, to say 40 buys, and then starts to move lower. If the market moves higher and generates 40 buys with the first cycle, the second cycle will have 20 buys. If the market then drops, the market would then need to pack on cycles may have closed out a profit and started another cycle around the 40th first. If the market tanks and moves 100 pips to the downside, there would be total of 40 buys and 60 sells on the first series of cycles while the second series of cycles probably closed 3 or 4 profitable cycles.

There are several benefits to this in addition to the obvious. Another benefit of staggering start cycles is the fact that when one goes into a drawdown, it is only with half the trade size. Let’s say you get stuck in a 30% drawdown with a single cycle. Since you have a $20k account and are only trading 1 micro per cycle, a serious drawdown is not 30%, but 15%. Further, another benefit is that the probability is strongly in favor that the second cycle has been closing out profitable trades which further cut that 15% drawdown to something smaller. Finally, during small drawdowns, second cycles have the possibility to completely offset them.

It most certainly is possible that both cycles get into a drawdown. In fact, it is impossible for both cycles to NOT be in drawdown at the same time. However, the probability of both cycles going into an extended drawdown at the same time is extremely small, especially when you wait to start the second series based on a little logic. Don’t get too caught up in when to start a series of staggered cycles as you will never know what the market is going to do and will never be able to pick the optimum time to start the second series. The “Cycles Within Cycles” section below talks about how to take advantage of exact situations.

In conclusion of this section, it is my strong suggestion that you put yourself in a position to stagger cycles, especially when volatility is higher. The easiest way to do this is to set up two accounts and be running the Pyramiding strategy on two different machines. When one is in a drawdown, you simply start the second machine. (you can also run two copies of the platform on a single computer each assigned to a different account).

On a side note, if you open up an account to have this traded for you, the broker implements the staggered cycles. But you have to have the $20k account to do it.

Also, you can be as creative with this as you want. There is nothing to prevent you from taking a $30k account and starting 3 series of cycles, etc.

Cycles within Cycles:

This section is slightly different than the Staggered Cycles section. This section deals with starting new (and second) cycle while there is an original cycle going. The difference is that there are only specific times to start the second cycle and when it is done, you do not start another cycle. In other words, it is not a new series of cycles, it is a cycle strictly limited to be executed at a certain point during the first cycle.

The theory of having a cycle within a cycle is based on being assured of closing one cycle at a profit if a previously started cycle does not reach the profit. For example: If you start a cycle at 120.00 and the market immediately drops to -5 and then pops up to +16. The target is at +22. The market needs to make a 6 point move to the upside to hit the target. If it moves to -6, it will expand the range. If you start a new cycle when the first cycle hits +16 in this scenario, you are assured of closing out either the first cycle or if not, the second cycle before the range expands on the first.

In this example, you are starting a cycle with zero additional risk. In fact, you are guaranteed to take a 100 point profit from one of the two cycles, thereby hedging a bit against a growing drawdown. This second cycle can be implemented multiple times during a single cycle at any time where the movement would guarantee the closure of one of the two cycles.

When the range is larger, you can start the cycle within 15 points of the highest or lowest point of the range. If the market moves up 15 points, you are guaranteed the closure of 2 cycles. If the market moves up 10 on the second cycle and then drops, it only has to move down 31 points below the second -0- line, far from expanding the range on the second cycle. At that point, the only way the range can expand on the second cycle is by taking the profit of the first.

If the market moves down first, you will be able to take the profit on the first cycle but may still be in the second cycle as the profit target may have increased. For example: The target on the first cycle is now at +53. At +38, you start a second cycle. If the market continues to move up, you will close out two profitable cycles at +53 instead of one. If you start the second cycle at +38 and it drops down 5 points first, then the target on the second cycle moves up to +60 instead of +53. Therefore, if the market moves to +53 and you take the profit on the first cycle, you will still have the second cycle open.

You can then begin to play second cycles on the second cycle. =0) You can immediately begin another cycle at +55. If the market moves up to +60, you will take another profit. If the market moves down to +40, you will take the profit target on the second, second cycle.

To implement manually, you could simply open two accounts and start the second cycle at the appropriate time level. Obviously, the problem with this is that you would have to monitor each original cycle to know when to start the second one.

The ultimate execution of this method that will give the absolute highest probability of long-term success, the least amount of drawdown and the highest profit potential is to be able to have a combination of staggering cycles and additional cycles within cycles be executed within each staggered cycles. The probability of success in that situation is astronomical.

NOTE – Understand that if you start a cycle within a cycle and fast market conditions hit, you may not be able to generate a buy with each tick. From time to time, this may cause the target level to change and the guaranteed profit doesn’t occur. It shouldn’t change dramatically and only ever so slightly increases the risk of getting stuck in two cycles, but you should be aware of it nonetheless.

Money Management Calculations:

Based on the risk analysis provided previously in this manual, trading more than 1 micro mini per $10,000 is strongly discouraged. The first rule in trading is survival if at all possible. Fortunately, money management can be used with this scenario. If you start with $10,000, you can increase to 2 micro minis at $15,000. You will still be risking $5,000 per micro mini, so you are risking all of the profits and still $5,000 of the original, but after this, the worst case level begins to increase:

$10,000 = 1 micro mini. ($5,000 risk based on above worst case scenario)
$15,000 = 2 micro minis ($10,000 risk) (can start staggered cycles)
$25,000 = 3 micro minis ($15,000 risk)
$40,000 = 4 micro minis ($20,000 risk)
$60,000 = 5 micro minis ($25,000 risk)
$85,000 = 6 micro minis ($30,000 risk)
$115,000 = 7 micro minis ($35,000 risk)
$150,000 = 8 micro minis ($40,000 risk)

$100,000 = 1 mini ($50,000 risk)
$102,500 = 1 mini + 1 micro mini)
$107,500 = 1 mini + 2 micro mini)
$115,000 = 1 mini + 3 micro minis)
$125,000 = 1 mini + 4 micro minis)
$140,000 = 1 mini + 5 micro minis)

These are example suggestions only. You need to understand money management principles.

TIPS

We can’t stress enough to use LOW leverage. Even with low leverage you are at risk still. There are no guarantees in trading. We hope this method gives you an edge for making it!

This method makes its money when the market moves – and it doesn’t matter in which direction. One way you might want to trade it is by opening up new cycles at the London session open (2 AM EST) and stopping it after cycles have been closed. Also – open new cycles if you don’t have any working before major USD news announcements like the GDP or non-farm payrolls. If you are stuck in a cycle – just let it sit there and eventually, when the market moves and barring a series of highly unlikely events, you will close out the cycle in profit.

Finally, you must understand that with any auto-trading situation, the success is dependant on the reliability of the technology being used to auto trade the strategy. If you internet connection goes down, you need to have a back up in place so that down time is as short as possible. You will either need to call in the broker to offset all open positions immediately, and/or get the system back online as soon as possible. If you are short 10 positions and long 5 with the market moving higher, and your connection goes down, you will be losing on 10 short positions without adding longs to offset.

Obviously, if that happens and you are short 50, you are looking at a serious potential problem. It could go either way (and pop you a nice profit), but you do not want to take the risk, so make sure you understand this importance and have a back up plan in place. This is another reason why watching a demo account trade this for a few months is so important.

Here’s my top ten reasons…

1. Spending too much time reading, learning, buying, watching and not enough time DOING your own research.

2. Not taking your trading business seriously enough. Always keeping a trading diary; by keeping a diary forces you to think through your idea because you have to write it down. Additionally a written trading record provides you with an opportunity to review your thought process so that you can replicate the successful trading ideas and modify the unsuccessful one.

3. Not focusing your efforts on a trading system (whether it be day trading, swing trading, scalping trading or whatever) for long enough to see results. Often this is because you get distracted by the ‘next big thing’ forex trading system or new expert advisor being promoted by all the so-called ‘guru’s’. You must trust your own trading method. You must have a methodology by which you go about your trading business and you must trust it; otherwise you are not operating in businesslike manner. you will end up chased the crowd.

4. Because there are so many forex trading system and forex mechanical system (metatrader expert advisor), it becomes almost impossible to know where to start. So you end up doing nothing.

5. Lack of perseverance. You start off thinking earning money in forex trading is easy (because everyone else seems to be doing it) and quickly become disillusioned and give up when it dawns upon you that it actually takes hard work and dedication.

6. Directing all your efforts into a forex trading system that is either unprofitable, or you lack the knowledge to make it profitable.

7. Not setting up your forex trading system or your expert advisor in the right way to be profitable from the outset.

8. Lack of a clearly laid out route to success. Always be aware of the bigger picture. A very important factor in having an edge in the market is to be aware of the big picture-where the trend goes and identifying the support and resistance of market that exists.

9. A failure to set practical, achievable, specific goals. Lot of newbies set an impossible profit target and set your goal to high. There is no free money in forex trading. Don’t dream it, many so called guru advertise their very profitable a trading system which almost guarantee make profit every month.

10. You are not using smart money management. You need to know when to cut your losses. Wheter you are fundamental or technical trader, always remember that market conditions change all the time. Most newbies ‘believe’ the market at the end will play out your way, and you end up losing to much money. Perhaps some of those ring true with you? I know I’ve been guilty of most of them at one point or another. So if you do recognize yourself in that list, atleast take heart from the fact you’re not alone. And remember, it’s never too late to change bad habits or direction if necessary.

I use 5 steps to trade Forex:

1. Identify potential new trades.

2. Provide you with proprietary bullish and bearish trend outlook for the current market.

3. Provide levels for entering a trade, closing a trade and booking profits at the end of a trade.

4. Include the Pyramiding Trading technique to help you extract maximum profits from any trended move.

5. Protect your trading capital with sound money management and stop loss mechanism.

I guest you already know about those steps. This time I will not discuss every steps in detail; except the Pyramiding trading technique, which has been the core of my trading system.

- What is Pyramiding technique ?

Pyramiding trading is the process of using profit generated from an existing position to acquire additional positions. This results in a “doubling” of your position during each pyramid iteration to rapidly achieve exponential gains. Pyramiding trading technique help you extract maximum profits from any trended move.

Some said “Pyramiding: A Risky Strategy”

Let me explain more about this one: Pyramiding is adding to positions as price moves in the desired trend direction. Pyramiding is a highly aggressive trading strategy suitable for professional traders who know how to control risks and have the discipline to execute a tested plan consistently.

Reward/risk tradeoffs quickly turn against the pyramid trader when the price trend reverses. Because adding to positions changes the total cost of the entire position on a per-unit basis toward the last price, a quick reversal to the original entry price can result in a significant loss.

Pyramiding should be executed only according a predetermined and tested method which includes an effective stop loss or hedging technique.

- What is a hedging technique?

Hedging is a strategy designed to minimize exposure to an unwanted financial risk, while still allowing the assets involved to profit
from their investment activity. PointBreak trading system use strong hedging strategy. It means PointBreak will hedge using the same currency (100% correlation and every 1 long position will be hedge by 1 short position). This hedge aims to minimize the risk from moves with the currency pair used, thus allowing profits to be accrued from the daily movement.

Although pyramiding increases profits if the trend continues as hoped, pyramiding also increases losses if the trend reverses, so
Risk Control is key.

In PointBreak EA, risk contol is our main concern, we never overtrade our pyramiding techinique. This will ensure that PointBreak trading strategy will go smooth, giving you profit month after month.

- When to Pyramid ?

There are just ways of pyramiding. One is to buy more or sell more just as soon as the market breaks into new territory or makes a new
high or a new low. In a fast running market, you can continue to buy or sell every few points the market moves in your favor, all depending on the stock or your method o pyramiding. A pyramiding
should always be followed up with proper and strict stop loss orders or special hedging technique above.

When you do a pyramid trade, the signal to add to positions may be triggered at predetermined price points that confirm the trend direction. Such price points might be based on volatility bands,
moving averages, a variety of trendlines, logical chart points, penetration of resistance levels, and so on.

No matter what method is used, because your profits must in all case be protected. The more profits are there on the table, the more room you can give the market to fluctuate or have its reverse moves or reactions, that is you can place your loss order further away from the market so that a natural reaction will not disturb
your pyramid. PointBreak EA divide its pyramid trade into multiple cycle to protect the profits and to minimize the risk.

For Example:
You have followed and added up on a EUR/USD market that is 100 points gain in your favor now. If the market has had a previous reaction of 20 points, it could again react 20 points without
changing the main trend, therefore your stop loss order could be 20 points under the market, because if it was caught, you would not be
losing part of your capital but only a fraction of your paper profits, while in early stages of your pyramid your stop loss order would have to be closer in order to protect you original capital.

- Pyramiding Trading Type

1. The Standard Pyramid, which is also known as the scaled-down pyramid or upright pyramid, starts with a large initial position and is followed by predetermined additions that decrease systematically in size as price moves in the indicated trend direction. For example, if the initial entry was for 10 lots, then as price moves to the next predetermined level add 5 more lots, then 3 more at the next level, then 2 more, for a total of 20 lots.

2. The Inverted Pyramid, which is also known as the equal amounts pyramid, adds to an initial position in equal share-size increments. For example, if the initial entry was for 10 lots, then as price moves to the next predetermined level add 10 lots more, then if the price continues 10 lots more, then 10 lots more, for a
total of 40 lots. Here, however, the average cost per share is much higher, such that a smaller price reversal eliminates all profit.

The inverted pyramid offers greater potential reward at the cost of much greater risk, as compared to the standard, scaled-down
pyramid.

3. The Reflecting Pyramid systematically adds to a position up to a predetermined price level, then it reduces the position systematically as the trend continues, so the reflecting pyramid is
not a pure trend following method. If the price does have a major move in the indicated trend direction, the reflecting pyramid would
result in less profit than both the standard and inverted pyramids.

4. The Maximum-leverage Pyramid keeps on adding maximum size up to the limits of accumulated profits and margin requirements. This is the
most aggressive strategy possible, and it offers the maximum potential reward, the maximum potential risk, and the worst reward/risk ratios. This pyramid must be combined with tight exit
rules, or else it is a formula for near-certain ruin.

I use Inverted Pyramid in PointBreak EA, and PointBreak EA in the long run (i.e. over the months or years) has been able to keep on the right side of the long term trend more often than not, you will have achieved what 95% of traders are unable to: “profitable success”.

Until the next strategy.

An increase in market volatility often leads traders to find a lot more trading opportunities. The opportunities to catch and profit from price movement, especially if it is the HUGE one.  The huge market usually swings lots of potential for gain, but also for loss, especially if traders do not take the necessary precautions.

During times of volatility, traders need to adjust their strategy to compensate for erratic market. The FX Markets also provides a great section on their site showing traders which currency pairs are experiencing the most and least volatility that day.

1. Decrease in Leverage

During times of extreme volatility, losses may seem traumatic. With the average daily pip movement increased in volatile times, traders should be considering how their leverage will affect their trades. At a one percent or even a half percent margin, investors should be mindful of how much leverage, or even the size position being traded, can affect their portfolio.

In normal market conditions, placing a 2 lot position is fine when you are looking to make about 50-100 pips. During a more volatile time, when the potential loss is 100-200 pips, it stops being an effective risk to reward ratio. To compensate, traders should look to taking on smaller trading positions, in this case only one lot as opposed to the average 2 lot position.

2. Use Tighter Stops

Many traders are hesitant to use tighter stops in volatile markets because they see the large swings increases the likelihood that the position will be taken out. Having tighter stops can also provide great risk managers in times of extreme volatility. For example, on a EUR/USD trade, rather than setting an 80 pip stop to protect your position, consider placing a 50-60 pip stop. This will insure the protection of your currency position and if the stop is broken, there is a higher likelihood that the trend will continue lower and the stop took you out before you could potentially lose more money.

The width of the stop being set does depend on the currency pair being traded, as some pairs have wider ranges. In a Yen cross like the GBP/JPY or AUD/JPY, traders may be more likely to have wider stops as their average daily range is 50% more than that of the EUR/USD. With that said, stops during volatile market conditions should not be as wide as before. Instead of a stop of 100 pips below entry, traders may consider a 25 pip reduction and have a 75 pip stop.

Below is a chart showing the EUR/USD and the GBP/JPY on the same very volatile day in the forex market. The EUR/USD had an impressive range of nearly 600 pips! The GBP/JPY far dominated though with nearly a 2000 pip trading range.

Volatile Market in Forex 2

Volatile Market in Forex 3

3. Be Selective with Trades

In volatile market conditions, traders are often tempted to place an increase in trades as the market is going wild and they want to take advantage of all the trading opportunities. It is important to remember that in volatile times, losses are likely to be big. Before placing a trade, assess risk tolerance levels. How much risk is acceptable for the trader both psychologically and financially? It may be a good idea for a trader to shift their interest somewhere else until things settle down, instead of trading a violent pair.

4. Increase Discipline When Trading

During all market conditions, traders should follow their predetermined trading strategy. During volatile market conditions, it is important to use that same level of restraint and self discipline. Any set stops, contingency plans or risk management benchmarks must be adhered to without hesitation. This will help in defining how much risk is taken and should price action be uncontrollable.

5. Know Before You Go

It also helps a trader to know what is causing the current spate of volatility in the markets in order to be prepared for the unexpected. As such, an investor can accommodate their strategy to the market environment and not just the currency pair being traded. The first of these considerations is accounting for emotions in a market: is fear currently driving the market lower? Or is it buyer’s mania that is keeping the bullish tone alive? Traders’ overreaction and emotion tend to push markets to overextended targets. This fact alone creates volatility through simple supply and demand.

Volatility can also, and more than likely will, be sparked by economic events. In this instance, market participants may interpret fundamental data differently and not as cut and dry as the more novice trader. A perfect example of this is usually monthly manufacturing reports that are released in pretty much all industrial economies.

The classic scenario has the market honed in on a particular number for the month. However, traders young and old will sometimes wonder why the market sold off if manufacturing showed positive growth. The answer is simple. The market had a different interpretation and positions were violently reshaped and shifted. These tend to create great opportunities for some and horrible memories for others. Below is an hourly chart of the EUR/USD during ISM Manufacturing for October 1, 2008. Here we can see the huge price gap that occurred due to market volatility as well as the resulting trend.

Panic and erratic momentum can additionally be found in certain market environments. Not to be confused with fear or greed, panic selling and buying can create very choppy and relatively untraceable markets. These conditions will lead some to flip flop their positions while leaving others gaping at the fact that the position was right, only to be stopped out prematurely. These two common examples will create further panic and volatility as traders abandon their own individual strategy for the possibility of instant profits or stoppage revenge. As a result, a vicious cycle of volatility ensues until a definitive market direction can be established.

The simple rules above, and a task of getting to know the current trading environment, can empower every trader through the ranks. Although some relate volatility with difficult and untouchable markets, opportunities continue to remain abound in these less than attractive conditions to those focused and fortunate.

By following these five simple steps, trading in volatile market conditions should be a little simpler. Remember to adjust leverage based on volatility, stick to how much risk your trading plan already determines, use tight stops and don’t jump into every trade that looks good.

Put volatility to work for you. Do you think of the glass as half empty or half full? Your perspective can affect the investment decision you make during market downturns. Investors who view market volatility negatively can make irrational decisions. A down market can be an opportunity for you to build your portfolio and take advantage of lower unit costs.

Happy Investing.

Put two rookie traders in front of the screen, provide them with your best high-probability set-up, and for good measure, have each one take the opposite side of the trade. More than likely, both will wind up losing money. However, if you take two pros and have them trade in the opposite direction of each other, quite frequently both traders will wind up making money – despite the seeming contradiction of the premise. What’s the difference? What is the most important factor separating the seasoned traders from the amateurs? The answer is money management.

Like dieting and working out, money management is something that most traders pay lip service to, but few practice in real life. The reason is simple: just like eating healthy and staying fit, money management can seem like a burdensome, unpleasant activity. It forces traders to constantly monitor their positions and to take necessary losses, and few people like to do that. However, as Figure 1 proves, loss-taking is crucial to long-term trading success.

Figure 1 – This table shows just how difficult it is to recover from a debilitating loss.

Note that a trader would have to earn 100% on his or her capital – a feat accomplished by less than 1% of traders worldwide – just to break even on an account with a 50% loss. At 75% drawdown, the trader must quadruple his or her account just to bring it back to its original equity – truly a Herculean task!

The Big One

Although most traders are familiar with the figures above, they are inevitably ignored. Trading books are littered with stories of traders losing one, two, even five years’ worth of profits in a single trade gone terribly wrong. Typically, the runaway loss is a result of sloppy money management, with no hard stops and lots of average downs into the longs and average ups into the shorts. Above all, the runaway loss is due simply to a loss of discipline.

Most traders begin their trading career, whether consciously or subconsciously, visualizing “The Big One” – the one trade that will make them millions and allow them to retire young and live carefree for the rest of their lives. In FX, this fantasy is further reinforced by the folklore of the markets. Who can forget the time that George Soros “broke the Bank of England” by shorting the pound and walked away with a cool $1-billion profit in a single day? But the cold hard truth for most retail traders is that, instead of experiencing the “Big Win”, most traders fall victim to just one “Big Loss” that can knock them out of the game forever.

Learning Tough Lessons

Traders can avoid this fate by controlling their risks through stop losses. In Jack Schwager’s famous book “Market Wizards” (1989), day trader and trend follower Larry Hite offers this practical advice: “Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade.” This is a very good approach. A trader can be wrong 20 times in a row and still have 80% of his or her equity left.

The reality is that very few traders have the discipline to practice this method consistently. Not unlike a child who learns not to touch a hot stove only after being burned once or twice, most traders can only absorb the lessons of risk discipline through the harsh experience of monetary loss. This is the most important reason why traders should use only their speculative capital when first entering the forex market. When novices ask how much money they should begin trading with, one seasoned trader says: “Choose a number that will not materially impact your life if you were to lose it completely. Now subdivide that number by five because your first few attempts at trading will most likely end up in blow out.” This too is very sage advice, and it is well worth following for anyone considering trading FX.

Money Management Styles

Generally speaking, there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses. The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy. On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month’s worth of profits in one or two trades. (For further reading, see Introduction To Types Of Trading: Swing Trades.)

To a large extent, the method you choose depends on your personality; it is part of the process of discovery for each trader. One of the great benefits of the FX market is that it can accommodate both styles equally, without any additional cost to the retail trader. Since FX is a spread-based market, the cost of each transaction is the same, regardless of the size of any given trader’s position.

For example, in EUR/USD, most traders would encounter a 3 pip spread equal to the cost of 3/100th of 1% of the underlying position. This cost will be uniform, in percentage terms, whether the trader wants to deal in 100-unit lots or one million-unit lots of the currency. For example, if the trader wanted to use 10,000-unit lots, the spread would amount to $3, but for the same trade using only 100-unit lots, the spread would be a mere $0.03. Contrast that with the stock market where, for example, a commission on 100 shares or 1,000 shares of a $20 stock may be fixed at $40, making the effective cost of transaction 2% in the case of 100 shares, but only 0.2% in the case of 1,000 shares. This type of variability makes it very hard for smaller traders in the equity market to scale into positions, as commissions heavily skew costs against them. However, FX traders have the benefit of uniform pricing and can practice any style of money management they choose without concern about variable transaction costs.

Four Types of Stops

Once you are ready to trade with a serious approach to money management and the proper amount of capital is allocated to your account, there are four types of stops you may consider.

1. Equity Stop

This is the simplest of all stops. The trader risks only a predetermined amount of his or her account on a single trade. A common metric is to risk 2% of the account on any given trade. On a hypothetical $10,000 trading account, a trader could risk $200, or about 200 points, on one mini lot (10,000 units) of EUR/USD, or only 20 points on a standard 100,000-unit lot. Aggressive traders may consider using 5% equity stops, but note that this amount is generally considered to be the upper limit of prudent money management because 10 consecutive wrong trades would draw down the account by 50%.
One strong criticism of the equity stop is that it places an arbitrary exit point on a trader’s position. The trade is liquidated not as a result of a logical response to the price action of the marketplace, but rather to satisfy the trader’s internal risk controls.

2. Chart Stop

Technical analysis can generate thousands of possible stops, driven by the price action of the charts or by various technical indicator signals. Technically oriented traders like to combine these exit points with standard equity stop rules to formulate charts stops. A classic example of a chart stop is the swing high/low point. In Figure 2 a trader with our hypothetical $10,000 account using the chart stop could sell one mini lot risking 150 points, or about 1.5% of the account.

Money Management Style 1

Figure 2

3. Volatility Stop

A more sophisticated version of the chart stop uses volatility instead of price action to set risk parameters. The idea is that in a high volatility environment, when prices traverse wide ranges, the trader needs to adapt to the present conditions and allow the position more room for risk to avoid being stopped out by intra-market noise. The opposite holds true for a low volatility environment, in which risk parameters would need to be compressed.
One easy way to measure volatility is through the use of Bollinger bands, which employ standard deviation to measure variance in price. Figures 3 and 4 show a high volatility and a low volatility stop with Bollinger bands. In Figure 3 the volatility stop also allows the trader to use a scale-in approach to achieve a better “blended” price and a faster breakeven point. Note that the total risk exposure of the position should not exceed 2% of the account; therefore, it is critical that the trader use smaller lots to properly size his or her cumulative risk in the trade.

Money Management Style 2

Figure 3

Money Management Style 3

Figure 4

4. Margin Stop

This is perhaps the most unorthodox of all money management strategies, but it can be an effective method in FX, if used judiciously. Unlike exchange-based markets, FX markets operate 24 hours a day. Therefore, FX dealers can liquidate their customer positions almost as soon as they trigger a margin call. For this reason, FX customers are rarely in danger of generating a negative balance in their account, since computers automatically close out all positions.
This money management strategy requires the trader to subdivide his or her capital into 10 equal parts. In our original $10,000 example, the trader would open the account with an FX dealer but only wire $1,000 instead of $10,000, leaving the other $9,000 in his or her bank account. Most FX dealers offer 100:1 leverage, so a $1,000 deposit would allow the trader to control one standard 100,000-unit lot. However, even a 1 point move against the trader would trigger a margin call (since $1,000 is the minimum that the dealer requires). So, depending on the trader’s risk tolerance, he or she may choose to trade a 50,000-unit lot position, which allows him or her room for almost 100 points (on a 50,000 lot the dealer requires $500 margin, so $1,000 – 100-point loss* 50,000 lot = $500). Regardless of how much leverage the trader assumed, this controlled parsing of his or her speculative capital would prevent the trader from blowing up his or her account in just one trade and would allow him or her to take many swings at a potentially profitable set-up without the worry or care of setting manual stops. For those traders who like to practice the “have a bunch, bet a bunch” style, this approach may be quite interesting.

Conclusion

As you can see, money management in FX is as flexible and as varied as the market itself. The only universal rule is that all traders in this market must practice some form of it in order to succeed.

I hope you could find it usefull in your trading journey. Please feel free to comment.

Happy Trading.

What Is a Breakout?
A breakout is a forex price that moves outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the price breaks above resistance or enters a short position after the price breaks below support. Once the currency pair trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout’s direction. The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases and large price swings. In many circumstances, breakouts are the starting point for major price trends.

Breakouts occur in all types of market environments. Typically, the most explosive price movements are a result of channel breakouts and price pattern breakouts such as triangles, flags or head and shoulders patterns. As volatility contracts during these time frames, it will typically expand after prices move beyond the identified ranges.
Regardless of the time frame, breakout trading is a great strategy. Whether you use intraday, daily or weekly charts, the concepts are universal. You can apply this strategy to day trading, swing trading or any style of trading.

Finding a Good Candidate
When trading breakouts, it is important to consider the underlying price’s support and resistance levels. The more times a price has touched these areas, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the price finally breaks out.

As prices consolidate, various price patterns will occur on the price chart. Formations such as channels, triangles and flags are valuable vehicles when looking for currency pairs to trade. Aside from patterns, consistency and the length of time that a price has adhered to its support or resistance levels are important factors to consider when finding a good candidate to trade.

Short Term Breakout

Short term breakout trading is perhaps the most popular strategy for short term traders.

Short term breakout trading is generally a chart-based strategy that lends itself readily to technical analysis techniques and is an easy tactic for beginning and novice traders to grasp.

This article will touch upon the basic ideas of breakout trading, provide some real-world examples of breakout trades, and give you an easy-to-use simple method that you can implement into your trading strategies right away.

Breakout trading refers to prices “breaking out” of either a technical pattern such as a triangle, a consolidation range or trend channel.

The theory of breakout trading is that price momentum will continue to carry the price far enough beyond the breakout point for the trader to be able to seize a profit. One, three or five minute charts can be used for traders using breakout trading for intraday markets, while daily charts are best for end of day breakout trading.

Breakout trades can be either long or short based on the direction of the break. However, breakout trades will always be with the general direction of prices (i.e., pro-trend) and never against it.

Volume plays a crucial role in choosing breakout trades. A trader should see increasing volume along with the breakout in order to confirm momentum before taking a position. It is important to note that a volume spike at the breakout, followed by a rapid decrease in volume often means that the breakout is weak and vulnerable to failure. Such breakouts should be avoided.

“This sounds like a great way to trade. But just how do I find breakouts?”

When I began my trading journey, it was very difficult to find breakouts in real time, especially in the intraday, which was my focus. Traders have tended to restrict their trading of breakouts to daily charts. Today, it is a far different story. Currency screeners are increasingly built into many trading platforms, and there are resources like the currency screener available in the market that intraday traders can use to spot breakouts that are happening in the intraday time frame.

Exits are discretionary once profits are obtained with this method. Many traders like to use trailing stops to allow profits to build. The one hard and fast rule I strongly suggest is that if prices immediately drop back below the breakout line after you enter the position, then close the position.

You can always re-enter once the price breaks out again. But a failure to continue in the direction of the breakout often leads to losses.

It was only after I embraced market cycles that I truly began to understand what to do with all the “lines and levels” I had learned to draw on my charts. Early on as I began teaching myself to trade in the late 1980’s to early 1990’s, there were not many books available to read about the subject of charting. I found myself gravitating towards price (instead of news) because my mother was a bit of a market timer (although not trained nor conscious that she was indeed market timing).
Price and the support, resistance, and trendlines they revealed made sense to me and I ventured into charting armed with my father’s old engineering graph paper, drawing my own charts based upon the closing price I would get from my commodity futures broker.

Little did I know it then but work that laid the foundation for my trading and my two books, “Forex Trading for Maximum Profit” (Wiley, 2004) and “Thirty Days of Forex Trading” (Wiley, 2006). It was also during this time I went to college and discovered the books that would forever shape my view of the markets. Books by Richard Schabacker and Richard Wyckoff were like the light I was searching for in my quest to become a trader. What is interesting about the books I read early on was that they were written in the early 1900’s and are still as true and applicable today as anything on my bookshelf.

The other pivotal moment in my trading as I alluded to earlier was the introduction of market cycles to my chart analysis. My bread and butter trades are momentum trades, and this is not only my favorite setup, but the one I will share here. So let’s first define what this is to me because there are so many definitions of this that I want to be sure we are on the same page. Momentum trading is an entry style that is based upon entering a market as it break out or breaks down from a sideways market.

Sideways markets are cycles of congestion or consolidation. Congestion is typically a wider ranging sideways market with higher volatility and a little more erratic support and resistance levels as compared to consolidation. Consolidation is a narrower sideways market with firm support and resistance levels; that is, the levels have little variance between the highs that make up resistance and the low that make up support. It is during these sideways markets that two of my favorite patterns for momentum trading develop: triangles and rectangles. Both these sideways market descriptions were born of the fact that they were initially discussing the stock market, where there is a buy-side bias.

So consolidation is that low volume, quiet channel where a stock is typically bought with little notice. Congestion typically follows an uptrend and is an interesting mix of selling muddled with late-comers to the uptrend who are buying. However since there is not enough interest and money chasing the market higher, the market levels off into a wider range, as compared to the accumulation cycle. Now when talking about markets such as commodity futures and forex, this is not as apparent, especially in the forex market where the buy-side bias is not as prevalent.

Chart patterns are powerful tools as they are the visual embodiment of price action on a chart. That being said I think that there is one distinction that took my analysis of chart patterns to the next level. Early on I would memorize the criteria, as well as nuances, of chart patterns such as my aforementioned triangles, rectangles, wedges, flags, head and shoulders, and rounded tops/bottoms. I would scan charts for hours a day looking for these gems on the charts.

Back then, that meant flipping through large, printed, daily charts that were mailed to my home once a week. With pen and ruler in hand I would draw the lines of the patterns I knew. Those were great days – long days. Starting something new is always exciting and discovering charting patterns only to see that my analysis was (mostly) right on was a thrill. But still, I wanted to know what “went wrong” on those patterns that would whipsaw me.

Before entering any market, it is vital that a trader (or investor) know what market cycle a chart is in. Markets travel in one of four market cycles at any given time: accumulation (consolidation), distribution (congestion), mark up, or mark down. Mark up is simply an uptrend and mark down is a downtrend. Here’s the next challenge every chartist faces: How to consistently determine which market cycle a chart is in.

Looking back on price, it’s always easy to see what the chart has already done. The key to charting analysis is being able to determine this as a market is trending or as the market is heading sideways. I do this quickly and easily with a simple visual tool I call the Wave. The Wave is made up of three individual 34 period exponential moving averages – one on the high, one on the close, and one on the low.

These three exponential moving averages create a “wave” that travels across the chart and by looking at the direction the lines are traveling I can determine if there is a trend and how strong it is. More importantly, the Wave tells me when there is no trend at all. And this is precisely when I look to set up a momentum trade, when there is no trend. The 60 minute chart of the British Pound has a flat, sideways Wave. This gets my attention because now I will look to draw trendlines, support and resistance and see if there is a chart pattern on this chart. I will only use congestion and consolidation patterns like triangles (symmetrical and asymmetrical) and rectangles in the sideways market cycles that I have identified with the sideways Wave. This is a key component to using chart patterns. Congestion and consolidation patterns should only be used in sideways markets.

It is important to go about identifying chart patterns by finding the building blocks of the pattern. One thing I realized early on is that I don’t want to enter trades by looking for the specific patterns, like triangles or head and shoulders. After all, what is a symmetrical triangle but the convergence of an uptrend and downtrend. No matter the head and shoulder’s location, inverse or otherwise, what is a neckline but support or resistance? Once all the trendlines, support and resistance levels are drawn on a chart, only then can I look for any patterns those lines and levels may have formed. This is a very different approach as opposed to looking for a specific pattern. Look hard enough at the clouds and your eyes will find a bunny. Look hard enough at the charts with a specific pattern in mind and it will appear.

It’s only after drawing the lines and levels on the chart do I see that a triangle pattern has formed and this is exactly the kind of pattern I like to see when setting up momentum trades. Without this triangle pattern there would be no way to mark and measure the potential breakout or breakdown on the chart. This pattern – along with the sideways Wave – offers me a momentum set up on this 60 minute chart of the Pound. In a momentum set up I do not carry a bias as to which side prices may break. The point is that there is no trend and that as a momentum trader I am waiting for the momentum to show itself to me. I do however use a confirmation indicator, the MACD Histogram. This allows me to confirm a move after the prices breaks through either the support or resistance level. So when prices finally broke through the support of multiple uptrend lines, as well has support levels, all I have to do is acknowledge the price trigger of the short and then glance down at the MACD Histogram reading. I use the MACD Histogram in an “on/off” fashion so in this scenario, the MACD Histogram simply has to be negative or below the zero line.

While the MACD Histogram is not much below the zero line, in the “on/off” way I use it, it is negative so the trade is confirmed. As prices break through the bottom of the triangle chart pattern, think about what is really happening: support is giving way. In this case that support is an uptrend line and that uptrend line is half of what makes up this triangle pattern.
One of the challenges of trading support and resistance levels and chart patterns is how to determine that the pattern has confirmed an entry. In my opinion, it is not the job of the pattern to confirm, rather only to trigger. Because I have the MACD Histogram to confirm the pierce through the pattern, I do not have to wait for the candle to close; I can enter at the pierce of the pattern thus optimizing the chart pattern based momentum entry.

The follow through from a triangle pattern with a sideways Wave is usually swift as momentum trading is like getting on the base of a trend. Consider that as a market cycles from trending to sideway to trending again, a sideways market typically precedes a trend and therefore if the momentum persists in an organized way, the Wave will also shift from the sideway direction and angle upward or downward signaling a shift away from the balance of a accumulation or distribution cycle to a trend. Momentum traders can be effectively traded by:

1. Identifying a chart with a flat, three o’clock Wave.
2. Drawing all the uptrends, downtrends, support, and resistance lines that are on the chart and see if a congestion or consolidation pattern has formed. (The only time you really need to spend time drawing the lines and levels on a chart is when you see a sideways Wave).
3. Wait for the price trigger. This means that you will wait for prices to pierce the support or resistance levels of the chart pattern, then and only then go to step four.
4. Check the MACD Histogram for confirmation of the price break direction.

I will be sharing set ups in my regular column here at TradingMarkets and you will get to follow momentum set ups at work as well my two other set ups: swings and Wave entries. These set ups all start with determining the clock angle of the Wave so that I apply the correct type of set up to the correct market cycle. And while I am thinking about it, there are some rules that can help you get the most from my commentary and set ups.

Raghee’s Rules to Successful Trading.

There no escaping that the way you or I live our lives reflects in our trading. If we are aggressive by nature so will our trading. If we are more cautious or tentative in life, we will carry that into our trade. Recognizing who you are is as simple as placing your first trade because you’ll see it up close to the minute the trade either goes in your favor or moves against you.

There are a few rules that have helped me become, and more importantly, stay a trader. Trading is my career. It’s not simply a good year or two but rather the culmination of all my years managing the risk of being in the market. It’s not just the Forex market that makes me a trader either. I trade all markets: stocks, futures, and Forex. If it has a chart and liquidity, I will trade it, if I like what I see. Diversification to me means that I do not limit myself to one market or even one style.

Let the charts dictate your stop losses and profit targets.

You now have learned how to begin using trendlines, support, resistance, Fibonacci Levels, the Wave, “psychological” numbers etc. to determine where your entries and exits should be. If the risk to reward ratio are not appropriate for your account, neither is that trade set up. (Deciding upon the risk to reward ratio requires that you know at what price level your entry, stop-loss, and initial profit target will be placed. The distance between your entry and stop-loss is considered your “risk” while the distance between your entry and initial profit target is your “reward”.)

The market doesn’t care if you are using a percentage or fixed point stop-loss, these have no bearing on where the market is most likely to move to next, like support and resistance levels do. If once you have set up your trade, you see that the nearest chart-based stop-loss is too far away for your account to absorb, move onto another chart and the next trade. Just remember you must know your stop-loss level and profit targets before you enter the trade.

Recognize, React, Repeat.

This is what you want to do each day as a trader. Much of your time will, and should, be spent recognizing the set ups. By doing this you are also training your eyes to see the difference between good, better, and best trades. The first decision is whether you have a momentum, swing, or no set up. The last one being the most significant distinction!

Once you recognize what you see on the charts as one of the set ups, the next step is to react. Reacting means deciding upon the entry and exit levels that correspond with the set up and as we know for momentum trades we look for breakouts and breakdowns. For swing trades we are looking to buy pullback in an uptrend and short bounces in a downtrend. Finally, we seek to repeat this process as consistently as possible.

Exit at each predetermined profit target.

We want to exit when we can, not when we have to. I will place my order – entry or exit — as the market nears my predetermined level or anytime I have to step away from the computer. There is no hard and fast rule for entries. I will sometimes leave a standing Limit Order and other times I will enter as I see my price. For stop-losses and profit targets, I will always leave standing orders, always!

Regarding profit targets: If a typical trade for your account size is two lots then by the second profit target, you will be flat. One way I decide how many lots I will enter with is to see how many profit targets total I can see on the chart. Sometimes there are five and six targets, other times there are only two or three. Of course, this falls second to what is right for your account size. And that leads me to the next rule.

Margin accelerates yours winners and losers.

There’s a saying in motorcycling: “Any Gomer can twist a throttle”. Anyone can push the limit, but it’s few and far between that you find someone that can bring it back. If you continually trade beyond your capabilities and risk capital,you will lose. When you trade Forex you are typically trading 50:1 or 100:1, and I’ve even seen 200:1. While you can make huge profits, always consider that if the market went against you, you would lose at the same rate. Margin makes everything move faster and the more margin, the faster is goes. I’ve seen new riders on motorcycles that had no business being on a bike with that much horsepower. The lucky ones had a few scares and learned from it. The unlucky ones pushed the limit and never could bring it back.

So what’s the answer? We know that trading, like motorcycling, can be a high- risk activity. Just a like a new rider should learn the art of riding a motorcycle on a smaller bike with less horsepower, so should a trader begin with a mini account. I love the idea of mini accounts. Almost all brokerages offer these types of accounts. Here’s how they work:

You can trade all the majors in a mini account. The lot size in a mini is 1/10 the size of a full size lot and the pip value is $1 versus $10. Once you have learned a methodology, back-tested it, and acquainted yourself with an execution platform, your next step is learning what it’s like to trade with real money. With a mini account you can benefit from real market action, the nerves, fear and greed that accompany it, and still not lose your shirt. At $1 a pip you can make plenty of mistakes (and you will!) without falling into a financial abyss.

Forget paper trading.

It is absolutely worthless as a trading substitute. If you wanted to acquaint yourself with an execution platform and practice order execution, fantastic! Go ahead and paper trade. If you wanted to test a new trading idea, great! Go ahead, back-test and paper trade the idea. If you want to see how you can trade with an established methodology, use a mini account. You will never be able to recreate the feeling of being in a real money trade with paper trading.

When you trade with real money, even in a mini account, you will still feel the burst of adrenaline when you enter a trade, the exhilaration when you are making money, and the pit in your stomach when you are losing. These are all kinesthetic reactions to a visceral activity. When our money is on the line, we are emotionally invested and we pay better and sharper attention to what we are doing than if the trade was taking place in the “land of make-believe”. Even now, I always keep a mini account open because if I find myself on a losing streak (or I want to experiment with a new trading idea), rather than retreating from the market completely, I will review my errors and make my comeback…using my mini account.

Draw trendlines, support and resistance rather then looking for specific patterns.

If you are looking for a specific pattern you will find it on the charts. It’s like looking at the clouds and seeing a bunny…we see it because we want to. Find all the lines and levels on a chart and if a pattern is there you will see it.

Find the trend before you enter any trade.

The scanning step of each trade set up is when we check for trend direction on each of our time frames. The “Prep Work” step is vital for this very reason. Finding the trend is directly related to the type of trade you will set up. The Wave is the best way I have found to make sure I am in the ideal environment for a momentum or swing trade. When I am swing trading, I want to see the Wave traveling at noon to two o’clock for buying opportunities and the Wave traveling at four to six o’clock for shorting opportunities.

When I am momentum trading, the most ideal Wave direction is sideways or three o’clock. There will be occasions that you will see your trendlines, support and resistance forming momentum trading patterns like triangles and rectangles, yet you may have an up or down trending Wave. In these situations you are getting mixed signals and your best course of action is to look at another time frame to see if the signals line up more clearly with either a swing or momentum trade.

Use your “and’s” your “or’s” to plan your trade.

Any trade is a process of asking and answering questions. We want everything to be right when we enter a trade. It reminds me of what my husband taught me about fishing. I love to go fishing…if I got the Internet on our boat I’d probably never come back to shore. Sure you can go out and try to catch fish but you won’t necessarily catch anything just because you dropped your line in the water.

It’s best to know what you’re fishing for and have the right bait and be out at the time of day the fish feed and in the right water temperature and fish with the tide. Basically you want to put as much as you can in your favor so you’re in the right place at the right time. Great fishermen do this, so do great traders. They line up all the “ands”. If one or more of the things we look for change, it can affect our plan and results. For example, we would not go fishing (or we would be less likely to catch fish) if the water temperature is too low or the tide is wrong or the bait is wrong or the barometer is dropping.

Don’t chase a trade.

When we trade a twenty-four hour market we will find ourselves missing entries. It’s inevitable because we must sleep, go out, eat dinner, etc. While we don’t chase a market, we will use our charts to find the next best way to enter the trade. Those levels could be based upon Fibonacci Levels, the four candle average entry, the Wave or even psychological price levels. If we don’t get our fill at the specified price, we move on. However, since we have learned to set up both momentum and swing trades, we can use both to help us out. For example, if we missed a momentum entry and a trend develops from the initial breakout or breakdown, we can look to see if we can get a swing set up.

Be thankful.

We live in a time that we have instant access to the markets, quotes, and charts. We have governing bodies that regulate the markets and brokerages. We live in a time that all the tools that allow us to be traders are accessible from our homes. Be thankful for all the opportunities on the charts and in your life.

We will explain to you how to develop a profitable trading system in five steps:

Step 1: Select a market and a time frame
Step 2: Define entry rules
Step 3: Define exit rules
Step 4: Evaluate your system
Step 5: Improving the system

Let’s take a closer look at these steps.

Step 1: Select a market and a timeframe

Every market and every timeframe can be traded with a system. But if you want to look at 50 different futures markets and 6 major timeframes (e.g. 5min, 10min, 15min, 30min, 60min and daily), then you need to evaluate 300 possible options. Here are some hints on how to limit your choices:

Though you can trade every futures markets, I recommend that you stick to the electronic markets (e.g. e-mini S&P and other indices, Treasury Bonds and Notes, Currencies, etc). Usually these markets are very liquid, and you won’t have a problem entering and exiting a trade. Another advantage of electronic markets is lower commissions: Expect to pay at least half the commissions you pay on non-electronic markets. Sometimes the difference can be as high as 75%.

When you select a smaller timeframes (less than 60min) your average profit per trade is usually comparably low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profits per trade will be bigger, but you will have less trading opportunities. It’s up to you to decide which timeframe suits you best.

Smaller timeframes mean smaller profits, but usually smaller risk, too. When you are starting with a small trading account, then you might want to select a small timeframe to make sure that you are not overtrading your account.
Most profitable trading systems use larger timeframes like daily and weekly, but be prepared for less trading action and bigger drawdowns.

Step 2: Define entry rules

Let’s simplify the myths of “entry rules”: Basically there are 2 different kinds of entry setups:

Trend-following: When prices are moving up, you buy, and when prices are going down, you sell.

Swing-trading: When prices are trading at an extreme (e.g. upper band of a channel), you sell, and you try to catch the small move while prices are moving back into “normalcy”. The same applies for selling.

In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted.

Most indicators that you will find in your charting software belong to one of these two categories: You have either indicators for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.

So don’t become confused by all the possibilities of entering a trade. Just make sure that you understand why you are using a certain indicator or what the indicator is measuring.

Step 3: Define exit rules

Let’s keep it simple here, too: There are two different exit rules you want to apply:

• Stop Loss Rules to protect your capital and
• Profit Taking Exits to realize your profits

Both exit rules can be expressed in four ways:

• A fixed dollar amount (e.g. $1,000)
• A percentage of the current price (e.g. 1% of the entry price)
• A percentage of the volatility (e.g. 50% of the average daily movement) or
• A time stop (e.g. exit after 3 days)

I don’t recommend using a fixed dollar amount, because markets are too different. For example, natural gas changes an average of a few thousand dollars per day per contract; however, Eurodollars change an average of a few hundred dollars a day per contract. You need to balance and normalize this difference when developing a trading system and testing it on different markets. That’s why you should always use percentages for stops and profit targets (e.g. 1% stop) or a volatility stop instead of a fixed dollar amount.

A time stop gets you out of a trade if it is not moving in any direction, therefore freeing your capital for other trades.

Step 4: Evaluate your system

The first figure to look for is the net profit. Obviously you want your system to generate profits. But don’t be frustrated when during the development stage your trading system shows a loss; try to reverse your entry signals. So if you are going long at a certain price level, and you lose, then try to go short instead. Many times this is the easiest way to turn a losing system into a winning one.

The next figure you want to look at is the average profit per trade. Make sure this number is greater than slippage and commissions, and that it makes your trading worthwhile. Trading is all about risk and reward, and you want to make sure you get a decent reward for your risk.

Take a look at the Profit Factor (Gross Profit / Gross Loss). This will tell you how many dollars you are likely to win for every dollar you lose. The higher the profit factor the better the system. A system should have a profit factor of 1.5 or more, but watch out when you see profit factors above 3.0, because it might be that you over-optimized the system.

Here are some more characteristics you might want to consider besides the net profit of a system:

· Winning percentage

Many profitable trading systems achieve a nice net profit with a rather small winning percentage, sometimes even below 30%. These systems follow the principle “Cut your losses short and let your profits run”. However, YOU need to decide whether you can stand 7 losers and only 3 winners in 10 trades. If you want to be “right” most of the time, then you should pick a system with a high winning percentage.

· Number of Trades per Month

Do you need daily action? If you want to see something happening every day, then you should pick a trading system with a high number of trades per month. Many profitable trading systems generate only 2-3 trades per month, but if you are not patient enough to wait for it, then you should select a system with a higher trading frequency.

· Average Time in Trade

Some people get really nervous when they are in a trade. I have heard of people who can’t even sleep at night when they have an open position. If that’s you, then you should make sure that the average time in a trade is as short as possible. You might want to choose a system that does not hold any positions overnight.

· Maximum Drawdown

A famous trader once said: “If you want your system to double or triple your account, you should expect a drawdown of up to 30% on your way to trading riches.” Not every trader can stand a 30% drawdown. Look at the maximum drawdown the system produced so far, and double it. If you can stand this drawdown, then you found the right system. Why doubling? Remember: your worst drawdown is always ahead of you.

· Most consecutive losses

The amount of most consecutive losses has a huge impact on your trading, especially when you are using certain types of money management techniques. Five or six consecutive losses can cause you a lot of trouble when using an aggressive money management.

In addition this number will help you to determine whether you have enough discipline to trade the system: Will you still trade the system after you have experienced 10 losses in a row? It’s not unusual for a profitable trading system to have 10-12 losses in a row.

Step 5: Improving your system

There is a difference between “improving” and “curve-fitting” a system. You can improve your system by testing different exit methods: If you are using a fixed stop, try a trailing stop instead. Add a time stop and evaluate the results again. Don’t look only at the net profit; look also at the profit factor, average profit per trade and maximum drawdown. Many times you will see that the net profit slightly decreases when you add different stops, but the other figures might improve dramatically.

Don’t fall into the trap of over-optimizing: You can eliminate almost all losers by adding enough rules. Example: If you see that on Tuesdays you had more losers than on the other weekdays, you might be tempted to add a “filter” that prevents your system from entering trades on Tuesdays. Next you find that in January you had much worse results than in other months, so you add a filter that enters trades only from February – December. You add more and more filters to avoid losses, and eventually you end up with a trading rule that could generate profit.

Though you eliminated all possibilities of losing (in the past) and this trading system is now producing fantastic profits, it’s very unlikely that it will continue to do so when it hits reality.

Conclusion

Developing a trading system can be tricky, but it’s by far not as complicated as many vendors make you think. Many people like to make it sound more complicated than it actually is, and some newcomers have trouble accepting that it can be so simple, but it is.

The purpose of this article is to give you an overview about the different steps of trading system development. The key to trading success is to keep it simple when developing and evaluating a trading system.