Control Bars for GBPJPY

Attached is the hourly chart for GBPJPY as requested by one of our beloved readers. We have 2 control bars on the hourly chart with basically similar highs and lows. So, consdering both the bars , i have marked off the high and low. You can see clearly that so far, despite deveral attempts, there has not been an hourly close above the high of the control bars and it has acted as good resistance.

The pound is proving to be a stubborn customer in all its crosses and has been pretty range. I expect GBPJPY to go down and so would be looking to short with a SL above 127.9. Why 127.90? Thats where the high of the daily control bar resides. As you know, the daily is usually more powerful than the hourly and thats why the SL is above 127.90.

Swing and Range Trading

Range trading is process of taking out a few pips of every small move in the price of a share or currency. This works best in a ranging directionless market where the price moves up and down without knowing where to go. It is in such a ranging market that the supports and resistances work very well. The idea behind range trading is to buy (or sell) near a support(or a resistance), wait for it to move up(or down) after hitting the support (or resistance) and thus get a few pips out of this move.

In a ranging market, there will be atleast 3-4 such signals per day per pair. Assuming that you make 5 pips out of every such move, u make 20 pips per pair per day which is pretty good. But what is most important in range trading and something which leads to many traders going broke is the stop loss. Before entering a trade, the trader has to decide whether he is going to range trade or swing trade. The mistake that most traders do is that they start off a trade with the intention of doing a range trade but when it breaks the support(or the resistance), they begin to treat it like a swing trade when actually there is no swing at all.

For thos who don know what swing trade is, it is just a bigger version of range trade where the traders look for 60-100 pip moves, use charts with greater time frames etc. These people lookout for fundamentals(more than what the range traders do), look out for much bigger and stronger supports and resistances and then take a trade hoping to get atleast 60-100 pips out of it...Swing traders get signals maybe once in 1 or 2 days per pair and so they need a greater amount of patience.

Coming back to the mistake made by range traders, they should remember that for range trading, the stop loss should be as minimum as required. When you are looking to make only 5-10 pips out of every signal, the SL should also be corresponding less (maximum 20 pips). Take the trade near the support or resistance and if the trade goes against you and breaks the support or resistance, just come out of it. Accept the fact that you have got it wrong and come out of it. Most range traders get into a trade planning to take 5-10 pips out of it and when they see the trade going against them, they wait and wait and keep seeing the position continue to go against them and after 100 pips loss, they realise their mistake and come out.

Just imagine this. In range trading, if you get 10 pips out of every signal and your SL is 100 pips, it means that you can afford to have only 1 loss out of every 11 trades that you make for you to make a profit. This means that you need to be successful more than 90% of the time which is next to impossible especially in range trading.
So take positions close to supports and resistances and when the trade goes against you and breaks the support and resistance, just accept the fact and come out as soon as possible.

In swing trading, you could afford to have much larger stop losses. As discussed in my article on this blog sometime back, the size of the SL would depend on the pair and also the direction of the trade. Trades in the direction of the trend can afford to have much larger SL than trades made against the trend.
For those who want to know more about SL, please refer my article on this blog which I had posted about SL sometime back.

Trading systems and Market Dynamics

Most traders, sucessful and otherwise, have some trading system. How successful the trading system is would depend on the market dynamics. If you study the trading systems, we will find that many trading systems depend a lot on the indicators. For me, trading systems and studying of the markets and trading is all about pattern recognition. Take any indicator or any study about trading and you will see that in the background, it is only pattern recognition.

Take elliot waves for example. We try to find patterns in the chart and then base our entry and exits on how these patterns work out. We try and interpret these patterns as waves. Likewise, with fibos as well. We basically look out for highs and lows and try to find patterns and match them and use them for fibos. As these depend a lot on the patterns, which are in turn dependent on subjectivity, we find that many people interpret these waves and patterns in different ways and this is the reason why , though many people might follow elliot and fibos, their results from this vary a lot.

Trading systems which depend on indicators also depend on pattern matching. Just throw in 2 or 3 indicators into the chart and watch it. Say throw in 12 ema, 20 sma and 10 macd or whatever. All that you have to do is look for patterns. If 70% of the time, you find that when 12 ema crosses 20 ema, the price goes up, then you have a trading system. So all that you need to do is throw in some indicators, qweak the parameters and watch for patterns. If you are able to find a pattern by which price rises or falls 70% of the time when the pattern occurs, then you have a good trading system. Sometimes, the trading system may not be so straightforward. You need to consider news, whipsaws and all that.

So now when you have a trading system which works 70% of the time, are you settled for life? No...Why? This is due to the market dynamics. The market is never constant. It keeps changing its character. So what might work today may not work tomorrow. One of the major market dynamics is the correlation between pairs. Lot of people would tell you that EURUSD and USDCHF are highly correlated. When one rises, the other goes down. But when i started out trading, the correlation between these 2 pairs was huge. If one pair went up, you could bet your house that the other would go down and you could also pinpoint how much it would drop down by a great degree. For eg., if EURUSD went up by 10 pips, you could pinpoint and say that USDCHF would drop by , say 15 pips. But now, predicting the correlation between these 2 pairs is not so easy nor can it be done so accurately. Each pair has slowly started to have its own characteristics.



Likewise, the volatility of the pairs also changes over time. Some pairs which had a daily range of 40-50 pips now have a range of 70-80 pips and the opposite is true as well.
This is just one example of changing market dynamics. So with the market changing so much over time, our trading systems also need to change and adapt to the changed market scenario. Thats why trading systems which used to work greatly a couple of years back do not work so well now. So be careful in choosing your trading system and once you have done that, keep following your systems closely to find out the time when their effectiveness becomes less and at those times, tweak it to make it more effective or move on to another trading system.

Control Bars for GU

Attached is the hourly chart of GU. This pair is just meandering with no specific direction. It has been ranging for quite sometime with good support from below but has not been able to make a break to the upside. Again, i have marked the high range control bar from 2 days back and you can see that today morning, the high of this bar, acting as support now, was tested and the price has since bounced about 30 pips.

This pair looks quite weak and hopefully, today's MPC meeting minutes should give it a specific direction. I expect it to go down but lets see.

Control Bar in EURUSD

Attached is the hourly chart for EURUSD. Yesterday we had a very
choppy day with no clear direction and the euro was moving up and down.

So we did not get any big range control bars yesterday. In the chart, i have marked
off the control bar from the day before. You can see that the price is currently
testing the high of the bar and so far, the high has held. Considering the fact that
this pair has not fallen much, i would expect this resistance to be broken and we might
be making a move towards 4270.

Stop Losses

How important are stop losses? Are they really required? Almost everyone who starts have trading would want to do trading in the right way and hence start off by having SL for all their trades. Due to the inexperience and lack of knowledge and various other factors, they choose wrong points to have their SL. The result is that the price hits their SL,closes their trade and then turns back and then carries on in the direction of the trade and the user is then heart broken.

This happens 5-6 times within a very short span of time and then the user comes to a conclusion that stops are of no use and then stops using the stop losses (!!). What happens then? 70% of the time, it leads to the account going up in smoke and rest of the 30% of the time, due to their good luck, the trade turns back and what was negative now becomes positive. That sounds great, aint it? If 30% of the time, if the trade does turn back in your favor, I guess most of us would be happy. But what we tend to do is conveniently forget the snowballing effect of negative trades.

Now lets look at what all we lose due to negative trades apart from the fact that we lose money. On the face of it, it seems that whatever amount we are in negative is the only loss that we have due to losing trades. But just think of the other losses that are not so obvious. Lets say that you short GBPJPY and the price goes against you. You donave a stop loss and by the end of the day it becomes -50 pips. Next day, it teases you, runs back and forth and then again turns against you even more and the loss becomes -100 and assume that it keeps doing this for a week and after one week, you find that the trade is -125 pips against you. You are too scared to take any other trade till this trade gets over and so you wait and keep watching this trade alone.So you have lost 125 pips worth of money so far.
But is that all? As said before, you are too scared to take any other trade. You have locked the premium money that you paid for the trade, you have locked 125 pips worth of money for about a week and also you have locked some more, say 100-200 pips of more money which you have had in your balance to sustain further losses. This means that roughly you would have locked about $300 on a mini account for a week.

If you had your SL at 75 pips, it would have got hit maybe on the second day of your trade and though you have lost 75 pips, the closed losing trade would have freed up all the locked money listed above. Using the $300 of freed money, in a weeks time, with proper trading, you could have easily made much more than 75 pips on GBPJPY. One more thing, in the above losing trade, by the time the price turns in your favor, you are exhausted, tired and tensed due to your wait and what do you do? Once the price turns in your favor and once you see just 5-10 pips of profit, you are overjoyed, you don’t want to lose the minute profit and you want to get out of this trade somehow. So instead of letting this profit ride on, you closed this trade and you are very happy for having survived the trade without a SL.

But just imagine how much you have lost from the above. You locked in $300 worth of money on a mini account for a week, did not take any other trades for a week, was scared to the hilt, was watching your monitor wasting electricity, not have proper food just to make 10 pips of profit in a week?

If you had had a SL, and if you are confident of your trading, you could have just digested the loss and moved on and made much more money by digesting the loss from your trade rather than wait for it to turn back. So try to use a SL as much as possible but at the same time, try to have it at the correct point. Study each trade, place your TP and SL at the correct points and enjoy your trading.

What are supports and resistances?

Supports and resistances are points in the price of an entity (it can be a share or a currency pair or a commodity or any other entity) where the prices stall. They have got more to do with history and user sentiment. Lets say that the price of the entity is 5 to begin with. It begins to rise and it keeps rising and seeing this price, more and more people would want to jump in and they keep buying and the price rises even more. This means that the demand is more than the supply and as long as this happens, the price will rise.
The price will continue to rise until a stage is reached where people start to feel that the price has become high enough or those who bought it early feel that they have earned enough profit. Lets say that at this point, the price of the entity is 10. So, people start feeling that the price has risen too much (this is also called overbought conditions) and slowly start selling. The demand becomes less than or equal to the supply and the price slowly drops from 10. As the price continues to drop, the people who plan to make money on shorts also jump in and the buyers (even though they might have very less profits or are in loss) start getting panicky and they start selling and the price starts falling more and also at a faster rate.
So the price continues to drop from 10 and thus 10 becomes resistance as the price has not breached 10. Next time the price comes close to 10, the buyers and the sellers will look at past history and find that 10 was the place where selling started the previous time and so the buyers would want to get out at that point just to be on the safer side and so 10 becomes a even bigger resistance.
The price drop from 10 continues and at one place, the opposite to the one explained above happens ie. the users feel that the price has dropped too much (say at 2) and they start buying again and the price starts to rise again. Thus 2 becomes the support.
Remember, the greater the amount of time that a support or resistance has not been broken, the stronger it is. Even yesterdays high and low are resistance and support respectively but they are not very strong as they are quite recent prices.
So, always watch out for supports and resistances. The big banks and traders dont sit with their ema or whatever indicators and buy and sell based on that. They look out for stops and resistances and buy / sell based on that. So be careful, watch out for opportunities and get a feel of the market before jumping in.