What are good entries and exits?

Posted on July 30th, 2008 by admin, under online forex trading.

What are good entries and exits?

Given a mechanical Forex trading strategy that contains an entry model to generate entry orders and an exit model to generate exit orders (including those required for money management), how are the entries and exits evaluated to determine whether they are good? In other words, what constitutes a good entry or exit?

Notice we used the terms entry orders and exit orders, not entry or exit signals. Why? Because “signals” are too ambiguous. Does a buy “signal” mean that one should buy at the open of the next bar, or buy using a stop or limit order? And if so, at what price? In response to a “signal” to exit a long position, does the exit occur at the close, on a profit target, or perhaps on a money management stop? Each of these orders will have different consequences in terms of the results achieved. To determine whether an entry or exit method works, it must produce more than mere signals; it must, at some point, issue highly specific entry and exit orders. A fully specified entry or exit order may easily be tested to determine its quality or effectiveness.

In a broad sense, a good entry order in good Forex trading strategy is one that causes the trader to enter the market at a point where there is relatively low risk and a fairly high degree of potential reward. A trader’s Nirvana would be a system that generated entry orders to buy or sell on a limit at the most extreme price of every turning point. Even if the exits were only merely acceptable, none of the trades would have more than one or two ticks of adverse excursion (the largest unrealized loss to occur within a trade), and in every case, the market would be entered at the best obtainable price. In an imperfect world, however, entries will never be that good, but they can be such that, when accompanied by reasonable effective exits, adverse excursion is kept to acceptable levels and satisfying risk-reward ratios are obtained.

What constitutes an elective exit? An effective exit must quickly extricate the trader from the market when a trade has gone wrong. It is essential to preserve capital from excessive erosion by losing trades; an exit must achieve this, however, without cutting too many potentially profitable trades short by converting them into small losses. A superior exit should be able to hold a trade for as long as it takes to capture a significant chunk of any large move; i.e., it should be capable of riding a sizable move to its conclusion. However, riding a sizable move to conclusion is not a critical issue if the exit strategy is combined with an entry formula that allows for re-entry into sustained trends and other substantial market movements.

In reality, it is almost impossible, and certainly unwise, to discuss entries and exits independently. To back-test a trading system, both entries and exits must be present so that complete round-turns will occur. If the market is entered, but never exited, how can any completed trades to evaluate be obtained? An entry method and an exit method are required before a testable system can exist. However, it would be very useful to study a variety of entry strategies and make some assessment regarding how each performs independent of the exits. Likewise, it would be advantageous to examine exits, testing different techniques, without having to deal with entries as well. In general, it is best to manipulate a minimum number of entities at a time, and measure the effects of those manipulations, while either ignoring or holding everything else constant. Is this not the very essence of the scientific, experimental method that has achieved so much in other fields? But how can such isolation and control be achieved, allowing entries and exits to be separately, and scientifically, studied?

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Murray Forex trading strategy

Posted on July 2nd, 2008 by admin, under online forex trading.

This Forex trading strategy is based on the designing of turning zones from lines outlined both by Murray levels, and confidence intervals of linear regression channels. This Forex trading strategy is not a new one and has been constantly discussed at the forums. We just tried to combine the knowledge and bring something new into this strategy.

In the book named “THE (MIS) BEHAVIOR OF MARKETS” BY B.B. MANDELBROT & R.L. HUDSON is demonstrated that there are moments when reliable prediction of financial series is possible and vice versa there are complete chaos moments when reigns any forcasr is impossible. R/S statistics or Hurst’s criterion is applied for the estimation of financial row forecasting possibility.

Results based on R/S statistics:

Areas of reliable forecasting –Hurst criterion differs significantly from 0.5 (Besides, with criteria close to 1, trend methods are more applicable, and with criteria close to 0 – contr-trend ones.)Sites of impossible forecasting - the criterion is close to 0.5 (Brownian motion)

The following provisions are the most important appendices of Hurst Н parameter:

If Н = 0.5, the efficient market hypothesis is confirmed (Efficient Market Hypothesis - EMH), ie, yesterday’s events do not affect today, and today’s events do not affect the future. Events are not correlated and already used and devalued by the market.

In contrast with the Н > 0.5 today’s events will be relevant tomorrow, i.e., the information continues to be considered by the market some time later. This is not simply autocorrelation when the impact of information quickly falls, and this is long-term memory, which causes information influence during big periods of time. Certainly, such influence nevertheless weakens in time, but still slower than short-term dependency. This influence is characterized by cycle length, when it drops down till indistinguishable values. In statistics it is called time of series decorrelation.

Thus, if the fractal nature of time-series is proved, it means that hypothesis of fractional market (Fractal Market Hypothesis - FMH) is proved also, which, in turn, contradicts FMH and all quantitative models, which are derived from this hypothesis.

For quantitative definition Hurst withdrew empirical law in the form of:

H = Lg(R/S)/Lg(n/2)

R - max magnitude of investigated series

S - MQD (medium quadratic deviation)

n - quantity of observations (it is the dimension of the sample)

The essence of the forex trading strategy is in forecasting of trend movements on the channel of linear regression and calculating statistical significance at the Murray line during the moment of approach to the line - determining the probability of a turn.

Within different periods of time the line may have different statistical significance: at one time lines can serve as a resistance (support) towards the price schedule, in another time line could not even be taken into account.

At any given time it is possible to construct a huge number of linear regression channels on the prices graph. The criterion for selection of channels is the standard deviation. Only channels with a minimal and reducing standard deviation will have a minimal error.

So, The situation № 1

The market is growing. Price moves along the linear regression channel and is near the Murray line, which assums stop and turn. Price is at the top of the regression channel *, the Hurst moves to zero.

We enter into a short position.

We set stop - loss behind the following line of Murray (line of resistance).

The goal is nearest Murray line (line of support).

At approach to the goal we make a decision to take profits or to keep a position.

The situation № 2

The market falls. Price moves on linear regression channel and is near the Murray line, assuming stop and turn. Price is at the bottom of the regression channel *, the Hurst moves to zero. We enter into a long position. We set stop - loss behind the following line of Murray (line of support). The goal is nearest Murray line (line of resistance). At approach to the purpose we make a decision to take profits or to keep a position

The situation № 3.

The market is in flete. According to indications of Murray line we make assumptions about further continuation of movement. If we have an open position and its direction coincides with the indications of lines and with the Hurst parameter (for example, in coincidence with the position of the projected traffic rate is close to 1 or 0), then we do not take action with the position and are waiting for achievement of the goals.

The situation № 4.

The market in flete, Hirst indications are close to 0.5. Do not enter the market, all warrants are taken off.

*- Distance from the border of the channel, outlined by confidence interval up to the price defines(determines) probability of a turn. I.e. the closer the price to the bottom (top) border of channel in situation № 1 (situation № 2) the higher the probability of a turn.

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How to get out of a trade (part 1)

Posted on June 27th, 2008 by admin, under online forex trading.

In this series of articles we will discuss the problem of how to get out of a trade once in, i.e., to exit strate­gies, an issue that has
often been neglected in the trading literature.

THE IMPORTANCE OF THE EXIT

In many ways, a good exit is more critical and difficult to achieve than a good entry. The big difference is that while waiting for a good opportunity to enter a trade, there is no market risk. If one opportunity to enter is missed, another will always come along-and a good, active trading model should provide many such opportunities. When a trade is entered, however, exposure to market risk occurs simultaneously. Failing to exit at an appropriate moment can cost dearly and even lead to the dread­ed margin call! We actually know someone who made a quick, small fortune trad­ing, only to lose it all (and then some) because the exit strategy failed to include a good money management stop! To get out of a trade that has gone bad, it is not a good idea to simply wait for the next entry opportunity to come along. Similarly, ening on the side of safety and exiting at the drop of a hat can also drain a trading account, albeit less dramatically through slow attrition. The problem with frequent and hasty exits is that many small losses will occur due to the sacrifice of many potentially profitable trades, and trades that are profitable will be cut short before reaching their full profit potential. A good exit strategy must, above all, strictly con­trol losses, but it must not sacrifice too many potentially profitable trades in the process; i.e., it should allow profitable trades to fully mature.

How important is the exit strategy? If risk can be tightly controlled by quick­ly bailing from losing trades, and done in such a way that most winning trades are not killed or cut short, it is possible to turn a losing system into a profitable one! It has been said that if losses are cut short, profits will come. A solid exit strategy can, make a profitable system even more lucrative, while reducing equity volatili­ty and drawdown. Most importantly, during those inevitable bad periods, a good exit strategy that incorporates solid money management and capital preservation techniques can increase the probability that the trader will still be around for the next potentially profitable trade.

GOALS OF A GOOD EXIT STRATEGY

There are two goals that a good Forex exit strategy attempts to achieve. The first and most important goal is to strictly control losses. The exit strategy must dictate how and when to get out of a trade that has gone wrong so that a significant erosion of trading capital can be prevented. This goal is often referred to as money manage­ment and is frequently implemented using stop-loss orders (money management stops). The second goal of a good exit strategy is to ride a profitable trade to full maturity. The exit strategy should determine not only when to get out with a loss, but also when and where to get out with a profit. It is generally not desirable to exit a trade prematurely, taking only a small profit out of the market. If a trade is

going favourably, it should be ridden as long as possible and for as much profit as reasonably possible. This is especially important if the system does not allow mul­tiple re-entries into persistent trends. “The trend is your friend,” and if a strong trend to can be ridden to maturity, the substantial profits that will result can more than compensate for many small losses. The profit-taking exit is often implement­ed with trailing stops, profit targets, and time- or volatility-triggered market orders. A complete exit strategy makes coordinated use of a variety of exit types to achieve the goals of effective money management and profit taking.

KINDS OF EXITS EMPLOYED IN AN EXIT STRATEGY

There are a wide variety of exit types to choose from when developing Forex strategy of exit. In the standard exit strategy, only three kinds of exits were used in a sim­ple, constant manner. A fixed money management exit
was implemented using a stop order: If the market moved against the trade more than a specified amount the position would be stopped out with a limited loss. A profit target exit was implemented using a limit order: As soon as the market moved a specified amount in favour of the trade, the limit would be hit and an exit would occur with a known profit. The time-based exit was such that, regardless of whether the trade was prof­itable, if it lasted more than a specified number of bars or days, it was closed out with an
at-the-market order.

There are a number of other exit types not used in tbe standard exit strategy: trailing exits, critical threshold exits, volatility exits, and signal exits. A trailing exit, usually implemented with a stop order and, therefore, often called a trail­ing stop, may be employed when the market is moving in favour of the trade. This stop is moved up, or down, along with the market to lock in some of the paper profits in the event that the market changes direction. If the market turns against the trade, the trailing stop is hit and the trade is closed out with a proportion of the profit intact.
A critical threshold exit terminates the trade when the market approaches or crosses a theoretical barrier (e.g., a trendline, a support or resis­tance level, a Fibonacci retracement, or a Gann line), beyond which a change in the interpretation of current market action is required. Critical threshold exits may be implemented using stop or limit orders depending on whether the trade is long or short and whether current prices are above or below the barrier level. If market volatility or risk suddenly increases (e.g., as in the case of a “blow-off top), it may be wise to close out a position on a volatility exit. Finally, a signal exit is simply based on an expected reversal of market direction: If a long posi­tion is closed out because a system now gives a signal to go short, or because an indicator suggests a turning point is imminent, a signal exit has been taken. Many exits based on pattern recognition are signal exits.

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Forex Trading Strategies

Posted on June 23rd, 2008 by admin, under online forex trading.

Forex Trading Strategies

Trading strategies that can be used as an independent system, and in combination with other trade policies, or as a basis for a strategy will be represented in this section. In any case - all represented - a purely subjective opinion and can not be interpreted as “philosophical stone” for Forex.

Bollinger Bands trading strategy(35,2)

The idea is that once prices will cross one of BB lines, tracking begins, and as soon as next candle, having closed, will not punch BB line, entrance in a direction opposite to breakdown.

Depending on the wish BB period (it is equal to 35 for us), temporal scale (4 hours for us) as well as confirmation from other indicators may vary. For example RSI.

Trading strategy of game on levels

Here lies the idea that price, having once reflected from some point, will reflect from it again, and if it will pass, the acceleration will be enough to play in the direction of a puncture. The figure shows the level of yen, the arrow shows the direction of the game, the lines around them - limit of stop-loss, with whose breakdown position is automatically deployed.

As evidence of breakdown or rebound from levels it can be used: rebound - if the price had passed longer way to the top without correction, relative to other movements. Breakdown - the price often
“Nuzzles” in the level, gradually approaching the rebound low (see figure)

Trading Strategy by Moving Average

It is possible to construct profitable system even on the most simple indicators. This example has a 2 movings with periods of 21 and 70. After breakdown of cost of one of movings standby begins. If prices deployed, not having reach the second (older) moving, the entrance is carried out while crossing (or slightly earlier), MA (21). Stop-loss placed below the recent peak. The system has flaws - one of them is the wrong signal at the conclusion of the trend. However, much advantage is that it always follows trend, contrary
to the wishes of the inexperienced player to play against him:)

Trading strategy by MACD

One of the most simple ways of game at presence of a trend. MACD 12/26 with an alarm line 7 is used on the graph. The entrance is carried out: Sale - at movement of MACD from a high hump downwards, at leaving
MACD below an alarm line. Closing of a pose occurs at MACD crossing “signal” upwards. At low peak achievement by MACD, at closing next turn and already a pose opens long will be closed at crossing by MACD an alarm line from top to down, and opens at crossing from below upwards. And again,
before formation of top by MACD… Stop is put at the price, hardly above recent finding fault (low). The system works well at a bright trend on 4-hour or day time, however the majority advises to refuse from MACD at flat. Nevertheless it is possible to play on MACD in range also. For this purpose 15-30 minutes
interval, and a quite other parameters of an alarm line are necessary. I suggest you to play with coefficients and to look, that will happen. The given tool have some hidden opportunities. Starting from a method of divergence and finishing by application of oscillators atop of MACD itself. All depends on wish of the trader to find the own weapon…

Stochastic trading strategy

Though there is an opinion that it is bad to define turning points, stochastic index does it quite well on big intervals. I do not recommend to use it on 5-60 minutes, or it is necessary to increase number of the periods (Stoch (35), Stoch (55), etc.) I have tried stochastic with the period 14 (by default). The system is such: an entrance is made after return crossing an alarm level aside this crossing. Levels are defined by the trader. Since a week-long trend is descending, the bottom rod is taken (8) and top (75) (it can by the way be hardly above, the entrance will be even earlier, but not above 78-80!) Stop becomes more likely fixed, by percent from the deposit (for example 1.5 from 100 K i.e. on 150 pips. At adjustment it is possible to play with alarm levels, the period of stochastic, and also to enter at crossing short moving (it usually constucts together) behind an alarm level.

Trading strategy game by Fibo-levels

One of the most common systems, based on fact that price, being adjusting, will go a distance equal to the movement factor multiplied by 0,236 0,382 0.5 and 0,618. The signal “prepare” occurs when, after a lengthy movements price had adjusted to not less than 0.2-0.3 part of this movement. fibo-levels are drawn, and orders for buy/sell about them establishes, with the foot above the next-fibo level. (if you have about 0,382,
stop is just above 0.5, when about 0.5, stop is above 0.618 …. nearly 0,618 Ц stop is above the peak, either immediately (0.65).

For example: After yen falling to 107.15 from 105.20 we draw fibo-levels (we also draw level after falling from 106.70 to 105.20). After the start of correction we put a warrant for the sale of about 0,382 correction from a large drop (level coincides almost exactly with a 50% drop as little correction). So Sell USDJPY 105.95, Stop above 0.5 from a large drop, to 106.30 … The level was the samples, and a warrant is selling about 0.5 from a large drop (note, the level again almost coincided with a fall of 0,618 smaller) So, Sell USDJPY 106.15, S / L 106.50 At this time, the level of 50% correction has stood (in this case, the convergence of 2 x levels in one place has had strong support bears.)

What we receive in the future:

The first red arrow points to our entrance points. Then almost 2-day consolidation followed  after which falling continued. The second arrow marks re-entry into the market after the correction, which ended about the previous low.

Depending on the test period and your preferences three strategies of work in the Forex are possible.

STRATEGY 1. Long-term maintenance of open positions (from a few days to several months). It is used by strategical investors and semi-professional speculators. It is most effective when trend starts and the least profitable at the side or sluggish trends. Mandatory insurance and relevant work expeditiously to the market’s biggest stock options are needed in doing so.

STRATEGY 2. Work on the medium-term trends lasting up to several weeks. This strategy is used mainly semi-professional speculators. This strategy may take advantage of all work strategies, can be quite long, and fairly short. Hedging using options is sometimes used in such transactions.

STRATEGY 3. Its essence is the opening position in the short duration from

several minutes up to several hours – intraday-trade. Implemented by professional players, who can “feel” the market, as well as small speculators, who because of insufficiency of financial resources are not available to use longer-term strategy. Advantage of this type of trading is that you do not expose yourself to risk of and unexpected price changes at a time when you were not in the Forex market. Disadvantage of this strategy is in large

indirect costs (commissions, spreads); great risk of adverse short-term fluctuations in prices. This type of trade throughout the day requires constant concentration, control and strain, which makes it exhausting one compared to the first strategy.

First, you recommended a second strategy of working with the gradual introduction of the benefits of the first and last strategy in sluggish side trends.

You may also need to keep in mind that

there must be the reason for each transaction - fundamental or technical one.

Good luck to you!

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System of 3 screens

Posted on June 19th, 2008 by admin, under online forex trading.

System of 3 screens

In the following article one of the Forex trading strategies which is based on so-called “system of 3 screens” is discussed.

System of 3 screens

According to some estimates more than 40% of professionals in one way or another use the system. Indeed this is the simplest and most popular from publicly known systems, and we advise beginners to start from it.

TS was created by Alexander Elder in 1985 and since then it did not actually changed, this means that its is reliable and wide applicable, both in the stock market and in the Forex market.

The main problem of trading is that a the same indicator may give contradictory signals in different time scales. For example, it may indicate ascending trend on the daily graph and descending trend on the sentinel graph. In other words, the testimonies of indicators become contradictory, and trading signals depending on the time period of the graph.

And there is an only one solutionof this problem: to split making a decision on a several stages, analysing different time frameswith different instruments.

Without a doubt, the best way to come to such separation offers the method of three screens. You build 3 graphs and consistently analyze them.

A “middle” screen gets out the first - this is the time scale to which most corresponds the length of the opened position (usually, four-hour or the sentinel graph).

Next, long-term and short-term scales are selected, which differ on about 10 times from the average for middle one. These are usually daily (four hour) and sentinel (15 - or 5 - minute) graphics.

Analysis of the system “triple screen” begins with a long-term graph. The system belongs to trend ones, and the first task which faces here is defining of basic long-term trendin the direction of which it is needed to play, and its state - beginning, middle or end.

Accordingly, on this graph it is necessary to apply trend indicators, the main of which is MACD-histogram. Direction of trend is determined by ratio of two last strokes or points of histogram: an ascending histogram, when the last point is higher than the previous one, points to the upward trend, a descending histogram points on a necessity to play on a sale.

* It is necessary to take into account that a turn or slump of histogram means completion and turn of tendency.

* Turns upwards occurring below the zero line, give stronger signal to buy than turns above the line.

* Turns downward occurring above the zero line, give a stronger signal to sell,than turns below the zero line.

It is recommended to use few indicators of tendencies simultaneously to avoid false alarms. Base rule is to play only in the direction of tendency, exposed on the first long-term “screen”.

For example, in certain moment of time, we see bright bull trend on the H4 graph:

A MACD histogram is in positive area and rises.

On the second middle screen it is necessary to identify movement against basic trend - “wave which runs against current”. It is like the yellow colour of traffic-light - it is necessary to begin prepares to the transaction, the turn of correction on trend will specify on possibility of buying or selling.

At a basic tendency to the increase on the first screen, for example, four-hour graph, hourly downs indicate the possibility of buying, at an a week’s downtrend the daily gettings up specify on potential possibility of sale at the end of the exposed correction. On the second screen it is necessary to use signalman, such as RSI, Stochastic etc.

* At the same time: a signal to buy is given if the first screen have ascending trend, and a signalman on the second screen, such as RSI, fell below the oversold line of 20% and begins to recover;

* a signal to sale is given, if on the first screen have descending trend, and RSI on the second screen rose higher than line of overbought 80% and begins to fall.

Let’s suppose. On the picture we see the ideal moment: stohastik unfolded after the correction and gave an order to buy.

The “third screen” is not the graph even but is the method of placing of orders on a purchase or sale depending on location of indicators on two previous graphs. Elder calls his “sliding order”.

* So: if a basic tendency goes upwards, and correction - downwards, sliding signals to a purchase catch the moment of overhead breaches of level of resistance. The method of sliding order works about buying works when, for example, week’s tendency goes upstairs for a long-term screen, and a signalmen falls on the second daily screen. Place an order about a purchase hardly higher then a maximum of previous day. At getting up of prices position on a purchase must be opened, as soon as a price will rise higher than comb of previous day to the proposed level. If prices continue to decline, it would not affect the order to purchase. Then push the order the next day at a teak above the last peak of quotations.

«Go on a daily to drop an buying order, while it will not appear affected, or until a one-week indicator, developing downward, will not cancel signal about a sale».

* if a basic tendency goes downward, and correction goes upwards, sliding signals to sale catch the moment of lower breaches of support level. At a week’s tendency of lowering wait while daylight recovery signal-man does not involve the method of sliding order about a sale. Place an order to sale a bit below of a minimum of closing date. As soon as a market will set down, you automatically will open position on lowering.

If a price rising continues, daily move the level of order about a sale on a few tics below than a minimum of the last candle. Purpose of method of sliding order about a sale is to catch the moment of daily lower breakthrough. An order comes into force when a daily tendency to the increase is torn off, and an a week’s downtrend again enters into the rights.

How protective orders should be placed in the triple screen system

Stop-order on fixing of loss at position on raising must be put a bit lower than a minimum of this or previous playing day - at the least of two.

Stop-order on fixing of loss at position on lowering must bet put a bit higher than a maximum of this or previous playing day - at the most from two. Further warrants can be moved on motion a market.

And. Elder. «How to play and win on the exchange».

Now let’s look at how correctly we predicted the market.

As you can see, a prognosis appeared accurate. And taking such motion, it is possible to increase the deposit approximately in one and a half - twice.This is truly powerful system.

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4-hour MACD FOREX strategy

Posted on June 13th, 2008 by admin, under online forex trading.

4-hour MACD FOREX strategy

Time range: H4

Used indicators: MACD, EMA, SMA

Transaction Volume: –

Algorithm of tactics:

According to the author, this forex strategy yields an average +300 points of profit per month. This forex strategy was successfully tested on historical data and more than two years traded on a real bill. Signal for entrance are patterns of MACD indicator on 4-hour schedule. Target profit and stop-loss levels are determined by the levels of support and resistance, as well as moving averages or Fibonacci levels.

Used tools

Moving Averages:
365 Exponential Moving Average (365EMA)
200 Simple Moving Average (200SMA)
89 Simple Moving Average (89SMA)
21 Exponential Moving Average (21EMA)
8 Exponential Moving Average (8EMA)MACD:
Fast EMA 5
Slow EMA 13
MACD EMA 1Horizontal Lines:Three sets of horizontal lines above and below zero should be set directly in a window of MACD indicator.

Level +0.0015
Level +0.0030
Level +0.0045
Level -0.0015
Level -0.0030
Level -0.0045

This is how your schedule should look like

Patterns, that MACD creates are very profitable as a rule. However one should execute only those signals which have high probability of success. The strongest patterns are represented in figures below.

At A and D patterns, MACD moved beyond the level of 0.0045, as a rule, this suggests a possible correction or a change of trend. This are contrtrend patterns. Patterns B and C are trend ones, they allow to enter in the direction of the prevailing trend. The red circles indicates to signal of the entrance. One should enter at the opening of the next bar.

Head and shoulders

Double Peak and basis

When MACD decreases to a zero line and it is launched back aside a dominating trend, being kept hardly above a zero line is a signal of a proceeding tendency. Such movement should be taken, as usually it happens strong.

Round peaks and bases. A good signal for action. Just be careful when MACD is within the first zone of 0.0000 0.0015 above or below zero. Pattern should be considered a good signal if rounding formed at least 5 bars.

Examples of patterns MACD on real schedules

The graph below shows how the price like playing, revolves around the levels of support and resistance. The first entry was above average sliding profits and the first goal will be around fast moving average (8EMA and 21EMA). The second goal arrived around will be slow moving average (89SMA and 365EMA). The third goal arrived on the price level will be 1.2100, etc., etc., etc. This is an example of how to plan your trade in advance to take partial profit until the sale is completed.

A level that was last tested by price should be near the entry point so that a stop-loss could be set to this level.

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