The worst thing a trader can do is lose control while on a winning streak. This is where trading in the foreign currency market is similar to gambling. Players who do not know when to stop end up losing everything. This is what we call overtrading. It represents the biggest threat to traders and accounts for the number one source of losing money in markets.
Despite this fact, a large majority of traders continue to overtrade. This applies even to those who buy and sell within the same trading day, i.e. day traders. It is completely unnecessary to trade every single say or even throughout a given day. However, good traders know how to choose only the most advantageous trades and thus avoid unnecessary losses. Indeed, highly professional traders are distinguished by their ability to know when not to trade.
Overtrading is particularly tricky because it is hard to tell when it is taking place. It may refer to the amount of contracts being traded, the frequency, number of positions or even just spending too much time following market trends.
Experienced traders will reduce the size as soon as they suffer losses or an equity drawdown. The amount of investment for a given entry must be determined with regard to a sensible anticipation of its possible return. There is no one-size-fits-all solution and, since every trade is unique, it must be assessed individually.
It is generally difficult to say with absolute certainty which is the optimal number of contracts you should trade. Nevertheless, every time that it is possible, you should endeavor to trade not less than two contracts. The idea is to have one contact which will serve to compensate for expenses and one more to provide you with earnings. It is usually not desirable to trade only one contract, unless you are trading options.
Day traders who would usually trade five contracts should consider trading less if it is late in the evening, the reason being that there is not sufficient time for the trade to evolve as there would be if it had been performed in the morning.
Thursday, March 26, 2009
Monday, March 23, 2009
Trading with Average True Range
Understanding Average True Range
The task of the Average True Range (ATR) indicator is to gauge volatility over a certain period of time. Keltner Channels and Starc Bands are examples of other systems for trading in which ATR is also used.
ATR was devised by Welles Wilder and presented for the first time in "New Concepts in Technical Trading Systems", a book he published in 1978. It is used to determine volatility and computed as the rolling average, over a certain period of time, of a true price range.
To be more precise, ATR is the moving, or rolling, average of usually a fourteen-day period of the true range. ATR is an indicator that is obtained by determining the biggest variation between: (i) the present high and the present low, (ii) the present high and the preceding close, and (iii) the present low and the preceding close.
When determining the true range, account should be taken only of positive numbers, since, as a rule, true range cannot be a negative number.
High values normally signify a greater possibility of a change in trend, i.e. greater volatility, when the market is at the stage of "blowing off". This is due to the fact that investors turn increasingly impatient to reap financial gains. On the other hand, when the value of the indicator is low, the trend is steadier and, hence, volatility is lower, since nobody is expecting to earn fast financial gains.
Hence, to sum up, when the indicator shows high values, volatility is stronger because prices go down as a result of selling. In contrast, low indicator values mean reduced volatility, since prices become more stable or shift to a sideways trend channel before a probable burst.
When interpreting the ATR, you should employ the Accumulative Swing Index together with the Swing Index, as the latter will not suffice on its own.
The task of the Average True Range (ATR) indicator is to gauge volatility over a certain period of time. Keltner Channels and Starc Bands are examples of other systems for trading in which ATR is also used.
ATR was devised by Welles Wilder and presented for the first time in "New Concepts in Technical Trading Systems", a book he published in 1978. It is used to determine volatility and computed as the rolling average, over a certain period of time, of a true price range.
To be more precise, ATR is the moving, or rolling, average of usually a fourteen-day period of the true range. ATR is an indicator that is obtained by determining the biggest variation between: (i) the present high and the present low, (ii) the present high and the preceding close, and (iii) the present low and the preceding close.
When determining the true range, account should be taken only of positive numbers, since, as a rule, true range cannot be a negative number.
High values normally signify a greater possibility of a change in trend, i.e. greater volatility, when the market is at the stage of "blowing off". This is due to the fact that investors turn increasingly impatient to reap financial gains. On the other hand, when the value of the indicator is low, the trend is steadier and, hence, volatility is lower, since nobody is expecting to earn fast financial gains.
Hence, to sum up, when the indicator shows high values, volatility is stronger because prices go down as a result of selling. In contrast, low indicator values mean reduced volatility, since prices become more stable or shift to a sideways trend channel before a probable burst.
When interpreting the ATR, you should employ the Accumulative Swing Index together with the Swing Index, as the latter will not suffice on its own.
Friday, March 20, 2009
How to Trade Successfully During Unstable Markets
How to Trade Successfully During Unstable Markets
Written by Spring Investment Ltd
Many buyers and sellers consider unstable markets to be a time of favorable conditions for trading. While large market variations can represent a great chance for profit, they can also mean losing a lot of money if you are not properly prepared. Unstable markets require traders to modify their approach. In this article, we will look at some important points to consider during volatile markets.
Since unstable markets offer more occasions for trading, buyers and sellers are lured into trading more. This is a mistake because unstable markets also yield greater losses. You should choose your trades wisely, always evaluating risk levels beforehand.
Another important point to consider is the amount of leverage used. Since unstable markets call for a higher average trading range, you need to take into account to what extent leverage will influence your trading. When the margin is 1 % or ½ %, traders must consider what amount of leverage or which position can influence their list of assets. When the market is stable, if you are seeking to gain around fifty to one hundred pips, a two lot position will work well. However, under unstable conditions where you could lose one hundred to two hundred pips, this position is no longer profitable in terms of risk. The solution is to adopt smaller positions, i.e. one lot instead of the average two lot.
Strict compliance with your strategy is a must, irrespective of the situation. This includes times of volatility in which moderation is essential. Risk management benchmarks, set stops and contingency plans have to be followed rigorously. You will benefit from this by being able to determine the amount of risk assumed if price movements get out of control. Failing to do this could lose you a lot of money.
Another mistake that traders make is to refuse to set lower stops in unstable times. By setting lower stops, you can benefit from good risk management during very volatile markets. Let us say that you are trading EURUSD. Instead of protecting your position by using an one hundred pip stop, you should contemplate a fifty to sixty pip stop, which will guarantee that your position is protected and take you out before the trend goes on downwards and increases your losses.
Last but not least, traders should study the root causes of the given market instability so as to be able to anticipate future events. This will help the trader modify his or her strategy to the overall conditions of the market, rather than simply focusing on a couple of currencies. For example, a trader should examine market emotions, i.e. whether the market is going down due to fright or going up because of an upsurge in buyer confidence. When traders overreact, this has a tendency to force a market to full targets and thus bring about instability. In addition to emotions, market instability may also arise from economic occurrences, erratic momentum and panic. The latter is especially critical because it leads traders to focus on quick profits and renounce their trading strategy.
If you adhere to this simple advice, you can reap great advantages during volatile markets
Written by Spring Investment Ltd
Many buyers and sellers consider unstable markets to be a time of favorable conditions for trading. While large market variations can represent a great chance for profit, they can also mean losing a lot of money if you are not properly prepared. Unstable markets require traders to modify their approach. In this article, we will look at some important points to consider during volatile markets.
Since unstable markets offer more occasions for trading, buyers and sellers are lured into trading more. This is a mistake because unstable markets also yield greater losses. You should choose your trades wisely, always evaluating risk levels beforehand.
Another important point to consider is the amount of leverage used. Since unstable markets call for a higher average trading range, you need to take into account to what extent leverage will influence your trading. When the margin is 1 % or ½ %, traders must consider what amount of leverage or which position can influence their list of assets. When the market is stable, if you are seeking to gain around fifty to one hundred pips, a two lot position will work well. However, under unstable conditions where you could lose one hundred to two hundred pips, this position is no longer profitable in terms of risk. The solution is to adopt smaller positions, i.e. one lot instead of the average two lot.
Strict compliance with your strategy is a must, irrespective of the situation. This includes times of volatility in which moderation is essential. Risk management benchmarks, set stops and contingency plans have to be followed rigorously. You will benefit from this by being able to determine the amount of risk assumed if price movements get out of control. Failing to do this could lose you a lot of money.
Another mistake that traders make is to refuse to set lower stops in unstable times. By setting lower stops, you can benefit from good risk management during very volatile markets. Let us say that you are trading EURUSD. Instead of protecting your position by using an one hundred pip stop, you should contemplate a fifty to sixty pip stop, which will guarantee that your position is protected and take you out before the trend goes on downwards and increases your losses.
Last but not least, traders should study the root causes of the given market instability so as to be able to anticipate future events. This will help the trader modify his or her strategy to the overall conditions of the market, rather than simply focusing on a couple of currencies. For example, a trader should examine market emotions, i.e. whether the market is going down due to fright or going up because of an upsurge in buyer confidence. When traders overreact, this has a tendency to force a market to full targets and thus bring about instability. In addition to emotions, market instability may also arise from economic occurrences, erratic momentum and panic. The latter is especially critical because it leads traders to focus on quick profits and renounce their trading strategy.
If you adhere to this simple advice, you can reap great advantages during volatile markets
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