Monthly Archives: October 2010

Supply / Demand Trade Review

More great email Q&A, that allows us all to learn…

Hi Lance,

I would like to know what would you do if you are faced with the trade situation as in shown in the attached files. I’m seeing in the one-hour chart that the supply and demand is in equilibrium, then supply is greater than demand at point A (unbalanced). Then I tried to use the smaller timeframe (15-mins) to find an entry point. I would enter short position at point B. But after moving the screen forward, my entry was wrong. Now I would like to know from your perspective, what mistake did I make? Thanks.

Regards,

Marto

Charts (as per attachment):

One hourly:

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Trading Gaps

A great email question from Mike:

I know you don’t trade stocks but I’ve always read that you leave gaps alone due to reversals. But take LOCM today; what’s the buy point?

I’m thinking $4.30 or is this to soon, or would $4.50 be the safer buy. I found it at $4.30 but stayed away because of the gap reversal, then watched it climb to $4.80 . What are your thoughts on the whole gap play thing?

Having a hard time with this,

Mike

 

LOCM 5 min chart:

Email response:

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Have You Ever Thought to Protect Against These Trading Risks?

When we talk trading risk, most people only ever think about individual trade losses. They rarely ever put any consideration to external risks, that can be just as damaging to your trading business profit & loss.

The following is a great email I’ve received from YTC reader Adam, who kindly gave permission to share his experience…

EMAIL:

Hi Lance,

Just thought I’d ask whether you’d put together anything like this for yourself. After reading YTC PAT and knowing your affinity for process and procedures, I figure you might.

I am now planning on putting together a log to go with my trading plan which will list the main sources of external risk to my trading career, outside of the trading, obviously.

Last night a neighbour knocked at my door and told me 2 guys had just tried to open my window from the street. That’s the window to my office and now that the nights are drawing in (here in the northern hemisphere) I had my desk light on but I hadn’t closed my curtains – this is on the ground floor at street level so my laptop was lit up like in a shop window and I’d gone off to do something else. Fortunately the would-be thieves failed to get the window open (it’s pretty stiff, fortunately) but I could have lost my trading machine.

The experience made me mad for a while but then I realised, it’s my own fault for being so careless. I thought, what else am I risking like this? I’m not the type who likes insurance and even if you have it, often the insurance companies don’t pay out – like in my situation maybe. So I need a financial buffer.

It means I have to put together a log of all these external risks along with:

  1. an estimate of how much it will cost to re-establish afterwards
  2. how long it will take to get back on track
  3. any precautionary measures I need to put in place now

Here’s my basic external risk list that I’m going to work with:

  • Laptop – fire, theft, breakage
  • Internet connection – e.g. if my local telephone exchange burns down
  • Base currency devaluation (GBP)
  • Health – accident or illness
  • Partner’s health – accident or illness or unemployment giving me the burden of her income
  • Child’s health – too ill to go to nursery = costs for a nanny
  • House – fire, flooding, etc

There are probably a few major points that are missing but that’s what I’m working with at the moment.

There you go. Maybe you’ll find it interesting, maybe you have it already. I’d be very interested to hear.

Best regards,

Adam

REPLY:

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Learning to Identify Key Setup Areas

Deliberate practice requires maximum exposure to price action and an ongoing process of learning through trial and error.

Whenever you have a spare five minutes or so, a great exercise you can do to enhance the ‘maximum exposure’ part of your deliberate practice, is the following:

  • Bring up a chart of any instrument you like to trade.
  • Identify the price swings which offered the best profit potential.
  • Identify the best areas for entry to these price swings.
  • And examine price action to see how you could have identified these setup areas.

This brief exercise (repeated over time) will develop your intuitive pattern recognition abilities, improving your ability to analyse price action and identify key setup areas in real-time.

Let’s look at an example, bringing up the FX Futures 6B chart (spot forex GBP/USD equivalent) from yesterdays session, Wednesday October 6th, 2010.

This is not cherry-picking the best chart, with a nice trending market and 100+ pip price swings. This is a choppy session with limited opportunity. This is reality.

The chart below identifies the price swings which offered the best profit potential.

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What is Market Replay?

Recent articles on my session review process mentioned the use of a market replay feature. I’ve been asked for some information on this tool. Not surprising really – it’s something that most forex traders will not have experienced.

Market replay is a feature that has appeared on many futures platforms in recent years.

It allows you to replay the trading session in a simulated environment. Price bars appear tick by tick, exactly as they did when trading live.

It will typically offer controls, as displayed below for play, pause and fast-forward, as well as a slide control to move to any particular chart time period.

We are also able to re-enter and manage trades all over again, this time in a simulated environment.

This is an ideal tool for implementing deliberate practice methods of learning.

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