Greetings and welcome. I’m Dr Sam. I have a start up fund business, a PhD and a professional research interest in financial markets analysis. I trust this site helps you with information I have picked up over 10 years of studying and trading financial markets.
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-BASED ON THIS POST (coming soon)
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In a forthcoming article, we will look at market orders, whereby a quote received from the broker lends the trader a price at which to buy or sell immediately (the ask and bid prices, respectively) and we shall learn that such trades are traded in real time ‘at the market’.
In this article, we will look at another type of order, which can be placed in advance of the market reaching a particular price.
In other words, the order is set and the trader then waits for the market to ‘come to him’ or ‘come to her’.
In the worked example, from today’s live trading (28 April, 2017), the Euro US Dollar (EURUSD) pair was chosen – a popular, liquid currency pair with good momentum on offer during the European session normally.
There are 20 figures used as illustrations for this article, namely: figures A And B, and figures 1-18. To enlarge an image, simply left-click on it to view the image in more detail
What is a limit order?
The limit type of order is used for trading when the trader expects a reversal of the price at a chosen, designated level at which the trade will be opened, if and only if the price reaches that level or goes beyond it.
Limit order metaphor
A metaphor for thinking about the limit order concept is the price ‘reaching its limit’.
Once something has reached its limit, it cannot go further, and needs to come back.
Thus, if the market price of an instrument is going up, a sell limit will sell the instrument once it goes up to what the trader perceives to be its ‘limit’.
If the market price is coming down, the buy limit order will execute a buy trade when the price comes down to the limit order price.
Therefore, a buy limit order, is set at a price lower than the market is currently trading.
A sell limit order is an order set to enter the market at a higher level than the market is currently trading.
The contrasting pending order set are the ‘stop’ orders, a buy stop being a buy order in the upward direction above the current price, and the sell stop being a sell order below the current price. These will be covered again and again, and in detail in another article, so keep reading even if you do not ‘get it’ yet.
Hypothetical limit order example: DAX cash index
Let’s say the German DAX cash index (an index of Germany’s leading stocks) is trading at 19243.5/19244.5 with a spread therefore of 1 DAX point.
Most charting platforms will plot the price using either the bid price or the mid-point between the bid and ask price, that is the SELL price offered by the broker, or the average of the sell/buy prices, respectively.
Options may exist within the platform to show additionally the ask price, such as below in the Metatrader platform (figure A), whereby a line will be added showing the current ask price.
In Metatrader 4 trading platform, right click and select properties, or simply key ‘F8’ and select ‘show ask line’ under the common tab.
The trader thinks that rather than entering the market now, the price is likely to retest a level such as 19235 (i.e. head down before going up).
Imagine that there is insufficient room, or confidence for the trader in this example to actually sell (trade) the market down to 19235.0 from 19243.5, but the trader does think that the 19235 level is a high proability candidate for a strong bounce, forecasting a catapulting of the price back up to the 19275 area, a move of 40 DAX points upwards.
In such a situation, the use of a buy limit order will allow the trader to get into the market at the desired price, with a preset order for the broker to execute, and a stop order that is fairly tightly below the support (in case the support fails, e.g. at 10 points below the entry, for a loss of 10 points in this event).
For example, the trade may place a buy limit order for a buy order to be instigated at 19236 (ask).
Therefore, when the bid price reaches 19235 (assuming the spread is equal at 1 DAX point), at that moment, the DAX will be bought at 19236, because the ask price will be at the buy limit order entry price, at which it will be converted to a market order.
Rather than entering the market with a buy trade at present time, a better bargain can be had by waiting to enter at a lower level. We will be looking at many trading strategies that will employ this risk reducing and profit increasing principle in this pro trader fast track trading course.
Trade planning in limit order execution
The buy/sell limit order allows the trade to be planned out in advance, not only the entry level, but the stop loss at entry and take profit at entry may also be setup in advance, in addition, of course to the position size.
The orders when placed for a sell limit and buy limit with pre-trade risk management parameters will be as follows:
SELL LIMIT (with BUY STOP LOSS [EXIT], BUY LIMIT TAKE PROFIT [EXIT])
BUY LIMIT (with SELL STOP LOSS [EXIT], SELL LIMIT TAKE PROFIT [EXIT])
Figure B provides a visualization of these four types of trade in metatrader and where they are supposed to be headed if used for entries.
In both cases, the stop loss order and the [limit] take profit order both have the effect of closing the trade either at a predefined acceptable level of loss (the stop loss), or at the predefined acceptable profit target level (the [limit] take profit).
Full workthrough from today’s live trading
From today’s trading, we take the reader through a limit order using the Metatrader platform and trace the evolution of the trade in images and commentary.
Figure 1. Trade Idea. Selling the Euro off a resistance level – M15 EURUSD candlestick chart
Figure 1 shows a EURUSD chart, the timeframe being 15 minutes per candle.
Rationale for limit order price point
Floor trader pivots (pivot points) show that the price has struggled to close above the mid-resistance 2 level, while the high of yesterday and the resistance 1 level have been clearly exceeded in a strong 25 pip upmove, likely to have resulted from news.
Assuming that the MR2 level struggle is a sign of the market being overcooked, a sell limit could be placed above the current price, with a stop loss at or above the current highs, and a suitably placed take profit, according to say, a risk:reward 1:2.5 or above trading rule.
It is also Friday and the end of the month, and we are not expecting huge ranges to be carved out, neither that the European economy is expecting a miracle today.
Furthermore, technically, the M15 chart shows clearly a normal reversal candle indicating potential impending weakness, and that candle is looking to close well within its lower 25% region, another sign that bears might take control for a time.
But this is only the 15 minute chart, so let’s await a retest of the MR2 to get a better entry to go short. A sell limit order will do the trick.
Figure 2. Setting up the sell limit order (1), by opening the order window.
Setting up an order in Metatrader 4
In figure 2, the ‘F9’ key has been pressed, or some other of several ways to open up the NEW ORDER menu in the platform, in this case Metatrader .
The current bid and ask price are revealed, and the type of order needs to be changed to ‘sell limit’ using the dropdown menu.
This is done in figure 3, below.
Figure 3. The pending order window set to sell limit in metatrader 4, with the EURUSD chart in the background.
Figure 3 shows the pending order being set up by the trader.
The volume shows the number of standard lots to be traded.
The stop loss allows a pre-defined [buy] stop loss order to be placed at the same time as the limit order is placed.
It is a buy stop loss, because once we are in the sell (selling Euros, buying US dollars in effect), we must buy back the Euros at a later exchange rate in order to realise a profit/loss.
Similarly when buying shares, one must sell the shares back into the market to realise a capital gain; it is as though the transaction pair is the share vs. the currency the share was bought in. It is an exchange transaction in the literal sense.
A take profit can also be placed (note that this is essentially a buy limit order, therefore at the ask price, which will have the effect of neutralizing the position and thus, have the effect of closing the trade).
Finally, on many trading platforms it is possible to add a timed expiry to the order, for example, after 15 minutes, or 1 hour, or whenever the trade is no longer desired if not filled. This will automatically delete the order if it is not filled at the expiry time.
Figure 4 shows what the chart looks like after the order has been placed. The – — – — dot-dash lines show the orders that are now on the chart.
The other lines are related to the floor pivots and the dotted red line just a visual tool to inform the trader of the price at which the high of the previous candle topped, and thus where to place the stop at or just above.
Figure 4. A placed sell limit order, with pre-defined stop loss and take profit (modifiable)
Risk management – stop loss, take profit and risk reward
The stop less (buy stop order) has been placed exactly at the high of the previous candle, plus 1.1 pips spread at 1.09488.
It is the ask price that will trigger the stop, since it is a buy stop order essentially.
When will the sell limit be converted to a market order?
The sell limit order is at the MR2 line, less the spread, at 1.09412 bid. A bid price of 1.09412 will trigger the entry.
The stop loss is therefore going to be 1.09488-1.09412 = 7.6 pips from entry, including an assumed spread of 1.1 pips, the current spread.
Initial take profit setting
The take profit order has been set at 1.0912 ask, just tucked above where the 8 simple moving average currently sits, 1.09412-1.09120, i.e. 29.2 pips below the entry price.
Note that the price shown in black highlights to the right of the chart is the mid price between the bid and ask, and that the take profit price in this case, refers to a buy limit order, therefore, the ask price.
For the take profit to be hit, the bid price therefore needs to reach about 1.09109 (1.1 pips lower – assuming this spread stays the same) for this buy limit (take profit order) to be triggered. It is the ask price that needs to reach the specified take profit level. Remember, the ask price is the brokerage price at which the broker will sell the instrument – it is what they are ‘asking’ for the instrument, therefore it is the trader’s BUY price.
The bid price is what the broker (and thence at least one other trader) is willing to ‘bid’ for the instrument. Therefore, it is the price at which the trader can SELL into the market.
Calculating the initial risk to reward ratio
The risk to reward then is 7.6:29.2 = 1:3.84 risk to reward ratio. We are willing to risk 7.6 pips in order to gain 29.2 pips at the outset.
Figure 5 shows the chart labelled manually, although these prices and the type of orders are shown to the left of the lines, out of the scope of the image.
Figure 5. The sell limit order with stop loss and take profit labelled.
Adjustments to the trade can now be taken, simply buy clicking on and then dragging any of the three lines around the chart.
Adjusting the take profit order (buy stop order)
In figure 6, below, the take profit has been moved up to 1.09211, or 19 pips from the entry price plus the 1.1 pips of spread, a more modest, yet still acceptable, 1:2.5 risk to reward ratio, with the take profit sensibly sitting just above the R1 resistance floor pivot point.
Figure 6. Take profit adjusted to a more modest level, but maintaining 1:2.5 risk reward
The trade has still not been filled at this point, though has come within 1 pip of being so. Everything is planned out in advance, so that we can let the market come to us, and let the trade take care of itself.
Figure 7 shows what the order looks like in the terminal region of metatrader, whose default placement is below the charts.
The order number has been obscured, as has the volume amount traded.
Figure 7. Order number, time, type, volume, instrument, price, stop loss, take profit and current price, for a sell limit order.
Figure 8 shows the tick chart from the market watch window, which shows the bid price being plotted tick by tick in real-time.
If the ticker chart ticks up 1.9 pips, then the sell limit order will be filled and the trade will be placed in the market, along with the stop loss and take profit orders earlier defined.
Figure 8. Tick chart alongside the sell limit order on EURUSD M15, showing the current bid price.
Sell limit order conversion to market order – order filled
In figure 9, the order has finally been filled and is shown in the terminal window, now with added columns, namely: commissions to broker, overnight interest paid (may be positive or negative depending on interest rate differential and the timing of interest payments overnight), and finally the profit/loss on the trade at present.
Figure 9. Order number, time, type, volume, instrument, entry price, stop loss, take profit, current price, commission, overnight interest and net profit/loss on trade (obscured).
There is nothing much more to do except for wait out the result of the trade and monitor the progress of the price action.
Evolution of the trade with the desired stop loss and take profit orders in place
Figure 10 shows the first evolution of the sell limit trade, now that it has been converted into a sell order that is already in the market, with its concomitant stop loss and take profit orders at -7.6 pips and +19 pips respectively, for a risk to reward ratio of 1:2.5.
Figure 10 EURUSD Sell limit trade now sell order in the market, with stop loss, take profit and risk management parameters (risk reward ratio shown by the red and dark green blocks).
Figures 11, 12 and 13 show the trade evolution over the next few hours.
Figure 11. EURUSD M15 chart 45 minutes after entry, with target areas marked
Triangle trading pattern
In figure 11, notice that a triangular pattern of consolidation seems to have emerged, being tested 4 times to the lower side, and twice to the upper side. This can be a continuation or reversal pattern, however, that this has now broken to the downside is a positive sign.
Quite soon after this breakout, after a similar mini-ranging movement, the trade then quickly reaches the 1:2 risk reward level (see figure 12).
Figure 12. Evolution of EURUSD trade triangle break
As figure 13 shows, after the break of the triangle to the downside, we now appear to be within another tight range, this time though, we can draw in the diverging wedge, using dotted lines here as each side, upper and lower, have only been tested twice, for a total of four times.
Furthermore, the lower side of the triangle from figures 11 and 12 is shown as an unbroken line, as it now becomes resistance, having been tested four times, it should support our sell trade.
Figure 13. Progression of trade with converging and diverging triangular/wedge formations
Figure 14 shows the trade almost completed, reaching the reward area to within 1.5 pips.
Notice also that the descending wedge lower line is just above the 2.5 reward area.
Figure 14. Edging closer to the take profit area of the 1:2.5 risk to reward trade
Intervention: trailing the stop up
For this reason, following the axiom ‘don’t let a winning trade turn into a loser’, we elect to bring the stop loss up to 1.25 of the risk, locking in a 1:1.25 risk reward, not optimal, but if the market decides this wedge is to catapult the price back up to the top, the trade would be back to where it started or worse, so this is a sensible option in this case.
Thus, the stop order (buy stop) is now the guarantor of a profitable trade, provided there is not some freak, very low probability instance of chronic slippage at or through that particular level.
Figure 15 shows the new [buy] stop loss order, which will have the effect of closing out the trade at a profit of 1.25 x the size of the original stop loss, but in (+)profit rather than loss(-) terms to the trading account.
Figure 15. Stop loss moved to 1:1.25.
The new stop loss, in its essence a trailing stop loss, because we are ‘trailing it down’ with the lower time frame swings down (kinetic energy movements), followed by smaller corrections up (potential energy gathering), is just a fraction above the high of the most recent swing correction and is labelled in figure 15.
The figure shows the 5 minute chart (incorrectly labelled as 15) to demonstrate the swing taking place at this lower timeframe, suggesting the stop is positioned reasonably, just above the most recent high in a correction within a series of downswings as just described.
Figure 16. Completion of the trade, and buy stop order (take profit) executed at 2.5 x the risk taken in the trade.
Figure 16, above, shows the completion of the trade.
Finally, almost 15 minutes after the stop loss was trailed to 1.09316, the market takes out the take profit level, providing the soothing 2.5 x reward to the risk taken.
Completion of the trade
The take profit (buy limit) order is completed, the details logged and the profit booked.
Here is what the completed order looks like in the terminal area of the Metatrader platform, figure 16, which is the penultimate figure in this series.
Figure 17. Order number, time of order, type, volume, symbol, entry price, [most recent] stop loss, take profit, time of close, price the trade was closed at.
The astute reader will notice that there is a discrepancy as can be seen in terms of the take profit order (the buy limit at the ask price order in effect).
This required some investigation. We talked earlier of the level 1.09211 yet the trade was closed out at 1.09225. What happened?
Further investigation by way of examining the chart (and seeing the price action in real time), plus a simple call to the broker revealed the cause was slippage.
The volatility of the market, captured in some way in figure 18 below meant that even though the take profit was triggered in the right place, the best price we could get out immediately after the trigger was 1.4 pips greater than our desired take profit.
The remedy to this would have been to allowed 1-2 pips for slippage over and above the spread when calculating the risk to reward ratio.
As it happens in this trade, the market did continue down, so this would be noted in trade journaling as a point for consideration, because over 1000s of trades, that slippage is going to add up and needs to be dealt with by factoring in some kind of average slippage, or slippage factor weighted by volatility in the current market to neutralize it.
Figure 18. Volatility on the exit candle (3rd candlle from the right)
Figure Note. The long wick on the exit candle was a very quick bounce off the take profit area (marked in green), demonstrating that there was considerable profit taking or buy at market and limit orders around our take proft, to the extent we could not get an excellent fill on this trade, thus losing 1.4 pips to slippage.
On the one hand this serves to demonstrate we picked a sensible price to exit, but on this occasion so sensible that the rest of the market’s buying in the absence of sellers at that moment, created a small liquidity gap and hence gap in the price action, resulting in the slippage – the next available price to buy when the price reached our buy limit of 1.09211 was immediately 1.09226.
The broker took us out at that best possible price to buy once 1.09211 had been touched.
Summary and Conclusion
Analysis for trading journal
Final analysis: the trade was entered on the exhaustion of a Friday morning burst, with a sell limit at the retest of the MR2 (mid-resistance 2) resistance line, confluent with an H1 warning 1 (unreported). The trade was filled and a 1:2.5 risk reward trade was set up, with 7.6 pips risk. As the trade progressed and almost hit the take profit, to within less than 1 pip, the stop was moved to -1.25 x the stop loss ahead of the break even point. The trade went on to hit the -2.5 x stop loss reward area, but 1.4 pips were lost due to slippage. In the end, 7.6 pips were risked, and 17.6 pips made, for a final risk:reward ratio of 1:2.316.
In conclusion, using a sell or buy limit order is a more sophisticated way to manage the entry of a trade, allowing the trader to have greater control over the parameters of a trade, in advance of the pricing reaching the desired level of entry. The same goes for sell or buy stop orders, which are covered in the stop order article.
About the author
Dr Samuel Alexander Beatson gained his PhD from the Research Centre for Banking & Finance at the University of Nottingham in 2015. He has taught financial markets analysis for more than ten years, including during a two year position at King’s College London, as a researcher and fellow at the Lau China Institute. He is the head of trading and market analytics at Quantisi Ltd.
Freddy FastTrack’s FastTrackForex.com quote of the day
Everything is planned out in advance, so that we can let the market come to us, and let the trade take care of itself.”
Top 3 Trading Moments from this trade
FREE PDF version of this article is available for saving or printing, click on the pdf icon below (opens in a new window).
To cite any part of this article, use the following citation information: Beatson, Samuel A., "Fast Track Pro Forex Trading Course: Limit Orders.," in Forex, Commodities & Stock Index Analysis by Dr Sam Beatson, April 28, 2017, http://www.fasttrackforex.com/2017/04/28/pro-forex-trading-course/. Accessed online on April 30, 2017.
I find more evidence from the close of last month than ever previously of the stock market having topped out in the US and elsewhere, however, I do believe that Hong Kong and China have energy left in them, even though they took a hit last week. Here is an article I have written and had published which puts my view online in another forum.
As many of you know, I write and do research on China, and extend my finance work to the Chinese case, both in terms of the currency, economy and stock market of China, more recently also political economy.
Here is a link to my being interviewed recently on BBC news.
I have been working for several months on how to best publish automated forex signals on this site. My tentative conclusion is that I am able to publish the following signals at present, along with charts and will endeavour to have this up and running, free of all charges, within the next 1 month.
I will provide the following signals, as they occur, for educational purposes only.
These will be provided at the following operational timelevels
DAILY; HOURLY; 15 minute (30 minute – see below)
On the following instruments
US500 (S&P500) cash index
The signals are informative rather than signs to absolutely execute a trade in the market.
They should be watched and studied and in no way constitute investment advice. Past performance does not inicate future performance, your capital is at risk and this website and its owner will not be held responsible or liable in case that any educational information on this site is read to constintute trading or investment advice.
SIGNAL 1: MOMENTUM MU (μ)
An advance warning signal that momentum may be changing direction on a currency, commodity or stock market index (Warning 1).
A second warning signal that momentum may be changing direction on currency, commodity or stock market index (Warning 2).
An unfiltered* signal to the effect that momentum seems to have changed to a particular direction (Warning 3).
*in sideways and choppy markets, warning 1,2,3 might signal in either direction. I like to see warning 1,2,3 come together in that order, and within 3-5 candles on the operational timeframe.
Many more pairs and instruments will be provided in a private members area that I am setting up. Check back regularly for updates.
SIGNAL 2: ‘STRONG’ REVERSALS
These signals will show where a reversal candle has been posted, demonstrating strength as defined by an algorithm I have been working on recently to improve filtering of reversal candles.
Reversal candles should in the vast majority of cases be used as a guide to an imminent reversal. As such, it is invariably best to use the following two rules of thumb.
Rule of thumb (i). Seek to enter on a 38.2%, 50% or 61.8% retracement of the reversal candle – for example, when the signal posts, the closed reversal candle will be visible as the most recent or second most recent candle to have closed. Entry should be by buy limit (for up reversals) at a retracement area, not immediately, sell limit (for down reversals) at a chosen retracement area.
Rule of thumb (ii). A stop is invariably placed between 3 and 10 pips/ticks above the reversal candle, depending on timeframe used and the target.
SIGNAL 3: MOMENTUM NU (v) – 30 minute chart only
These signals will fire off when the price reaches a point that a proprietary measure of momentum is aligned across multiple timeframes.
The two entries are:
Immediately on the signal firing (aggressive)
Awaiting a retracement to the 50% level on the M30 or H1 charts.
SIGNAL 4: OVERBOUGHT / OVERSOLD
These signals should be used as a signal that a reversal might be imminent, or that the immediate market may have become overheated.
In view of the above headline and keeping things succinct, I am of the view that Trumps diplomatic incompetencies and thus his seemingly constant and deliberate faux pas, not to mention his proposed foreign policy on trade with China and Mexico can mean only one thing and that is much higher costs for American businesses. As a result, I believe that the bull market in stocks which, inconsiderate of corrections, since 2008, has had its day and will begin to correct seriously in this quarter, if not then in the next quarter. This is just a view I am forming, it in no way constitutes investment advice or even education, this is a blog, not a bank.
However, in light of the above view I will be looking for significant technical reversal signs in stocks. I received Fidelity‘s 2017 outlook this week and that is bullish on equities, bearish on bonds for the whole of 2017. I guess only one of us can be right on this!
Also, like Jimmy Young, I am now bearish on the US dollar. Dollar rallies are showing a significant possibility of having had their run most major currencies, barring perhaps the loonie (US dollar, Canadian dollar pair) could offer short term opportunities as of next week, in my view, to sell the US dollar.
Here are some possible strategies for trading based on the technical assumptions below each graph and the talking down of the dollar from Trump’s words of last week.
Australian dollar US dollar
Here is the aussie dollar vs US dollar
Been in a strong uptrend for about three weeks now, the aussie gaining ground agains the US dollar and has broken and taken out stops above the most recent swing high on the daily chart. I do not like the fact the stochastic oscillators are overbough at the moment, although I do see the 60% and 100% extensions of the most recent swing down as potential targets. Friday finished indecisive. The only strategy on offer to me, is to either buy on a dip, or wait for a breakout of Friday’s high, so there’s nothing immediate to me there. The bias is long though.
Oil (WTI CFD)
Oil has had a volatile run up from 43.65 early November and is topping out at around 55.80. A stronger close on Friday, but did no close above Wednesday’s high, although penetrated above it during the day. It has nicely ‘turned up’ its 8 simple moving average, and the 20 moving average will continue to turn up on a higher close. There is also a series of higher lows over the last two weeks. I would certainly consider buying the 50% retracement of Friday’s candle, particularly because it is confluent with the 8 SMA. A stop below Friday’s low would require a clear break of the 20SMA to work, similarly a stop below the low of either last week, or the week before. The problem with the wider stops is that for decent risk to reward, that would require taking out the last two major highs of early December (the candle after the gap) and the one mentioned earler. Clearly oil is making significant swings up and down, I don’t fancy taking a direction on it, except to look at the possible entry mentioned, possibly with a tighter stop based on a lower timeframe.
Great British Pound vs US Dollar (Cable)
Huge day on Tuesday with May’s confident Brexit speech which sounded softer at first with its talk of integration and community in my view. Huge gains were to be made on both this pair and the cross pair pound-yen (GBPJPY) below. There is a bit more steam and room left on the oscillators. The pair was also boosted by Trump’s dollar weakening statements and the inaugural speech which seem to make investors flee the dollar on immediate reaction (and buy anything including gold, euro and pound). Again, I think there is room for a further leg up, but nothing screaming at me right now to buy the pair, mainly due to those looming averages the 40 and 50 SMA in turquoise. A clear break of the high of the Brexit speech day (Tuesday) leaves the upper Bollinger band to contend with and the 200 SMA, technically on this chart, but it would be a new swing upmove clearly in play. Certainly one to watch and again, long bias against the dollar. A possible high risk buy on a break of the two averages and the high 3 weeks ago or so. Not too appetising for me though.
Here is the:
Here’s where I am thinking the stock market hasn’t much left in it. This view gets annihilated as soon as there is a break higher of course, but it has been flat for about 2 weeks after a limp attempt to go higher, then was attempting to breakdown a few weeks ago. Plenty of bearish divergence on the two oscillators. I won’t sell the index, but given gold’s ascent, I think that stocks ought to follow in the reverse direction, with the start, potentially of a major bear market.
This is the best chart of the lot in my view. It is a weekly chart. Taking the trend to be the upward channel for now, there has been a clear break from zone 4 into zone 3 this week using zone channel analysis and a strong bullish reversal candle. Therefore, looking for opportunities to re-enter a long dollar, short Canadian trade on a 30%, 40% or 50% retracement of last week’s candle is a thought, but bearing in mind this is a weekly chart, position sizing managed accordingly to give a stop below the weekly low, or look for something on the daily or H4 chart to work with in this regard.
The second chart shows the retracement levels for entry, namely the 40%, 50% or 60%. It is worth noticing the zone 3 line as well. The lower the retracement chosen, the lower the risk in point terms, yet the lower the chance of actually getting a retrace that far, to that level.
Of course, we could say that the a 2 bar reversal means a break lower than the low of the previous bar, after two consecutively higher lows, higher highs and higher closes. This is one definition of a 2 bar reversal (indeed it will be the definition of a 3 bar reversal in the next post in this series – in case you can’t wait).
However, we will make it quicker to define a 2 bar reversal.
Very simply, in an upmove, a 2 bar reversal means the price goes below the close of the bar before the previous in a situation of 2 higher highs and higher closes.
In a downmove, a 2 bar reversal means the price goes above the close of the bar before the previous in a situation of two lower lows and lower closes.
Simple and effective rule. I will add some images later.
This outcome has been powerful following that trend and from buying a new entry into zone 3 (NB the zones have been marked slightly off, the numbers in the chart – 1,2,3,4 should be LOWER down within the respective channel).
We will go through each part as a summary.
Firstly, we were looking at waiting for a retrace into zone 4, followed by a strong reversal back into zone 3. This occurred 21 candles from the right, counting left (see the first image – I have redrawn the channel lines so they may be slightly different).
We said it is worth waiting for a 40, 50 or 60% retrace of such an entry candle and this occurred during the next candle, giving us our entry.
A possible first target then becomes the top of zone 2.
Note, there are other possibilities for targets. For instance, you could use the level of ZONE 2’s top and ZONE 1’s top AT THE TIME OF ENTRY for alternative (and more conservative targets.
The stop marked on image 2 is a sensible position to put the stop, underneath the most recent swing low. It could also follow a break of say 10-15 pips below the channel bottom. I prefer the swing low stop, because sometimes the market will spike below a channel, but then close back inside the channel to and the channel may remain valid.
Target 2 is the level of the top of zone 1.
It can easily be seen that the risk:reward ratio for this trade no matter which target is outstanding. Getting it right only 40% of the time if aiming for target 2, would yield a profitable result if consistently maintained over the long term.
The stop loss: 35 pips (30+2 spread+3 slippage)
The take profit at each target and risk:reward ratio
100 trades at 1:2.85 risk reward, with 60 incorrect (40% success rate)
= -1(35 x 60) + 1(100×40)
= -2100 + 4000
= 1900 pips (net profit).
As for the gold trade, this has also reached the extension target mentioned in the earlier post.
Here was intial trade call – NB I was sick over Christmas, hence the use of a mobile app image.
Here was the first follow up image, including a target area for the extension.
And here is the result, I am delighted to present:
Let’s go through this post-analysis.
Firstly, we’ve been through the entry several times, I suggest going back over the previous posts on gold for the entry.
I’ve added into this chart the possible options for stops we could have used. I opted on a discretionary basis for the option 2 stop or thereabouts, essentially in case of a nasty spike down at a higher level, which did not occur. Therefore, I had to scale down position sizing in order to be able to reasonably accept the potential loss of the stop, unfortunately, but that is the nature of discretionary decision making.
Stop options 1a, 1b, and 1c would have meant that the market had to take out the low of the day prior, the day prior to that, or 3 days prior to the entry candle, again all reasonable and increasingly liberal places to put a hard stop and effectively, accept a loss.
None of these stops would have been hit.
Target 1 is not an unreasonable first target to aim for because it is a hit of the top Bollinger Band. These bands are simply an extension above and below the 20 day simple moving average. The distance from the moving average above and below the bands are 2 standard deviations of the price during that 20 day period. These are the standard settings. Assuming normally distributed prices around the moving mean (the simple moving average), the price ought to stay within the bands approximately 95% of the time. Therefore, when the price hits or exceeds above or below the bands, it can be a time to look for reversals. There are notable exceptions to this, just as there are notable reasons one might consider ‘obeying’ the Bollinger Bands. We’ll go through this in another post.
As can be seen, yesterday and today, the extension target (2) has been hit at 1200. Although there are chances of gold going much higher, I will be coming back to gold later now this trade cycle has completed itself.
GBP failed to plug its gap last night, disappointingly, falling throughout the Asia session and most of the UK session, finding a bottom during the US morning at around 1.2120, bouncing back to about 1.2160 from the open of the week at around 1.2260, a 140 point gain for the greenback against the pound. Thanks to the 25 point stop loss, risk was contained to only 25 points.
Going back to the Australian US Dollar posted on Friday. Here is how that one is working out – a great trade to demonstrate here in fact and one that can be repeated often.
Firstly, the channels were drawn in and a plan was made to enter on a powerful re-entry into zone 3. This occured overnight and it is often worth waiting, as discussed here, for a pullback of 40%, 50% or 60% of an entry candle, to get a better price.
This occurred, with an entry at the 50% line (actually the market retraced a perfect 60% of the candle as can be seen. I normally take the 40% or 50% because they are more common – I would rather pay a bit more to actually get in on the trade. It is still a ‘bargain’ compared to buying at the close of the entry candle. See this post on gold trading strategy for another example of this kind of SIGNAL – PULLBACK – ENTRY setup.
The overnight Asia session trade offered the entry signal, the next four hourly candle the pullback (buy) and you can see a couple of extensions which are good to go for – the first of which has been hit – a repeat of the first move (the length of the entry candle) x 60%, the second target being 100% of that move, before we might reasonably expect another retrace and follow through type setup, provided we have not hit a very important resistance (note the most recent highs with the triple top are undoubtedly a place where short stops will have been placed.
Stops can follow each candle’s low, or even a few pips below the 60% retracement of each successful bullish candle if something tighter is desired.
Right now, the price is bouncing off the 100 day SMA, has already reached 60% of the entry candle, which actually offers a profit of 110% the length of the entry candle, because our actual entry was 50% BELOW the entry candle’s high. It has gone on to hit the 100% So a very satisfactory trade already, meeting the 1:1.5 risk reward target.
To reach the 100% extension line above, we had to contend with the triple top from last week. I would argue that some profit ought to be taken now for sure, perhaps as much as 1/2 or 2/3 of the position and the trade turned into risk free (move the stop above break even), allowing the rest to run. So I will turn the stop to around 10 pips below the triple top high.
It is hard to tell right now whether the momentum is sufficient to carry the trade through onto new highs in zone 1, but the trade is now a swing breakout as well, so it is looking auspicious indeed for the commodity curency.
Nice trade and caught nice and early, you’ll agree from the previous post on it.
Cable was expected to open with a gap today and has, after PM May interviewed with Sky news today (Sunday). The normal play is to trade the filling of the gap, so a purchase of pound against dollar, stop several pips below the open and due to the small size of the gap, it has to be for a 1:1 risk reward of about 15-20 pips risk for 15-20 pips profit, factoring in also a slightly wider spread due to thinner liquidity at these hours. Quite tight to do, but one has to trade what one sees, and the pattern of gaps filling is not generally one to trade against. If it does not fill overnight, it will probably fill some time next week, so a good target level to reach for any buy trades this week (1.2272 or so) if the market does trade lower and take out stops over night.
I have actually gone for a more ambitious play having seen that the gap only exists on lower timeframes like the M30, M5 and M1. I have actually gone for a 25 pip stop and a take profit of 115 pips, a play I will take again later if it doesn’t work out. Second or third time lucky is fine with such a high risk to reward.