A moving average reversal, trend and momentum based trading system—example NASDAQ trade

Review

In the last article in this series, we introduced a way to establish intraday momentum on the M15 and the H1 charts, using only moving averages, with Bollinger bands for confirmation of viable trend exhaustion (a reversal).

Let us take the basic anatomy that we have explored and the trade that was identified on the NASDAQ cash index chart, and explore the follow on from that.

We suggested that given the matrix in the previous post, the downward bias can be clearly seen, with the full short term momentum signalling down on the M15 chart, and the first warning on the H1 chart.

Furthermore, recently, the price action had touched the upper Bollinger band on both charts, informing us of a possible trend exhaustion coming up.

Chart setup – M15 and H1

Here are the two charts as a reminder.

Chart 1 – 15 minute chart of NASDAQ cash index

Figure 1. NASDAQ cash index 15 Minute chart.

Signal candle

The signal candle for entry using the system we have built up is the last candle showing on the chart (close of the 1st candle in from the right).

The entry candle has offered a greater price change than any of the preceding 8 candles, and has closed very easily within its bottom 25%, it is a classic momentum down candle, closing also nicely below all three of our short term momentum averages.

Stochastic Oscillator

Notice also that a Stochastic oscillator (14,3,3) has been added and the main line is diverging away from the signal line, and both are pointing downwards, having just breached the 80 level from above, another good sign that we are on the right track.

The downward sloping longer term averages support the directional bias of the trade and add confidence to the entry.

One Hour Chart

Entry, stop and target price

On the one hour chart, we add the entry price, the stop and a 1:2.5 risk reward target to the H1 chart.

Bollinger bands sidways

We earlier noted that the H1 Bollinger bands were trading sideways, in which case, the bottom Bollinger band should be a serious candidate for a bounce.

Price should range between the bands in such a condition.

Entry candle from the one hour chart

Below is the entry as it looks on the H1 chart, the entry being the close of the rightmost candle.

The 3EMA ‘Elbow’

Note the acute elbow-like hook on the 3EMA, which forms our warning 1, given that it closes below the 5SMA on this chart.

One hour chart of NASDAQ cash index

NASDAQ cash index trading strategy

Stop loss

The stop is 12 Nasdaq points from the entry, including spread (5390 VS 5378, respectively).

This level is sufficiently tight, but still above the 88.6% retracement of the H1 candle, what I call the ‘point of no return’.

Alternative stop

An alternative stop would be just above the high of the H1 candle, but no higher, unless we were trading from an H2 chart, which we are not in this case.

Target risk reward level

The ultimate target of 1:2.5 risk reward is conveniently tucked below the current level of the Bollinger band lower line, which we believe will be hit in a sideways market, at level 5348.

We are therefore looking for the momentum to take the Bollinger band itself lower than its current sideways static level, as the market travels down, in order to reach this satisfactory risk reward area.

Trade progression

Following from our previous look at a trade triggered by confluent indications of a downward move starting from the M15 chart, leading the H1 chart and giving a high probability of reaching the bottom Bollinger band, after a reversal near the top of the H1 bollinger bands, sufficient momentum from the moving averages trading system described here.

Let us see the progression of the trade now, using the M15 chart and introduce some more advanced technical forecasting techniques, and visualise the risk management strategy.

Progression of the trade on the 15 minute chart

Complete trade evolution

The above chart shows the evolution of the trade from start to finish, using the operational timeframe, namely, the M15.

This article is continued by using some more advanced technical analysis and trade management techniques.

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Trading the DAX opening gap

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Introduction

Just a quick share for members and non-members alike, pointing out the possibilities of trading a gap down to its open.

Gap size

This morning, the German DAX cash index opened with a gap of about 20 DAX points.

There was no commensurate overnight up-move in the S&P500 CFDs, which might indicate risk-on sentiment and a strong move up in advance.

Post-gap action

From 7am London time, the market continues to advance away from the gap, with some technical signs of overheating.

First sell order

In the first order, a sell stop is placed to sell the market at 12467.2 just before 8am London time. The market continues to advance, so this order is not filled and is cancelled.

At precisely 8am London time, the latest 5 minute candle shows strong bullish candle, but which again shows technical overheating, and several of the other timeframes are also showing such overheating.

In this case, the overheating indicator confluence happens to be the Commodity Channel Index (CCI) set to 5 periods, and the overheating level is 167.

Second sell order

A sell stop is placed just below its high, at 12477.5, with a tight 4 point stop loss and a take profit of 12445.5. The stop loss is promptly hit, which is to be expected with such high reward trades.

In this case there was an additional 0.2 points of slippage, taking the loss accrued to 4.2 points – not exactly a bank breaker!

The idea here is to accept small losses, but to stay in for the big winning trades.

Third sell order

We will have one more try, the order being set to enter again, after the doji just below its open and just below the high of the overheating candle before that, an aggressive sell stop entry entry of 12378.35.

NB In the Quantisi Ltd. trade plan, which I will be making commercially available via this blog, a maximum of 3 units or 3 tries at any one given trade is the absolute maximum, and sticking rigorously to the risk management strategy is as always, essential.

Sell stop order filled

Figure 1, below, shows the trade having been placed. The entry is shown by the green dot-dashed line at 12478.35 (bid – filled), the stoploss is just 3.15 DAX points above that at 12481.5 (ask), allowing 2.15 pips of upward movement over and above the 1 pip of broker’s spread factored in.

This is an exaggerated tight stop, however, for the purposes of this trade it worked fine. The reason for the extreme tight stop is the desire to obtain a very good risk reward ratio, especially since the first trade did not work out and this is chance 2 out of a potential 3.

Figure 1. The DAX gap trade several minutes after being filled

Trade risk management parameters

The take profit is at 12455.9 (ask). Therefore 3.15 pips are risked (including broker’s spread) while a reward of 22.45 pips are sought. This includes 7 x 3.15 pips and an additional 0.4 pips to account for negative slippage on the trade.

This is actually a very conservative target, given that the gap trade normally seeks to fill the gap itself (see also figure 4). What we are actually targeting is the opening candle after the gap, so it seems a very reasonable target since many gaps seek to be filled. More on identifying specific types of gap and what to expect from them in stock index trading in another post.

The precise risk to reward ratio of the filled trade is 1:7.127, or rounded down, 1:7, more than satisfactory given the 1:2.5 minimum advocated in our trade plan rules.

Figure 2 shows the evolution of the trade, and indeed when the price has hit the take profit (buy limit) level, the order is filled, and in fact, we are granted the treat of positive slippage of a luxurious 2.2 points – another good reason to use our recommended brokerage.

Take profit (buy limit)

Figure 2. Take profit order filled.

Figure 3 shows the three main order sets mentioned, the first the trade that was not filled and cancelled, the second which resulted in a stop loss being hit, and the third successful 1:7 risk to reward trade, with the final risk reward being 1:7.825 – a great result.

Figure 3. Order sequence and results from trading platform

Figure 4 demonstrates clearly how this was a low risk, high probability trade, whereby the market itself has actually gone on to fill the gap after a potential energy – kinetic energy correction – impulse sequence.

Figure 4. Filling of the DAX opening GAP on the M5

DAX Gap Trade: Discussion & Analysis

Technical indications

Rarely does ‘top guessing’ offer benefit to the trader, except in the case of opening gaps, and/or high level confluence clusters which offer reasonable limit order entry solutions.

CCI overheating

A forthcoming post will detail the use of the commodity channel index (CCI) in much more detail. For now, the key to the chart is that the red arrow ‘caps’ above the candles indicates that the relatively longer term or trend CCI (in this case set to 15) has ‘overshot’ to a level of 280 or above (in the case of upward momentum, -280 in the case of downward).

Three of the red caps in a row often indicate an imminent correction or reversal.

The white ‘caps’ on the candle tips are an indication of the period 5 CCI having hit its ‘overheated’ or ‘overshot’ mark of 167 (166.6 recurring).

Divergence on the RSI-7 indicator

The RSI-7 indicator is in the second indicator window off the chart. Divergence means that while the price has risen, the RSI has fallen, or while the price has fallen, the RSI has risen (classic divergence). This is seen as white trendlines on the chart.

As can be seen, there were two clear divergence set ups, the second, more steep divergence right before our second entry, and which acted as the guarantor of the reversal.

Reversal candle

Probably the perfect entry was at the close of the 8.05 AM London time candle (marked 10.05 on the chart) because this was a ‘normal reversal’ candle. Our aggressive entry used ‘reversal condition 2’ – which will be discussed in another post – and refers to a break below the high of the candle previous to the prior candle (i.e. at time minus two periods, t-2), in a down reversal, or a break above the low of the candle previous to the prior candle (i.e. that at t-2) in the case of an up reversal.

Stochastics & WPR_MA

Although they were not really utilised in the trade, note that the stochastics were in a prolonged overheated mode above 85, and the WPR_MA WPR (William’s Percentage Range (21) with moving average (8)) lines were beginning their descent towards their average, the top and bottom versions offering multiple timeframe analysis – M15 and M5 in this case.

Conclusion

Summary of trades

This trade used knowledge that an opening gap is often filled with a range of indications of a reversal. The first trade was cancelled due to a continuation away from the gap. The second trade failed. The third trade, similar to the second, succeeded in following through, for a 1:7.8 risk to reward. Therefore 1 unit was lost, and 7.8 gained.

Learning points for trading journal

The initial trade exceeded the 1:7 risk reward by double, simply by filling the gap. Consider in future 2-3 units with a more reasonable stop, e.g. double or three times the stop used in this trade, closing out 1-2 at the first target, or 1 at the first target, 2 at the second target (twice the height of the first rectangle shown in figure 5), stop to breakeven, and 3 with a trailing stop to let the market run.

Target 2 projection

Figure 5. Projection of height of the first swing above the gap in the downward direction.

In figure 5, the height of the first swing above the gap is taken as 34 DAX points (the green rectangle shows this until it is broken to the downside.

The height of this move is then projected downwards as a further move of 34 DAX points, providing a second target.

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

The idea here is to accept small losses, but to stay in for the big winning trades.

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).

DAX opening gap trade M5

To cite any part of this article, use the following citation information: Beatson, Samuel A., "Trading the DAX opening gap," in Forex, Commodities & Stock Index Analysis by Dr Sam Beatson, May 2, 2017, http://www.fasttrackforex.com/2017/05/02/trading-the-dax-opening-gap/. Accessed online on August 17, 2017.

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Fast Track Pro Forex Trading Course: Limit Orders.

Trading using limit orders – complete EURUSD trading process example

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Introduction

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.

Figure A

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.

limit and stop orders explained for trading
Illustration of buy and sell limit and stop orders

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.

Trade Idea

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 [4].

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.

Slippage

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.

Concluding remarks

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).

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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 August 17, 2017.

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Gold and Aussie updates

Both Gold and Aussie have reached their targets with not much sign of abating. Here are the update charts.

These relate to this post on trading the Aussie dollar and this post on gold trading.

Firstly the Aussie dollar you will recall the entry from this post on entry signal for Aussie dollar US dollar.

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).

Follow up to channel trading Aussie

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

T1: 55 points profit vs. 35 pips potential loss. = 1:1.5 risk reward

T2: 100 points profit vs 35 pips potential loss. 1:2.85 risk reward

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.

Daily gold chart – buy on the close of the day after the first retrace day of a strong upmove

Here was the first follow up image, including a target area for the extension.

Gold Daily – has followed though from Quantisi Ltd’s entry.

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.

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Channel Analysis for AUDUSD

A possible trade on the Australia dollar vs US dollar pair could set itself up next week. It would require the intraday momentum of Friday to SLOW in the downmove in the pair and a reversal to set itself in motion. This reversal would need to keep intact the channel in the image below.

The ideal scenario would be a spike down into the ‘bounce zone’ marked green, followed by a clear 1 bar reversal, or some other potential reversal pattern, including 2 bar reversal or an outside bar (these will be covered in later posts).

In terms of explanation, the spike off the topmost channel (zone 1) line set in place that channel line and the bottom channel line is drawn in from Bank Holiday Monday 2 January.

The first thing to note is that the pair on this chart (H4) is in a clear uptrend, therefore, using this channel methodology, I’m only looking for opportunities to buy.

I’ve marked the buy zone clearly, and we’re coming into the bounce zone now.

Note the price has bounced off the 20 simple moving average (dotted line), and this line is pointing nicely upwards still, although the 8 simple moving average, as I have mentioned, a crucial indicator of the current chart’s trend, is beginning to turn down.

A strong reversal back into the 3rd zone might indicate a buy. Better yet, a test and hold of the bottom zone (zone 4) and a reversal back into the 3rd zone would confirm the channel is still a good play.

At the moment there is a clear break of the strong uptrend in play, both the triple top and a trend line break (as such a sell), so it will be a case of patiently waiting to see whether the channel is able to contain the downmove, and looking for a strong sign that the uptrend will continue, or seek its previous highs.

Further opportunities to rejoin the uptrend, or enjoy a bounce exist lower down and are marked by the retracement % levels and the orange dot.

The 200 SMA (purple) is still pointing down but has lost some momentum, similarly, the 100 SMA is pretty much flat, so if we do get momentum upside, I don’t see a big problem with breaking the 100 SMA (pink) on the next attempt. The 50 SMA (turquoise) is pointing up, hence its being marked as support.

The trade(s!!).

Buy. On the upside, looking either for a reversal back into the buyzone from here, or preferably the market dipping lower, then reversing back into the buyzone for a buy, stop will then go 10 pips below the bottom channel line (probably by this point, this will helpfully also take the stop below the 40% retracement area and aiming for 1:1, or the 100SMA, or beyond on the assumption of the trend continuing.

Sell. Having talked about the buy trade, the most obvious immediate trade is simply join the downmove for now (sell), with a short term stop above the high of the current candle, perhaps aiming for 100% of the length current candle, for a 1:2 risk reward, or just under that. This would mean the price going down to the low of the current candle, and extending a further 50% of the length of the current candle.

To contend with are: the 20SMA already mentioned, and the 40% retracement area marked. The price might struggle with the 20SMA as it already has acted as support. Possibly one to use half the normal number of lots, due to the trend being an upward one in terms of the most recent sustained strength.

 

 

 

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Gold has followed through nicely

This post about buying gold is due a follow up now that three trading days have passed and we are into day 4 of the trade. The trade went in favour of the analysis posted and the entry point of Friday’s close.

The market did behave with great volatility on Monday evening and Tuesday morning (Monday was a bank holiday so the market opened only at around 6PM Eastern time on Monday 2nd January).

Thankfully the wide stop mentioned in the previous post meant that volatility did no harm and the move has since followed through in a majestic fashion, hitting the 1:1 risk reward target with relative ease and looking at the chart below, I would argue bringing a stop now up to the low of today (a few ticks below that), taking profit, or bringing the stop to break even for a ‘risk free trade’. after banking 1/2 to 2/3 of the trade.

1187.75 of so is the 1:1.5 target.

1200.00 is the 1:2 target.

I initially figured 1:1.5 is the one to go for, and I think it is reasonable, but want to lock in much of what has been gained so far as well now 1:1 has been hit, a discretionary decision I may regret.

The ‘extension target’ is only the first target upwards, it is by no means a limit on how far gold could go.

Harry Dent’s gold analysis I found a little alarming on this matter, perhaps why I have erred towards caution throughout on this. It is important to think independently though.

I have added potential further targets, the entry and the initial stop to the chart below.

Gold Daily – has followed though from Quantisi Ltd’s entry.
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