All secrets of tracking positions on Forex
Correct determination of entry, exit, stop loss and take profit setting levels can be a real headache for a beginner Forex trader. Today we’ll try to figure out what are the options for entering and exiting a position, and also discuss ways to modify orders and manage open positions.
Any trading strategy begins with the idea of how to enter the market. This is usually the starting point when developing a trading strategy of any complexity.
Typically, a trader’s entrance to a trading strategy is associated with a specific set of rules: if this or that happens, then you can enter a purchase transaction. The rules themselves do not arise from the vacuum and usually the algorithm here is as follows:
- the trader reads various literature, visits online forums and blogs, communicates with colleagues. At some point, various ideas surely come to him in the format "what if you try to trade the ascending triangle according to the rules that I read today?";
- Next, a check on historical data follows to identify the optimal set of rules for entering, exiting and tracking positions. Usually this is done using special programs for manual testing, such as Forex Tester, or add-ons for the MT4 terminal, allowing manual testing;
- after checking the idea, the trader already decides whether to use the developed strategy in his trading.
The strategy for entering the market can be very different - the usual entry is on a rollback, on the breakdown of a certain price level, on the news, according to the Price Action pattern and so on. Depending on the strategy, suitable types of orders are selected. For breakout strategies, these are pending Buy Stop and Sell Stop orders or market ones, for strategies on pullbacks they sometimes use Buy Limit and Sell Limit, and so on.
I cannot but mention that novice algorithmic traders often use pending orders in their advisors, not caring about the consequences. For high-quality testing of advisers using pending orders, you need a high-quality tick history. Otherwise, those orders that would not be activated on a real account would be activated on a test and vice versa.
Let's take a closer look at the three main ways to enter deals - by trend, breakdown, and flat.
Trend trading is often the easiest thing to do. We all know the old immutable truth: "Trend is your friend." But entering a position at the very beginning of a newly emerging trend usually looks problematic and dangerous for most. The reason is hidden in the psychological barrier that arises in most people who can hardly change their views on the existing trend.
When prices rise after the downward movement has begun, everyone expects a catastrophic fall, so they are happy to sell, and with any decrease in the uptrend, it seems to everyone that prices will go higher, and therefore everyone is ready to buy at every correction. That is why most traders enter into purchases almost at the very top and sell almost at the base of the market. In the middle of the trend, traders often find peace with their worries about the safety of profits accumulated in their trading accounts.
Most traders do not match the rhythm of the market when buying in an uptrend and selling in a downtrend. Please note that we do not consider cases when an entry occurs at the moment a trend is generated. Now we are talking about how to behave within a trend. And for this situation, the best ways to enter the market are based on the use of trend lines with the use of support or resistance, determined using the last completed movements.
An uptrend is determined when prices rise. We have the opportunity to draw a line with an upward slope. It is carried out on two successively increasing bases of price bars, which have an absolute bottom relative to at least two previous and two subsequent bars. The best moment to enter the market occurs when the price touches the trend line for the third time. At this point, of course, you have to buy - and only buy. In this case, entry is assumed using limit orders, and only occasionally - market ones, if there are good reasons for this.
Using such a technique, it is worth noting in advance the main price levels. They can serve you as a guideline for taking profits, and help to avoid entering into unpromising transactions. The best option for this is to use daily charts. More accurate markup can be done using hourly or 30-minute charts. In the figure below, price levels served as an excellent guide for setting goals.
The use of trend lines is negatively affected by false breakdowns that create the appearance of a break of a trend line. Unfortunately, it is impossible to admit the true or false breakthrough until the bar that breaks the trend line closes and the next one begins to bargain. Very often, traders expect other price tips, for example, the formation of Price Action patterns. Of course, it is best to use the daily timeframe, but hourly and half-hour charts show themselves well.
Trading strategies for breaking prices through important levels are considered the most effective ways to manage trading positions that provide high returns. Often they are associated with stop orders that are triggered immediately at the time of breakdown and thereby provide an opportunity to take a position at the very beginning of a developing price impulse.
This is all true, but in many markets, stop orders are not very practical, and often even dangerous for a trading account, so this path is not always justified. For breakdown strategies, options for entering the market with the help of limit orders provide a great opportunity for profit at relatively low risk.
In a growing market, we often see prices moving upward, developing in a zigzag fashion. As a rule, in the first third of the trend, when it has already been outlined, and the bulls have switched to a consistent attack, the bears still have serious strength, so they often manage to reduce prices after each price surge so that they drop to the level of the penultimate peak. Sometimes the drop here stops, followed by a new upward movement, pushing prices higher.
If the trend is strong, then the depth of decline rarely exceeds 23%, even less so - the 38% level of the last fully completed market movement down.
As can be seen from the figure above, points 1, 2 and 3 are the breakthrough of previous highs. Points 4, 5 and 6 are the optimal entry points and they are at 38.2%. Thus, instead of using stop orders to enter a position, you can use limit orders.
Trading in the lateral movement of the market seems to many a rather dangerous and ungrateful business. Attempts to apply breakdown strategies in flat work poorly, and often such a story develops: after stop orders are triggered, prices move in the right direction for a while and then unfold, resulting in losses. Few can buy from the lower border of the trading range and sell in its upper region - the psychological stress is too great, because for the most part you have to trade against the current trend.
However, when trading in flat, the best tools are oscillators. There are many varieties of this trading approach, for example, night trading. As a rule, entries in positions in these cases most often occur with market orders.
Another option, as shown in the figure above, is unhurried trading on the daily charts on one of the oscillators. When there is no established powerful trend, such trade brings a small profit. Stops, as a rule, are not used, with each new signal of the oscillator topping up or closing a profitable position. Entrance is usually carried out in a small lot, hence the low profitability of the strategy. Another minus is that you need quite a lot of capital for such trading or opening a cent account.
As can be seen from the figure, approximately 2,000 points can be earned in one pair in about a year. Problems arise when a strong trend begins, as in the figure below:
Thus, you can get several major losses in a row. That is why trading against the trend is considered dangerous.
Getting an input signal is pretty simple. Before entering into any transaction, we know exactly what should happen for the formation of a signal, and if the market conditions coincided with the rules of our system, we will receive the correct input signal. The inputs are simple, because we can set all the conditions for them in advance, and the market must come into compliance with these conditions, otherwise the transaction will simply not be opened.
When we are in the market with an open position, the number of likely scenarios of what may happen to our transaction is endless. It would be extremely naive to hope for effective returns in all trading situations with only one or two simple exit strategies. Nevertheless, all that I see on the forums and in the descriptions of various trading systems is, at most, a couple of rules for exiting a position.
Good exits from a position require tremendous work on their content, and simple single-choice exits are far from being as effective as a series of well-planned exits that provide many possible options for developing the situation.
As you remember, the very first task of a trader is to protect capital from any catastrophic losses. On the other hand, if you worry too much about losses, you can start closing deals early with the slightest hint of a reversal and thereby miss potential profit. Therefore, it is very important to maintain balance.
Something constantly happens on the world stage, various news, fundamental factors, various disasters happen. Predicting in advance where the price will move is a very difficult task, especially if you do not have extrasensory abilities.
And since it is impossible to predict the prices of market assets, you just need to accept this fact. It also follows that no indicator can predict future price movements. The same applies to fundamental, and technical, and generally any analysis. Sometimes I see beginners asking more experienced traders to tell you where the price will go. It looks funny.
The question begs: why then all these indicators and complex methods of technical analysis? Everything is simple - they help to understand the current situation, the situation at the moment. For example, after analyzing the indicators, at point 1 you can find a potential entry into the deal.
A moving average with a period of 200 is under price and is growing, which indicates an uptrend. This does not mean at all that the price will not reverse and a bear trend will not start, it means that at the moment the trend is bullish and there is no reason to change so far, which suggests a certain probability that the trend will continue in the future. The oscillator is almost at the oversold level - this suggests that the previous rollback has been going on for quite a while. The oscillator will not show you the exact point of the end of the rollback, but its presence in the oversold level hints that it would be time to end the rollback.
The levels themselves are constructed in such a way that when they are achieved, most often this is exactly what happens. But this is not a fact - for a long time the price may be near this level, while the market continues to fall.
Nevertheless, at the moment, the situation, based on our simple analysis, suggests that, most likely, the movement will continue. Moreover, this probability can be quite a bit more than 50%, say, 55%. That is, in 45% of cases we will be wrong, and this is normal.
So, we enter into a deal and our analysis turned out to be correct - the price really turned around and goes up. More often than not, as I have already said, systems use one single primitive exit option. This option does not completely take into account all the options for the development of events after entering the transaction, it considers only one option. In our example, at point 2, the oscillator reached the overbought zone and the deal was closed.
But, as you see on the chart, there were no adequate reasons for exit. If we did not use this exit option, but simply tightened our stop after the moving average with a period of 21, we would have earned almost 3 times more and at the same time we would have reached a logical point - after the exit, the price continued to fall.
But the fact is that the conditions for the exit coincided so favorably in this particular example. And in another place of the chart, the same output on the oscillator would work better. And in the third, something else. But there are not so many options for the preferred way to exit transactions and no one forbids you to use several exit options in your system. Now let's look at the main ways to exit transactions.
This is one of the most inefficient ways to close a deal. As mentioned above, in advance we will never be able to find out how far the price will go from the entry point, and limiting our profits to a fixed ceiling sounds illogical. Nevertheless, you still need to set take profits - you can’t always be at the terminal, the equipment may refuse, and it will be a shame if your transaction brought a bunch of profit, but then the price turned around and you got a stop just because you didn’t put take profit. But take profit should be exactly technical - about 2-4 times more stop loss.
The best option for stop loss has been discussed more than once. Someone likes shorter feet, some are more authentic and so on. Too far a stop makes it ineffective, too close will constantly work. It is important to understand that the task of stop loss is not to avoid losses or reduce their size, but to simply limit their maximum size! Reduce losses by completely different methods, which we will discuss below.
As a rule, any strategy has an average position holding time, and deviations in one direction or another bring less efficiency. Thus, if a deal, for example, has been hanging for three months already, it is time to close it.
Another approach is to close the transaction after a certain number of candles, if the market does not move in a certain direction, or the transaction has little profit.
This option of position tracking allows you to improve trading results and not hold deals when the market is not ready to give you a profit.
On big movements
In this case, the exit occurs with a strong, clearly unusual movement during the day. Personally, I use this exit option if the price per day has passed more than 3-4 levels of the ATR indicator. This behavior, as a rule, indicates the imminent end of the trend.
Another option that may require manual intervention is the planned release of important news that can significantly affect the rates of the currencies in question. An example is brexit, which led to a significant drop in the pound. This event was announced in advance, so it was completely possible to close positions in advance in order to avoid large losses.
This is the largest group of exit methods, which includes outputs for oscillators and trend indicators.Usually I set for each such exit the minimum number of bars that must pass from the moment of entering the position for the beginning of this rule.
It will also be useful to limit profit or loss on a position, exceeding which this rule does not apply. For example, we can exit a purchase after twenty bars of the current timeframe after its opening, if the oscillator reaches the overbought level and the profit is at least 40% of the take profit level.
The output at the levels quite often justifies itself - prices often after reaching levels begin to go against our position. There are many indicators that determine the levels in automatic mode. Although such levels are not very suitable for searching entry points, using them to exit positions is quite effective.
In addition to the timely entry into the position and a good set of options for exiting it, it is also important to think over options for modifying the stop loss level for insurance in the case when the indicators, due to their delay, do not have enough time to signal the exit from the position.
Therefore, the earliest option should be a breakeven strategy. As a rule, I set the stop loss to breakeven when the price goes 30% of the distance to take profit. In this case, I usually lay 4-7 points in excess of the order open price in order to compensate for losses on swaps and possible slippages.
The easiest way to make a trailing stop is to use a fixed trawl. In this case, the stop is pulled up after the price in such a way that between the price and the stop level there is always exactly the number of points that you set. Stop is tightened strictly at the price, does not go back.
A more adaptive option is to set the stop on a moving average. For daily charts, EMA21 with a shift of 4 usually works well:
A moving average with these parameters allows you to work pretty well in trending markets. EMA with a period of 48 works best inside the day.
Also often used trawl on the Parabolic SAR indicator. It allows you to quite effectively accompany positions in medium-term trading, when there is no problem to squeeze everything out of the trend to the maximum.
On the ATR indicator, it turns out to perfectly set the stops. If you try to use this indicator to work with trailing stops, you get a good option, which will pull up the stop quite effectively at times when the price accelerates. During high volatility, such a stop will stay at a fairly large distance from the price and in case of sharp fluctuations it will not hurt.
On the contrary, when the market has quieted down and the volatility is very small, such a trailing stop is close to the price and will not allow you to lose a lot on unexpected bursts of activity. And as you know, after acceleration, the price just calms down, the market is gaining strength for the next spurt. If this jerk happens not in our favor, we will be protected by a trailing stop on ATR.
Another of the most common options is to trawl the shadows of candles. This method consists in the following. A given window is taken, say, in the 10 previous candles and the minimum minimum for purchases and the maximum maximum for sales are determined:
Each new candle is recalculated so that exactly the last 10 candles participate in the calculation. Such a trawl shows itself well in periods from H4 and higher, since there are too many noises at lower TFs.
Today we met with the main, most common ways of tracking open positions. There are also a large number of less common and more sophisticated methods, for example, a trailing stop "noose", the description of which I left out of the scope of this article.
In addition to familiarizing yourself with these techniques, you need to understand that it is very important to use sets of these methods together, in combination with each other. The fact is that in certain situations some methods work better, in other situations - others. For example, exit on a volatile day (a day the price range for which exceeded 3-4 ATR levels) will never work just like that, on a regular trading day, but it will save when other indicators have not noticed major changes.
Moving average trading will be effective in case of breaking news, which will entail a sharp change in price, and trailing on the ATR indicator will be far from prices. But when the market goes quiet, the trawl on the MA will be far away, and on the ATR - exactly where you need it.
All these methods must be applied together, so your system of exits and position tracking will be most effective, and you will be ready for any surprises.