Which is more profitable: Continuation Inside Bars or Reversal Inside Bars

What are inside bars

For the benefit of anyone who may not have heard of it, an inside bar is a bar (or a series of bars) that is (are) completely contained within the range of the preceding bar. The inside bar has a high that is lower than the high of the previous bar (aka the mother bar), and a low that is higher than the low of the previous bar . Some traders use a more lenient definition of inside bars to include equal bars (bars with equal highs and/or equal lows).

 

Psychology Behind Inside Bars

Inside bars typically occur after a large directional move, and reflects a balancing of sentiment between bulls and bears. This balancing of sentiment may indicate that the previous trend is running out of steam and price is ready to reverse, or it may simply indicate that price is consolidating before continuing in the same direction.

After a large sustained move, traders tend to adopt a wait-and-see attitude, and neither bulls nor bears are willing to bid above or below the previous day’s extremes. When traders finally make up their minds, volatility increases and price will either reverse or continue in the same direction. Either way, when price breaks out from an inside bar formation, it indicates that traders have enough conviction to push prices in their desired direction. A breakout from an inside bar formation is like a vote of confidence from the traders. They’ve pondered over which direction they want price to move, and have cast their votes with their money.

How to Trade Inside Bars

In this post, we are interested in investigating the profitability of trading continuation inside bars vs reversal inside bars. Are inside bars more reliable when they signal a reversal, or when trend continue in the same direction? I’ve written an inside bars EA to test this.

In this EA, I define reversal as a breakout of the inside bar in the direction opposite to its previous trend. The previous trend is defined using a 20-Days moving average. If price is above the moving average, it is in an uptrend. If it is below the moving average, it is in a downtrend. Therefore, a bullish inside bar reversal is defined as a break above the high of the mother bar when the mother bar is BELOW the moving average. Conversely, a bullish inside bar continuation is defined as a break above the high of the mother bar when the mother bar is ABOVE the moving average.

For exit, I used a 3 ATR trailing stop. In addition, I used an averaging up strategy that adds a new position whenever price moves 1 ATR in my favor, up to a maximum of 4 positions. All tests were done on daily charts, from Jan 2001 to Oct 2012, with a 1% risk on each trade and an account size of $100000.

So, what did I find?

Comparing Profits and Max DrawDown of Reversal and Continuation Inside Bars

Pair	Reversal	Continuation	Winner
EUDUSD	$50124.31 DD: 27.05%	$62709.88 DD: 39.29%	Continuation
GBPUSD	$67763.32 DD: 33.77%	-$11865.55 DD: 51.68%	Reversal
USDJPY	$50199.2 DD: 46.83%	$19914.76 DD: 23.21%	Reversal
USDCHF	$82595.81 DD: 33.05%	$35061.32 DD: 37.79%	Reversal
AUDUSD	$314545 DD: 32.87%	$77265.41 DD: 40.51%	Reversal
NZDUSD	$79273.36 DD: 37.28%	$25676.24 DD: 34.8%	Reversal

REVERSAL inside bars are much more profitable, at least for 5 of the pairs. This means that more often than not, an inside bar indicates that the previous trend is running out of steam and ready to reverse. In addition, the maximum drawdown for reversal inside bars is also lower in 4 of the 6 pairs.

How can you apply this knowledge to your Forex Trading?

For one, if you trade inside bars, you can choose to trade only when price reverses. Alternatively, you can choose to take both reversal and continuation trades, but use a tighter stop or smaller profit target for continuation trades.

Secondly, even if you are not trading inside bars per se, you should still be alert to their presence. If you are currently in a profitable position, consider tightening your stops because an inside bar is a warning signal that the current trend is likely to reverse.

Either way, make use of this test result and incorporate it into your forex trading strategy. Then backtest your strategy and see if it improves your results.

That’s all I have for you today. Cheers and trade well!

How to reduce your maximum drawdown while increasing your profits

 

The Principal Behind the Strategy

Consider this: If you use a system with a R/R ratio of 1:1 and it’s profitable, that means the entry criteria that you use has at least a 50% chance of hitting the profit target. Suppose when you win, you gain $1 and when you lose, you lose $1. If your R/R ratio is 1:1 and your win percentage is only 50%, your system will break even (before commissions).

Now, what if when you win, you gain $1, but when you lose, you only lose $0.75? In that case, even with a 50% winning percentage, your system has a mathematical edge. If you take a total of 100 trades and 50% of them are winners, after 100 trades, you would have lost 50*0.75 = $37.5 but gained 50*1 = $50, resulting in a net profit of $12.5.

If price has an equal chance of moving x pips in your favor and x pips against you, but you win more (dollar-wise) when you are right and lose less when you are wrong, your system will be profitable. This is the basic principal behind the strategy.

How to implement the strategy?

This strategy does not require our profit target to be greater than our stop loss. Rather, it requires us to do a partial exit when we are wrong. The strategy focuses on reducing our losses when we are wrong instead of maximizing our profits when we are right.

Here’s how to implement it: Say you bought EURUSD at 1.2312, with a stop loss and take profit of 50 pips. You’ll enter two orders, one with a stop loss and profit target of 50 pips and another with a stop loss of 25 pips and a profit target of 50 pips.

If price goes against us and hit our maximum stop loss, we’ll only lose 50 + 25 = 75 pips . However, if it moves in our favor, we’ll gain 50 + 50 = 100 pips. If we assume that there’s a 50% chance of price hitting our profit target, our system will have a significant edge.

But…

Of course, there’s no free lunch in the world, especially in the financial market. One disadvantage of using a partial stop loss strategy is that on some occasions, price may go against us initially and hit our first stop loss, before reversing to hit our profit target. In that case, we’ll end up with a smaller profit than we would have if we didn’t use a partial exit. Nonetheless, even in this undesirable situation, we’ll still have a profit of 25 pips. However, if this happens regularly, we should perhaps consider revising our entry criteria.

Putting it to the test

To test if this exit strategy can indeed lead to higher profitability, I coded an Expert Advisor using a low volatility breakout strategy. Here’s where the rubber meets the road.

Entry Criteria:

Take today to be Day 1, yesterday to be Day 2, and the day before yesterday to be Day 3.

If range of Day 2 (High – Low) is greater than 10 pips, but smaller than 50% of the 14-days average true range (ATR) of Day 3,

• Buy when price breaks above Day 2′s high by 1 pip.
• Sell when price breaks below Day 2′s low by 1 pip.

Cancel orders if they are not triggered by the end of the day.

Stop Loss:

First Stop Loss:
For both buy and sell orders, set the first stop loss at the midpoint between the high and low of Day 2′s candle.

Second Stop Loss:
For buy orders, set second stop loss at the low of Day 2′s candle.
For sell orders, set second stop loss at the high of Day 2′s candle.

Low Volatility Breakout Sample Trade

Note:

Since stop loss is based on Day 2′s range, and Day 2 is a low volatility day (range < 0.5*ATR), there will be some cases where the stop loss is very close to the entry price. When that happens, the order may be rejected by your broker as most brokers require stop loss to be at least a certain number of pips away from the entry price. For such cases, set stop loss to be as close to the order open price as possible. For instance, if you enter a buy stop order at 1.3213 and the previous low was 1.3205 (8 pips away), but your broker requires a minimum stop loss distance of 5 pips, set your first stop loss at 1.3208 (5 pips away) and second stop loss at 1.3205 (8 pips away).

Profit Target:

Use a R/R ratio of 1:1 (based on the second stop loss) to determine your profit target.

Results:

This strategy is profitable for all the 6 pairs (EUDUSD, GBPUSD, AUDUSD, NZDUSD, USDCHF, USDJPY) tested, but the percentage return is rather low. However, the key focus of this test is to determine if a partial stop loss strategy can indeed lead to greater profits and smaller drawdown.

As you can see from the table below, results clearly indicate that the partial stop loss exit strategy works. For the first four pairs, using this exit strategy resulted in greater profits, and more importantly, a lower drawdown. For GBPUSD and NZDUSD, the stop loss strategy resulted in slightly lower profits, but the maximum drawdown is reduced in both cases. This reduction in maximum drawdown more than compensated for the reduction in profits.

Profits and Maximum Drawdown of a Partial Stop Loss Exit Strategy

Pair	With Partial Stop Loss Profits Max DD	Without Partial Stop Loss Profits Max DD
USDJPY	$20823.72 21.46%	$17746.76 26.77%
AUDUSD	$4462.73 29.91%	$2428.55 32.72%
EURUSD	$10110.54 29.87%	$6554.3 34.94%
USDCHF	$4665.39 31.68%	$1221.15 39.02%
GBPUSD	$6769.66 22.89%	$6936.93 29.39%
NZDUSD	$16477.03 22.30%	$17746.30 25.34%

Conclusions

In conclusion, I would say that the exit strategy ‘works as advertised’. It is indeed possible to achieve greater profits without incurring higher risk, you just have to work on a better money management strategy. I think it’s pretty amazing.

This exit strategy may not be THE BEST forex money management strategy, but it’s definitely a strategy that I’ll employ if I use a 1:1 R/R ratio. If you are currently trading with a 1:1 R/R ratio, I strongly urge you to consider this strategy. But of course, do your own backtest first to determine if it works for you.

Ok, that’s all for this post.

Thanks for reading, take care and I wish you all the best in your trading.

Trading Success | Forget Technical Indicators And Learn How To Trade

It’s amazing to me how many traders I meet who have completely the wrong idea of what it means to trade successfully.

Let me make it clear. Trading success and profitabiliy have absolutely NOTHING to do with the following:

1. Owning or using the next “holy grail” fancy technical indicator;
2. Tweaking the settings of your fancy indicator;
3. Trying to predict the tops and bottoms of the market;
4. Grabbing as many points as you can from the market every single trading day;
5. Following the next best trading “strategy”.

None of the above points are going to make you successful. Sure, you may make the occasional money every now and then, but you’ll be lucky if you’ve made any profit after a year.

Using or Abusing Technical Indicators

I know a lot of traders who are fond of trashing the use of technical indicators. I am not one of them.
I do make use of technical indicators in my day-to-day trading and I find them very helpful in simplifying and identifying key information about the markets that would have otherwise have taken a very long time.

In the above video I show a real example of how I apply indicators and multi timeframe analysis to carry out my own trades, whether its spreadbetting or trading contracts.

It’s not the indicators that are the problem, but about how and when to use them.

Some traders seem to obsess too much about getting their indicator settings right – like whether they should use an 18 or 20 period moving average, or use a 14 or 12 period Stochastics.

You know what, it probably will not make a damn bit of difference! If this sounds like you, then the first step is stop focusing on tweeking indicators and learn how to trade instead.

Consistency

To achieve any degree of success in trading you need to first achieve consistency. Consistency involves in being able to carry out and execute your trading plan without hesitation time and time again.

Consistency is also a state of mind: to be able to execute your trading plan you need to have confidence in what you are doing.

If you lack confidence or you find yourself hesitating, then it is probable that you have not tested your trading plan sufficiently or that you do not have a solid or proven plan of action yet.

Conclusion

While Technical indicators, newsletters and tip-services have their uses and can be very beneficial – they do not replace sound trading skills and principles. These principles focus on: timing your entry and exit, risk control, trade management, money management and most importantly of all, your trading psychology.

If you focus on yourself and building your own trading skills, instead of messing around with the next best indicator or “strategy” you will achieve not only trading consistency but more profit in your P/L account.

Did you find this article useful or helpful? Do you have any related trading stories of your own you wish to share? Feel free to leave me a comment below.

Forex News Trading Strategy – How to Trade the News

Trading the economic news in the forex market is another profitable trading method. It also carries a significant amount of risk. In this trading method, traders trade just before or after the news releases.

The economic calendar is very helpful for this trading method. Traders tend to trade the key economic news releases such as NFP, CPI, GDP etc. This news trading can be short term or long term as the economic news impact can be for short term or long term.

Objectives of News Trading :

The main objective of news trading is to make money from the impact of the news in currency pairs. Some news has a short term effect and some have a long term effect on the currencies. Traders tend to catch the swings from the major movement due to the impact of the economic news releases. The aim of a trader is to get the right direction of the news impact and trade in favour of the news.

Risks of News Trading :

News trading in forex market carries a significant amount of risk due to high volatility, slippage, fake-outs and short lived price movements. During the major news releases, market becomes volatile and spreads are high which results in slippage in most of the cases. When you fail to enter at a certain market price due to high speed, then it is called slippage. Another major risk is that, market sentiment may shift and the market might not favour the news in the short term.

Key Economic News for News Trading :

Most news traders choose some key economic news releases for news trading. These are,

• Non-Farm Payroll report (NFP)

• Trade Balance

• Consumer Price Index (CPI)

• Retail Sales

• Gross Domestic Product (GDP) etc.

Best Currencies for News Trading :

There are eight major currencies which are popular for news trading. These eight currencies are,

U.S. Dollar (USD)
Euro (EUR)
British Pound (GBP)
Japanese Yen (JPY)
Swiss Franc (CHF)
Canadian Dollar (CAD)
Australian Dollar (AUD)
New Zealand Dollar (NZD)

The most traded currency pairs for news trading are,

EUR/USD
GBP/USD
USD/JPY
USD/CAD
USD/CHF
AUD/USD
NZD/USD

Types of News Trading : 

There are two types of news trading. One is directional bias, and another is non-directional bias. 

 

Directional Bias:

In this type of news trading, traders expect a currency pair to move in a certain direction after the news release. In this case, a trader should know in which direction the pair might move following the news impact. Traders predict the future trend direction by the forecasted economic data and trade in that direction before or after news release. Some traders enter into the position just before the news release to avoid slippage and fake-outs. Some traders want to wait to check the market sentiment towards the news release, and they trade after the news release. In this case,  they have to deal with slippage and fake-outs.

Non-Directional Bias:

 

This type of news trading is widely used in forex trading. This is different from directional bias. In this case, traders usually do not care about the direction of movement as they place both buy and sell orders in breakout points. For example, before NFP news release you place a buy stop order above the resistance and a sell stop order below the support line in EUR/USD. Now if the pair breaks the support line then your sell stop order is executed. If the price of EUR/USD crosses above the resistance line, then your buy stop order is executed. In this way,  you can trade a major news release without caring the future possible trend direction. Sometimes market may move against the news. In this case,  you will not get a loss in non-directional bias trading as you are aiming to prefer the market sentiment more than the forecasted direction.

Summary: 

 

News trading can be short term or long term depending on the trading style. Some key economic news is very useful for long term trading concepts, such as NFP report. Short term trading might carry more risks than long term trading as the economic condition is reflected in the long term trends. However, short term trading using news releases is also an effective way to make a profit if used in a disciplined way with proper money management. A trader should develop a strategy before starting trading whether he is technical trade, day trader, swing trader or news trader.

FOREX TRADING WITHOUT USING INDICATORS

Is it possible to be rich trading forex without using indicators? If you think about it, is there any other way for you to truly understand what the market is doing besides trading just the price action. Think of all the indicators most people plaster all over the charts.

Can you really explain what moving averages crossing each other actually means? The truth is nobody can. It’s the same case for any of these popular indicators. They may know the rules of how to trade them, but they don’t have a clue what it actually means.

When you are able to get rid of these indicators from your charts, then you start to see the reasons why the market go up, down, or stay range bound. You truly get to see the market as an energy, not just numbers.

When you finally have the ability to seeing the market this way, you can never go back to using those indicators that everybody else does. Personally I do trade by reading the chart and never use any Indicators, split it in two area divided by pivot lines because I believe that any indicators out there are Lagging.

Using OHLC (Open High Low Close) data and I still in this game today. Don’t you realize the present of lagging indicator out there?

 You already know that 95% of the forex trading public failing to make any money, a lagging Indicator is like a death trap, like a path that guide you to the wrong line! That’s why you should be carefull in choosing Indicators inside your trading tool box.

 Anybody can understand price action and this not really difficult. Most people just don’t want to take the time to really understand how to read the movement of the market. Everybody always wants the holy grail magical indicator that people can just plug into their trading platform and it’ll do all the work for you, but sorry it doesn’t exist out there!

Forex trading is about a proccess, no overnight instant rich scheme there, it need learning by doing, patience and dicipline. I do agree with some Indicator that help you manage your trade, but again be carefull with the lagging Indicator and just don’t depend on it. You need to have a chart movement reading skill, by understanding the OHLC data it will help you to know where the market direction and how much trading range might happen.

Parabolic SAR Indicator in Forex

SAR stands for stop and reverse and it is a trend following indicator, designed to identify the turning point in price action.

SAR stands for stop and reverse and it is used to identify the turning point, or reversal, of a trend. It is shown on a chart by a series of small dots. If the dots are above the price, then the trend is likely to be down; if the dots are below the price, the trend is likely to be up.
The parabolic SAR is shown on the charts as a series of small ‘dots’ that are placed either above or below the price. When the price is trending to the upside, the dots are below the price action and when the price is trending to the downside, the dots are above the price action.

It trails the price movement until the price move has finished and begins to reverse.

As the price move comes to an end, the parabolic SAR moves steadily closer to the price until the price ends up touching the dots - the SAR then begins to form on the other side of the price, indicating that the price is changing direction.

The Parabolic SAR can be used effectively for:

Determining the trend
Entry and exiting trades
Trailing stops

The chart above demonstrates the parabolic SAR indicating and then tracking an uptrend.

 - SAR indicating an uptrend
 - SAR tracking the uptrend

In the illustration above, notice how the SAR appears below the price as price moves upwards. When the price move is finished, the price touches the SAR, signalling a possible change in the trend to the downside.











 - SAR touches the end of the uptrend, indicating a reversal
 - SAR tracking the downtrend

In the example above, the SAR appears above the price, signalling a downtrend. The SAR trails the price down until the price movement is finished and when the price touches the SAR, it changes, signalling the end of the current downtrend and a possible reversal to the upside.

Traders can use the SAR to identify the direction of the trend.

The SAR can also be used for trailing stop losses, moving the stop loss just behind each new SAR that forms, until the price eventually reverses and stops them out in profit.

Tips for Pivot Point trading

Pivot Points are considered by some traders as being the most important indicators in Forex. They are easy to identify, and also to use.The Pivot points appear on the charts often,but only some of them are useful.If you don't know about pivot trading you should learn on this topic.

Now start to learn more about pivot point trading to improve your trading style and here are 5 tips for you:
1.If the market opens below above the resistance or below the support of the previous day, it is called a distant opening. This means that the price has a somewhat unusual behavior, meaning that it might correct itself soon. It is harder to trade with those signals, and this is why this method is used only by advanced traders.

2.Don’t enter a trade unless the price takes a clear direction, breaking the pivot points or rebounding from those. Those details are established considering your strategy as a trader, on how many pips you are trying to make and on your profile as an investor.

3.The support and resistance are considered as the daily floor and ceiling of the chart, therefore normally, the price must not move past those. Of course, anything can happen in Forex, especially in a market affected by rumors, but the general tendency of the price is to get back to the central pivot. If the price moves far from the central pivot, it means that your opportunity to trade is getting weaker.

4.When you trade on pivots, keep count of the market on the medium term. If the market trends strongly, the pivots will be breached easier. The traders can take advantage in both scenarios, using channel or breakout trades.

5.If you want to trade on pivots, you will have to use t when the chart is close to the earliest pivot of the day, as this way, you will have an increased chance to open a successful position.

Do you follow any one of the above mentioned tips?. Kindly leave a comment