Hi Jeff,

Looks like you are making some good progress there in developing your strategy which is always good to see. The first thing that I like about this is that you are working to very specifically define your reasons for entering trades which from my experience is the first step in developing a profitable strategy.

As far as what periods traders normally use for the indicators most people that I know use the default periods in each of the indicators you have mentioned.

While it seems that you have defined your conditions for entering the market here it does not look like you have defined your conditions for exiting the market or will you be in the market when you buy until the sell signal that you have outlined is given?

Best Regards,
Dave

Hello David,


Thank you for the kind words.

As for the entry and exit strategies, I am planning to use 1:2 risk-reward ratio.

For either BUY or SELL Entry Order I will use a 40-pip limit order and 20-pip stop order with the trailing stop set at 10 pips.

I just want a systematic way of taking a profit or experiencing a loss. I really don't care if the market suddenly went ballistic and that it went beyond my profit expectation of 40 pips per trade. I am happy as long as the market reached my 40-pip profit expectation and the limit order is automatically executed successfully.


Regards,
Jeff

My pleasure Jeff. This is the type of post I would like to see more of here as it allows all of us including me to learn from each other which is the ultimate goal of this site.

The next question I would have here is what your rationale is behind the 40 pip profit target and 20 pip stop. I see where you say 2 to 1 however this could be 80/40 instead of 40/20 etc so I am curious as to why you chose 40/20.

Best Regards,
Dave

Hello David,



The reasons I used 40-pip limit and 20-pip stop with 10-pip trailing stop are:



1.) I am preparing to do a "get my feet wet" actual currency trading on the end of year 2008 by using $300 as a micro account on FXCM.
Based from the $300 I am already exposing about 7% of the trading capital to risk which for me is actually "stretching the boundary".
Anything more than 20 pips as a stop is trading capital suicide in my opinion.

2.) Based from my experience in a 1-hour time frame there is a high probability for the chart to always hit 20 pips profit.
But according to my FOREX teacher who taught me channel trading, 20-pip loss is recommended in order to allow the chart to "breathe".

3.) The reason why I used the 10-pip trailing stop is to minimize the chance to get a losing pip. As I said in #2 there is a high probability
for the chart to hit 20 pips profit. If the chart hits 20 pips the loss will be eliminated because of the 10-pip trailing stop.

4.) Another reason why I used the 10-pip trailing stop is that once the chart reached 30-pip gain, I have a 100% guarantee that I will get a 10-pip
profit even though my trade is stopped-out.



What do you think?


Regards,
Jeff

Hi Jeff,

Thanks for the reply. My comments below:

I think most traders would agree here that 7% per trade is streching the boundary. One thing I would consider if it were me in this situation is opening a micro account instead of a mini account. This would allow me to trade in lot sizes of 1k instead of 10K and to bring my risk per trade back in line.

I assume you mean there is a high probability for the market to always hit your 40 pip profit target here. With stop and limits that are this tight I think many traders would consider some form of breakout trading as potentially a better way to go than a purely indicator based system. As you mention above channel trading trading breakouts from those levels or reversals would be one potential scenario there. The thing that I would worry about is that without incorporating a break through or bounce off of support/resistance into a strategy such as this there will not be enough momentum to consistently hit a 40 pip target. I could obviously be wrong there though so I would defer to how it is going with paper trading and go from there.

not following you here. If you could explain this one in a little more detail that would be appreciated.

confused on this one as well. If you have a 10 pip trailing stop in and you reach a 30 pip gain on your trade and then the market reverses then you should be stopped out 10 points behind that with a 20 pip profit correct?

Best Regards,
Dave

Hello David,


Here are my explanations about using the 10-pip trailing stop:

1.) When the chart hits a gain of 20 pips my new stop level will be the same with the
price where I initially enter the trade. This means that once I hit the 20-pip gain
there is a 100% guarantee that I will not experience a loss even if the market
reverses because of the 10-pip Trailing Stop.

2.) When the chart hits a gain of 30 pips my new stop level will be 10 pips higher (for
a BUY position) or 10 pips lower (for a SELL position) than the price where I
initially entered the trade. With this there is a 100% guarantee that I will still get
a profit (even though if it is only 10 pips) if the market reverses.


Yesterday was the third day I am using my proposed technique and so far I am continuously getting profits. I observed that there is a higher probability of me getting stopped-out at a loss if a set the Stop order to 10 pips or less.



Regards,
Jeff

Hey Jeff,

Ok that makes sense to me now. Well it sounds like you have outlined your criteria for entering the trade, managing the trade once you are in it, and exiting the trade. Those are the three main components so the next stage is to test it as it looks like you are doing now.

There are two ways that I would recommend testing a strategy such as this. One is what you are doing trading it in real market conditions and the other is to backtest it using a software such as Tradestation or Metatrader.

The main thing that I would look for in the backtest is how it performed under different market conditions ie when the market is in a trend vs range, under high volatility vs low volatility conditions etc.

Shaun Overton is writing a nice series on how to do this where you should be able to pick up some tips if interested.

If you would not mind keeping us in the loop with how this goes with a post or two in the future I would love to hear and I am sure others would appreciate the ability to follow your progress as well.

Best Regards,
Dave

Hello David,

I will also be using a modified Anti-Martingale Methodology found on Robert Borowski's article called "Forex Freedom" (http://www.geocities.com/neng_dyah/Forex_Freedom.pdf)

The good thing with this methodology is that after I passed the first step (turning $300 to $400 by trading 1 mini lot per trade), I can "accelerate" my trade by going to Step 2 (trading 2 mini lots as long as your equity if $400 - $599). If I failed during the period where I have to trade 2 mini lots I have to go back to Step 1 (trading 1 mini lot as long as your equity is $300 - $399).

Here is an example:

1.) I started with $300 trading capital. Because I fall in the $300 - $399 equity range
I have to trade 1 mini lot until I reach $400.
2.) A week later my equity turned into $420. Because I fall in the $400 - $599 equity
range I have to trade 2 mini lots until I reach $600.
3.) A week later my equity turned to $380. Because of this I have to go back to Step
1 again until I reach $400.
4.) And so on and so forth....

Another good thing with this is that even though I experience a loss and went to $380 this is actually a profit compared to my starting capital of $300.

My FOREX teacher told me that in real-life an average investor who only relies on Channel Trading can turn the $300 capital to $14,000 in 2-3 years if he just stick to the plan and have great discipline.


I was overwhelmed by the complexity of MetaTrader 4. Is it possible to chart trade on MetaTrader 4 using historical data in a 1-hour period? If so, how?

I still like the user-friendliness of FXCM because you can trade on the chart itself.


Regards,
Jeff

Hi Jeff,

Good to hear from you again.

I had a look at the ebook linked to above. To be honest I am always very skeptical of anything that uses the type of sales technique which basically tries to convince people that trading is easy by saying things like "you can make a living in an hour a day" and "turn $300 into $30,000 in as little as 6 months".

It is my opinion that sales tactics such as these are one of the major reasons why so many traders loose money as they read things like that and come into the markets with a get rich quick and easy type of mentality.

So anyhow I would take anything said in this book or by the person who puts it out with a heavy dose of skepticism.

With that out of the way in my opinion the way that you are going about trying to figure out a way to enter trades, manage trades once you are in them, and then exit those trades is the right place to be focusing your attention.

With this in mind I think most traders would agree that the basic idea of having a methodology to up your trade size as the account grows is a good one.

In my opinion however traders should find a way to do this while staying inside their risk parameters. So with this in mind with a 20 pip stop loss trading 2 mini lots on a $400 account you are upping your risk per trade to 10% of your account which I think most would agree is pretty high.

Dr. Van K. Tharp in his book Trade Your Way to Financial Freedom outlines two popular methods for position sizing which are known as the % Risk position sizing method and the % volatility position sizing method and which may be a better starting point for you. If you have not seen them already I also have two videos on this in my free basics of trading course which are located at the links below:

How to Increase Trading Profits Using the % Risk Model

Maximize Trading Profits Through Correct Position Sizing 2

I also highly recommend Dr. Tharp's book for more info on this as well as the many other steps involved in developing a trading strategy which can be found here:


As to your question on Metatrader if you are looking to simply trade from the charts then you probably don't need all the additional functionality of the Metatrader platform as there are many other options such as FXCM's platform as you have mentioned which will allow you to do this.

What I am referring to is using the platform to test out ideas on historical data something which if you are not familiar with I will be doing a course on in the coming months.

Thanks again for sharing your development here I think many benefit by seeing someone go through the process of putting together a strategy.

Best Regards,
Dave