PipDaddys: February 2013

USING TRAILING STOPS

Earlier in this chapter we discussed how breakeven stops and scaling out
can actually add volatility to your trading performance, but what about
trailing stops? Many traders attempt to lock in profits as the market moves
in their favor by trailing the market with their stop order. I rarely use trailing

As a discretionary trader, using Fibonacci retracement ratios is my favorite
technique for identifying profit targets. Many books discuss using
Fibonacci as a trade entry technique, but I prefer to use them to identify
profit targets. Fibonacci ratios provide a simple and consistent profit management

Knowing when to take profit on a trade is often a subjective and frustrating
process for many discretionary traders. Often a trade will be closed too
early or open too long while a trader tries to squeeze every last pip out
of it. Without a systemic, repeatable procedure to determine when to take
profits, a trader will never feel truly comfortable with his decision to take
profit, and volatility will continue to be an issue in his returns.
In this section you will learn two of my favorite tactics to identify profit
targets. First, you will learn how to use support and resistance to identify
simple profit targets based on price action. Second, you will learn an advanced
method of identifying profit targets using Fibonacci retracement
and extension ratios.

Identifying Profit Targets with Support and Resistance

Regardless of how careful a trader is in planning a trade, there is no guarantee
that the market will reach the intended profit target. Occasionally
the market will come close to a profit target only to reverse direction and
move quickly against a trade. There is nothing more frustrating than setting
a trade in motion only to find out later that you could have taken a profit
but ended up with a loss.

Complete trade management should include guidelines to enter a
trade, manage risk, and manage when to take profit. Many traders
focus on entering and managing risk but leave managing profit open
to subjective decision making, which is a mistake. Knowing when to take a
profit is important enough to include managing profit as a core trading principle
for bargain hunters. In this chapter you will learn to manage profit

Finally, the last mistake I see traders make on a regular basis is refusing
to take a break when their trading is really suffering. I think this applies to
discretionary traders more often than system traders. If you are a system
trader, you probably understand your trading system’s average drawdown

What would you think if I told you I lost money on 70 percent of my trades?
Would you scoff at my trading performance? Would you think I’m a bad
trader? Or would you be interested in knowing how much I made on the 30
percent of trades on which I made money? Traders tend to focus on winning
and taking profits because nobody likes to lose money and everybody

To move or not to move my stop order—that is the question. Emotions are
a powerful thing to overcome when you are watching the market move
against a profitable trade. Many traders live by the advice “Never let a
winner turn into a loser,” and use trailing stop losses to protect profit

Since we are on the topic of position sizing and risk percentages, traders
often make the mistake of risking inconsistent amounts. Either they believe
in one trade more than another or they are just terrible at calculating

Managing risk is all about controlling the amount of money you lose when
a trade doesn’t go your way. Many traders make the mistake of sizing their
positions too large and losing more money than they should on a single
trade. To determine position size, you first need to decide how much money

Whenever I do a presentation about trading long-term charts, I’m always
asked how many pips I risk on each trade. Many traders assume that trading
a daily or weekly chart requires risking a tremendous number of pips
on each trade, and they can’t afford that risk. This is a logical assumption
because many traders are conditioned by lessons on day trading to risk
a small number of pips when trading a smaller timeframe. The notion is

In terms of risk, another reason I promote long-term trading is to reduce
transaction costs. Currency dealers are very good at marketing the notion
that somehow the currency market is cheaper to trade because there are

Without capital in your account, you’re dead as a trader; therefore, protecting
your trading capital should be your top priority. Anytime you open
a trade you are placing capital at risk, so it is important to select only the

I get at least one e-mail each month from a trader who has let a bad trade
get away from him. Usually the trader did not place a stop order on his
trade and the market moved against him, creating a significant loss. Closing

Losing is part of trading, and sooner or later you will lose money on
a trade. How you handle risk is the single most important concept a
trader must understand to survive long term. Unfortunately, managing
risk is a confusing topic for many traders. Through my blog I’ve spoken
with traders from around the world who have made the same mistakes I did
as an inexperienced trader; the discussions in this chapter are a response
to those conversations.

In this chapter you will learn how to use stop orders, avoid overtrading,
size your positions correctly, and manage trailing stops appropriately.
Managing risk is a key principle of bargain hunting because you can’t trade
if you end up losing all your money. Arm yourself with the information in
this chapter and you’ll be prepared to protect your account capital from
the risks of trading currency.

TRADING PRICE ACTION

Identifying support and resistance is only half the battle; to make money,
you have to be able to trade them. There are a couple of tactics I prefer to
trade price action along support and resistance levels, and you will learn
those tactics in this section. You will see these tactics in action when we
discuss actual trading methodologies in Chapters 6 through 9. To trade

The trading methodologies in this book are built on the assumption that
you will build your skills as a support and resistance trader. Identifying
support and resistance isn’t difficult with a little practice. This section will
teach you the techniques I use to identify support and resistance. By the
end of this section you will be able to identify support and resistance levels
on any currency pair and any chart timeframe. You will learn to identify

If technical indicators or oscillators do not drive price, then what does?
Viewing a currency chart, price seems to oscillate in a completely random
fashion, but under the hood what drives price is actually quite orderly. The
spot currency market is a competitive marketplace driven by the economic
model of supply and demand. Many factors influence the equilibrium between
supply and demand, causing shifts in the market price. When more
traders are willing to buy a currency than sell it, the price will move higher,seeking new sellers. The opposite effect occurs when more sellers exist
than buyers: prices fall.

Traders constantly search for an edge over other market participants
that will lead them to greater profits. Many traders have placed their
faith in technical indicators or oscillators to help them predict the
next move in price without regard to price itself. Unfortunately, indicators
and oscillators have no influence on the market, as we discussed in Chapter
2. Despite this fact, I still know traders who cover their charts with so
many indicators and oscillators they can’t even see the price bars, which is
unfortunate because the best indicator to predict the next move in price is
price itself.
In this chapter you will learn to read price action without the aid of
technical indicators or oscillators. This is a very important chapter for you
to consider, because reading price action through the study of support and
resistance is at the center of every trading methodology in this blog.

MANAGE YOUR PROFIT

Taking profit is often more difficult than taking a loss for many traders.
Unlike risk, reward is not a fixed variable. The market may move 10 pips
or 1,000 pips in your favor, and though you know how much you’ll lose
if the trade goes bad, you have no idea how much potential profit a trade

The only factor a trader has under her control when a trade is opened is
risk. Managing the amount of money you lose when a trade goes bad is
critical to your longevity as a trader. The reality is that there is no safe

In real estate it is said the real profit is made when you purchase the property,
not when you sell it. This adage means that when you purchase a
home or investment property, you should try to get the absolute best price
for the property. Paying as little as possible for a home will help you makethe most profit when you decide to sell it at a later time. Buyers who pay
market or get into bidding wars for a home are paying full price and will
have a much harder time making a profit than those smart enough to wait
for the best price.

Humor me for a moment and consider this riddle: What is the difference
between a great bass guitarist and a great bass guitarist? It’s an impossible
riddle, right? Although both bass guitarists can play and entertain a crowd,
only one truly understands how music works. The other has simply memorized
notes and mastered a tempo. Without understanding how music is

Why are you trading? Are you trying to fulfill a lifelong desire to wake up at
3:00 A.M. and stare at currency charts for 10 hours a day? I didn’t think so.
Unfortunately, I continue to meet traders who remain glued to their charts
for more than 10 hours a day! Ironically, for many of these traders their
effort doesn’t translate into additional profits. I don’t know your interest in
trading, but whatever the reason you trade, never forget that there is more
to life than trading!

Principles of a Bargain Hunter

Principles of aBargain Hunter

Nothing makes you feel like a sucker more than discovering you could
have paid less for something you just bought. From garage sales
to global finance, bargain hunters seek out the absolute best price,
whether they are buying velvet Elvis or 1 million euros. Under all the fancy
software, chart patterns, indicators, and analyst opinions, trading currency
has only one goal: to buy currency when it is dirt cheap and to sell it to
someone else for top dollar. Unfortunately, traders often get distracted
from the primary goal of trading to search out new or exotic trading systems
promising to have unlocked the secrets of trading currency. There is
no secret to making a profit, whether you’re running a pawn shop or trading
pounds. Your job as a trader is to buy at a value, sell at a premium, and
never pay full price.
Identifying a good deal in the currency market is a little more complicated
than telling the local car dealer you won’t pay sticker price. Traders
become bargain hunters by learning to read price action and then anticipating
the market’s next move. It takes discretion and experience to develop
a sixth sense about price action, and even an experienced bargain hunter
can get suckered from time to time. Bargain hunting is a large component
of the way I trade, because demanding the best price out of every trade
ultimately reduces risk and increases profit.
I have created five principles of a bargain hunter to frame my style of
discretionary support and resistance trading. The strategies described in
this book have their own guidelines for locating trades, but all are grounded
in the principles of bargain hunting. Each of the five principles is designed
to guide you through a specific trading task. From maintaining a healthywork and life balance to managing profit, the tenets of each principle in
this chapter must be met before I will take a trade. Pay close attention to
the material covered in this chapter; this is how I bargain hunt and I don’t
mind being called cheap. It’s a badge I wear proudly.

SELECTING A CURRENCY DEALER

The only partner a retail currency trader needs is a retail currency dealer.
No two dealers are alike, so care should be taken to select the very best
dealer as your trading partner. We discussed earlier that currency dealers
are different from stockbrokers because they routinely assume the full

The currency market is designed to facilitate the trade of money between
two parties interested in actually delivering the currency being traded. The
contracts traded on the spot market are designed to settle within two business

Currency is traded in lot sizes ranging from 100- to 100,000-unit lots on the
retail spot market. Remember that a unit of currency could be a dollar,
euro, pound, or whatever your account denomination. By trading multiple
lots, a currency trader can hold a position of virtually any size, provided

At some point you will have to place an order with your dealer to make any
money in the currency market. Opening, closing, and managing trades are
accomplished through four different order types. Market orders, entry orders,
stop orders, and limit orders all serve a specific role in trading on the
forex market. The implementation of each order type is slightly different
among currency brokers. Ensure that you have a firm grasp on how to use
your dealer’s software before you trade with real money.

Trading currency is a process of exchanging one currency for another, so
each currency trade is actually two transactions happening at the same
time. One currency is bought while the other is sold. The forex market
quotes prices as currency pairs to facilitate the ease of trading one currency

The forex market is not structured like a traditional exchange market such
as the New York Stock Exchange or the Chicago Mercantile Exchange.
Forex is a decentralized global marketplace where trades are cleared one
on one between trading partners. There is no central exchange, no pit full
of yelling traders, no big board of quotes on a New York street, and no
closing bell to ring. The pros and cons of an exchange-based market versus
off-exchange currency trading are debatable, but there are obvious differences
you should understand before trading in the forex market.

Forex has a diverse population of participants, ranging from Japanese
housewives to powerful central bankers. The objectives of the participants
differ, and their individual actions may have dramatic affects on
the market. It is important to remember that the forex market is an offexchange
marketplace; there is no central exchange where all orders are
cleared, as on the New York Stock Exchange or the Chicago Mercantile
Exchange. The bulk of trading is done between trading partners on the
interbank; however, small retail traders are unable to trade directly with
partners on the interbank. Therefore, some participants in the forex market
exist to create a marketplace for others. Currency dealers create a
market for smaller retail speculators and offset their risk by trading with
their larger partners on the interbank. The hierarchy of forex participants
is illustrated in Figure 1.1. There is a definite food chain among forex
market participants, with interbank members on top and retail speculators
on the bottom.

The roots of our modern forex market are an interesting topic that has
been covered ad nauseum by other trading books; however, I do believe
it is important to have some knowledge of the market’s history, so this
section covers the key points. If you have never studied global monetary
systems, consider this section an abridged history of the forex market.
The modern forex market’s roots began with over-the-counter currency
trading desks established by banks throughout the 1970s and 1980s,
following the collapse of a postwar-era monetary system known as the
Bretton Woods system. Bretton Woods was established in June 1944, as
World War II came to a close. The Allied nations sought to establish a new
monetary system to promote global investment and capitalism and to eliminate
the challenges of a gold standard system.

WHAT IS FOREX?

The currency market, or more specifically the forex market, derives its
name from the generic term foreign exchange market. The forex market is
a decentralized global network of trading partners, including banks, public
and private institutions, retail dealers, speculators, and central banks involved
in the business of buying and selling money. The forex market is a

Exploring the Currency Market

Whether you trade stocks, commodities, currencies, or real estate

on Mars, it is important to understand the marketplace in which

you’re working. If you have little market experience, if you’re new

to currencies, or if you want to brush up on market basics, this chapter is

for you. This chapter does not contain an exhaustive history of the modern

foreign exchange (forex) market. Instead, we look at the market from the

perspective of an active trader. You will learn about the roots of the market,

its structure and participants, how currency trades are executed, and the

tools used to conduct business. If you have experience trading other markets,

this chapter will brief you on the unique attributes of the currency

market. If you have little or no experience in trading, the contents of this

chapter are an essential part of learning the business of currency trading.

Leading vs. Lagging Indicators

We've already covered a lot of tools that can help you analyze potential trending and range bound trade opportunities. Still doing great so far? Awesome! Let's move on.

Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Congratulations! You've gotten through the Pre-School and, with a few boo-boos here and there, you are ready to begin your first day of class!

You did go through the Pre-School, right????

What is Traded?

The simple answer is MONEY.

Because you're not buying anything physical, this kind of trading can be confusing.

Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

If you've ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet (if you're a dude) or purse (if you're a lady) or man purse (if you're a metrosexual) into the currency of the country you are visiting.

You go up to the counter and notice a screen displaying different exchange rates for different currencies. You find "Japanese yen" and think to yourself, "WOW! My one dollar is worth 100 yen?! And I have ten dollars! I'm going to be rich!!!" (This excitement is quickly killed when you stop by a shop in the airport afterwards to buy a can of soda and, all of a sudden, half your money is gone.)

toke

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