Psiholog's EUR/USD trading style

Hello all and welcome to my thread.
After much inner debate I have decided to finally post my trading method and mentality at the time of trading. Before I begin, I will share a little about me and how I arrived to where I am today.

I started trading live in December 2007. Unlike the majority, I chose to take no course in Forex trading, read no books and chose to not follow any particular strategy. I felt that by watching the markets as much as possible to try to understand the psychology behind price action was the only way to truly understand what it is that I am doing. Over time I tried I tried to include several components into my trading, different indicators and correlations whether its to other pairs, commodities or the us stock market as well as placing multiple positions on different pairs. It did not take me long to realize that such correlations are a thing to be aware of at best, not tradeable. This is because each pair has its own personality. While one pair has a daily range of 150pips, another may have a range of 400. While one pair is ranging most of the day and then we see sudden quick movements, the other pair may bounce betwen the low and the high all day long. This is why I specialized in the EUR/USD pair only (having lived in both places and knowing how both worlds work) and chose to learn its behavior disregarding the rest. This has brought me to today where my strategy is based only on the EUR/USD and while it may work with other pairs, be aware that each pair has its own personality and behaves differently.

Thats enough about that, now to the next part. I have divided what i find most important about my method into different posts so please no posts until I am finished, I want to keep everything I want to post together.

Trading Psychology

Today is the day that I make a million dollars and can live happily drinking coronas on some beach in the carribean (like the commercials). Today is the day I make enough money to buy a Lamborghini Diablo. Today i am highly emotional because I got in an argument with a family member so I am going to trade without a care in the world, win/lose...doesnt matter. Today is the day that the market is very risky to be in yet im going to enter anyways because I want to make some money. I am drunk, lets make some drunken money. I am tired but i need to fill my daily quota. WRONG. WRONG. WRONG.

As a self proclaimed psychologist I know how important it is to be in the right state of mind when trading. My strongest attribute is also my strongest weakness, I speak this from ALOT of expierence. Either I feel no emotion or I am very emotional. First off, I will say that I have had little money to start with and am still struggling. It is almost impossible to make money out of an account worth less then lets say at least 10000 and expect to get anywhere any time soon especially if you cannot afford to lose a single cent and are living on borrowed time. Many times I would trade with the emotions always in the background which constantly reminded me how much I need to make some money (the places I need to go, people I need to see, etcetera). This is all wrong. Emotions should be checked at the door before clicking that power on button on your computer. Forex after all is a job, a job like any other job that needs to be performed well to stay hired. This means we cannot mix bussiness with personal issues or pleasure, they are 2 entities and must be treated separately. The bussiness leads to the personal, not together, not vice versa.

The right state of mind when trading is as follows:
I am not tired. I am not thinking about the money I need to make or a particular daily goal instead I am thinking about the right entries and exits according to my strategy. I had an argument with my woman earlier today but that is not in my mind at the moment. I am trading now and my full attention is focused on trading. No alcohol has entered my system so I am seeying things clearly. I am not tired. I am not tired. I am focused. Emotions were checked at the door. Gut feeling which is used to trigger orders or close positions is in check, ready for bussiness. Emotions and gut feeling are not the same (learned this the hard way). I am not superman so I cannot predict the markets. The best I can do is give my best analysis which leads to a calculated estimate of what the most possible outcome is. I am ready to rock and roll, patiently waiting for the right moment to do my damage. I am not thinking about the money. I am not thinking about the money. Good entries and exits. I am in the right state of mind.

For some time now I have been looking out for your posts on the EUR/USD thread.Your insights are insightful, analytical, and to a large extent, accurate. Iam mighty glad you still post on this pair, espicially now that it's on your thread. I don't really have time to analyse the market, so your opinions occassionally stand as a sign post for me. Keep on doing your thing

Money Management

There are so many guides out there on how to properly manage money, the options are limitless on what you do. As for me heres how i manage mine.

First off, my stop loss is always 50 pips. ALWAYS. not one pip lower or one pip higher. My take profit is not 2:1 ratio or 3:1 ratio anymore. My take profit is as price action develops. In a ranging market if i scalp i may take anything from 5 pips to 50 pips. In a trending market i may keep a position for as long as 150 pips. If a position is getting close to my target where i know strong support or resistance will be reached, I may choose to get out of the position entirely or at least close half of it. The way I see things, Its best to get out and protect gains made when in doubt then to let the market bully you around when your not sure of direction. There is always another entry waiting around the corner, no rush.

Secondly, there are 2 kinds of trades that I place. the first kind is where i am pretty confident we have hit a strong resistance or support and that there is limited room to be stopped out. This position is regular size. Then there is the second kind of order where I am not so confident anymore but I am pretty sure of direction. If we reach a temporary resistance where PA is struggling to pass, I may place a sell order which is equal to 1/3rd of a normal position. If I am correct, I will make a decent profit and have not lost the opportunity to make some quick pips. If I get stopped out, I have lost only 20pips of a regular position size but gained a much better entry point for where I feel confident in placing a regular size position. It is really a win win situation that I have done many times with limited downside risk as long as analysis of the PA is correct.

Thirdly and last, position size. Position size is relative to account size. A simple rule of thumb, for every 2000dollars in account, pip size increases by 1dollar. So if at 1000 dollars you do 1dollar pips, at 2000 you do 2dollar pips but then you wont do 3 dollar pips until 4000 and 4 dollar pips until 6000. Do not ask me for how i would do things past 10000 as i have never been there. I am 22 after all and have started with little money and am trying to accomplish the highly improbably, rags to riches.

Sidenote: forgot to mention, while the stop loss is 50pips always, I always try to look for trades that have the potential for at least 50pips, even in scalping conditions

Trading strategy (about time right)

My strategy is K.I.S.S (keep it stupid simple). I use no indicators. I repeat, I use no indicators which is why this strategy is not going to work for the majority. I am my own indicator and I determine what the trend is through what the eyes see and the mind interprets. The challenge is interpreting things correctly. Countless hours watching price action has developed this ability and in a sense I am my own indicator. If you think you can do this, then this is the right thread for you, otherwise, I recommend the THV thread by cobraforex. There are a few other good threads out there, you just have to look.

I use mainly supports and resistances. Price action does not move in a straight line. It moves up and down and left to right, always. Price action is 2dimensional. If 1.2850 is strong resistance and 1.2750 is strong support, we will not go from the resistance to the support in an instant (with the exception of news releases), we go in channels. Price action is always contained within a range. (I will go into detail on this in a later post with charts).

I also use patterns. For the EUR/USD there are a few main patterns that develop all the time. W's and M's, h&s, cup and handles, triangles (the most common pattern), flags and flagpoles. There may be others but this is all I am interested in. I use this in combination with what i perceive as strong support and resistance as well as the upper or lower wall of a channel (rarely the middle wall).

News. I am always aware of the news. Trichet said this, feds cut rate to that, oil spiked up because of this or that, new president this, holiday that. I am always aware of the news. However I rarely trade the news. This is because with so many news out there, its hard to know which news will impact the markets, especially these days. The one exception of trading the news is when its a clear cut case of "buy the rumor, sell the news". This happens clearly when the market trends in a direction and sticks at that low or high for up to several days before a news release at which point we see a quick reversal in the other direction after the news release. Trading fundies 101, simple and clear cut (most of the time haha), any other scenario is too big of a gamble.

Starting with my next post I will explain through charts how i do what i do exactly.

Before anything else I take a birds eye view of what is going on with price action. Channels are everywhere from the largest timeframe to the lowest timeframe. The birds eye view is very simple, just take a look at the bigger timeframes and draw the channel walls to see where price action is contained. To make the upper wall, simply connect the highest spikes. To make the lower wall, simply connect the lowest spikes. To make the middle wall, simply draw a line through the middle where the largest amount of spikes are visible as that point divides bear and bullish sentiment within the trend. Similar to andrews pitchfork however i find my way of doing this is alot more accurate

Secondly, I look at what has been going on for the past few days. The channels that develop. To do this I look on the 15minute chart and sometimes 1h chart. This is also clear cut. Same principle as birds eye view only on a smaller timeframe and more current. This helps develop bias of what is most likely to happen at the present. A good example was price action starting sunday (January 23,2009 for when this thread is old). We had a nice trend up. Simple again, connect the spikes and you get the trend.

Bonjour

I agree with you psiholog, the price action is the best way and the most profitable in the trading market.
I use many other systems, but they are only complementary to my PA trading.

I like reversal V Bottom/Top because they are very efficient and profitable.

Reversal V Bottom below.

Channels can go as low as the 1minute chart depending on the volatility but for now this is enough, lets move on to entries and exits. Before even entering the market, you must develop your bias for the day. To develop your bias of the day you must be aware of the news. You will not trade the news but it gives you an idea...whos stronger..the bulls or the bears. If it is a bull day, I like to have all my buy trades with regular position sizes as it is the safe bet (play with the trend) whenever the lower wall of the upwards channel is reached. All my sell orders will be 1/3rd regular position size as they are riskier and you are playing against the trend. These are placed when the upper wall of the channel is reached. Before buying at the low and selling at the high..you must be really sure you interpreted the channel correctly and the only way to do this is by allowing the channel walls to develop clearly with the first 2 spikes for the low and the first 2 for the high. Only then on the 3rd tap would you buy or sell. For example in the chart previously posted it would be like this. (note that i mention wall extensions, ill go into detail on those later as well as pa behavior within a channel)

When a channel is fully developed and interpreted correctly there are 4 main things that i look for when deciding entries. One is, what is pa doing, is it sticking to the lower wall or the upper wall. This is crucial because when pa stick to one wall for an extended period of time, it will most likely break hard to the other wall in one big move with the middle wall acting as first support or resistance (which is why i may choose to partially close position or fully close position at the middle wall). Secondly is, wall extensions. Each time a wall is tapped or close to being tapped there is a potential breakout coming. How do we know whether a wall will be broken or extended? depends on the timeframe you are looking at. If a channel is drawn on the 15min timeframe, any candlestick that exits the upper or lower wall is not the deciding factor. The deciding factor is where a candlestick closes. If it closes within the channel with the spike outside the wall, you know that was just an extension. If the 15min candlestick closes outside the wall, the very next candlestick has to close within the wall for it to be an extension. If that second candle closes outside the walls, you can consider it a temporary breakout if price action does not return within the channel walls. Sometimes when breakout occurs, price just hangs there with no real strength to go any further and most times returns within the channel (as no indicators are used, this si where gut feeling comes in and judging the strength of bulls or bears). Thirdly, I look for any patterns that may develop within that channel that may indicate future direction. A bull flag indicates continuation up, an M indicates a potential reversal and breakout and so on( again this will come easy with lots of hours spent watching pa). THe last main thing that I look for when Judging price action within a channel is the relative strength of the trend. The longer the candlesticks in a particular direction, the stronger the trend, the more candlesticks that are bundled together within a small range, the more I know the strength of the trend is either coming to a stop or is facing strong resistance/support before continuation(interpreting this correctly again comes with experience. Lets look at the previous chart again to see all this.

Breakouts. Lets say you are in a trade, you buy at the lower wall in an uptrend yet breakout occurs and you get stopped out. What a tragedy!..you just lost some money. Wrong. No strategy is guaranteed 100% success. You will make more money playing with the trend then gambling on a potential breakout. I speak from experience. The trend is your friend, the triend is your friend. So, breakout occurs, price action exits the channel and you are looking for your next entry. Oh what to do what to do, how to decide. There are 2 ways here. One which I use alot is wait for the retest of the breakout wall. IF the break is down, the upper wall gets retest to make sure it has become resistance at which point you may enter the trend short as well. The second method is just simply patiently wait. Price action always moves in channels. Once one trend ends, another develops..simple as that. Once the new trend develops clearly, you can use the same entry criteria as before, upper wall or lower wall always being aware of potential patterns that could form, strength of bulls and bears and so on. Here is an example of a breakout and retest as that last chart does not show it (was news related, the price was held up at the high before the news and broke the channel down after news, classic buy the rumor sell the news which had no retest).

Congrats PSI, a good decision opening your own thread.

Already bookmarked it

If I may ask Sir,

What is your nationality? I apologize for the off-topic question.

Hey thanks for posting, I always value your input inn the Eur/Usd thread.

Hey man... I remember you from our forex chat on Geese. I'm extremely interested in learning more from you as Im 18 years old and trying to do the same as you. This business has such a strong learning curve , which I find myself experiencing atm with account loss. But I do not look at it truly as a loss but as cost of education.

I learned about the middle wall this last session. Longed the bottom of the EU (small position) 2802 and it bounced right off the middle wall of the channel 2900 and came down to its current position 2760 or so.

Will keep an eye on this thread.

-Dstryr

As I said earlier, Forex is 2dimensional. I fully explained channels (I hope) but that leaves horizontal supports and resistances. Channel walls keep price action in a trend but horizontal supports and resistances tell us the most likely targets of a channel, this level or that level. The same principles apply though, the exact same principles. I use them mainly to look at the longer term trend. For example, we hit a low at 1.2780 or so last week, today (january 30, 2009) we touched that low again but it still holds as strong support. We know for now it is strong support and a bounce off that level is likely. Here is a simple chart portraying all strong supports and resistances we recently hit. Explanation really not needed as they are exactly the same as channels. Hope the chart makes sense

As a conclusion for now, heres a chart incorporating all, supports/resistances/channels/patterns of the current situation of the eur/usd. Keep in mind i have been doing this for countless hours, this comes easy to me, for all of you interested, gotta do the work, put in the hours or walk away from this method if it does not suit you.


we have reached a double bottom. 1.2780 or so is the strong support. we are currently in a descending channel with pa sticking to the lower wall. The previous strong support has become resistance (1.2850). Conclusion, because pa is in such a tight channel, a breakout of the channel as well as the horizontal support and resistance is required to determine direction. There are no patterns currently except a potential double bottom on the longer timeframe. Methods of play starting sunday: for the downside, wait for a break of this range, the 1.2780 level as well as the lower wall of the current channel (which does happen sometimes) and wait for retest of the 1.2780 level or so before jumping in short. TO the upside, a break of 1.2850 followed by a retest or the formation of a new uptrend with targets up to the congestion area around 1.3000. Bias, to be determined, depends on where the market opens sunday, neutral.

Hope that covers all, for any questions you can pm me or ask here. I am debating whether I will post my observations here from now on or in the main eur/usd thread....to be seen.


Have a nice weekend all, took me 3 hours to type all this...I am out haha!

I think here would be a better idea

Hi.

How I can use the method of trendline break out on M5? could be other additional indicator needed? when I looked at the chart normally the pip movement is varying with same height or half and double. that why the trendline is very important and possible. But how to sure that the price will bounce or break out?

And u are entry on lower and higher price but you close at the middle?

Sometime it would not bounce and keep move higher and higher. if you entry when it reach the trend line possibility it would not bounce is higher. then the price close at the middle is to far from the target. lose or equal.

Are this only an indicator that give 70 % of movement? I admit that the price will reverse if the price is break out from the channel. but sometime it will do some retracement before it have a strength to buy or sell.

That convince me there are several indicator that needed to ensure i not false entry (-ve profit)

thanks