How to avoid being shaken out | Forex Factory

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How to avoid being shaken out

  • #1
  • First Post: Aug 10, 2006 11:47am Aug 10, 2006 11:47am
Hi all,

I am trying out a KISS method of trading. I trade breakouts of significant
S/R areas and daily highs/lows. In my admittedly limited experience, I have found that if a daily high/low is broken, or a significant S/R area, the price will tend to go in the direction of the break for at least 10 to 20 pips. I am looking to turn this knowledge into a system that will produce consistent returns.

Now, I know that this method works, but I keep getting shaken out of trades, probably because I pay too much attention to it. To illustrate, here are some trades I took earlier today:

1) B USDCHF 1.2303 - closed it when it went back to 1.2296, as you all know it reached 1.2380 or so.

2) S GBPUSD 1.8972 - closed it when it went back to 1.8976, thereafter it reached a low of 1.8870 or so.

Being a professional stock trader, I am used to being "in the money" the instant my chosen stock breaks out (i.e. i'm ahead 10 to 20 cents at least). The moment it goes back to my entry price, I take it as a sign that I made a mistake, and more often than not, exit my position. This is what my boss taught me hehe. Apparently, forex is a completely different animal.

Now, I want to ask the veterans here at FF, how much "breathing room" should you usually give a certain currency after it breaks out? In other words, how do you know if a breakout is false, or if it's just retracing a bit to gather strength? Is there a certain number of pips that would be the optimum stop for a strategy like this? I mean, should I just leave a 20 pip stop and then go do something else? Any suggestions, comments or opinions are welcome and will be very much appreciated. thanks for taking the time...

Nat
  • #2
  • Aug 10, 2006 12:18pm Aug 10, 2006 12:18pm
Nat,

This is always a tough call. Honestly, if we had the correct answer, this board would probably have no participants because everyone would be successfully trading or better yet, retired.

However, what I have found, with great success with the limited time that I do get to trade, is that it's easier to determine whether a breakout will be sustained if the fundamental reason for the breakout helps to support the move. Often times, S/R will be broken because something happens (like NFP, or oil spike or something). A breakout for the sake of breaking out often has less of a chance (albeit, it does have a chance) of continuing. Currencies, in my opinion, while techinically motivated for small bursts (10-50 pips) usually require an underlying mood caused by fundamental data for larger moves. (although, fundamentally, the mood could be created on technical scenarios - I think we're seeing SOME of that today...the dollar mood is generally, weak, but trying to break major resistance for the GBP/USD [ie 1.9000] is a bit exhaustive as we have already extended our upwards movement...this coupled with world events help to create a short term break-down).

I think the key to understanding whether or not a breakout can be sustained is a balance between understanding the technical properties of the currency involved (like how the currency reacts around S/R) and understand the fundamental affects of news more efficiently as to more quickly determine the mood. It's neither one or the other, but a good combination of both.

The trick is usually this: if you are absolutely unsure of how the market is feeling, then a technical break will have a higher chance of coming back to equilibrium. If you get caught in that scenario, then it's best for you to probably take profit as quickly as possible.

However, if you can "feel" the tendency (like the market wants to move up or the market wants to move down), then a technical break often has a good chance of popping, coming back down and then continuing on it's merry way. In this case, it's best to get alerted when you reach an acceptible profit level, then CLOSE 1/2 of your position to help you with the pyschological portion of the trade (after all you did win) and then move your stop to break-even and start a trailing stop. When you feel the mood of the market change, if you happen to still be in the trade (depending on how wide your stop is, you could very well be), then go ahead and tighten the stop or close the trade altogether.

The key here is being able to discern the mood or tendency.

I would say 65% of the technical breaks that I watch or have interest in tend to be of the latter (undecided types). However, the other 35% are almost no-brainers (because I have been able to determine the mood of the market). I can tell you that my success ratio has been much greater (like in the 90-95% range) when I can discern the mood prior to the trade. Trades in the other 65% fall somewhere at the 50% line.

With that said, just being able to determine the mood doesn't make it a sure-fire trade...it just makes it a heck of a lot easier to trade.
  • #3
  • Aug 10, 2006 11:08pm Aug 10, 2006 11:08pm
Quoting natgo
Hi all,

I am trying out a KISS method of trading. I trade breakouts of significant
S/R areas and daily highs/lows. In my admittedly limited experience, I have found that if a daily high/low is broken, or a significant S/R area, the price will tend to go in the direction of the break for at least 10 to 20 pips. I am looking to turn this knowledge into a system that will produce consistent returns.

Now, I know that this method works, but I keep getting shaken out of trades, probably because I pay too much attention to it. To illustrate, here are some trades I took earlier today:

1) B USDCHF 1.2303 - closed it when it went back to 1.2296, as you all know it reached 1.2380 or so.

2) S GBPUSD 1.8972 - closed it when it went back to 1.8976, thereafter it reached a low of 1.8870 or so.

Being a professional stock trader, I am used to being "in the money" the instant my chosen stock breaks out (i.e. i'm ahead 10 to 20 cents at least). The moment it goes back to my entry price, I take it as a sign that I made a mistake, and more often than not, exit my position. This is what my boss taught me hehe. Apparently, forex is a completely different animal.

Now, I want to ask the veterans here at FF, how much "breathing room" should you usually give a certain currency after it breaks out? In other words, how do you know if a breakout is false, or if it's just retracing a bit to gather strength? Is there a certain number of pips that would be the optimum stop for a strategy like this? I mean, should I just leave a 20 pip stop and then go do something else? Any suggestions, comments or opinions are welcome and will be very much appreciated. thanks for taking the time...

Nat
Just my opinion, when a major support or resistance is broken, the market will move for sometime in the direction of the break & then attempts to go back to the broken line (Support or resistance)....This comeback is very famous & happens 80% of the times....You just need to watch this trial at the support or resistance closely, if it failed & continued in the direction of the breakout, then your decision was correct & you will make a decent amount of money...If the comeback attempt succeeded, then you got trapped in either a bull trap or a bear trap & you should close your position & take the loss...

In a nutshell, the attempt to go back to the broken support or resistance point is very normal & happens most of the times...So don't worry about it, it's just normal...


Thanks,

Nader
  • #4
  • Aug 11, 2006 12:41am Aug 11, 2006 12:41am
Mr. Mikal,

Thank you very much for the great insights and the detailed post. What really bugs me about last night is that my analysis did happen to coincide with the direction of the breakout... the terror threat in the UK, non-reaction to the worse than expected US trade balance, record high of GBP/USD long positions, etc. Everything was pointing to GBP going down, and when the position went a couple of pips against me, I closed it. Oh well, I made back what I lost by going short again on the break of 1.89. let's just chalk it up to a lesson learned...

ItLikePoker,

Great analogy man! I love playing poker, and I'm a regular on the 50k SnGs on Pokerstars (play money at the moment though hehe). You're right... if I'm pretty confident that I have the best hand, I should play it aggressively. Thanks for the inputs!

Narafa,

Thank you also for your inputs! That move is exactly what I am looking for. The problem is that when I enter, and price moves a few pips against me, I'm out... this all happens within a few minutes. I don't even wait for the candle to close. I really have to modify this mentality of mine from stock trading.

Ok, in hindsight, here is what I probably should have/could have done:

1) Upon entry, left a stop loss (say 25 pips, or nearest S/R level) and do other stuff (like play poker hehe).

OR

2) Be more conservative with my entry... wait for a 5m/15m candle (does it matter which one I use?) close above the breakout level, then entry above that candle.

Bottom line is, I was jittery, I wasn't fully prepared with my trading plan, and that's why I was shaken out. A valuable lesson learned, and I'm glad it cost me nothing this time. Thanks all for your inputs!!

Nat
  • #5
  • Aug 11, 2006 1:50am Aug 11, 2006 1:50am
natgo.......

here is some reading that may help you put it together....
http://strategybuilderfx.com/showthread.php?t=15439
Same Whore .... Different Dress
  • #6
  • Aug 11, 2006 12:10pm Aug 11, 2006 12:10pm
Quoting natgo
Mr. Mikal,

Thank you very much for the great insights and the detailed post. What really bugs me about last night is that my analysis did happen to coincide with the direction of the breakout... the terror threat in the UK, non-reaction to the worse than expected US trade balance, record high of GBP/USD long positions, etc. Everything was pointing to GBP going down, and when the position went a couple of pips against me, I closed it. Oh well, I made back what I lost by going short again on the break of 1.89. let's just chalk it up to a lesson learned...

ItLikePoker,

Great analogy man! I love playing poker, and I'm a regular on the 50k SnGs on Pokerstars (play money at the moment though hehe). You're right... if I'm pretty confident that I have the best hand, I should play it aggressively. Thanks for the inputs!

Narafa,

Thank you also for your inputs! That move is exactly what I am looking for. The problem is that when I enter, and price moves a few pips against me, I'm out... this all happens within a few minutes. I don't even wait for the candle to close. I really have to modify this mentality of mine from stock trading.

Ok, in hindsight, here is what I probably should have/could have done:

1) Upon entry, left a stop loss (say 25 pips, or nearest S/R level) and do other stuff (like play poker hehe).

OR

2) Be more conservative with my entry... wait for a 5m/15m candle (does it matter which one I use?) close above the breakout level, then entry above that candle.

Bottom line is, I was jittery, I wasn't fully prepared with my trading plan, and that's why I was shaken out. A valuable lesson learned, and I'm glad it cost me nothing this time. Thanks all for your inputs!!

Nat
Well somehow I deleted my Post. Ha! Just figuring this all out. Good example of "Think then Click". Did a "Click and Think" on my FX the other night and found I was in the wrong pair in the wrong direction. So, a $10 lesson in "Think and Click". I play poker same place as you. Started real money first of year and slowly build up. Then change to higher stakes as my Capital Permits. Do the same with the FX.
  • #7
  • Aug 11, 2006 3:44pm Aug 11, 2006 3:44pm
I can bring your post back if you want...
Scott


Quoting ItLikePoker
Well somehow I deleted my Post. Ha! Just figuring this all out. Good example of "Think then Click". Did a "Click and Think" on my FX the other night and found I was in the wrong pair in the wrong direction. So, a $10 lesson in "Think and Click". I play poker same place as you. Started real money first of year and slowly build up. Then change to higher stakes as my Capital Permits. Do the same with the FX.
  • #8
  • Edited 6:47pm Aug 11, 2006 6:34pm | Edited 6:47pm
Dear Traders

with the utmost respect I will like to point out a few things comming from experience. I normally sit down and read the threads but from time to time I like to post some comments for the benefit of this great fellowship of traders.

First you guys are talking about breakouts and S/R and everything which is completely valid but nobody is talking about the bigger picture. If you're going to look for S/R or trends within a single-limited time frame, chances are you're going to get whipsawed, stopped-out and that equals = losing money and feeding your good ol' beloved and thrustworthy broker(irony included). And the flavoured question of the day that almost every trader makes at one point is.......what happened????? the market was shouting "long" and then I fell on my cushioned/comfortable butt.. OUCH....I've been there too...many times.

If you like to trade on 15, 30 or one hour charts, you need to step-back a little and look what's been cooking on the daily chart. Remember, the faster charts will carry more noise .

You think you have a trend forming on the 5/15/30 or even 1 hour charts, you better watchout. In my experience most often that not those are simply dips/rallies/pullbacks/retracements, well whatever name makes you happy. Large institutions and big guns usually dumps/collects gazillions of dollars/Euros etc in the market without any warnings.Unfortunately, everytime one of this sheeks/jeques/Kings/ Queens/banks is going to do that, there's no news anoucements for that particular event. Their weapon of choice: larger time frames, which will definitely have an impact on shoter one's. They don't need the noise of shorter time frames. They're capitalized enough to make a risk assesment bigger that you and me(and whip our asses if we're trading against.)

If you get caugth in the middle, well you better have your guns pointing @ the rigth way.

I am not against traders on faster time frames

Just a word of caution if you choose to trade that way. Keep you eyes open and your noses clean of any substance, so you can stay focused.

About your frustration on the anouncement, don't feel bad. Alot of currency went from dumb-assed hands( those who thinks that everytime the feds spits ay any direction, the dollar MUST go weak) into smart-assed hands(those who are waiting at the end of the line to catch dumb-asses hard-earned money) in a matter of 1/2 hour...pretty impresive rigth???

I've seen that before. Many times.

My sincere apologies if I offended anyone

Cheers
Peace
  • #9
  • Last Post: Aug 11, 2006 11:21pm Aug 11, 2006 11:21pm
Hi Feb,

I totally agree with what you said in your post. Indeed, I was looking at the higher time frames (daily) to verify my analysis. For instance, at the time I took my trades, USDCHF was bottoming out IMHO, being unable to break the key 1.2180 support the past couple of days. GBPUSD, on the other hand, made a higher high in price but a lower high in MACD (many thanks to Kolachi for pointing out the bearish divergence btw). So, I believe I was trading with the trend from the higher time frames, only using a lower one for my entry.

I was simply voicing out my frustration with myself for not having the conviction to see the trade through, since I exited both positions with a couple of pips loss instead of being patient and letting it do what I expected it to do based on my analysis. In your words, the noise shook me out. Definitely no offense taken, and thank you for your post, i have learned from it. Have a good weekend everyone!

Nat
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