Zhu's Forex Thoughts

Hello all,

In my five or so years on FF (and a lurker before joining), this is by far the best thread I have seen.

It is the (very few and far between) threads like this that keep me looking in from time to time.

Absolutely excellent stuff!!

If only new traders would read threads like this instead of the constant (and fruitless) search for the "HG" indicator or the "magic" MA setting....

Many thanks indeed for your fascinating contribution. Much appreciated.

All the best,

OD

.

Bro, very nice and informative thread you spent your time writing and sharing to others. I am curious on some points, you can choose to answer or not to.

(1) All your posts are very well written, and you spent time organizing all these stuffs and share with others. I wonder do you trade full time or you have other source of income?
(2) As stated in your post about the trade sizes in tiers, I will like to know how much leverage do you use for your account, as 30k will not be enough to open so many standard lots?
(3) Do you use indicators? If you do, do you code your own indicators or you use standard broker's provided indicators?
(4) Understand that you are an intraday trader, when you establish a direction, how long do your direction bias hold? Or are there any fundamental indicators or technical indicators you use to validate your direction?
(5) As you mentioned you have different trade sizes in different tiers, how much percentage of your full account will you allow in the drawdown if your trades doesn't do well? Do you limit yourself how much you can lose per day?

Btw, thanks for sharing a well written thread.

(1) I have a full time job. I trade 3 times a week in the evenings, 5.5 hours each time, inclusive of 45 mins of prep and about 45 mins of review. I might or might not change my career depending on how things turn out. But if I do I am considering a) going onto Wall Street b) trading and writing c) data scientist

(2) my max leverage is 1:500 but ofcourse not all is employed. To open 60 lots on a 30k account, that requires about 1:300 leverage I believe.

(3) I do. They are not self-coded.

(4) It really depends. It's a game of probabilities. Sometimes it can hold for an entire session. Those are typically the royal flush days. For example, Black Monday last year was a royal flush day. EUR/USD went up 200+ pips in the early US session. That was completely tradable. I traded it in fact with large size. Sometimes when things are unclear, it becomes a scalping game where you basically catch the range based trades and if something breaks, go along with the break and then reverse soon after. Other days you get somewhat of a trend mid-session going and it goes for about 30-40 pips and then stops. Those can be good too if you were sensitive to the tape.

(5) I am prepared to lose up to 70% of my account each day but most days would not even come close to that. As I said, it's an intraday stop-loss. If you trade for a living you need to have one. Also, it's good to have a give-back rule. Meaning if you make beyond a certain number after 2 hours of trading, you will stop when you give back say 40% of the closed profits in the next 2 hours. This will ensure you stay in the GREEN. Think of 70% of my account balance as my intraday risk. The best trades should have you risking half of that intraday risk. Meaning 35% of the account. That is around a 13 pips risk for a Tier 5 trade. I don't try to pyramid. I withdraw and reset my account at the end of everyday.

Glad you found the thread helpful.

Thanks Old_Dog, would be interested to hear what you have to share about your trading experiences too! I am sure you have tons of them

My take on investing

I am trading/investing in bitcoin with no leverage.



I think anything on a daily time frame and above should be done with zero or minimal leverage. Maybe 1:2 at the most for a volatile instrument like bitcoin.

Investing imo is trading with a long time frame. I know some people would argue that investment means just buying and holding for the long run. That to me is the same kind of mentality that justify averaging down in FX. The only reason they haven't lost all their money is because most equity markets have a tendency to trend up. But I wonder if that's a natural thing? Can't we have decades of stagnation?

I think any investment should follow 3 rules:

1) When I tap you on your shoulder, you should be able to tell me unequivocally when you will exit your investment. It should be for both gains and losses. You need to know exactly how much you are willing to risk for this idea.

2) Blind or over-diversification is for 2nd rate investors who have no conviction with their ideas and can't distinguish good opportunities from bad. The real money is made when you look for good opportunities in things you understand and you gradually build your position until it becomes a large one, letting the market confirm your idea, and then you hold for the real move.

3) Always keep sufficient cash/liquidity on hand so you can act on opportunities when they arise.

The best advice for entering positions

is from Jesse Livermore.

Determine how much you want to risk on the trade.

Enter 1/5 on first sign/clue of idea. (spike/puke; volume signals; hunches. Exit on predefined SL.)

Add 1/5 when it starts working. (when level starts holding, exit on predefined SL.)

Add 1/5 when it works even more. (The trend change should be established here with HL, HH, or LH, LL. If it breaks down, exit 2/3 when HL/LH is broken and final 1/3 when previous trend resumes.)

When it travels further and retraces and then validates your idea again, put on the final 2/5. (usually when price crosses above VWAP or holds above/below a key level/structural support/resistance and starts consolidating).

If you are right, price should have moved about 30-35% of the move by now. Hold for the next 40-50%.

**Cross reference this with the trade I have shown above.

In general, assume you are WRONG until the market proves you are right. When something goes against you, exit double of your previous entry. Meaning if the final 2/5 fails, you exit 4/5 of the position and wait for the market to prove itself again.

The most important thing in staying alive in this business

Is to prevent outsized losses.

Think about what this means for trading

Imagine two urns filled with millions of poker chips. In one of the urns, 70 percent of the chips are red and 30 percent are blue. In the other, the ratio is reversed, so we have 70 percent blue and 30 percent red chips. Suppose one of the urns is chosen randomly and a dozen chips are drawn from it: eight red chips and four blue chips. What are the chances that the chips came from the urn with mostly red chips? (Give your answer as a percentage.)

If you are like most people, you have probably just said a figure between 70 and 80 percent. Surprisingly, the correct answer is actually a whopping 97 percent. To arrive at this answer you would need to apply Bayes Theorem, a relatively simple formula which shows how the probability that a theory is true is affected by a new piece of evidence. However, very few people solve this problem correctly. They end up being too conservative.

Urns & Bayes' Theorem

Imagine the states of the market. Uptrend, downtrend.

Take any time frame.

How do we know that the probabilities are favouring a trend change?

Think about the higher time frame above that.

How do we know that the probabilities are favouring a trend change in that time frame?

On an intraday basis I am typically doing one of the following things:

1. Trading with/against the 1 minute thinking the 5 minute trend might reverse to align myself with the 15 minute trend.

2. Trading with/against the 1 minute and 5 minute trend, thinking the 15 minute trend might reverse to align myself with the 1 hour trend.

3. Trading with/against the 1 minute trend, with the 5 minute trend, against the 15 minute trend and 1H trend, thinking that things might reverse to align with the 4H trend.

And to take a page from Alien's book



How do trends end?

Maybe 1/8 times it will end abruptly.

The other 7/8 times it will end with a blow-off top/puke style bottom OR it will end by a consolidation.

Play the odds. Don't play for a trend change on any time frame without a parabolic move or a consolidation.

A different way of thinking about risk management

Going back to this, you should set an amount you are willing to risk for the total investment capital you have.

Let's say I dedicate 100k to investment/capital gains.

I will decide that for Tier 5 trades/investment, I will want to risk 5% of my total capital.

This will be 5k.

To achieve this 5k risk, it means that 35% of my intraday account should be about 5k. That means I should trade with a 15k account roughly.

My Tier 1 trades will be 1/10 of that meaning 500$ risk.

Doing it this way will keep things in perspective and not put too much open capital at risk at any point in time. You should rarely ever hit your intraday loss limit. If you do you are doing the trading thing wrong.

Bear in mind that Tier 3/4/5 trades only occur less than 20% of the time. If you find yourself putting on size for more than half of your trades, you are being too loose with your trading.

Try to keep > 50% in cash so you can activate them for opportunities that arise.

Could you please share some your experiences about breakout trading using daily candel. (Price).
Thanks and regard.

UK

I am looking at GBP/USD and the UK stock market.

Thinking how I can trade the downtrend that I think may travel to 0.80. People are all looking at EUR/USD but I think shorting the pound offers far greater potential.

Shorting the GBP/USD

Entry time frame: 1hr
Movement timeframe: Daily
Trend TF: Weekly
Key Levels TF: Monthly

Expected trade hold duration for each trade: 1 week

Sizing is 1/8 of my intraday sizing.

Only trading shorts as long as weekly stays bearish.

If retail sales are bad, we'll likely get a Tier 5 set-up (to the upside) on the EUR/USD today.

Wait for it to hit 1.097x, short it, and then get HEAVY long on the 30 pip retrace.

Be patient and the entry will present itself.

466 and 225 are good places to long

Pattern within a pattern.

15 minute chart has same pattern as Weekly chart.

Going long on the break-out here would potentially net 500 pips+ with 35 pip risk.

Learn from your best trades

Focus on the best trades that you have made, or the best opportunities you have seen in the market. Dissect them; understand them.

Master the best ideas and train your brain to see them.

***

Every idea feels like a good idea

But not all ideas are made equal. The key then is to develop an objective criteria to distinguish between the "okay" ideas and the best ones. It's okay to risk money even for "okay" ideas, just so long you are risking much less.

***

Scaling in and good MM gives you FREEDOM

Yes. I have never felt so FREE and happy when trading as I am now using a scaling in approach. Don't put on the size until the trade starts working and when it stops working, take off double of what you put on. The best trades will work from start to FINISH. They demonstrate near perfect trade structure. Your job is to know what perfection looks like and when something doesn't look that way, take risk off.

15 Jan 2016 European Session Trade by Trade Review

To get the most out of this, I encourage you to pull up a chart and refer to the levels I am looking at.



Session Time: 1 hour before London Open to 3 hours after London Open.

Technical Picture

1. 4H is up. 1H is up. 15 min is up. 4H we closed above 1.08689 level.

Key Levels:

1. 1.09329(R)
2. 1.09700(R)
3. 1.08689(S)
4. 1.08209(S)

Are there any specific technical patterns or facets that are appearing?

1. Breakout pattern on the 15 minute chart.

Overall session plan:

1. 1.08804 area for long
2. Above 1.08901, consolidation for long.
3. 1.08760 area for longs.
4. 1.08689 area for longs.

Take profit levels:

1. 1.09147: 80% chance of consolidation/retrace/reversal.

General positions sizing:

1. Tier 4 sizing: Each long trade idea risks up to 3.75% of my total investment capital
2. If 15 minute trend changes this turns into a Tier 2 trade.

Trade 1: Price was consolidating/tightening after showing some support at a 1 min level, I decided to initiate 1/5 of my position here based off that idea. The trade did not work and I exited once it made a new low for -3 pips.

Trade 2a, 2b, 2c: At the 1.08804 level that I identified pre-market price started showing some support. I initiated 3/5 of my position here based off various micro-factors I was looking for. The trade failed and I lost 2 pips on every part of the trade.

Thereafter, price started a steep decline towards the 1.08689 area, sweeping through multiple levels in between without and support.

Trade 3a: At the 1.08689 level, it did a puke style down move with high volume. I initiated 1/5 of my position.

Trade 3b: It found support and made a HH, HL, I initiated another 1/5 of my position. Right after, the HL broke and I exited my positions.

Trade 4: Price seems to keep finding support at the 1.0865x area so I decided to put on 1/5 of a position. I exited for a 4 pip loss when it made a new low.

Trade 5a: But price immediately recovered the level again on the next bar, so I reentered 1/5 of my position on the same idea.
Trade 5b: Price also broke a key pivot level that I was looking at so I entered another 1/5.
Trade 5c: Price made a new HH so I added another 1/5.

Price traded up quickly into the Asian high/Intraday high. It showed some weakness there and I exited 2/3 of my position, taking 21 pips for each of them. At this point I was already heavily in profit.

Trade 6a: Price made a suddenly aggressive move up after multiple rejections. From experience this is likely a false break after a consolidation at a key level. I exited the last 1/3 of my position and initiated a 1/5 of a position of short trade of Tier 1 sizing (a Tier 1 position risks 0.5% of my investment capital, so 1/5 means 0.1% risk.)

Trade 6b: This worked immediately so I added another 1/5 on rejection of the level.
Trade 6c: Price made LH, LL, I added another 1/5.

But at this point when the low held, I realised that since we are still in a general uptrend, the point of entry of a short trade is the best chance to go long. So I exited the shorts.

Trade 7a: I initiated 1/5 of my tier 4 position size here on that idea.
Trade 7b: Price broke a key pivot level so i added 1/5.
Trade 7c: I added another 1/5.

But at this point I realised that price was consolidating and I was too aggressive with the adding so exited 2/3 of the position and waited.

Trade 7d: Price consolidated and broke out, giving me good reason to size up. I added 4/5 of my position here with a 6 pip stop below a key low.

As expected, price broke above and then came back to retest the level. I held to my positions and waited for the larger move. The larger move came and price eventually advanced to the 1.09147 level I identified premarket. Price showed weakness there so I took off 2/3 of my position.

Later price made a classic breakdown pattern, so I exited everything on the retest of a resistance level, making 18 pips on a full size trade with an average of 5 pip risk. At this point I was up 50% on my trading account. This translates into a 6.5% gain on my investment capital.

Trade 8: Initiated a 1/5 position for a Tier 1 short that didn't work. -3 pips.
Trade 9a: Tried the same short again after price appeared to breakdown at the level.
Trade 9b: This started working and I added another 1/5.
Trade 9c: It made a LH/LL so I added another 1/5.

At this point the level held so I made the same decision as earlier to exit and go long. On hindsight this was a bad call because price looked like it was due for a complex correction.

Trade 10: I initiated 1/5 of a Tier 4 long. It didn't work and I lost 1 pip.
Trade 11a, 11b: Price showed support at a key level, made a false break of the level and recovered. I entered 1/5 and then another 1/5 on key pivot breaking.
Trade 11c: Price made HH/HL. I added another 1/5.

I exited 1/2 on a unexpected trendline break.

I exited everything on the close of the session after 4 hours of trading for a 53% gain on my trading account. This translates into a 6.6% gain on my investment capital.