10/26 Analysis: How to Reduce a Loss by 75%
2 minutes into the NY session, we see a great pattern emerge. The AUD (orange line) is strong with a steep line to the far right showing huge momentum in the market.
The EUR (pink line) is weak also with a steep line indicating huge momentum downward.
- EUR/AUD SELL
From the time we see the momentum show up on the indicator, price for this pair goes down about 15 pips which is just 5 pips short of our 20 pip breakout strategy profit target.
So, this trade would have been a loss (which is unavoidable of course).
However, because we trail the stop, the loss was only 5 pips instead of the original 20 pips we had at risk.
This is how you minimize losses when a trade doesn’t work out.
You can watch the entire video analysis below:
[00:00 – 07:00]
[slide] [1st view indicator: lilac / orange up, blue / pink down]
Hello, I’m James Edward from CompleteCurrencyTrader.com, here with another Currency Strength Analysis training video. And, today, we have an example of a break-out trade at the New York Market Open and I think this has given us a good opportunity to discuss the role that odds and probabilities play with any trading system and how important they are to your trading system.
So, let’s start out with our initial analysis, we are looking for weak currencies which are continuing to weaken to match against strong currencies which are continuing to strengthen. Ideally, we want to see them moving away from each other at this time, but right at the Market Open, at this time, they’re not doing that. We do have a weak Euro and a weak Swiss Franc and we also have a strong (lilac) New Zealand Dollar (NZD) and a strong (orange) Australian Dollar (AUD), but none of these currencies are continuing to move in that direction. So you don’t have an entry [points generally along right-hand side] right at the start of the Open, but we didn’t have to wait–
[slide] [2nd view: orange steep up, pink steep down and blue diving]
(continues)… too long today. Just two minutes into the Market and we have a fantastic break-out opportunity! You can see that the (orange) Australian Dollar (AUD) is moving rapidly up to strength. That line is nearly vertical over hear on the right-hand side, which is precisely what we look for, for the ideal conditions to trigger a Buy order. And, down to the weak side, you have the (pink) Euro (EUR) moving, diverging away in the opposite direction from the (orange) Australian Dollar (AUD). You have two currencies that are moving rapidly, a lot of momentum, very steep lines. That is a perfect break-out trade on the Euro:AUD.
But, at the same time, you have the (blue) Swiss Franc (CHF) moving down to weakness and the —(lilac) New Zealand Dollar (NZD) moving up to strength. Now those two currencies–(lilac) New Zealand Dollar (NZD) and the (blue) Swiss Franc (CHF) are not quite as ideal as the AUD:Euro because these two currencies are not as steep.
But, nevertheless, that is something that you may have looked at, and, coincidentally, I did trade both of these trades today. I matched the (pink) Euro against the (orange) AUD and took a trade on that pair, the Euro:AUD. I also traded the (lilac) N Zed D against the (blue) Swiss Franc (CHF). So, if I go over–
[slide] [B&W vertical line EURAUD.MS]
(continues)… to those charts, now, and I’ll show you those moves.
[drags cursor length of longest bar, center] This is the New York Market Open. You can see the size of that price bar and the momentum that has kicked off as that has come into play. So, you could’ve entered that trade.
Bear in mind that this pattern–
[slide] [previous 2nd view: orange steep up, pink steep down and blue diving]
(continues)… on the indicator is at two minutes into the session. So, two–
[slide] [previous B&W vertical line EURAUD.MS]
(continues)… minutes after the Open at this point, [indicates top long bar] the price started moving down very rapidly and you could’ve entered at any point on this price bar.
I actually entered around about here (where my mouse cursor is) [center long bar] and, the first thing [creates cross bar] that I want to show you is, if you’d entered at the same point as me, [diag line to bottom 5th bar right] the price actually went down right around 15 pips into profit and then, [diag line to top 9th bar right of that] it pulled back. You would’ve been stopped out for a loss on this trade. (I did take a loss on this trade), so that’s the first thing to point out.
But, what I’d point out, here, is it would’ve been a significantly-reduced loss. Remember, you are using a trailing stop. You start off with your stop-loss 20 pips behind your entry price and then it trails down, pip by pip.
So, in this case, if your trade had gone 15 pips into profit, your stop-loss would’ve closed at 15 pips, which means you now have a 5-pip stop. That’s 75% reduction from your initial risk and you’d have ended up losing around about 5 pips on that trade. So, it would’ve been a losing trade, but it would’ve been a very small, losing trade.
And, if I bring in–
[slide] [B&W vertical line NZDCHF.MS]
(continues)… the N Zed D:Swiss Franc, which is the other opportunity that you had, this is the price bar. And, again, I entered [points longest line just left center] on this trade [creates cross point] and, from the close of that price bar, it [diag line to top highest point] actually went up, in total, around about 18 pips.
So, again, this would’ve actually been a losing trade. It didn’t quite go the 20 pips into profit, so you probably wouldn’t have taken your 20-pip profit. It would’ve got[ten] up very close to it, but then reversed and you would’ve been stopped out around [points bottom longest bar right 3rd of chart] about here. But, again, remember, you’re using a trailing stop so the price would’ve pushed up 18 pips into profit, which means your trailing stop would’ve trailed up 18 pips, giving you a two-pip stop-loss by the time the Market came back here [bottom same bar] and stopped you out.
So, in both of those instances, you–
[slide] [previous 2nd view: orange steep up, pink steep down and blue diving]
(continues)… would’ve actually taken a losing trade, had you entered either one of those break-out trades.
And, I think it is important to show you these losing trades for two reasons: first of all, it shows you that anything can happen at any given time. Just because you have a perfect entry [points right side] with a lot of momentum behind you, that doesn’t mean that that is a guaranteed winning trade. Anything can happen at any given time and it only takes one Market participant to do something different and the entire Market can reverse (which is pretty much what we’ve seen today) and you could end up getting stopped out for a loss.
So, just because you have the perfect entry (like this), that does not mean you are guaranteed to have a winning trade. That’s the first thing you have to understand if you want to be a professional trader.
And, what that leads into is understanding odds and probabilities because they are absolutely critical to your long-term success. Odds and probabilities are absolutely central to a professional trading system. You have to understand them if you’re going to trade professionally and profitably. What you have to understand is, just because you have a high-probability trade, doesn’t mean it’s a guaranteed trade.
Let’s say you have a 60% chance of winning. Well, most people would assume they are going to win six out of every ten trades. But it just doesn’t work like that because of the random distribution of those wins and losses. They could be spread out in any order. You could actually take ten losses in a row and it’s only over the next lot of hundred trades that the real odds and probability fees balances out.
To give you an extreme example of that, let’s just look at a coin flip. If you are to flip a coin, you have a 50/50 chance. So the odds are 50/50. However, if you only flip that coin once, your odds aren’t 50/50, they’re 100% guaranteed to get heads or 100% guaranteed to get tails. Your probabilities for 50/50 cannot balance out because you’ve only spun that coin once. You’d have to spin that coin again and again and again over the long term for those odds to balance out.
If you’d spun it ten times, it’s unlikely you’d get five heads and five tails. You might get six heads and four tails, and so on. So, odds and probabilities only balance out over the long term. Why most traders fails is that they would enter a trade like this that they is a high-probability trade (which it is). It then loses and then, they assume that there’s something wrong with the system, so they then go look for another indicator or another strategy or another Market. That’s why they never succeed because they never stick with anything long enough to allow those odds to balance out over the long term.
I think that’s a good example to show you today, that you can have a perfect entry but that doesn’t guarantee you are going to have a winning trade. The key to your success is to keep taking these perfect entries [points generally, right side] day after day after day over the long term and that is when your odds will balance out and that is when your accuracy curve will go upwards.
You can see that our Currency Strength Indicator is an effective tool for picking out the highest probability, lowest risk trade set ups while avoiding market conditions that aren’t favorable. If you keep using this tool every day along with our daily Forex analysis, you will increase your win rate and be on your way to becoming a profitable trader long term.
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