Today we closed out a GBP/USD trade which was a perfect “text book” example of a properly executed Red Bar trade along with the peculiar price action behavior of typical SuperADX signals. It’s important you know about these in order to trade the SuperADX successfully.
Let’s review step-by-step, the setup and characteristics of this trade.
The trade sequence:
1) SuperADX Red Bar GBP/USD 30min received November 3rd, 2am ET indicating a Big Move is near. Next step is to decide which direction the Big Move has the greatest probability of moving.
2) To determine direction, we look at a timeframe which is 4x the timeframe which the SuperADX triggered the forex signals. In this case, we load a 120min chart and look at price slope. We are NOT looking at any indicators to determine price slope. We are looking at ONLY price action which is often the best indicator anyway. We want to see the angle of price action, and which side of the MoneyLine2 price is at. In this case, price angle was UP and price was on the Northern side of MoneyLine2.
3) Based on overall trend direction using the longer (4x) timeframe, we can assume price will continue on it same path and the next big move will be to the top side. This strategy is simply based on Newton’s first Law of Motion: an object in motion tends to stay in motion. This is not an exact science but it is as close as we can come to making the most profits, however, know that this method has a long term success rate of only 65.8%. That’s a full one third (1/3) of our trades will be losers. Come to expect those losers and winners alike. Also know that forex trading is very streaky. We can have multiple consecutive winners… or losers! It is not unusual to have 5-7 winners in a row, but can your account handle 5-7 consecutive losers? If not, get your leverage in order so you can survive the streaks.
[in our education briefs, you can come to expect my rants on money management and trading psychology, which is just as important as the method itself. It does no good in learning the method, if your psyche or money management is not prepared.] Back to the trade…
4. We take an immediate LONG position. We go in with two positions at the same entry price. Both long positions having the same stop loss. One has a target (TP) price, the other is open. Based on our Stop Loss, we will target the same amount for half our position. For example, if we place a 70 pip stop loss, our target will also be 70pips. Once the first target is reached, we move our stop loss to breakeven for the 2nd lot and keep the remaining target open until we receive an exit signal from the SuperADX. This is the fun part and where we can see big successes! It is good to occasionally hit a home-run. It’s good for our trading psychology and gives us confidence. The other side of this isn’t so bad because you understand and accept the risk going into the trade. You know exactly how much you will lose if both positions go south and become a statistic of the 34.2% of trades which lose… plain and simple. But, allowing price action to dictate the exit gives us an element of surprise. And, often a pleasant surprise with no downside risk since our stop loss is breakeven. It is not unusual to see runs of several hundred pips on that second lot… and that feels good when you know you only risked 70pips! =) Some suggest using a trailing stop to accomplish the same feat, but trailing stops do not work. I have massively backtested them and I get taken out too often on strong pullbacks. I do not use them.
5. Now, let’s examine the characteristics of price action while we were in this trade. Note that this is VERY typical and important to understand: For those traders that have been accustom to trading into momentum and chasing trends, you will be uncomfortable with this trading style because price WILL most always goes against you with our trading. Notice that as soon as we enter the trade, price moves the opposite direction. In fact, backtesting reveals that this happens in 70.4% of all winning trades. So if price moves against you after you enter… don’t worry, be happy =) because statistically, that trade has a greater probability of being a winner. Trading is all about probabilities and knowing the statistics… And when we can put them in our favor, we know we can achieve the long term status of successful trader.
Next, notice the massive price pullback of over 100+pips after while in the trade. This is perfectly normal and you need to be able to stomach this. Again, it is very typical of SuperADX price action and we must become accustom and expect it. Otherwise, we panic and make dumb decisions.
6. Based on historical averages of SuperADX “Big Move” Red Bars which trigger on a GBP/USD 30min chart, it is best to use a 70pip Stop Loss and First Target. Of course, there will be plenty of moves that exceed the 70pips, but the 70pip mark on the 30min chart captures the majority of the winners. Again, this is based on statistics compiled over 1.25 million candles of backtesting.
After we enter, price can do one of two things: Stop out or Hit Target. In this example, we hit target. We exited half our position at +70pips. We then move our stop loss to breakeven for the 2nd half. Any pips we capture on the 2nd half is all gravy now since our stop loss is breakeven. Our risk is essentially zero. This is where home runs are made along with having the slight mystery of the unknown. Meaning that price can run several hundreds of pips in our favor. We don’t exactly how far price will go, but we are setup and ready to capture a huge move with minimal downside risks.
7. Since we also received a Red Bar on the 60min chart (the original trade triggered off a 30min chart), we need to watch for a White “Exit” Bar on either the 30min or 60min chart.
8. On Nov 4th at 8am ET, we got our SuperADX White “Exit” Bar on the 60min chart which tells us to immediately exit the trade with a Market order. We exited and made +215pips on the 2nd half of this trade. While it’s not huge, (I’ve seen much bigger), I consider this a home-run.
9. Trade Risk/Reward Breakdown:
Exited 1st Half: +70pips
Exited 2nd Half: +215pips
Total Gained: +285pips
Total Risked: 140 total (70×2)
“Successful Traders do what Unsuccessful Traders DO NOT want to do.”
November 5th, 2010 in Forex Articles by Steven M. Matrix | 11 comments