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Jay Meisler's Forex Trading Tips

Jay Meisler's Forex Trading Tips

 

 

 

Why I Love Repeat Trades

Why do I love repeat trades? Some of my best winning streaks have come through repeat trades. By repeat trades I mean repeating the same strategy day after day or intra-day, sometimes at the same level or on the same side of the market (e.g sell rallies or buy dips).

I find this works best when trading with the trend although if you find a pattern that is working, milk it until it stops working.  In other words, there is no reason to reinvent the wheel each time you trade. This does not mean to trade one side blindly but there are repeat trade opportunities and when they arise, this strategy can be very profitable, even when markets are stuck in tight ranges.

 

Complacency can be a Traders Worst Enemy

There was a time in my trading career when every time I left for a break or lunch the market would stage a big move. It was uncanny. There were times it would be stuck in a range and I would use that time for a break. When I came back to the office I would take a double take as sure enough the market had moved.

I am not saying to stay glued to your screen but just be aware that it pays to stay alert. Markets have a tendency to move when traders give up on the day and get lulled into complacency. It may be a matter of liquidity thinning when traders back away and then an inability to absorb fresh flows. It may be that positions get trimmed during periods of sideways trading (i.e. congestion), making it harder here as well to absorb fresh buying or selling. It could also be that stops get closer to the market during these times, making them vulnerable and inviting targets.

Whatever the case, when the market turns quiet and complacent, it pays to raise your level of alertness and be on watch for a setup and a market move.

 

Why do Retracements Work?

As those who have followed my thinking know, I believe trading is common sense. When you think of trading this way you can make sense of what many take as blind faith.

Take retracements as an example. Why do FIBO levels work? Is it because they are magic levels? There is no magic. These levels work because many traders, both technical and other, use retracement levels such as 38.2%, 50%, 61.8% and thus they increase in importance. 

Using a common sense approach, retracements work because trends, no matter what the timeframe, need to shake out the weak positions with the trend (e.g. longs or shorts) to setup the next high or low. The reason this works is because once a retracement runs out of steam, the market has less ability to absorb fresh buying (in case of an uptrend) or selling (in case of a downtrend) after weak longs (or shorts) have been shaken out. FIBO levels give the market reference levels for retracements and can be a self-fulfilling prophecy because many use them more than being magic levels and react once they hold. When you think of trading in these terms, trading is common sense. 


Suggest reading my tip from last week, When trading against a trend don’t overstay your welcome.  

Bonus Video: How to use Retracements in Your Forex Trading.

 

When trading against a trend don’t overstay your welcome

 Many traders like to fade moves and trade against a trend. This is often referred to as contra trading. 

When trading contra, you need to be faster to take profits than when trading with a trend. While there is no rule set in stone, more times than not a contra move does not reach a target level for the trade and is quicker to reverse once the buying (or selling) runs out of steam than a move with the prevailing trend. 

This suggests not to hold out for the last pip when contra trading and why I say don’t overstay your welcome when trading that side of the market.  


When to Fade a Correction or Counter Trend Move 

There is not a set rule for this but my experience is that a correction or counter trend move that takes place early in the session (I am using the NY session) is easier to fade and has a better chance of working than one that takes place late in the day. One reason for this is that the market is less able to absorb late day flows than those that occur earlier in the day. 

As with any trading pattern, the overall picture needs to be taken into account and whether news, technical levels or indicators being violated, etc. have occurred that would change the risk. 


Treat Trading as a Business and Not a Casino 

If you were running a business you would deduct expenses from sales to see if you are making a profit. You would also calculate profit per sale and measure that against your overhead. 

Treat trading as a business and keep a log of your trades. Calculate your average profit per winning trade, average loss per losing trade and percentage winners vs. losers. If this does not produce a profit or a profit not worth the risk you are taking, then reassess your approach and set goals. 

With limited capital it is important that your business strategy has a formula that produces a profit or you will eventually run out of money. 

I was quoted nearly 10 years ago saying the following and it still holds true today:

"Those who treat forex trading as if they were in a casino will see the same long-term results as when they go to Las Vegas," he says, adding: "If you treat forex trading like a business, including proper money management, you have a better chance of success." …Newsweek International, March 15, 2004
 

Stay Alert! Markets Move When There is a Surprise

It does not take a rocket scientist to quickly realize that global markets move when there is a surprise vs. expectations. This is true for key economic reports as well as other key market events. Positions are often tilted to one side or the other based on market expectations and you need to stay alert to consensus forecasts so you know how to react to a surprise, either one that exceeds or misses expectations. As with any trade, you need to be aware of the overall technical picture in any decision to go with or fade a reaction to a surprise and whether there are any levels that would accelerate or reverse the prevailing trend. As always, it is the reaction to news that will tell you more than the news itself.

The key is not to become complacent before a key event as it is easy to get lulled into a feeling that it will be a non-event when markets settle into tight ranges ahead of it. While this may sound like an obvious tip, you would be surprised how many ignore it.

There are two tips (see below) worth reading on this topic, News Matters! and Beware of Tight Ranges.

 

Use Stops: Live to Trade Another Day 

One of the major flaws that retail forex traders make is a reluctance to take a loss. Losing is part of the trading business and many traders, especially new ones, do not like to admit they are wrong. This may sound obvious but I have also seen experienced traders get stubborn, lose disicpline and override their stops.  

This either leads to outsized losses or hedging losers in the hope of recouping the loss by trading out of the hedged position. Either way it is a road to the poor house and why we always use stops in our trading.  

So traders beware. Don’t think you can outlast the market, especially when in a leveraged trade, as your pockets are not deep enough. Accept losses as a cost of doing business and hopefully your gains will exceed your losses. In any case, using stops to protect your capital means you can live to trade another day.   


Remove the Word HOPE from your Trading Dictionary. 

I have written about this on numerous occasions but it is worth reiterating as I still see traders hanging on to losing positions in the hope the market will recover. If your analysis does not support your trade cut your loss and start again.  

Winning traders do not use hope in this instance of sitting on a losing trade like the majority, they have risk/money management rules that force them to get out of the losing trade. 

The quote above is from an article posted in our blog entitled, What Differentiates a Winning from a Losing Trader?  

 

The Hard Trade is Often the Right Trade. 

Markets rarely give you an ideal entry level and when in a trend, finding a good one may be hard to find. This lures many into buying or selling at what looks like a bargain price only to see it be a sucker bet. Of course there are exceptions but as a rule the hard (to find) entry is often the right one

This may sound simple but I believe it is one of the keys to trading. Get on what I call the strong side of the market and the odds can tilt in your favor. In this regard, the hard trade is often the right trade as it puts you on the strong side of the market.

Video: Forex Trading Tip: The Hard Trade is Often the Right Trade


Treat trading as a marathon and not a sprint

A long-time friend reminded me of one of my basic principles of trading, which is to treat trading as a marathon and not a sprint.  He has a good memory as he wrote:

Your statement has made it into mainstream media... i am a marathon runner not a sprinter...

What does this mean? Don’t look to make losses back in one trade and don’t look to hit the jackpot on every trade. If you want to be in the trading game for the long haul, treat it as a marathon and pace yourself. There will be plenty of opportunities for taking a shot at a big trade but do it when your analysis suggests a good risk/reward opportunity. In the meantime, look to build consistency and profits. On the other side, losses are part of the game so factor them into your business plan.  .

So to sum up, it requires discipline to be a marathon runner while a sprinter can get by for a while with raw speed but will not succeed without proper technique.

 

Beware of Widening Broker Spreads

Beware of brokers spreads widening during times of reduced liquidity and increased volatility, such as after key news events (e.g. US employment report). This holds true for brokers that offer market execution orders, which means that trades get filled at the price being quoted when your order hits the broker’s server.  

You need to especially beware if placing stops during times when spreads may widen. During these times your stop can get triggered by a widening spread even though the actual market does not trade there.

I cover this in the following article Beware of Broker Spreads and suggest reading it.

 

Stick to your time frame: Don't think like a position trader and trade like a spot trader.

This is a trap many fall into and just about all of us have experienced this at one time or another. What I mean by this is entering a short-term trade based on a longer-term bias without support for the trade on short-term charts. An example is buying into a dip knowing that it won’t last (i.e. longer-term view) but then getting stopped out when the market overshoots your stop to the downside. Another example, is buying or selling just because a currency looks too low or high based on a longer-term view, ignoring the current technicals and rtsk in the market.

It does not mean you cannot use different time frames in your analysis to gauge the overall risk in the market but be careful mixing time frames when trading (e.g. thinking in terms of a daily chart and trading based on a 5 minute time frame). In other words, don’t think like a position trader and trade like a spot trader (or vice versa).,

Remember, markets can remain illogical longer than we can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe… Gartman's 20 Trading Rules

 

Identify the Market and Adjust Your Strategies Accordingly 

While you never know when a market going sideways will turn into a trend market, hitting your head against a wall betting on breakouts can be painful to your account. I prefer to try and identify the market we are trading in and adjust my strategies accordingly. It pays to stay alert but I prefer to take what the market will give more than what I hope it will give.  

This is a skill you can develop over time and one you should put into your trader's toolbox. For example, you do not want to be playing a range on a breakout day nor do you want to play for a breakout on a day where the market is stuck in ranges.


Take Emotion Out of Trading

The market is mindless and not your enemy. Too many traders take it personal and want to get back at the market for a loss. They then wind up repeating losing trades as they fight the market. Treat the market for what it is, a mindless entity. See my article in our blog The Market is Not Your Enemy

 

Don’t Leave Yourself at the Mercy of the Market.

Trade the strong side of the market!

More than half the battle in trading, no matter what market you are in, is to pick the strong side of the market. When you trade on the strong side, there are better odds your trade will work out and a better chance of seeing the market come back to you even if you your entry level is not timed right.

As I have said many times, a key to trading is staying power and you get more time to allow your trade to work when you are on the strong side of the market. There are various ways to determine the strong side (always keeping in mind the broader trends) and one way is to pick the side where there is a greater risk of stops being run. I define the weak side as the one where you have to exit your position if the market moves against you.

There is another aspect to avoid being at the mercy of the market when time is a factor. What I mean by this is to be aware of upcoming key events where the prudent trade is to be flat. In these cases, you need to plan ahead so you are not left to the mercy of a market looking to square up or one where you have to square your positions before a key event or data release. This does not mean you cannot trade or position in anticipation of a key event but you need to plan ahead so you are not subject to the whims of a thinning market. The same holds true ahead of a weekend if you do not plan to run a trade over this period.

 

News Matters!

News drives markets and it is the surprise in a news or economic report that triggers the larger reaction.

While some technical traders still say news does not matter anyone who trades these days knows better. So you need to stay on top of what news is due and what is expected as markets move most when there is a surprise (i.e. miss vs. market expectations). I wrote an article on this subject that I suggest you read: News vs. Charts

GTA offers a discount on live news + live squawk box. See Member Benefits

 

Path of Least Resistance

Markets are like a river flowing downstream constantly looking for the path of least resistance. When if finds a clear path the pace of flow accelerates. This is why the forex market focus will shift from currency to currency, always looking for the weak (or strong) spot and the path of least resistance.

This is a way to look at trading and an example would be the way the JPY was sold vs. the dollar and on its crosses at various times during 2013, the EUR sold after mid-2014 and the JPY again in the 4th quarter of 2014 as fundamentals supported the technicals.

Video: Forex Trading Tip: Path of Least Resistance


Beware of Tight Ranges

When in narrow ranges, small price moves can have an exaggerated look on charts and on your emotional sentiment,. For example, if the EURUSD is stuck in a 40 pip range, a 10-15 pip move (up or down) can look like a huge move on charts. This, in turn, can influence your sentiment and have you buying a top or selling a bottom looking for a breakout.  As ranges narrow they usually setup for a breakout move on one side or the other but while within them, you have to guard against getting chopped up by reacting to small moves that look like large ones on your charts. 

 

Watch Out for Stops and Use Them to Your Advantage!

I cannot emphasize enough how important this is to understanding how the forex market works. 

The forex market is driven by a constant search for stops. This is true across all time frames but especially true for intra-day trading. You do not need an order book to get a sense for where stops may be resting. It is a skill you can develop over time. 

This is not to suggest basing your trading on guessing where stops are lying and a hope that they get run. However, adding this to your trading mix should help you assess the risk and the strong side of the market at any point in time.

Note, when there are no stops left to run, a currency usually trades sideways in a narrowing range. This may explain why the market tends to die off during the US afternoon as there are no stops left nearby to go after.

 

Beware of a New Year Whipsaw

This can also occur to a lesser extent at the start of a new quarter and after summer ends.

As a rule I am wary of start of the year moves and there are times I do not look to trade until a full week is in. One reason may be muscle memory from a long time ago where I got caught in a whipsaw during the first week and it took a long time to dig out of that hole. While this year has started out with some logic (e.g. long EUR unwinding as turn of the year funding pressures ease), I have seen too many start of a New Year false starts not to keep me cautious betting on early trends continuing. So my Tip of the Week is just to be aware of early in the year moves and keep it close to the vest until full liquidity returns to markets.

 

 

 

 

 

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