外汇市场高胜算交易架构 - 「会员精华区」 - 火线外汇论坛

离线xiakexian

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只看楼主倒序阅读使用道具楼主发表于: 2008-02-14

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[ 本帖最后由 xiakexian 于 2008-2-16 08:45 编辑 ]

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离线xiakexian

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只看该作者沙发发表于: 2008-02-14

1. Never Let a Winner Turn Into a Loser

Repeat after us: Protect your profits. Protect your profits. Protect your profits.

There is nothing worse than watching your trade be up 30 points one minute, only to see it

completely reverse a short while later and take out your stop 40 points lower. If you haven’t

already experienced this feeling firsthand, consider yourself lucky - it’s a woe most traders face

more often than you can imagine and is a perfect example of poor money management. The FX

markets can move fast, with gains turning into losses in a matter of minutes therefore making it

critical to properly manage your capital.

One of our cardinal rules of trading is to protect your profits - even if it means banking only 15

pips at a time. To some, 15 pips may seem like chump change; but if you take 10 trades, 15 pips at

a time, that adds up to a respectable 150 points of profits. Sure, this approach may seem as if we

are trading like penny-pinching grandmothers, but the main point of trading is to minimize your

losses and, along with that, to make money as often as possible. The bottom line is that this is your

money. Even if it is money that you are willing to lose, commonly referred to as risk capital, you

need to look at it as “you versus the market”. Like a soldier on the battlefield, you need to protect

yourself first and foremost.

There are two easy ways to never let a winner turn into a loser. The first method is to trail your stop.

The second is a derivative of the first, which is to trade more than one lot. Trailing stops requires

work but is probably one of the best ways to lock in profits. The key to trailing stops is to set a

near-term profit target.

For example, if your “near-term target” is 15 pips, then as soon as you are 15 pips in the money,

move your stop to breakeven. If it moves lower and takes out your stop, that is fine, since you can

consider your trade a scratch and you end up with no profits or losses. If it moves higher, by each

5-pip increment, you boost up your stop from breakeven by 5 pips, slowly cashing in gains. Just

imagine it like a blackjack game, where every time you take in $100, you move $25 to your “do

not touch” pile.

The second method of locking in gains involves trading more than one lot. If you trade two lots,

for example, you can have two separate profit targets. The first target would be placed at a more

conservative level that is closer to your entry price, say 15 or 20 pips, while the second lot is much

further away through which you are looking to bank a much larger reward-to-risk ratio. Once the

first target level is reached, you would move your stop to breakeven, which in essence embodies

our first rule: “Never let a winner turn into a loser.”

Of course, 15 pips is hardly a rule written in stone. How much profit you bank and by how much

you trail the stop is dependent upon your trading style and the time frame in which you choose

to trade. Longer-term traders may want to use a wider first target such as 50 or 100 pips , while

shorter-term traders may prefer to use the 15-pip target.

Managing each individual trade is always more art than science. However, trading in general still

requires putting your money at risk, so we encourage you to think in terms of protecting profits

first and swinging for the fences second. Successful trading is simply the art of accumulating more

winners than stops.

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只看该作者板凳发表于: 2008-02-14

2. Logic Wins; Impulse Kills

More money has been lost by trading impulsively than by any other means. Ask a novice why

he went long on a currency pair and you will frequently hear the answer, “’Cause it’s gone down

enough - so it’s bound to bounce.” We always roll our eyes at that type of response because it is

not based on reason - it’s nothing more than wishful thinking.

We never cease to be amazed how hard-boiled, highly intelligent, ruthless businesspeople behave

in Las Vegas. Men and women who would never pay even one dollar more than the negotiated

price for any product in their business will think nothing of losing $10,000 in 10 minutes on a

roulette wheel. The glitz, the noise of the pits and the excitement of the crowd turn these sober,

rational businesspeople into wild-eyed gamblers. The currency market, with its round-the-clock

flashing quotes, constant stream of news and the most liberal leverage in the financial world tends

to have the same impact on novice traders.

Trading impulsively is simply gambling. It can be a huge rush when the trader is on a winning

streak, but just one bad loss can make the trader give all of the profits and trading capital back to

the market. Just like every Vegas story ends in heartbreak, so does every tale of impulse trading. In

trading, logic wins and impulse kills.

This maxim isn’t true because logical trading is always more precise than impulsive trading. In

fact, the opposite is frequently the case. Impulsive traders can go on stunningly accurate winning

streaks, while traders using logical setups can be mired in a string of losses. Reason always trumps

impulse because logically focused traders will know how to limit their losses, while impulsive

traders are never more than one trade away from total bankruptcy.

Let’s take a look at how each trader may operate in the market. Trader A is an impulsive trader.

He “feels” price action and responds accordingly. Now imagine that prices in the EUR/USD move

sharply higher. The impulsive trader “feels” that they have gone too far and decides to short the

pair. The pair rallies higher and the trader is convinced, now more than ever, that it is overbought

and sells more EUR/USD, building onto the current short position. Prices stall, but do not retrace.

The impulsive trader who is certain that they are very near the top decides to triple up his position

and watches in horror as the pair spikes higher, forcing a margin call on his account. A few hours

later, the EUR/USD does top out and collapses, causing trader A to pound his fists in fury as he

watches the pair sell off without him. He was right on the direction but picked a top impulsively

- not logically.

On the other hand, trader B uses both technical and fundamental analysis to calibrate his risk and

to time his entries. He also thinks that the EUR/USD is overvalued but instead of prematurely

picking a turn at will, he waits patiently for a clear technical signal - like a red candle on an upper

Bollinger band or a move in RSI below the 70 level - before he initiates the trade. Furthermore,

trader B uses the swing high of the move as his logical stop to precisely quantify his risk. He is also

smart enough to size his position so that he does not lose more than 2% of his account should the

trade fail. Even if he is wrong like trader A, the logical, methodical approach of trader B preserves

his capital, so that he may trade another day, while the reckless, impulsive actions of trader A lead

to a margin call liquidation. The point is that trends in the FX market can last for a very long time,

so even though picking the very top in the EUR/USD may bring bragging rights, the risk of be-

ing premature may outweigh the warm feeling that comes with gloating. Instead, there is nothing

wrong with waiting for a reversal signal to reveal itself first before initiating the trade. You may

have missed the very top, but profiting from up to 80% of the move is good enough in our book.

Although many novice traders may find impulsive trading to be far more exciting, seasoned pros

know that logical trading is what puts bread on the table.

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只看该作者地板发表于: 2008-02-14

3. Never Risk More Than 2% Per Trade

This is the most common and yet also the most violated rule in trading and goes a long way towards

explaining why most traders lose money. Trading books are littered with stories of traders losing

one, two, even five years’ worth of profits in a single trade gone terribly wrong. This is the primary

reason why the 2% stop-loss rule can never be violated. No matter how certain the trader may be

about a particular outcome, the market, as John Maynard Keynes used to say, “can stay irrational

far longer that you can remain solvent.”

Most traders begin their trading career, whether consciously or subconsciously, by visualizing

“The Big One” - the one trade that will make them millions and allow them to retire young and

live carefree for the rest of their lives. In FX, this fantasy is further reinforced by the folklore of the

markets. Who can forget the time that George Soros “broke the Bank of England” by shorting the

pound and walked away with a cool $1 billion profit in a single day? But the cold hard truth of the

markets is that instead of winning the “Big One”, most traders fall victim to a single catastrophic

loss that knocks them out of the game forever. Large losses, as the following table demonstrates

are extremely difficult to overcome.

Just imagine that you started trading with $1,000 and lost 50%, or $500. It now takes a 100% gain,

or a profit of $500, to bring you back to breakeven. A loss of 75% of your equity demands a 400%

return - an almost impossible feat - just to bring your account back to its initial level. Getting into

this kind of trouble as a trader means that, most likely, you have reached the point of no return

and are at risk for blowing your account. The best way to avoid such fate is to never suffer a large

loss. That is why the 2% rule is so important in trading. Losing only 2% per trade means that you

would have to sustain 10 consecutive losing trades in a row to lose 20% of your account. Even if

you sustained 20 consecutive losses - and you would have to trade extraordinarily badly to hit such

a long losing streak - the total drawdown would still leave you with 60% of your capital intact.

While that is certainly not a pleasant position to find yourself in, it means that you only need to

earn 80% to get back to breakeven - a tough goal but far better than the 400% target for the trader

who lost 75% of his capital.

The art of trading is not about winning as much as it is about not losing. By controlling your losses

- much like a business that contains its costs - you can withstand the tough market environments

and will be ready and able to take advantage of profitable opportunities once they appear. That’s

why the 2% rule is the one of the most important rules of trading

[ 本帖最后由 xiakexian 于 2008-2-14 10:56 编辑 ]

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只看该作者地下室发表于: 2008-02-14

4. Trigger Fundamentally, Enter and Exit Tech-

nically

Should you trade based upon fundamentals or technicals?This is the $64 million question that traders

have debated for decades and will probably continue to debate for decades to come. Technicals are

based on forecasting the future using past price action. Fundamentals, on the other hand, incorporate

economic and political news to determine the future value of the currency pair. The question of

which is better is far more difficult to answer. We have often seen fundamental factors rapidly shift

the technical outlook, or technical factors explain a price move that fundamentals cannot.

So our answer to the question is to use both. We know all too well that both are important and have

a hand in impacting price action. The real key, however, is to understand the benefit of each style

and to know when to use each discipline. Fundamentals are good at dictating the broad themes in

the market, while technicals are useful for identifying specific entry and exit levels. Fundamentals

do not change in the blink of an eye: in the currency markets, fundamental themes can last for

weeks, months and even years.

For example, one of the biggest stories of 2005 was the U.S. Federal Reserve’s aggressive interest

rate tightening cycle. In the middle of 2004, the Federal Reserve began increasing interest rates

by quarter-point increments. They let the market know very early on that they were going to be

engaging in a long period of tightening, and as promised, they increased interest rates by 200 basis

points in 2005. This policy created an extremely dollar-bullish environment in the market that

lasted for the entire year. Against the Japanese Yen, whose central bank held rates steady at zero

throughout 2005, the dollar appreciated 19% from its lowest to highest levels. USD/JPY was in a

very strong uptrend throughout the year, but even so, there were plenty of retraces along the way.

These pullbacks were perfect opportunities for traders to combine technicals with fundamentals

to enter the trade at an opportune moment. Fundamentally, we knew that we were in a very dollar-

positive environment; therefore technically, we looked for opportunities to buy on dips rather than

sell on rallies. A perfect example was the rally from 101.70 to 113.70. The retracement paused

right at the 38.2% Fibonacci support, which would have been a great entry point and a clear

example of a trade that was based upon fundamentals but looked for entry and exit points based

upon technicals. In the USD/JPY trade, trying to pick tops or bottoms during that time would have

been difficult. However, with the bull trend so dominant, the far easier and smarter trade was to

look for technical opportunities to go with the fundamental theme and trading with the market

trend rather than to trying to fade it.

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只看该作者下水道发表于: 2008-02-14

5. Always Pair Strong With Weak

Every baseball fan has a favorite team that he knows well. The true fan knows who the team

can easily beat, who they will probably lose against and who poses a big challenge. Placing a

gentleman’s bet on the game, the baseball fan knows the best chance for success occurs against

a much weaker opponent. Although we are talking about baseball, the logic holds true for any

contest. When a strong army is positioned against a weak army, the odds are heavily skewed

toward the strong army winning.

This is the way we have to approach trading.

When we trade currencies, we are always dealing in pairs - every trade involves buying one currency

and shorting another. So the implicit bet is that one currency will beat out the other. If this is the

way the FX market is structured, then the highest probability trade will be to pair a strong currency

with a weak currency. Fortunately, in the currency market we deal with countries whose economic

outlooks do not change instantaneously. Economic data from the most actively traded currencies

are released every single day, and they act as a scorecard for each country. The more positive the

reports, the better or stronger a country is doing; on the flip side, the more negative reports, the

weaker the country is performing.

Pairing a strong currency with a weak currency has much deeper ramifications than just the data

itself. Each strong report gives a better reason for the central bank to increase interest rates, which

in turn would increase the yield of the currency. In contrast, the weaker the economic data, the less

flexibility a country’s central bank has in raising interest rates, and in some instances, if the data

comes in extremely weak, the central bank may even consider lowering interest rates. The future

path of interest rates is one of the biggest drivers of the currency market because it increases the

yield and attractiveness of a country’s currency.

In addition to looking at how data is stacking up, an easier way to pair strong with weak may be

to compare the current interest rate trajectory for a currency. For example, EUR/GBP - which is

traditionally a very range-bound currency pair - broke out in the first quarter of 2006. The breakout

occurred to the upside because Europe was just beginning to raise interest rates as economic growth

was improving. On the flip side, the U.K. raised interest rates throughout 2004 and the early part

of 2005 and ended its tightening cycle long ago. In fact, U.K. officials lowered interest rates in

August of 2005 and were looking to lower them again following weak economic data. The sharp

contrasts in what each country was doing with interest rates forced the EUR/GBP materially higher

and even turned the traditionally range-bound EUR/GBP into a mildly trending currency pair for a

few months. The shift was easily anticipated, making EUR/GBP a clear trade based upon pairing

a strong currency with a weak currency.

Because strength and weakness can last for some time as economic trends evolve, pairing the

strong with the weak currency is one of the better ways for traders to gain an edge in the currency

market

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只看该作者 6楼发表于: 2008-02-14

6. Being Right but Being Early Simply Means

That You Are Wrong

There is a great Richard Prior routine in which the comic lectures the audience that the only way to

reply when caught cheating red-handed by one’s spouse is by calmly stating, “Who are you going

to believe? Me? Or your lying eyes?” While this line always gets a huge laugh from the crowd,

many traders unfortunately take this advice to heart. The fact of the matter is that eyes do not lie. If

a trader is short a currency pair and the price action moves against him, relentlessly rising higher,

the trader is wrong and needs to admit that fact, sooner rather than later.

In FX, trends can last far longer than seem reasonable. For example, in 2004 the EUR/USD kept

rallying - rising from a low of 1.2000 all the way to 1.3600 over a period of just two months.

Traders looking at the fundamentals of the two currencies could not understand the reasons behind

the move since all signs pointed to dollar strength.

True enough, the U.S. was running a record trade deficit, but it was also attracting capital from

Asia to offset the shortfall. In addition, U.S. economic growth was blazing in comparison to the

Eurozone. U.S. GDP was growing at a better than 3.5% annual rate compared to barely 1% in

the Eurozone. The Fed had even started to raise rates, equalizing the interest rate differential

between the euro and the greenback. Furthermore, the extremely high exchange rate of the euro

was strangling European exports - the one sector of the Eurozone economy critical to economic

growth.

As a result, U.S. unemployment rates kept falling, from 5.7-5.2%, while German unemployment

was reaching post-World War II highs, printing in the double digits. In short, dollar bulls had many

good reasons to sell the EUR/USD, yet the currency pair kept rallying. Eventually, the EUR/USD

did turn around, retracing the whole 2004 rally to reach a low of 1.1730 in late 2005. But imagine

a trader shorting the pair at 1.3000. Could he or she have withstood the pressure of having a 600-

point move against a position? Worse yet, imagine someone who was short at 1.2500 in the fall of

2004. Could that trader have taken the pain of being 1,100 points in drawdown?

The irony of the matter is that both of those traders would have profited in the end. They were right

but they were early. Yet in currency markets, unlike in horseshoes, close is not good enough. The

FX market is highly leveraged, with default
margins set at 100:1. Even if the two traders above

used far more conservative leverage of 10:1, the drawdown to their accounts would have been 46%

and 88%, respectively. In FX, successful directional trades not only need to be right in analysis,

they need to be right, in timing as well.. That’s why believing “your lying eyes” is crucial to

successful trading. If the price action moves against you, even if the reasons for your trade remain

valid, trust your eyes, respect the market and take a modest stop. In the currency market, being

right and being early is the same thing as being wrong.

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只看该作者 7楼发表于: 2008-02-14

7. Know the Difference Between Scaling In and

Adding to a Loser and Never Make That Mis-

take

One of the biggest mistakes that we have seen traders make is to keep adding to a losing position,

desperately hoping for a reversal. As traders increase their exposure while price travels in the

wrong direction, their losses mount to a point where they are forced to close out their position at a

major loss or wait numbly for the inevitable margin call to automatically do it for them. Typically

in these scenarios, the initial reasoning for the trade has disappeared, and a smart trader would

have closed out the position and moved on. However, some traders find themselves adding into

the position long after the reason for the trade has changed, hoping that by magic or chance things

will eventually turn their way.

We liken this to the scenario where you are driving in a car late at night and are not sure whether

you are on the right road or not. When this happens, you are faced with two choices. One is to keep

on going down the road blindly and hope that you will find your destination before ending up in

another state. The other is to turn the car around and go back the way you came, until you reach a

point from where you can actually find the way home.

This is the difference between stubbornly proceeding in the wrong direction and cutting your

losses short before it becomes too late. Admittedly, you might eventually find your way home

by stumbling along back roads - much like a trader could salvage a bad position by catching an

unexpected turnaround. However before that time comes, the driver could very well have run out

of gas, much like the trader can run out of capital. Adding to a losing position that has gone beyond

the point of your original risk is the wrong way to trade.

There are, however, times when adding to a losing position is the right way to trade. This type of

strategy is known as scaling in. The difference between adding to a loser and scaling in is your

initial intent BEFORE you place the trade. If your intention is to ultimately buy a total of one

regular 100,000 lot and you choose to establish a position in clips of 10,000 lots to get a better

average price - instead of the full amount at the same time - this is called scaling in. This is a

popular strategy for traders who are buying into a retracement of a broader trend and are not sure

how deep the retracement will be.; Therefore, the trader will choose to scale down into the position

in order to get a better average price. The key is that the reasoning for this approach is established

before the trade is placed and so is the “ultimate stop” on the entire position. In this case, intent is

the main difference between adding to a loser and scaling in.

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只看该作者 8楼发表于: 2008-02-14

8. What Is Mathematically Optimal Is Psycho-

logically Impossible

Novice traders who first approach the markets will often design very elegant, very profitable

strategies that appear to generate millions of dollars on a computer backtest. The majority of such

strategies have extremely impressive win-loss and profit ratios, often demonstrating $3 of wins for

just $1 of losses. Armed with such stellar research, these newbies fund their FX trading accounts

and promptly proceed to lose all of their money. Why? Because trading is not logical but instead

psychological in nature, and emotion will always overwhelm the intellect in the end, typically

forcing the worst possible move out of the trader at the wrong time.

As E. Derman, head of quantitative strategies at Goldman Sachs, once noted, “In physics you are

playing against God, who does not change his mind very often. In finance, you are playing against

God’s creatures, whose feelings are ephemeral, at best unstable, and the news on which they are

based keeps streaming in.” This is the fundamental flaw of most beginning traders. They believe

that they can “engineer” a solution to trading and set in motion a machine that will harvest profits

out of the market. But trading is less of a science than it is an art; and the sooner traders realize that

they must compensate for their own humanity, the sooner they will begin to master the
intricacies

of trading.

Here is one example of why in trading what is mathematically optimal is often psychologically

impossible. The conventional wisdom in the markets is that traders should always trade with a 2:1

reward-to-risk ratio. On the surface this appears to be a good idea. After all, if the trader is accurate

only 50% of the time, over the long run she or he will be enormously successful with such odds.

In fact, with a 2:1 reward-to-risk ratio, the trader can be wrong 6.5 times out of 10 and still make

money. In practice however, this is quite difficult to achieve.

Imagine the following scenario. You place a trade in GBP/USD. Let’s say you decide to short

the pair at 1.7500 with a 1.7600 stop and a target of 1.7300. At first, the trade is doing well. The

price moves in your direction, as GBP/USD first drops to 1.7400, then to 1.7460 and begins to

approach 1.7300. At 1.7320, the GBP/USD decline slows and starts to turn back up. Price is now

1.7340, then 1.7360, then 1.7370. But you remain calm. You are seeking a 2:1 reward to risk.

Unfortunately, the turn in the GBP/USD has picked up steam; before you know it, the pair not

only climbs back to your entry level but then swiftly rises higher and stops you at 1.7600. You

are left with the realization that you let a 180-point profit turn into a 100-point loss. In effect, you

just created a -280-point swing in your account. This is trading in the real world, not the idealized

version presented in textbooks. This is why many professional traders will often scale out of their

positions, taking partial profits far sooner than two times risk, a practice that often reduces their

reward-to-risk ratio to 1.5 or even lower. Clearly that’s a mathematically inferior strategy, but in

trading, what’s mathematically optimal is not necessarily psychologically possible.

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只看该作者 9楼发表于: 2008-02-14

9. Risk Can Be Predetermined; But Reward Is

Unpredictable

If there is one inviolable rule in trading, it must be “stick to your stops”. Before entering every

trade, you must know your pain threshold. This is the best way to make sure that your losses are

controlled and that you do not become too emotional with your trading.

Trading is hard; there are more unsuccessful traders than there are successful ones. But more often

than not, traders fail not because their idea is wrong, but because they became too emotional in the

process. This failure stems from the fact that they closed out their trade too early, or they let their

losses run too extensively. Risk MUST be predetermined. The most rational time to consider risk is

before you place the trade - when your mind is unclouded and your decisions are unbiased by price

action. On the other hand, if you have a trade on, of course you want to stick it out until it becomes

a winner, but unfortunately that does not always happen. You need to figure out what the worst case

scenario is for the trade, and place your stop based on a monetary or technical level.

Once again, we stress that risk MUST be predetermined before you enter into the trade and you

MUST stick to its parameters. Do not let your emotions force you to change your stop prematurely.

Every trade, no matter how certain you are of its outcome, is simply an educated guess. Nothing is

certain in trading. There are too many external factors that can shift the movement in a currency.

Sometimes fundamentals can shift the trading environment, and other times you simply have

unaccountable factors, such as option barriers, the daily exchange rate fixing, central bank buying

etc. Make sure you are prepared for these uncertainties by setting your stop early on.

Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small.

Money management becomes extremely important in this case. Referencing our rule of “never

let a winner turn into a loser”, we advocate trading multiple lots. This can be done on a more

manageable basis using mini-accounts. This way, you can lock in gains on the first lot and move

your stop to breakeven on the second lot - making sure that you are only playing with the houses

money - and ride the rest of the move using the second lot.

The FX market is a trending market; and trends can last for days, weeks or even months. This is a

primary reason why most black boxes in the FX market focus exclusively on trends. They believe

that any trend moves they catch can offset any whipsaw losses made in range-trading markets.

Although we believe that range trading can also yield good profits, we recognize the reason why

most large money is focused on looking for trends. Therefore, if we are in a range-bound market,

we bank our gain using the first lot and get stopped out at breakeven on the second, still yielding

profits. However, if a trend does emerge, we keep holding the second lot into what could potentially

become a big winner.

Half of trading is about strategy, the other half is undoubtedly about money management. Even if

you have losing trades, you need to understand them and learn from your mistakes. No strategy

is foolproof and works 100% of the time. However, if the failure is in line with a strategy that

has worked more often than it has failed for you in the past, then accept that loss and move

on. The key is to make your overall trading approach meaningful but to make any individual

trade meaningless. Once you have mastered this skill, your emotions should not get the best of

you, regardless of whether you are trading $1,000 or $100,000. Remember: In trading, winning is

frequently a question of luck, but losing is always a matter of skill.

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只看该作者 10楼发表于: 2008-02-14

10. No Excuses, Ever

One time our boss invited us into his office to discuss a trading program that he wanted to set up.

“I have one rule only,” he noted. Looking us straight in the eye, he said, “no excuses.” Instantly

we understood what he meant. Our boss wasn’t concerned about traders booking losses. Losses

are a given part of trading and anyone who engages in this enterprise understands and accepts that

fact. What our boss wanted to avoid were the mistakes made by traders who deviated from their

trading plan. It was perfectly acceptable to sustain a drawdown of 10% if it was the result of five

consecutive losing trades that were stopped out at 2% loss each. However, it was inexcusable to

lose 10% on one trade because the trader refused to cut his losses, or worse yet, added to a position

beyond his risk limits. Our boss knew that the first scenario was just a regular part of business,

while the second one would ultimately bring about the
blow up of the entire account.

In the quintessential ‘80s movie, “The Big Chill”, Jeff Goldblum’s character tells Kevin Kline’s

that “rationalization is the most powerful thing on earth.” Surprised, Kline looks up at Goldblum

and the later explains, “As human beings we can go for a long time without food or water, but we

can’t go a day without a rationalization.” This quote has stuck a chord with us because it captures

the ethos behind the “no excuses” rule. As traders, we must take responsibility for our mistakes. In

a business where you either adapt or die, the refusal to acknowledge and correct your shortcomings

will ultimately lead to disaster.

Markets can and will do anything. Witness the blowup of Long Term Capital Management (LTCM)

- at one time one of the most prestigious hedge funds in the world - whose partners included several

Nobel Prize winners. In 1998 LTCM went bankrupt, nearly bringing the global financial markets

to their knees when a series of complicated interest rate plays generated billions of dollars worth

of losses in a matter of days. Instead of accepting the fact that they were wrong, LTCM traders

continued to double up on their positions, believing that the markets would eventually turn their

way. It took the Federal Reserve Bank of New York and a series of top-tier investment banks to

step in and stem the tide of losses until the portfolio positions could be unwound without further

damage. In post-debacle interviews, most LTCM traders refused to acknowledge their mistakes,

stating that the LTCM blowup was the result of extremely unusual circumstances unlikely to ever

happen again. LTCM traders never learned the “no excuses” rule, and it cost them their capital.

The “no excuses” rule is most applicable to those times when the trader does not understand

the price action of the markets. If, for example, you are short a currency because you anticipate

negative fundamental news and that news indeed occurs, but the currency rallies instead, you must

get out right away. If you do not understand what is going on in the market, it is always better to

step aside and not trade. That way you will not have to come up with excuses for why you blew up

your account. No excuses. Ever. That’s the rule professional traders live by.

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Part 2

Trading Setups

1. Five-Minute “Momo” Trade

Some traders are extremely patient and love to wait for the perfect setup while others are extremely

impatient and need to see a move happen in the next few minutes or hours or else they are quick to

abandon their positions.
These impatient traders are perfect momentum traders because they wait

for the market to have enough strength to push a currency in the desired direction and piggyback

on the momentum in hopes for an extension move as momentum continues to build.
However,

once the move shows signs of losing strength, our impatient momentum traders will also be the

first to jump ship so a true momentum strategy needs to have solid exit rules to protect profits while

at the same time be able to ride as much of the extension move as possible.

We developed a great momentum strategy that we call the “Five Minute Momo Trade” because

we look for a momentum or “momo” burst on very short term 5 minute charts.
We lay on two

indicators, the first of which is the 20-period EMA (Exponential Moving Average).
We use the

exponential moving average over the simple moving average because it places higher weight on

recent movements, which is what we need for fast momentum trades.
The moving average is used

to helps us determine the trend.
The second indicator that we use is the MACD (Moving Average

Convergence Divergence) histogram which helps us gage momentum.
The settings for the MACD

histogram is the default, which is first EMA = 12, second EMA = 26, Signal EMA = 9, all using

the close price.

This strategy waits for a reversal trade but only takes it when momentum supports the reversal

move enough to create a larger extension burst.
The position is exited in two separate segments,

the first half helps us lock in gains and ensures that we never turn a winner into a loser.
The second

half lets us attempt to catch what could become a very large move with no risk since we already

moved our stop to breakeven.

Rules for a Long Trade

1)
Look for currency pair to be trading below the 20-period EMA
and MACD to be

negative

2)
Wait for price to cross above the 20-period EMA, make sure that MACD is either in

the process of crossing from negative to positive or have crossed into positive territory no

longer than 5 bars ago

3)
Go long 10 pips above the 20-period EMA

4)
For aggressive trade, place stop at swing low on 5 minute chart.
For conservative

trade, place stop 20 pips below 20-period EMA

5)
Sell half of position at entry plus amount risked, move stop on second half to

breakeven

6)
Trail stop by higher of breakeven or 20-period EMA minus 15 pips

Rules for a Short Trade

1)
Look for currency pair to be trading above the 20-period EMA
and MACD to be

positive

2)
Wait for price to cross below the 20-period EMA, make sure that MACD is either in

the process of crossing from positive to negative or have crossed into negative territory no

longer than 5 bars ago

3)
Go short 10 pips below the 20-period EMA

4)
For aggressive trade, place stop at swing high on 5 minute chart.
For conservative

trade, place stop 20 pips above 20-period EMA

5)
Buy back half of position at entry minus amount risked, move stop on second half to

breakeven

6)
Trail stop by lower of breakeven or 20-period EMA plus 15 pips

Now let’s explore some examples:

Our first example is the EUR/USD on 3/16/06, when we see the price move above the 20-period

EMA as the MACD histogram crosses above the zero line.
Although there were a few instances of

the price attempting to move above the 20-period EMA between 00:30 and 02:00 EST, a trade was

not triggered at that time because the MACD histogram was below the zero line.

We waited for the MACD histogram to cross the zero line and when it did, the trade was triggered

at 1.2044.
We enter at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 – 20 pips = 1.2026.
Our

first target is 1.2056 + 30 pips = 1.2084.
It gets triggered approximately 2 and a half hours later.

We exit half of the position and trail the remaining half by the 20-period EMA minus 15 pips.
The

second half is eventually closed at 1.2157 at 21:35 EST for a total profit on the trade of 65.5 pips.

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On the short side, our first example is the NZD/USD on 3/20/06.
We see the price cross below the

20-period EMA.
However the MACD histogram is still positive, so we wait for it to cross below

the zero line 25 minutes later.
Our trade is then triggered at 0.6294.
Like the earlier USD/JPY

example, the math is a bit messy on this one since the cross of the moving average did not occur

at the same time as when MACD moved below the zero line like in it did in our first EUR/USD

example.

So we enter at 0.6294.
Our stop is the 20-EMA plus 20 pips.
At the time, the 20-EMA was at

0.6301, so that puts our entry at 0.6291 and our stop at 0.6301 + 20pips = 0.6321.
Our first target

is the entry price minus the amount risked or 0.6291. – (0.6321-0.6291) = 0.6261.
The target is hit

2 hours later and the stop on the second half was moved to breakeven.
We then proceed to trail the

second half of the position by the 20-period EMA plus 15 pips.
The second half is then closed at

0.6262 at 7:10 EST for a total profit on the trade of 29.5 pips.

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The second based upon an opportunity that developed on 3/10/06 in the GBP/USD.
In the chart

above, the price crosses below the 20-period EMA and we wait 10 minutes later for the MACD

histogram to move into negative territory whereby triggering our entry order at 1.7375.
Based

upon the rules above, as soon as the trade is triggered, we put our stop at the 20-EMA plus 20 pips

or 1.7385 + 20 = 1.7405.
Our first target is the entry price minus the amount risked or 1.7375

– (1.7405-1.7375) = 1.7345.
It gets triggered shortly thereafter.
We then proceed to trail the sec-

ond half of the position by the 20-period EMA plus 15 pips.
The second half of the position is

eventually closed at 1.7268 at 14:35 EST for a total profit on the trade of 68.5 pips.
Coincidently

enough, the trade was also closed at the exact moment when the MACD histogram flipped into

positive territory.

As you can see, the Five Minute Momo Trade is an extremely powerful strategy to capture mo-

mentum based reversal moves.
However, it does not always work and it is important to explore an

example where it fails to understand why.

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The final example of the Five Minute Momo Trade is EUR/CHF on 3/21/06.
In the chart above the

price crosses below the 20-period EMA and we wait 20 minutes later for the MACD histogram to

move into negative territory, putting our entry order at 1.5711.
We place our stop at the 20-EMA

plus 20 pips or 1.5721 + 20 = 1.5741.
Our first target is the entry price minus the amount risked

or 1.5711 – (1.5741-1.5711) = 1.5681. The price trades down to a low of 1.5696, which is not low

enough to reach our trigger.
It then proceeds to reverse course, eventually hitting our stop, causing

a total trade loss of 30 pips.

When trading the Five Minute Momo strategy the most important thing to be wary of is trading

ranges that are too tight or too wide.
In quiet trading hours where the price simply fluctuates

around the 20-EMA, the MACD histogram may flip back and forth causing many false signals.

Alternatively, if this strategy is implemented in a currency paid with a trading range that is too

wide, the stop might be hit before the target is triggered.

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2. “Do the Right Thing” CCI Trade

Often in life the right action is the hardest to take. The same dynamic occurs in trading. For most

traders it is extremely difficult to buy tops and sell bottoms because from a very early age we are

conditioned to look for value and buy “cheap” while selling “dear”. That is why although most

traders proclaim their love for trading with the trend, in reality the majority love to pick tops or

bottoms. While these types of “turn” trades can be very profitable (and show you several setups

that succeed with this approach), turn trading can sometimes seem like a Sisyphean task as price

trends relentlessly in one direction, constantly stopping out the bottom and top pickers. Sometimes

it is much easier and far more profitable to go with the flow. Yet most traders are still reluctant to

buy breakouts for fear of being the last one to the party before prices reverse with a vengeance.

How can we trade breakouts confidently and successfully? “Do the right thing” is a setup designed

to deal with just such a predicament. It tells the trader to buy or sell when most are averse to doing

so. Furthermore, it puts the trader on the right side of the trend at a time when many other traders

are trying to fade the price action. The capitulation of these top and bottom pickers in the face of

a massive buildup of momentum forces a covering of positions, allowing you to exit profitably

within a very short period of time after putting on a trade.

“Do the right thing” employs a rarely used indicator in FX called the commodity channel index

(CCI), which was invented by Donald Lambert in 1980 and was originally designed to solve

engineering problems regarding signals. The primary focus of CCI is to measure the deviation of

the price of the currency pair from its statistical average. As such, CCI is an extremely good and

sensitive measure of momentum and helps us to optimize only the highest probability entries for

our setup.

Without resorting to the mathematics of the indicator, please note that CCI is an unbounded

oscillator with any reading of +100 typically considered to be overbought and any reading of

-100 oversold. For our purposes, however, we will use these levels as our trigger points as we put

a twist on the traditional interpretation of CCI. We actually look to buy if the currency pair makes

a new high above 100 and sell if the currency pair makes a new low below -100. In “do the right

thing” we are looking for new peaks or spikes in momentum that are likely to carry the currency

pair higher or lower. The thesis behind this setup is that much like a body hurtled in motion will

remain so until it’s slowed by counterforces, new highs or lows in CCI will propel the currency

further in the direction of the move before new prices finally put a halt to the advance or the

decline.

Rules for the Long Trade

1.
On the daily or the hourly charts place the CCI indicator with standard input of 20.

2.
Note the very last time the CCI registered a reading of greater than +100 before

dropping back below the +100 zone.

3.
Take a measure of the peak CCI reading and record it.

4.
If CCI once again trades above the +100 and if its value exceeds the prior peak reading,

go long at market at the close of the candle.

5.
Measure the low of the candle and use it as your stop.

6.
If the position moves in your favor by the amount of your original stop, sell half and

move stop to breakeven.

7.
Take profit on the rest of the trade when position moves to two times your stop.

Rules for the Short Trade

1.
On the daily or the hourly charts place the CCI indicator with standard input of 20.

2.
Note the very last time the CCI registered a reading of less than -100 before poking

above the -100 zone.

3.
Take a measure of the peak CCI reading and record it.

4.
If CCI once again trades below the -100 and if its value exceeds the prior low reading,

go short at market at the close of the candle.

5.
Measure the high of the candle and use it as your stop.

6.
If the position moves in your favor by the amount of your original stop, sell half and

move the stop on the remainder of the position to breakeven.

7.
Take profit on the rest of the trade when position moves to two times your stop.

Now let’s take a look at how this setup works on the longer and the shorter time frames:

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In this daily chart of the EUR/USD pair we see that the former peak high above the CCI +100 level

was recorded on September 5, 2005, when it reached a reading of 130.00. Not until more than three

months later on December 13, 2005, did the CCI produce a value that would exceed this number.

Throughout this time we can see that EUR/USD was in a severe decline with many false breakouts

to the upside that fizzled as soon as they appeared on the chart. On December 13, 2005, however,

CCI hit 162.61 and we immediately went long on the close at 1.1945 using the low of the candle

at 1.1906 as our stop. Our first target was 100% of our risk, or approximately 40 points. We exited

half the position at 1.1985 and the second half of the position at two times our risk at 1.2035. Our

total reward-to-risk ratio on this trade was 1.5:1, meaning that if we were merely 50% accurate,

the setup would have positive expectancy. Note also that we were able to capture our gains in less

than 24 hours as the momentum of the move carried our position to profit very quickly.

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For those traders who do not like to wait nearly a quarter of a year between setups, the hourly chart

offers far more opportunities of the “do the right thing” setup. It is still infrequent, which is one of

the reasons that makes this setup so powerful (the common wisdom in trading is: the rarer the trade

the better the trade). Nevertheless it occurs on the hourly charts far more often than on the dailies.

In the above example, we look at the hourly chart of the EUR/USD between March 24 and March

28 of 2006. At 1pm on March 24, 2006, the EUR/USD reaches a CCI peak of 142.96. Several

days later at 4am on March 28, 2006, the CCI reading reaches a new high of 184.72. We go long

at market on the close of the candle at 1.2063. The low of the candle is 1.2027 and we set our stop

there. The pair consolidates for several hours and then makes a burst to our first target of 1.2103

at 9am on March 28, 2006. We move the stop to breakeven to protect our profits and are stopped

out a few hours later, banking 40 pips of profit. As the saying goes, half a loaf is better than none,

and it is amazing how they can add up to a whole bakery full of profits if we simply take what the

market gives us.

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Here is an example of a short in USD/CHF trade on the dailies that employs this approach in

reverse. On October 11, 2004 USD/CHF makes a CCI low of -131.05. A few days later, on October

14, 2004, the CCI prints at -133.68. We enter short at market on the close of the candle at 1.2445.

Our stop is the high of that candle at 1.2545. Our first exit is hit just two days later at 1.2345. We

stay in the trade with the rest of the position and move the stop to breakeven. Our second target is

hit on October 19, 2004 - no more than five days after we’ve entered the trade. Total profit on the

trade? 300 points. Our total risk was only 200 points, and we never even experienced any serious

drawdown as the momentum pulled prices further down. The key is high probability, and that is

exactly what the “do the right thing” setup provides.

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Here is another example of a short-term trade, this time to the downside in the EUR/JPY.

At 9pm on March 21, 2006, EUR/JPY recorded a reading of -115.19 before recovering above the

-100 CCI zone. The “do the right thing” setup triggered almost to the tee five days later at 8pm on

March 26, 2006. The CCI value reached a low of -133.68 and we went short on the close of the

candle. This was a very large candle on the hourly charts, and we had to risk 74 points as our entry

was 140.79 and our stop was at 141.51. The majority of the traders would have been afraid to enter

short at that time, thinking that most of the selling had been done. But we had faith in our strategy

and followed the setup. Prices then consolidated a bit and trended lower until 1pm on March 27,

2006. Less than 24 hours later we were able to hit our first target, which was a very substantial 74

points. Again we moved our stop to breakeven. The pair proceeded to bottom out and rally, taking

us out at breakeven. Although we did not achieve our second target overall, it was a good trade as

we banked 74 points without ever really being in a significant drawdown.

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Finally, our last example shows how this setup can go wrong and why it is critical to always use

stops. The “do the right thing” setup relies on momentum to generate profits. When the momentum

fails to materialize, it signals that a turn may be in the making. Here is how it played out on the

hourly charts in AUD/USD. We note that CCI makes a near-term peak at 132.58 at 10pm on May

2, 2006. A few days later at 11am on May 4, 2006, CCI reaches 149.44 prompting a long entry

at .7721. The stop is placed at .7709 and is taken out the very same hour. Notice that instead of

rallying higher, the pair reversed rapidly. Furthermore, as the downside move gained speed prices

reached a low of .7675. A trader who did not take the 12-point stop as prescribed by the setup

would have learned a very expensive lesson indeed as his losses could have been magnified by a

factor of three. Therefore, the key idea to remember with our “Do the Right Thing” setup is - “I

am right or I am out!”

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3. Moving Average MACD Combo

In theory, trend trading is easy.
All you need to do is “Keep on buying when you see the price

rising higher and keep on selling when you see it breaking lower.” In practice, however, it is far

more difficult to do successfully. When looking for trend-trading opportunities, many questions

arise such as:

What is the direction of the trend?

Should I get in now or wait for a retracement?

When does the trend end?

The greatest fear for trend traders is getting into a trend too late, that is, at the point of exhaustion.

Yet despite these difficulties, trend trading is probably one of the most popular styles of trading

because when a trend develops, whether on a short-term or long-term basis, it can last for hours,

days and even months.

We have developed a strategy that answers all of the questions above while at the same time

giving us clear entry and exit levels. This strategy is called the moving average MACD combo.

We use two sets of moving averages for the setup: the 50 simple moving average (SMA) and the

100 SMA. The actual time period of the SMA depends upon the chart that you use. This strategy

works best on hourly and daily charts. The 50 SMA is the signal line that triggers our trades, while

the 100 SMA ensures that we are working in a clear trend environment. The main premise of the

strategy is that we buy or sell only when the price crosses the moving averages in the direction of

the trend. Although this strategy may seem similar in logic to the “momo” strategy, it is far more

patient and uses longer-term moving averages on hourly and daily charts to capture larger profits.

Rules for a Long Trade

1)
Wait for the currency to trade above both the 50 SMA and 100 SMA.

2)
Once the price has broken above the closest SMA by 10 pips or more, enter long if

MACD crosses to positive within the last five bars, otherwise wait for the next MACD

signal.

3)
Initial stop set at five-bar low from entry.

4)
Exit half of the position at two times risk; move stop to breakeven.

5)
Exit second half when price breaks below 50 SMA by 10 pips.

Rules for a Short Trade

1)
Wait for the currency to trade below both the 50 SMA and 100 SMA.

2)
Once the price has broken below the closest SMA by 10 pips or more, enter short

if MACD crosses to negative within the last five bars; otherwise, wait for next MACD

signal.

3)
Initial stop set at five-bar high from entry.

4)
Exit half of the position at two times risk, move the stop to breakeven.

5)
Exit remaining position when the price breaks back above the 50 SMA by 10 pips.

Do not take the trade if the price is simply trading between the 50 SMA and 100 SMA.

Now let’s explore some examples:

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Our first example is for the EUR/USD on an hourly chart. The trade sets up on March 13, 2006,

when the price crosses above both the 50-hour SMA and 100-hour SMA. However, we do not enter

immediately since MACD crossed to the upside more than five bars ago, and we prefer to wait for

the second MACD upside cross to get in. The reason why we have this rule is because we do not

want to buy when the momentum has already been to the upside for a while and may therefore

exhaust itself. The second trigger occurs a few hours later at 1.1945. We enter the position and

place our initial stop at the five-bar low from entry, which is 1.1917. Our first target is two times

our risk of 28 pips (1.1945-1.1917), or 56 pips, putting our target at 1.2001. The target gets hit at

11am EST the next day. We then move our stop to breakeven and look to exit the second half of

the position when the price trades below the 50-hour SMA by 10 pips. This occurs on March 20,

2006, at 10am EST, at which time the second half of the position is closed at 1.2165 for a total

trade profit of 138 pips.

For those who ask, “Why can’t we just trade the MACD cross from positive to negative?”, you can

see just from looking at the EUR/USD chart above that multiple positive and negative oscillations

occured between March 13 and March 15, 2006. However, most of the downside - and even

some of the upside signals if taken - would have been stopped out before making any meaningful

profits.

On the other hand, for those who ask, “Why can’t we just trade the moving average cross without

the MACD?”, take a look at the following chart. If we took the moving average crossover signal to

the downside when the MACD was positive, the trade would have turned into a loser.

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The next example is for USD/JPY on a daily time frame. The trade sets up on September 16, 2005,

when the price crosses above both the 50-day and 100-day SMA. We take the signal immediately

since the MACD crossed within five bars ago, giving us an entry level of approximately 110.95.

We place our initial stop at the five-bar low of 108.98 and our first target at two times risk, which

comes to 114.89. The price is hit three weeks later on October 13, 2005, at which time we move

our stop to breakeven and look to exit the second half of the position when the price trades below

the 50-day SMA by 10 pips. This occurs on December 14, 2005 at 117.43, resulting in a total trade

profit of 521 pips.

One thing to keep in mind when using daily charts: although the profits can be larger, the risk is

also higher. Our stop was close to 200 pips away from our entry. Of course, our profit was 521 pips,

which turned out to be more than two times our risk. Furthermore, traders using the daily charts

to identify setups need to be far more patient with their trades since the position can remain open

for months.

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On the short side, we take a look at the AUD/USD on hourly charts back on March 16, 2006. The

currency pair first range trades between the 50- and 100-hour SMA. We wait for the price to break

below both the 50- and 100-hour moving averages and check to see if MACD at the time went

negative less than five bars ago. We see that it did, so we go short when the price moves 10 pips

lower than the closest SMA, which in this case is the 100-hour SMA. Our entry price is 0.7349. We

place our initial stop at the highest high of the last five bars or 0.7376. This places our initial risk

at 27 pips. Our first target is two times the risk, which comes to 0.7295. The target gets triggered

seven hours later, at which time we move our stop on the second half to breakeven and look to

exit it when the price trades above the 50-hour SMA by 10 pips. This occurred on March 22, 2006,

when the price reached 0.7193, earning us a total of 105 pips on the trade. This is definitely an

attractive return given the fact that we only risked 27 pips on the trade.

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只看该作者 25楼发表于: 2008-02-14

From a daily perspective, we take a look at another short example in EUR/JPY. As you can see, the

daily examples date further back because once a clear trend has formed, it can last for a very long

time.
If it didn’t, the currency would insteade move into a range-bound scenario where the prices

simply fluctuate between the two moving averages.
On April 25, 2005, we saw EUR/JPY break

below the 50-day and 100-day SMA. We check to see that the MACD is also negative, confirming

that momentum has moved to the downside. We enter into a short position at 10 pips below the

closest moving average (100-day SMA) or 137.76. The initial stop is placed at the highest high of

the past five bars, which is 140.47. This means that we are risking 271 pips. Our first target is two

times risk (542 pips) or 132.34. The first target is hit a little more than a month later on June 2,

2005. At this time, we move our stop on the remaining half to breakeven and look to exit it when

the price trades above the 50-day SMA by 10 pips. The moving average is breached to the top side

on June 30, 2005, and we exit at 134.21. We exit the rest of the position at that time for a total trade

profit of 448 pips.

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只看该作者 26楼发表于: 2008-02-14

Yet this strategy is far from foolproof. As with many trend-trading strategies, they work best on

currencies or time frames that trend well. Therefore, it is difficult to implement this strategy on

currencies that are typically range bound, like EUR/GBP. The chart above shows an example of

the strategy failing. The price breaks below the 50- and 100-hour SMA in EUR/GBP on March 7,

2006, by 10 pips. We check that the MACD is negative at the time, so we get our green light to

go short 10 pips below the moving average at 0.6840. The stop is placed at the highest high of the

past five bars, which is 0.6860. This makes our risk 20 pips, which means that our first take-profit

level would be two times the risk, or 0.6800. EUR/GBP continues to sell off but not quite strongly

enough to reach our take-profit level. The low in the move before the currency pair eventually

reverses back above the 50-hour SMA is 0.6839. The reversal eventually extends to our stop of

0.6860 and we end up losing 20 pips on the trade.

Therefore, traders implementing the moving average MACD strategy should make sure they do so

only on currency pairs that are typically very trending. This strategy works particularly well on the

majors. Also it might be smart to check the strength of the breakdown below the moving average at

the point of entry. If we looked at the average directional index (ADX) at that time, we would have

seen that the ADX was very low, indicating that the breakdown probably did not generate enough

momentum to continue the move.

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只看该作者 27楼发表于: 2008-02-14

4. RSI Rollercoaster

Sometimes simplicity is the best of all paths. The relative strength indicator (RSI), invented by

Welles Wilder, is one of the oldest as well as one of the most popular tools of technical analysis. In

fact, if there was a hall of fame for technical analysis indicators, RSI would certainly be accorded

top-five status. Its ability to measure turns in price by measuring turns in momentum is unmatched

by almost any other tool in technical analysis. The standard RSI settings of 70 and 30 serve as

clear warnings of overbought and oversold territory, and the RSI rollercoaster is a setup that we’ve

developed to take advantage of these turns in the market. The purpose of the RSI rollercoaster is

to harvest points from range-bound currency pairs.

First and foremost, this setup works best in a range environment when overbought and oversold

readings are far more likely to be true signals of a change in direction. Secondly, as we will see

from several examples in this chapter, the setup is much more accurate on the daily charts than on

smaller time frames like hourly charts. The primary reason for this difference is that daily charts

incorporate far more data points into their subset and, therefore, turns in momentum tend to be

more meaningful on longer time frames. Nevertheless, the asymmetrical structure between risk

and reward in this setup makes even the shorter time frames worth considering. Just keep in mind

that although the setup will fail far more frequently on the shorter-term hourly charts than on the

daily ones, the losses will generally be far smaller, keeping the overall risk manageable.

Rules for a Long Trade

1. RSI reading must be less than 30.

2. Wait for an up candle to form and close with an RSI reading greater than 30.

3. Go long at market on the open of the next candle.

4. Place your stop at the swing low.

5. Exit half of the position at 50% of the risk and immediately move the stop on the rest

to breakeven.

6. Exit the rest of the position when one or the other following condition is met:

a. Stopped at breakeven

b. Trade first moves into overbought territory marked by RSI readings of greater than 70

and then eventually drops from that zone. As soon as RSI declines below 70, sell at market

on the close of that candle.

Rules for a Short Trade

1. RSI reading must be greater than 70.

2. Wait for a down candle to form and close with an RSI reading less than 70.

3. Go short at market on the open of the next candle.

4. Place stop at the the swing high.

5. Exit half of the position at 50% of the risk and immediately move the stop on the rest

to breakeven.

6. Exit the rest of the position when one or the other following condition is met:

a. Stopped at breakeven

b. Trade first moves into oversold territory marked by RSI readings of less than 30 and

then eventually rises out of that zone. As soon as RSI increases above 30, buy at market

on the close of that candle.

The key to this RSI strategy - versus the traditional interpretation of RSI, which simply trades

overbought or oversold levels - is to first look for a reversal candle, which provides us with a sign

of exhaustion before taking the trade. This way, we are prevented from prematurely picking a top

or bottom and instead wait for indicator confirmation.

Note that the RSI rollercoaster is designed to squeeze as much profit as possible out of the turn

trade. Instead of immediately closing out a position when it moves from oversold to overbought

condition, the RSI rollercoaster keeps the trader in the market until price shows a sign of exhaustion.

Sometimes a strong move will generate multiple consecutive periods of overbought RSI readings,

and this setup is specifically intended to catch part of these potentially profitable moves. Note

also that the RSI rollercoaster is almost always in the market, as the rule for the liquidation of a

long trigger is the creation of a fresh short position. The only two times this setup stays out of the

market is when the trader is stopped out of his position on a false signal or when he is stopped out

at breakeven on the second half of his position.

Now let’s take a look at some examples:

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只看该作者 28楼发表于: 2008-02-14

In our first example we look at the AUD/JPY currency pair from approximately December 12,

2005 to April 1, 2006. On December 12, the pair records an RSI reading of 73.84, but at the close

of the very next candle the RSI drops to 48.13 and we go short at 88.57. Our stop is set at the most

immediate swing high of 91.33, or 276 points back. Our first target is set at 50% of our risk, or 138

points forward. The very next day the pair collapses further and our first profit target is realized.

We then move our stop to breakeven and stay in the position until RSI reaches oversold territory.

On December 27, 2006 RSI moves up from severely oversold readings below 30 to 30.70. We

exit the second half of the trade at 85.01, harvesting 356 points. Immediately we initiate a long

position at the same price as the RSI Rollercoaster has now indicated a buy setup. Our stop is set

at the nearest swing low of 84.51. Our risk is a relatively small 50 points and thus our first profit

target is a very modest 25 points, which we achieve in the very next candle when prices rise to

85.26. We move our stop to breakeven and stay in the trade for more than a month until February

6, 2006 when RSI leaves the overbought territory and we liquidate the rest of our position at 88.23

for a 322-point profit. Again we immediately sell at the same price to establish a new short, as

per the setup. The swing high of 89.34 serves as our stop. The first target of 87.68 is achieved the

very next day as we bank 55 points. We exit the rest of the position at 84.01 when RSI once again

returns from its oversold level. The second half of the position produces a 422-point gain. All in

all, the RSI Rollercoaster generates a very respectable 660 points (1319/2) over a four-month time

frame.

Some traders may not have enough patience to trade the RSI rollercoaster on daily charts, so the

next example of the setup is on four-hour charts.

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只看该作者 29楼发表于: 2008-02-14

In the four-hour chart of the EUR/USD shown on the previous page, we see the RSI rollercoaster

perform well once again. We start on March 21, 2006, as RSI, after spending some time in the

overbought zone above 70, finally falls below that value, triggering a short order at market at

1.2178. The swing-high stop is extremely close at 1.2208, allowing us to risk only 30 points on the

trade. Our first target at 1.2163 is hit within the next candle and we move the stop to breakeven and

follow the trade. The pair eventually trades down to 1.2035 before regaining upside momentum,

and we are able to close out the second half of the position with an additional 138-point profit. We

then immediately go long at the same price. This time our risk is considerably larger at 100 points,

as the swing low lies at 1.1935. Nevertheless, the pair climbs steadily and we reach our first target

with ease, exiting at 1.2085 for a 50-point gain. We then stay in the trade until the rules of the setup

force us to liquidate at breakeven. All in all, in this example of the RSI rollercoaster we are able

to harvest a total of 203 points while risking only 260 points. Although in this sequence the risk

reward ratio is a bit less than 1:1 the high probability aspect of this setup generally assures positive

expectancy overall.

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