I was sitting as an invited “expert trader” on a panel with four other traders at the 2009 Las Vegas Traders Expo last week. They called the standing room only panel discussion “Successful Strategies for Profiting from Forex Trading.” (Click here for Webcast events from the recent Expo.)
They asked the question of all of us, “How do you make money trading the forex markets?” The panelists said some things about using their decades of experience to get a “feel for the market,” and then they each in turn cited several different methodologies such as trading breakouts and using proprietary sentiment and Elliott Wave analysis to come up with an area to trade. They were not more specific than that on how they entered trades. Although they all differed in how they entered trades, what I found most interesting is that they all had one thing in common: They all said that they would scale out of the trade as the trade (hopefully) went in their direction.
I have found that a very important component of my success is that I fit my trading strategy to my personality. Although I admire those who say they can pick the perfect top and bottom of a trend, a trader has to know his limitations! Scaling out of a trade has also never been my cup of tea, as all the analysis in the world really just boils down to nothing more than an educated guess on where a trend move might end. The problem with educated guesses is that half of the time, they are wrong! Since they can be wrong up to half of the time, that breeds stress and uncertainty and is no way to pay the bills!
But is there an objective way to enter a trade and to know with a high degree of certainty where it will go? Here is one way to go about it.
If you see a trend move occurring, measure it! What I do is measure from the very top of a move to the very bottom of a move. When the retracement occurs, I draw a trend line along the bottoms of the retracement bars. I will enter when I see a bar closing below the trend line I just drew, and then I can measure where it will often times go! It turns out that the market is such that it will always seek symmetry. That is, a 100-pip down move in a currency pair tendss to predict another 100-pip move down from the retracement high. That is, a move from A to B predicts a move from C to D.
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Now, am I just predicting the tops and bottoms of a move just like the others? Not exactly– it’s just nice to know where the road is heading before you go on a cross-country road trip. Fibonacci can help predict where the market will get to along the way, and I use the .382 and .618 extensions of the first move from A to B. (That means I am multiplying the amount of the move from A to B by .382 or .618, and subtracting that amount of pips from the high at C to predict where the market will go and where I will exit the trade with the sure money!) It is obviously much easier to reach the .382 or .618 level from C than it is to reach all the way down to point D! That sits well with my personality of wanting to take the high percentage of sure winners in my daily trading. But how can you re-enter and get more of the trend move? Well, just rinse and repeat!
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I entered short at the first red arrow and exited at either the .382 or.618 level. Shortly after exiting at these levels, there was another retracement! I can draw another trend line (second chart), wait for a new entry into the market, and measure where I will exit again at the .318 or .618 extensions of the last move.
By Lawrence Korbus, trader and chief forex educator, Tsunami Trade
