Trading Forex with Donchian Channels
10/25/2012 12:00 pm EST
Richard Krivo recently started trading for a living full-time, after trading part-time for many years. In this detail-packed podcast interview, Richard talks about how he uses Donchian channels to find stocks that are breaking out or breaking down and how he enters those trades with a tight stop. We also discuss how he uses multiple timeframes to gauge trends in the currency pairs he monitors and how he decides which trades to take each day. Listen in to learn how one successful currency trader enters, manages, and exits profitable trades on a weekly basis. Pay attention especially to the parts about how he manages risk.
Tim Bourquin: Hello, everybody, and thanks very much for joining me for another interview today.
My guest today is Richard, Richard Krivo, and we're going to talk to him about how he trades forex. He's got a lot of experience here. I wanted to get him on Skype and just find out a little bit about how he approaches the markets and finds good opportunities and how he evaluates the currency pairs. So we're going to talk to Richard about that.
So first of all, Richard, thanks very much for joining me over Skype today.
Richard Krivo: My pleasure, Tim. Thanks for having me.
Tim Bourquin: All right, so let's talk about how you define yourself as a trader. Are you a day trader, a swing trader? How do you kind of see yourself?
Richard Krivo: I kind of have coined a phrase for that. I fancy myself an elongated swing trader. I'm in trades for maybe three days to a week to maybe a couple of months at the outside. So I wouldn’t really fancy myself precision, but I'm not generally flat at the end of every day.
Tim Bourquin: All right. And then do you have a set of currency pairs that you like to watch?
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Richard Krivo: There's about 28 pairs that I'll watch and it's just the combinations of the major currencies, the euro, the dollar, the pound, the Swiss franc, Aussie, CAD, New Zealand, and Japanese yen. And then I just take the various combinations that come up. It comes out to 28 pairs. Those are the pairs that I'm on it on a regular basis.
Tim Bourquin: And how about timeframes, what do you like to look at?
Richard Krivo: I look at daily, a 4-hour, and 1-hour. I'm very big in the multiple timeframe analysis and I use that daily chart to determine the trend. And then I'll look to find entries based off of a 4-hour chart or a 1-hour chart.
Tim Bourquin: So Richard, give me an idea of the type of trading you do in terms of technical analysis. Is there a specific pattern that you're looking for or even a trade that you had recently that's a really good kind of garden variety indication of the types of trade you take?
Richard Krivo: Well, what I like to do, Tim, primarily is trade in the direction. I'm definitely a trend follower, a trend trader; and I'm trading in the direction of a longer term trend. So with those daily 4-hour and 1-hour charts, a trade that saw set up recently was—oh, a few days ago now was the dollar/Swiss chart.
So the trend on the daily chart was to the downside and what I'm looking for is a break of a significant level of support to the downside and that would be my entry. And then I'll just set my stop based on the last high on maybe a 4-hour chart or on a 1-hour chart. But essentially, what I'm looking for is the strongest trends and then I'll get into, if it's a downtrend, I get into that trade as soon as support is broken in a significant level of support on a 4-hour or 1-hour chart.
Tim Bourquin: All right, and that level of support, is it a moving average, a previous high or a low? What are you looking for?
Richard Krivo: It's a previous high or low. One thing I found to be very helpful in my trading is the Donchian channels or sometimes on some charting packages they are called price channels. And you can set the number of periods in those channels so you can be looking at maybe, let's say a 55-day high or low or a 20-day high or low, a 20-period 4-hour high or low or something like that. So I look for a break of that channel and then that would be my entry, which in fact is what I did with the dollar/Swiss to the downside, which is the last time I looked anyway a few hours ago was still profitable by about 40 or 50 pips I think.
NEXT PAGE: A Break in the Hourly or 4-hour Chart?|pagebreak|
Tim Bourquin: Okay. And is it a break in the hourly or the 4-hour? Which one?
Richard Krivo: It kind of depends. I prefer the 4-hour chart because the more data on the chart, the more reliable feedback is going to be. So in this particular case, it was a break on the 4-hour chart to the downside. But if the set-up doesn’t present itself and I wish I had a visual I could give you here, but if the trade doesn’t present itself to my liking, let's say, on a 4-hour, then I might look to a 1-hour chart, wait for a retracement and then wait for it to move back to the downside again.
Tim Bourquin: All right. Well, if you like, maybe you could—if you have a chart of that particular trade, then maybe you could just kind of point out with arrows or something and we can certainly post that for listeners to take a look at.
Richard Krivo: Okay, I can send you off something afterward on here.
Tim Bourquin: Perfect. All right. So let's talk about that stop/loss that you mentioned and maybe also the profit target. How do you like to set your stops and profit targets?
Richard Krivo: Well, it depends on the strategy that I'm doing. If I'm doing that Donchian channel strategy which is kind of unique, and again if your listeners would want to find out more about that strategy, they could email me. My email address is firstname.lastname@example.org, and I'll be happy to sent them some information about it. But like on that Donchian channel trade, for example, when price breaks below the lower Donchian channel, that's my entry, and then I set my stop above the upper Donchian channel.
Now, if I'm not trading Donchian channel strategy, what I'll do is once I'm into the trade, if it's to the short side, I'll just set my stop above the previous high on a 4-hour chart if that's the chart, which kind of shepherded me into the trade.
Tim Bourquin: Is it a pip above or below? How far away is it?
Richard Krivo: Generally, I'll do probably two to five pips above or below. I don’t like to have it—it's pretty close, but I don’t like to have it right on top of it because oftentimes what I find is something I'll just wait a pip or two above and then goes back in the original direction of the trade anyway and I'm left there sitting with a closed out trade.
Tim Bourquin: Right. Three to five pips is still pretty close though.
Richard Krivo: It is pretty tight, yeah.
Tim Bourquin: You must have a lot of confidence in those Donchian channels to actually work.
Richard Krivo: They've been good to me over the years.
Tim Bourquin: All right. I'm always curious as to how traders come to rely on a specific method that they think works for them. Is it trial and error? Did somebody teach this to you? What did you do?
Richard Krivo: Well, a lot of it is trial and error. Practice, practice, practice. One of the nice things about the FX market is virtually any broker that you go with, they'll have demo accounts that you can use. So you can start off with something like that and not risk anything. This particular Donchian channel strategy was introduced by Richard Donchian. Gosh, back—I think he passed away a couple of decades ago, but he's the one that introduced it. I learned it from a good friend of mine and excellent trader as well, Tom Long.
Tim Bourquin: All right. And then the pairs that you're trading this on, are there certain ones that it works better than with others? Well, I've heard actually Donchian channel is being used in all kinds of markets. So I have answered my own question there.
Richard Krivo: Yeah.
No, I use it. I apply it to all those 28 different pairs that I was telling you about. The only thing that causes me to pick one pair over the other to trade is which one has got the more dominant trend on the daily chart in one direction or another. The stronger the trend, the more I like it.
Tim Bourquin: And I guess having 28 pairs to choose from allows you to usually find a trade every day or every week? How often do you trade?
Richard Krivo: If I'm entering off the 4-hour chart, there are some weeks that I just don’t see a set-up that I like on the 4-hour chart. So if I'm just trading strictly off the 4-hour chart and looking for set-ups there, I might get into—on the high side maybe three trades, four trades a week; on the low side, no trades. Now, if I'm on the 1-hour chart, I'm probably looking at maybe three to four, three to five trades a week.
NEXT PAGE: A Comfortable Amount of Trades|pagebreak|
Tim Bourquin: And how many trades are you comfortable having on at any one time? Will all of those be on at the same time theoretically?
Richard Krivo: It's going to depend on the amount of risk that I have out there at the time. Generally, I think the most I've have open at any one time has been six positions. Generally, it might be two to three. But I want to make sure that I'm paying attention to money management, so I never want to have more than at maximum 5% of my trading account at risk at any one time no matter how many trades I have open. So that plays into it too. If I'm maxed out, if I've got 5% of risk hanging out there, I'm not going to open anymore positions even if the trade set-up looks like a godsend to me.
Tim Bourquin: How about scaling in and out of positions, do you do that?
Richard Krivo: I will scale out. I just over the years I've tried scaling in and for whatever reason I'm just better at scaling out. So what I'll do is I'll just decide how many positions I want to put on a certain trade. The higher the likelihood, the greater the probability that the trade looks like it's got a strong trend. The greater the probability of success, the more I put on it not to exceed that 5% amount.
Tim Bourquin: Now with forex I always ask about news because currency can be so whipsawed by interest rate events, central banks, that sort of thing. Do you pay attention when announcements are coming or are you one of those guys that says, "Hey, everything I need to know is in the chart. I ignore everything else"?
Richard Krivo: Yeah. Well, everything I need to know is in the charts and then a caveat to that is it's because I trade longer term like off a 4-hour or 1-hour. Generally, a dramatic news announcement can come out, maybe not like NFP or something. But like a lot of times on trades, if I'm setting my stop based on a 4-hour chart and a Donchian channel situation, my stop is quite likely to be 200, 250 pips away.
So if Bernanke is talking or some sort of FOMC announcement comes out or an ECB rate announcement comes out, chances are good that even if there are some dramatic price action there, I'm not going to get stopped out with the 250-pip stop and the longer term trend is more than likely going to still be intact.
Tim Bourquin: What about ways that you are finding these each day? Do you have scanning software or you're just flipping through these 28 charts each night? What do you like to do?
Richard Krivo: What I do each morning and I Tweet this out as well, I do a strong week analysis. What I'm looking for is trying to identify a situation where a currency group like, let's say, what is the euro doing this morning? Is the euro strong against all other pairs or all other currencies or is weak against all other currencies? Like take, for example, this morning the Swiss franc was the strongest currency that was out there. The Japanese yen was the weakest currency that was out there.
So I immediately flipped to the Swiss-yen chart to see what potential openings, what potential entries might be setting up. So that's my step one. I do that strong week analysis, and essentially I do it on a 4-hour chart because that's my chart of choice for trading. And all I'm doing is I have a 4-hour chart with a 200-period moving average on it. And this is so low tech. it's unbelievable. I mean it's a legal pad and a number 2 pencil is what I use to do this with.
And if, for example, I'm looking, let's say, the euro or USD, if the euro is above the 200-period moving average on that pair the euro is stronger, lend it out. Then I go on to the euro-yen. If the euro-yen pair is above the 200-period moving average on the euro-yen chart, the euro is stronger than the yen and so forth. And after I go through that, it takes probably about 10 minutes or so.
Once I go through that, I then know which is the strongest currency, which is the weakest currency and that's what I look to pair up so I can trade the strongest against the weakest in an uptrend or the weakest against the strongest in a downtrend.
NEXT PAGE: Should You Pay Attention to Correlations?|pagebreak|
Tim Bourquin: Do you then add into that correlations between these and if something is normally correlated and goes against that we trade them back to correlation?
Richard Krivo: No, I don’t pay attention to correlations at all for better or for worse.
Tim Bourquin: All right. So you're just shorting the weakest buying the strongest?
Richard Krivo: Correct, but at a breakout. I don’t just immediately see, oh, like the Swiss-yen this morning I didn’t just immediately buy it because it was the strongest. I'm waiting to look for a breakout to kind of confirm that it's going to continue, it's moved higher.
Tim Bourquin: Now, one of the benefits of currency, of course, is that you can trade it 24/5 and a half. Do you find yourself getting up in the middle of the night to check where things are or you put in discipline?
Richard Krivo: No, generally, what I'll do is I like to see what's going on at the beginning of the day and beginning of the day for me is about 4:00 a.m. So I'll get up for that London open or right around the London open just to see what's shaping up, see if I need to maybe adjust some stops or maybe there are some new entries that are setting up that weren’t there the night before. So I'll take a look at that.
So I'm not a screen jockey, if you will, because again one of the advantages of using 1-hour charts or 4-hour charts is you don’t have to be checking them all the time like a day trader or a scalper would. But I do get up just to see—because that London open kind of sets the tone until we get into the US open anyway.
Tim Bourquin: You've recently quit a job to trade full-time. What kind of brought you to that decision to decide to do that?
Richard Krivo: That's a good question. I mean I enjoyed what I was doing, but I just—there's a time for staying and there's a time for going and I just felt there was a time to break away. I wanted to be able to devote more time to experimenting with trading different types of strategies. I've been doing it for about 11 or 12 years, and it's one of the few things I think I've done in my life where I can honestly say I learned something new almost every day, certainly two or three things every week. And I just wanted to pursue that and I was fortunately in a position that I was able to take advantage of that situation.
Tim Bourquin: And now that you are trading full-time, I always like to ask the business side of things, too. How do you pay yourself? How do you decide how much money you're going to take out of your account? What do you do in that area?
Richard Krivo: Well, I just got certain amounts in my mind that when the account gets up to a certain level I'll withdraw x from it, a certain percentage, always keeping the accounts large enough so that I've got room to maneuver because it's infinitely easier if trading can be easy. It's easier to trade with a larger account than a smaller account. So I just look at percentages, maybe once the account gets 5%, 10% up, peel that off, and then you're back to where you began that trading scenario with and then just let it get up another 5% or 10%. Hopefully, I'm saying it's a done deal, but nothing is ever a done deal in trading.
Tim Bourquin: And what about leverage and margin? That's always been an issue with forex because people get themselves into trouble with too small an account, too large a margin. How do you balance that?
Richard Krivo: Right. Well, I go back to that 5% rule that I mentioned a little bit earlier. No matter how big my account size is, I never want to trade or put at risk more than 5% of that trading account. And if you keep that rule in mind, you're never going to run into a situation where you're going to have a margin call because you just don’t have enough leverage out there to work against you when you're only putting 5% of your trading account at risk.
And many traders say, "Well, 5%, that seems like a lot. Why not 2% or 3%?" Well, that's better. You can do that too. Five percent is just the max that I look at. Generally, I'm probably putting 2% or 3% at risk at most. So that helps me keep everything in track, just knowing what that 5% number is. Like if I've got a $10,000 trading account, for example, 5% of that is $500 and a pip in a 10k account in forex is roughly $1. So I know I can have $500 or 500 pips at risk at any one time.
NEXT PAGE: Is the 5% a Personal Feeling?|pagebreak|
Tim Bourquin: That area of the 5%, is that because it's a personal feeling that that's the risk that's good for you or how did you come about that figure?
Richard Krivo: It's been good for me over the years, and the reading that I've done on it and the people that I've spoken with, it seems to be almost an "agreed upon" percentage in a lot of quarters that are out there not to take on more risk than that. And I know traders at major banks, hedge funds, entities like that, they might only take 1% or 2% risk or half a percent risk in some cases but they're trading gargantuan size trading account. So they're putting more at risk dollar-wise but less at risk percentage-wise. And you're right, Tim, that's the thing that gets newer traders into a lot of trouble. They just try to do way too much with too little.
Tim Bourquin: And you're trading the spot market, not the futures market, correct?
Richard Krivo: Correct.
Tim Bourquin: Is there a reason why you like the spot market versus futures?
Richard Krivo: It's kind of what I began with. I looked at futures a little bit, and I just enjoy the spot. I don’t know if it'—just being in the middle of it that way and being able to look at everything on a daily basis and looking at what's going on. I don’t know if it was a conscious decision or not, but it's just the way I gravitated.
Tim Bourquin: And did you start with forex or did you start elsewhere?
Richard Krivo: I started with equities for a couple of years and then some friends of mine back when online trading became more of a viable concern and they mentioned about FX to me and I took a look at it and I haven’t traded in equity in probably eight or nine years.
Tim Bourquin: All right. One of the questions I always like to start to wrap things up with is what do you think you did along your trading evolution and education that you thought really helped you become more profitable or helped you take your trading to the higher level that you were looking for? Was it a class, a book, a way of looking at something? Can you point to anything that you think would help other traders?
Richard Krivo: Yeah, the two biggest things for me was—when I first learned about multiple timeframe analysis. That would be one. And the other is when I started to trade multiple lats as opposed to just single lats. Multiple timeframe analysis, it just allowed me to really get granular with a currency pair, see what it's doing in the daily timeframe, see what it's doing in the 4-hour timeframe, see what it's doing in the 1-hour timeframe. And that would allow me to time my entries, to find to my entries.
Like, let's say, for example, on a daily chart, if price action is moving up, would you bring up a 4-hour chart on the same pair and price action is moving down and you look at a 1-hour chart on the same pair and price action is flat, you go, "Okay, what am I supposed to do here?" Well, the daily chart trumps everything. So if the daily chart is moving up, what I want to do is wait until that 4-hour chart starts to move up, wait until the 1-hour chart starts to move up.
So where the 1-hour is flat, if it starts to move up slowly, starts to move up to the up side and it keeps doing that, that's eventually going to make that 4-hour chart start to move to the up side as well. And pretty soon I got the 1-hour chart moving up, I've got the 4-hour chart moving up, getting in sync with that daily chart. That's my entry because I've got everything now moving in the direction that I wanted to go. So that was a biggie for me when I learned about multiple timeframe analysis. And then multiple lats, I mean that's what allowed me to scale out positions.
Once I reach a certain level of profitability, I can close out a portion of the lats, move the stop to break even or at least move it up, and just kind of lucky in profit as the trade continues to move in my direction. That was a biggie for me too.
Tim Bourquin: Excellent. And is it a deal breaker for you today to have the 1-hour and the 4-hour maybe trending up higher with the one day, the daily maybe in a downtrend? Will you still take a trade then or do you have to see all three match up?
Richard Krivo: If the daily is in a downtrend, I'm going to be waiting until the 1-hour and 4-hour get into sync and start to move down.
Tim Bourquin: All right. So having all three of those lined up is really where your sweet spot is.
Richard Krivo: Right, exactly. And that's one of the reasons why somebody might be scratching their head and go, "It doesn't take a trade for a week sometimes." That's the reason why. I try to time myself and take advantage of the best situations that are out there, the higher probability trades.
Tim Bourquin: Well, great. Richard, I appreciate your time. Thanks very much for sharing some of these strategies with us and your overall trading methodology. Thank you.
Richard Krivo: Hey, my pleasure, Tim. Thanks for having me again.