A little later, I’ll show you exactly how I use it to maximise my trades. But let’s start at the beginning.

The ATR is really rather simple. But it can be a pretty useful tool for planning your entry and exits for trades.

As the name suggests, it’s simply the average of the true range of a currency pairing (or index, stock, commodity) of the past X bars (minutes, hours, days, etc.)

Now you might be wondering what I mean by the ‘True Range’…

Three ways to find a currency pair’s true range

Well the range of a currency is simply the high minus the  low. But the True Range is actually calculated slightly differently (although some basic ATR indicators get this wrong).

Actually there are three potential ways of calculating a  day’s true range, depending on the circumstances.

I don’t want to go into details about the variances but for  reference the three methods are:

1) High minus Low

2) High minus previous Close

3) Low minus previous Close

The most commonly used ATR setting is for 14 periods,  frequently 14 days. However, personally I use the 20-period (and more specifically 20 day) ATR in all of my trading.

Why is this?

Well it’s because I know my statistics for my currency pairs.

And I know that just under 80% of the time, price will stay  within a range that is defined by the 20-day ATR. In the chart below, you can see how the ATR is normally plotted. Here I’ve used my 20-period ATR.

20-period-atr

As you can see typically the indicator shows the ATR as a pip  value. In the example above, the ATR reading is showing an Average True Range of 110 pips.

How you can use the ATR

A lot of people use the ATR as a good indication for profit  targets.

For instance, let’s say I know that my ATR is 100 pips and  I’m taking an intraday trade (i.e. opening and closing the same day.)

If that’s the case, then setting targets at 100 pips could be  a stretch. It’s like trying to call the exact bottom and top of the market: difficult!

So, on a daily basis, I might target the 80-pip mark instead.  That gives me a better chance of a decent exit.

Now let’s say I know from looking at the forex calendar that  we have a non-news day (i.e. no big data or announcements due). And that price has already moved 100 pips on an ATR value of 110 pips.

Given those two factors, I know that realistically the price  is unlikely to move much past this point. (That isn’t to say it won’t – but it’s a lower probability, as we know the ATR.)

Make sense? If this isn’t clear, just leave a comment on the  website and I’ll clarify. There’s a link at the end of this article so you can do that.

For now, though, let me help by showing you another chart of  the ATR in action.

This is one of my very own charts that I use almost daily in my trading. It should give you a slightly better view of how I use ATR.

how-i-use-atr

The key to this chart is the grey lines surrounding the  price.

These are my daily ATR price boundaries, created by adding  and subtracting the daily ATR over a 20-period from the previous day’s close price.

[Note: if you would like this as an indicator, get in touch.  If there’s enough interest, Frank and I will look at pulling together a nice add-on for you. Just email  feedback@agora.co.uk with “ATR” as the subject line.]

I use these ATR boundaries to give me clues to potential  reversal areas. Price breaching these lines is likely to pull back to find better value.

And when you combine these with Stochastics and some order  book information, you have an extremely powerful strategy for trading 4-hour charts.

What do you think – something you’ll try? Let me know your thoughts.

Best wishes,
Max Munroe
Forex Round-Up

I’ve said a few times, I think the COT is gold dust for traders if you can pick out the useful bits. But as you’ll see in a minute, it’s pretty ugly to look at. You just need to figure out how to use it. Then you’ll see the magic.

So it’s about time I started to introduce you to it in more detail. I’m very keen to hear if you’re already using this in your trading, by the way. Let me know by leaving a comment at the end of this piece please.

We’re still working on a Forex Round-Up tool that you’ll be able to use to harness the power of the COT. But that’s a little way away. So in the meantime, I just want to get you familiar with the report itself.

I’ll take it slowly and do this over a few issues. So you’ll need to keep reading Forex Round-Up in the weeks ahead to make sure you’re up to speed. And of course we’ll have lots of great stuff in between, too.

But let’s make a start…

A peek at what the big guys are doing

By the way, if you like to trade EURUSD, pay particular  attention. The COT report is remarkable for getting a heads- up on EURUSD (basically as it’s so actively traded).

I’ll come back to that over the next few weeks. But I want to  focus today on introducing you to the report. Then, in future FRU issues, I’ll touch on some techniques you can use to trade it.

OK, so the COT is a weekly report released on Fridays. It  gives you a snapshot of the futures order book position in a number of underlying markets (currencies, stocks, commodities, etc.)

Produced by the US Commodity Futures Trading Commission, it gives a complete breakdown of market orders and positions for various groups of traders. It gives you a peek at what the big guys are doing – that’s powerful information, believe me.

A couple of things to note about this. First, the COT is  based on the futures market rather than the actual foreign exchange market.

The second key point is that it is giving you a snapshot of  Tuesday’s open positions on a Friday. In other words, there is a delay to this report. But it’s very useful nonetheless.

You can find the report here:

http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm

The image below shows you what the page will look like. I’ve  circled where to find the report…

COT_REPORT

When opened (I’ve chosen the one on the right showing both  Futures and Options positions), it will look something like this:

futures_options_numbers

Eek, I know – what a mess of numbers! Told you it was ugly!

Anyway, this is just a small section. I’m just showing the  euro data here so we can run through what it all means.

When it says Euro in the report that is the same as  considering EURUSD as it is Euro contracts in US Dollars.

Now the orders are split into categories based on who has  placed them.

For this we need to use a special form of the report which  can be found here in a rather large excel file (it’s even worse than the text file above!)

Note the files are split into years in text or excel. So  choose 20113.

There are three categories in the report that we’re really  interested in…

1. Commercials These are your regular multinational  companies like Coke, Nike, etc.

2. Non-Commercials These are your banks and financial  institutions.

3. Speculators These are your funds and traders.

In reality, the Commercials tend to be the most clued up about the underlying and the changes in fundamentals. They take longer-term positions which are typically used to hedge against negative movements.

For example, let’s say a European airline needs to buy fuel in one month’s time in US dollars. It will hedge its position so that it will not be impacted is the USD rises in value against the euro.

The Non-Commercials are the liquidity providers to the whole market. As such, they are the ones taking the opposite positions to the Commercials.

They make money by charging commissions on the orders they take. Typically they then redistribute the orders to others. However they may take open speculative positions as well.

Then we have the Speculators. These are all the little guys that tend to make up the difference.

Now let’s start to look at how we can use the report. I’ll show you some of the things I look at…

Key things to look for in the COT

Firstly, there is the initial view of the extremes.

The report provides you a comparison of those short positions versus those long for each category.

When we find that longs or shorts are at extremes, that’s useful info. It could mean the market is approaching a turning point as there are fewer people to take opposite sides of the orders when they are redistributed.

This means liquidity in the market dries up on one side and the market will turn.

Now as you’ll see in the weeks ahead as I look closer at this, you can use that intelligence to trade.

But where the report becomes really interesting is also looking at the changes in the underlying orders from one week to the next.

Granted, this is extremely difficult to do off the report alone. That’s why I use an indicator to plot the various components of the COT report.

Now as we are still in a very brief intro to the COT report, don’t worry too much about the chart below. I just want to show you some of the quick stats we can pull from the report and how powerful they can be.

On the chart, Commercials are in Blue, Non-Commercials are in Green and Speculators are in Red.

cot_chart

The four indicators at the bottom are showing movements in  the order book for the euro. And if you compare them, you soon see how powerful an indicator this can be.

Just take a look at the above chart in detail. I have marked a very simple strategy for the EURUSD.

Simply look at when the Commercial Index of the Net Positions (don’t worry, we’ll explain in more detail soon) crosses the Non Commercial Index of Net Positions.

The initial short trade went from 1.4160 to 1.3115, slightly more than 1,000 pips over 10 months. And that was one single trade.

That’s just a taster for what this can do for your long-term positional trades. I promise you, there’s much more to this. But you’ll need to keep tuning in to see exactly what!

Frank and I are looking to build you a version of the very indicator I use to help with the COT report. We want to translate it into something really nice – something you can set up on your own trading platform.

And I’ll also give you a few ways to trade the EURUSD by using this powerful tool. So don’t miss Forex Round-Up over the next few weeks.

Thanks for reading. Let me know what you thought of today’s issue here.

Regards,

Max Munroe

New traders often get caught up with the ins and outs of the trading system they’re trying to implement. And in the process, they ignore price action.

Whilst understanding the system you trade is vital, understanding where you are on the chart and price action is equally as important.

I’m sure many of you have heard of the saying “the trend is your friend”. And in fact, those of you that know me and my brother, Nicky, will have heard us talk passionately about trading in the direction of the trend.

Our trading strategies are based on following market trends because we believe it gives our strategies a valuable edge.

Identifying a trend will help your trading dramatically.

However, if you can take the next step and put the trend in to context you will increase your strike rate instantly.

Let’s take a look at some charts with different time frames and I’ll show you what I’m getting at.

Look at the chart of EURUSD below. You can see a clear downtrend on the 1 hour chart:

1 Hour Chart

Many of you will be thinking, “Great we have a clear downtrend, let’s look to sell”.

Right idea, but let’s get some perspective.

Take a look at the 4 hour chart:

4 Hour Chart

Does the big downtrend on the 1 hour chart look as prominent when we zoom out to the 4 hour chart?

To me, price action has moved down, but on the 4 hour chart price appears to be in consolidation mode.

And let’s zoom further out still to the daily time frame…

Daily Chart

Clearly the big downtrend we saw in the 1 hour chart is simply a minor pullback in the bigger uptrend.

This is a prime example of why it’s important to put price into context.

Traders shorting this move may profit a little if they get their entry exactly right, and take profit at the lows.

But for most, the longer, more powerful uptrend will come too soon and shorts will be stopped out.

Those of us that put price into perspective would have ignored that decline on the hourly chart. Instead we would be waiting patiently for the longer-term up trend to resume!

When it does we’ll be buying as mistimed shorts will be getting stopped out.

This is how professional traders think. This is why we make money when new traders lose money.

So please, etch these three charts into your mind and remember to zoom out to put price in to context before you enter your next trade.

Regards,
Alex Ong
For Forex Round-Up

Each year before we get the typical May sell-off (“sell in May and go away”), we do a bit of a recap on what’s happened so far this year against what we thought would happen.

Turns out this year we were pretty close. But interestingly we haven’t always managed to capitalise on some pretty accurate predictions.

And that’s all down to some rather interesting price action we’ve noticed repeatedly this year…

When markets upset your strategy

What we’ve been seeing quite often is a few days of tight ‘chop’ in most currency pairs, with two days of aggressive moves. These moves come either in the form of a breakout and retracement or of a strong play in one direction.

On the other three days we tend to see a grind higher generally. But a grind in the direction most speculators are placed.

Now these can be pretty difficult trading conditions for most people swing trading.

That’s because there is little immediate follow through on strong signals. Instead, the pair tends to hang around for a bit.

Now that hanging around often causes people problems, as they start to play with orders. They start to doubt the initial signal.

I’ve even seen it a few times this year with the pros I work with. Thankfully they spot their mistakes quite quickly and revert to their pattern. And often they find something else to do on these ‘down days’, as I call them.

In fact, one of our guys has knocked his golf handicap down whilst waiting for the right conditions. Another has actually started listening to foreign language tapes.

And I even have one trader writing up all the prop trading strategies we use (watch this space – I’ll show you these in future issues of Forex Round Up.)

Anyway, the point I want to drive home is that if conditions are not right for your strategy, don’t rush to force a trade.

Listen to the Master traders

If you read Tom Tragett’s excellent Forex Insider Daily, you’ll know he’s a strong advocate of that. Sometimes he goes for days without trading a particular currency pairing. He sits out, waiting for the right price.

This is the key to many trading strategies, especially ones for retail traders like you and me: patience.

And the markets are really teaching us that at the moment!

You have to wait for the right set-up that ticks all the boxes. And you have to stick to your plan once you get it.

Some other good people to check out on this front are brothers, Alex and Nicky Ong. These guys are masters are the patience game.

They wait for their key levels and set-ups to take place. And if that means they only get two set-ups in a week, so be it. Because they know that if they are consistent, their strategy will be profitable.

And as soon as they start deviating and take a different approach, then their strategy won’t be as profitable.

By the way, if you haven’t come across the Ong brothers, you’re in for a treat. In next week’s Forex Round-Ups, we’ll be showing you one of their very successful strategies.

If you’re prepared to be patient, and stick to their simple rules, you’ll make good money following it. Anyway, that’s for next week.

For now, if you’re turning a good consistent profit, then pat yourself on the back. If you’re struggling, don’t beat yourself up. Even some of the pro fulltime traders are, too!

But the key is that you stick to your plan, OK?

And if you really can’t trade because the conditions aren’t right for that strategy, try adding a new strategy to your arsenal for these down days. (If you’re like me and despite years of trading, still have no patience!)

Different strategies for different markets

One of the things I do during breakout days is run a series of intraday breakout strategies I have. These are essentially designed to capture the large moves during the UK session.

I actually ‘pinched’ this idea from a hedge fund we used to work with. It’s amazingly simple as well, based on the order book.

One I really like works particularly well on EURUSD because of its low cost and high liquidity. I’ve been working with Frank on writing this up so we can share it with you. Will let you know when it’s ready. (We might even get a few keen readers to try it out before we publish it!)

To be honest, these breakout strategies can be run every day and are profitable. But we like to ramp them up on potentially volatile days like those with major news events, central bank meetings etc. (like today with the ECB!)

A quick aside: How do we personally classify low volatility?

Well either a below 25 reading on the ADX (average directional index) technical indicator is one way.

But if I’m honest, a bit of obvious chart gazing can do the trick! Let’s say it comes to 10am and nothing has really moved in the London session. And I know there is no real major news due out until later in the US session. (That’s very important – knowing what’s coming up in the day… so make sure you read Tom Tragett…)

In those cases, I can probably assume it’s a low volatility day, although always keep an eye on twitter or any squawk feeds for breaking news. The next Eurozone crisis can quickly change things!

Otherwise, my best recommendation is not to sweat it and go do something else. That’s part of the joy of trading.

You have a lot more time to do some of the important things in life. Don’t miss out on those opportunities because you’re staring at charts that don’t move!

That’s all for today. But if you have any thoughts or questions on today’s article, please leave them below.

Bye for now,

Max Munroe
For Forex Round-Up

But that’s what I’m here for, and that’s absolutely fine with me.

Today I want to think about the value of things. The value of cars first… and then I’ll talk about the value of currencies.

I know, it might sound off topic, but hear me out…

Why entering a forex trade is like buying a car

See, I’ve been looking to change my car recently. Now I love cars. And I’ve been lucky enough to have some pretty nice ones in the past.

But when it comes to buying a new car, it’s value for money I want.

I want a good deal. And not just a good deal that the salesman has verbally abused me with. What I mean is that I actually work out a net present value for the car. I want to know it’s going to hold its value.

Now I do very few miles each year. I’m talking less than 5,000. So I want something that will stabilise in value over five years.

That should mean that mine will have very low mileage amongst comparable cars by the time I sell. And I should only lose a small amount on the car when I sell. In fact, in some cases I’ve even turned a small profit.

Nothing ground-breaking about that. It’s the same process we naturally go through for any purchase, be it a house, a watch, whatever.

My point is that your forex trading should be no different.

You wouldn’t buy a car if it doesn’t offer good value.

And by the same logic, neither should you buy a currency if it doesn’t offer good value.

Why you MUST be disciplined

Of course, sometimes you see aggressive moves and breakouts from key levels. And when you do, it can be hard to stop yourself trying to jump on the trade, would you agree?

But that’s where you have to be disciplined. You’ve got to be like Tom Tragett or Alex and Nicky Ong. They’re all masters of discipline. Be patient. Wait for the right moment. That’s what they preach and I can’t argue with that.

Because the likelihood in forex trading is that the currency will pull back at some point. And that’s when you make your move.

This is your opportunity to buy (or sell if you’re going short!) Don’t get greedy. Be patient and if you miss the move that’s ok, there will be another one.

Yes, I know. This can be a real challenge as it’s an emotional response to a situation. Your brain doesn’t think of this as ‘just another trade’. It thinks of that exact moment as ‘the most important trade ever’.

But the joy of forex is that these opportunities keep coming. That’s why I love it!

And thanks to all the technology and various tools to help you in forex, you can learn to spot them.

So here are a few we can use to our advantage.

Four simple tools to help you know when to trade

You already know the first two: Relative Strength Index (RSI) and stochastics.

I’ve talked about the RSI in our Three Essential Forex Indicators report.

And in another article I wrote about building the stochastic oscillator into your trading strategy.

When you’re using RSIs and stochastics, there’s a simple rule. Don’t buy in overbought regions and don’t sell in oversold regions. Wait until the pair is back in neutral territory before pulling the trigger.

If you aren’t sure on what ‘oversold’ and ‘overbought’ mean, make sure you read that “three essential indicators” report.

And here’s another great tool for you: the ATR.

ATR stands for Average True Range. It’s very simple. It gives you an average range between the High and Low over X periods/bars. And the reason it’s useful is that it will give you a pip trading range for your currency pair.

If you’re already having success with the ATR, let me know with a comment at the end of this article. Or if you have any questions about it, let me know.

But for now, one really nice setting is a 20 period ATR on daily charts. I’ll explain why.

On average across all currencies, ATR 20 is only hit approximately once in every five days.

That means that if we’re trading towards the ATR limits, it’s an extreme move. So wait for the move to come back before pulling the trigger and entering a trade.

One very useful and simple thing to do is mark down yesterday’s close price PLUS the ATR and yesterday’s close price MINUS the ATR. That can give you a great trading range.

Part of the reason this works so well is that many people use the ATR as their profit targets. So you will find orders bunched at these key levels that will cap movement.

OK, and one final tool for today that I think you can use. I’m actually putting together a series of emails on this for you, but I’ll just touch on it today.

This is the Commitments of Traders Report (COT).

For me, the COT is pure gold dust, especially on the EURUSD cross. That’s why I want to take some time to show you it in more detail. If you already use this, you’ll know what I mean.

The COT is basically a snapshot (released every Friday) of the net long and short positions held by both commercial (e.g. corporations) and speculative (e.g. banks, brokers and retail) traders.

What’s good about it is that it gives you a great idea about what the overall bias is in the market each week. It’s a great sentiment reader – and something you can use to inform your trading.

One simple technique here is not to buy or sell at extremes in the order book (as shown on the COT). That’s because these are likely areas where the market has run out of people to buy or sell to and therefore we are due a correction.

Sound interesting? Stay tuned for more on the COT in the weeks ahead.

Always ask this before you trade

Anyway, these are all useful tools. They can help us to know whether we should be buying or selling a currency.

Think of your currency pair as you would with any purchase – just like a car or a house or a work of art if you’re into that.

Then add to your trading checklist a simple question, alongside your risk Vs reward calculation…

Does this trade offer good value for money? Could it make back more than I am investing in it (your stop loss)? If it does, then, so long as it meets your other trading rules, maybe you have a good trade on your hands.

As for my car, well I still haven’t decided what to go for. But I reckon something a little bit different is on the cards. I’ll let you know how I get on…

Best wishes,

Max Munroe
For Forex Round-Up

P.S. If you’re not already a member of Forex Round Up you can get my “Three Essential Indicators” report by entering your email address below:

But before that I wanted to touch on a candlestick pattern which will help you find key support and resistance levels. In fact, it forms one of the key features of my very own personal swing trading strategy.

Today we’re looking at a candlestick pattern called the Pinocchio Bar or Pin Bar for short. It’s a great little sign post if you’re looking to play a trend.

How to use pin bars to time your trade entry

Pinocchio bars are formed when price ‘rejects’ a strong move in one direction to reverse in the opposite direction.

When do you see these?

Well, often they can be formed around significant news events. And the beauty of them is that they can highlight two things:

• A change in trend, or
• A confirmation of the current trend.

How useful is that!

Well, once you get used to them, they can be gold dust.

So let me tell you a little more about them – and show you what they look like.

A pin bar is a candlestick with a wick on one side, that’s the long tail, and a short wick, or no wick at all, on the other.

The name Pinocchio comes from the fact that the tail could be described as its long nose lying about which direction the price was going to move in.

Here are some examples…

Now candlestick purists will say that pin bars are only formed when the candle wick is at least two or three times the length of the body.

But I’m not a purist. And in my experience, when looking for signals, the key is often not the exact size of the wick. It’s how it looks in relation to other candles around it.

In the chart I’ll show you in a minute, the highlighted pin bars are all of a similar relative size. Their wicks are more than twice the size of their bodies.

However, their size in relation to the candles around them makes them more or less significant.

On the chart below I’ve plotted two of my favourite moving averages and an RSI.

I’ve also marked bullish pin bars with green arrows and bearish pin bars with red arrows.

Let’s take a look at a few currencies to see how they interact with price.

First up the USDJPY (US dollar v. Japanese yen)…

See how the bullish pin bars (shown by green arrows) interact with the dynamic support provided by the moving averages and provide good entry points to join the trend.

What I mean is that you can see the long tails on the candles. These are formed as the market tries to push lower. But then they find support and eventually push back in the direction of the trend. So if you spot them, you can hop on for the ride!

These trend pin bars (i.e. pin bars in the direction of the trend), after correctional moves, are a great way to join an overall trend.

Ok now let’s look at slightly more volatile pair – EURUSD (euro v. US dollar).

This time I have also plotted weekly support and resistance levels in the market (those horizontal lines).

See how these long tailed candles interact with the support and resistance levels. They give us clues as to where the market may be headed next.

Now I could go into a lot more detail here. But hopefully you can see how powerful these long tailed candlesticks can be in your trading.

A simple technique that can make you money

Remember, the key to the power of these are that they are created by the underlying movement in price and the orders within the market.

And these signals can become really powerful in developing a swing trading style strategy. I’ll show you what I mean another time.

If you’re just starting to look at these formations though, I recommend you only focus on pin bars forming in the direction of the trend.

FRU Tip: Remember: a quick way to find the trend is by using the moving averages on the chart. For more on moving averages, see our “3 technical indicators” report.

What I want you to think about today is this…

These signals are very powerful if you start to couple them with some of the indicators we’ve looked at in previous articles and apply strict money and risk management rules.

In fact, they form the basis of one of my favourite swing trading techniques that I’ve used for years and still use to this day. This makes me a lot of money, all thanks to some very basic patterns. Forex does not have to be complicated.

I’ll keep developing these ideas in Forex Round-Up – so don’t miss an issue.

For now, given the chop in the markets at the moment, these signals can help you avoid some of those nasty trades and work out where some key levels are.

I hope that’s given you something to think about. Leave your thoughts below.

Regards,

Max Munroe
For Forex Round-Up

I was at a Jaguar launch event recently – you know, just looking! And I got talking to a few people about investment returns.

The guys were discussing how they go about earning a good return from their wealth each year.

So I asked them how they define ‘good’.

Now these were all relatively wealthy individuals. They had investments ranging from property, cash savings and money stashed with private wealth firms…

… all the way through to one guy who buys and sells cars. Not just rare ones. He also buys slots on waiting lists for new cars he knows will be in demand. (Quite interesting actually – but maybe not for a forex letter!)

Anyway, apparently for these guys, a ‘good’ return is around 10% per year.

What does ‘good’ look like?

The reason I’m telling you this is that it’s a conversation I often have with new traders I’m working with… what does ‘good’ look like?

Maybe you have your own idea – something you aim for. It certainly makes sense to have a target.

The problem with forex trading over recent years is the number of systems and people promising astronomical returns in such short spaces of time. You’ve seen some of them, I’m sure.

But a word of warning…

For these to be remotely achievable, you need to leverage your account to ridiculous levels. So high, that the probability of you losing everything is off the scale. And that meant that the propositions in themselves were just nonsense.

And what happened in the end was that the guys using these wonder systems would eventually they blew up.

Part of the problem was that people were aiming for 100% a month returns. And that is just unrealistic. Ridiculous, in fact.

So I want to clear up a few things on trading that should give you some comfort in your own progress.

First let’s set a few markers. What you can expect from putting your money to work in different places…

Now in the UK, average instant access savings on offer pay about 1% Annual Equivalent Rate per year. That’s just what you can see on the high street or flicking through the Sunday papers.

Pretty rubbish, right? And that’s why many of us trade: to make our money work harder – for a higher risk, of course.

Further up the risk scale come the hedge funds. Average ‘hedgie’ returns over the past several years have roughly equated to around 20% per year, with some of the better ones in the 30% to 40% region.

That’s getting better. You’d take that 40% on your money wouldn’t you?

But… and it’s quite a big but…

In order to generate those returns, a hedge fund uses extreme risks and has an average life expectancy of only three years before it blows up.

Again, we’re not here to talk about savings accounts and hedge funds.

As I understand it, you’ve signed up to this little email because you want to learn how to trade forex. And make money from it. At least I hope that’s why you’re here! ?

So what should you expect in forex?

The smarter way to get to 100% annual returns

Well I’ll be honest. I look for 100% return a year when compounded monthly. I think that’s easily achievable. So that means I’m looking for a monthly return of around 5% to 6% compounded.

In order to get that, I use strict risk management. I try to hold on to what I have and not give too much away to the market.

But quite honestly, I take the rough with the smooth. Some months will be negative. Some months will be positive. That’s OK.

What’s important is that I know on average is that I’m consistent and can generate the return I want. That’s where you want to get to.

However, I’m doing that across a series of systems and strategies. In truth, I’d say that’s an unreasonable target for most new traders.

So what’s reasonable?

Well, if you manage to return 30% to 50% in a year on your account, you’re doing extremely well. I mean that’s returning £3,000 to £5,000 on a £10,000 account. You could be chuffed with that.

So if last year you achieved that sort of return, given the market conditions, well done.

Be consistent and compound your returns

As I’ve mentioned before, the key here is consistency.

It doesn’t matter whether you make 10 pips a week or 100 pips a week. If you can do that consistently, you’ll do fine. In fact, by using compounding, you can make a lot of money in a relatively short space of time (talking years not days here).

So what do I mean by compounding? It’s the powerhouse of successful trading…

Let me explain this concept with an example.

Let’s use the 10 pips a week.

If you can trade the EURUSD and make 10 pips a week consistently and you always scale your positions by the amount in your account, then this is the net effect.

Let’s start with a £10,000 account, using £10 a pip (remember you would need to work out your appropriate risk on this and do not over leverage but this is a very simple example).

For every £1,000 in our account we will risk £1 per pip, therefore if I have £11,000 in the account I risk £11 per pip).

For this example we will also assume that although we win and lose, the net effect each week is that we end the week up 10 pips.

Week 1 = £10,000 + (10 pips * £10) = £10,100

Week 2 = £10,100 + (10 pips * £10.10) = £10,201

And so on and so on up to…

Week 20 = £12,081.09 + (10 pips * £12.08) = £12,201.90

And on to…

Week 52 = £16,610.78 + (10 pips * £16.61) = £16,776.89

And on to end of year two…

Week 104 = £27,867.72 + (10 pips * £27.87) = £28,146.40

So in two years (roughly, as you are unlikely to trade every week), you have returned over 180% profit on your original £10,000. That could have turned £1,000 into £2,800. That’s pretty good.

And I know, that’s with spread betting. And spread betting can be high risk. But not if you are trading sensibly, using strict money management and following a decent, proven strategy.

This is why being consistent is so important. That one big trade in a month that returns you 20% is frankly lucky. It’s nothing compared to that 2% return every month that you can continue tocompound in a nice steady cash flow.

That’s what to aim for. Keep reading Forex Round-Up. You’ll get there – we’re going to do all we can to make sure of it. Leave your comments below.

Best wishes,

Max Munroe
For Forex Round-Up

By covering the things you’ve asked about, together with some tricks of the trade we’ve learned, we hope you’re finding Forex Round-Up useful.

One of the things that came up right at the beginning, when we asked for suggestions, is Ichimoku. In fact, a few readers put this forward as a request.

It’s been working its way up our to-do list ever since. Today, at long last, it made it to the top!

Now, my bet is that you won’t know much about this one. (If you do, and you’re using it already, please let me know with a comment at the end of the article.)

See, Ichimoku is kind of a niche area of technical analysis. Few retail traders have discovered it. Although judging by all the requests, it’s gaining a small following.

Our colleague Tom Tragett is a fan. He uses it to look for support/resistance levels and to spot breakouts. So if you follow Tom’s excellent Forex Insider Daily, you’ll have come across this tool.

If not, then the word Ichimoku likely means nothing to you.

But it should. It’s really good. I’ll show you what mean.

How this Japanese “chart art” can help you trade

I want to touch on the basics today. Then, if you want to know more, I’ll point you to a good resource for learning how to use this in your trading.

So let’s get to it.

Ichimoku Kinko Hyo (or Ichimoku or just Ichi for short) is a method of technical analysis developed by a Japanese journalist some 45 years ago.

It took him about 30 years to perfect this method. But with the right help, you can actually put Ichimoku to work in your trading with just a few simple moves.

In fact, if you like the look of this, you can start learning how to use it today. I’ll show you how later.

First, I’ll give you a whistle-stop tour and the basic indicators, which are extremely good. In fact, Ichimoku can be pretty much profitable without having to make any amendments from default settings.

Now, in this instance a picture really does say 1,000 words. So I’m going to show you a few charts so you can see what this can do.

I’m throwing you in at the deep end here. But don’t panic, I’ll take this apart so you can see the various components. So here is an Ichimoku indicator in all its glory. Isn’t it beautiful!?

Ichimoku indicator

I know, I know. It looks complicated, right?

I mean, I always look at these charts and think of chart art. Perhaps we should run a competition on who can create the craziest or prettiest chart using only technical indicators!

Anyhow, please don’t be put off by all those lines and colours. The rules for this are actually really simple.

And if you want to know the truth, a lot is made about going into lots of detail on this indicator. But for me, the real power of Ichimoku comes from how easy it is to use.

Anyway, let’s break this down into its component parts…

Breaking it all down

First let’s take a look at the Red and Blue lines on my chart.

The Blue line is called the Kijun-Sen line and the Red one, Tenkan-Sen.

Here they are nicely plotted on my chart:

Kijun-Sen line - Tenkan-Sen line

Now when I say these components are simple to understand, I mean it. That’s why trading Ichimoku is so attractive.

Try this…

Red line above Blue line = Bullish.

Blue line above Red = Bearish.

See what I mean? Simple…

In fact, if you simply went long when Red crossed above Blue and went short when Blue crossed below Red, then trading this on £1 a pip since 2009 would have netted you about £1,500 on EURUSD. True.

Now let me bring in the next component. (Sorry, I did warn you this would have to be a whistle-stop tour.)

Next up is the Purple line in my initial chart. This is called the Chikou Span.

Again, it’s very simple:

Price below this line is Bullish.

Price above it is Bearish.

Chikou Span

So put these two rules together on your chart for Ichi lines…

Ichi lines

Now you might be wondering why we wouldn’t close out the long position earlier, i.e. when the Purple line crossed the price.

However, note the Purple Chikou Span is actually plotted 28 days behind the current price. So we would only see the cross 28 days after it happened. Thus our other signal would take precedence.

OK, now let’s move onto the next component of Ichimoku – the Cloud…

The most powerful component of all

Again, I can’t help but reiterate how simple (but powerful) these components are.

What I mean is that above the Cloud is bullish. Below the Cloud is Bearish. And in the Cloud is neutral or you could say “choppy”.

An easy way to trade the Cloud directly is by looking for breakouts. I’ve circled a few possible breakouts on the chart below…

Trade The Cloud

How else could we use these Clouds?

Well, you can use them to identify zones of support and resistance. Or even to give you a dynamic stop level.

Finally, how about using the Clouds to exit and re-enter positions in the direction of the trend?

That’s right.  You can use Ichimoku Clouds for all these things.

And in fact, now we have all the components, where this becomes extremely powerful is when you start joining them all together.

Take a look at this next chart…

Three confirmations of potential trades

See what I mean? Three confirmations of potential trades.

Now if you want to try something really adventurous, then try using Ichimoku Clouds with range bars instead of ordinary Candlesticks.

If you don’t know what a range bar is, don’t worry. We’ll be covering those shortly.

But in the meantime, take a look at Ichimoku indicators on your own regular charts.

The settings for mine above were as follows:

Fast Period = 9

Medium Period = 26

Slow Period = 52

But have a play around. And as always, tell me how you get on with Ichimoku or whether you use it already. Let us know your thoughts by leaving a comment below.

Discover how to use the Cloud right now

Of course, we’ll touch on Ichimoku again in the future. It’s a really good technique when you combine it with some of the key trading rules.

But if you like the look of this and fancy some focussed training, we’ve got something to show you right away.

I’ve already shown you some of the components of Ichimoku. The Kijun-Sen line, the Tenkan-Sen, the Chikou Span and the Cloud.

And as we saw earlier, the chart can look a little confusing when you see it all together. I guess that’s why it’s typically used by professional traders.

But trader, Chris Nice, has done something very impressive. He’s managed to strip down the Cloud into something really accessible to retail traders like you.

It’s a condensed version, if you like, and even simpler to use.

But what I think you’ll like especially is that Chris has developed an accelerated fast-track programme for showing you how to trade with his uncomplicated version of the Cloud.

It’s not your standard forex manual. It’s interactive, hands-on and dynamic. So if you’re interested in harnessing the undeniable power of the Cloud, this is well worth checking out.

Check out the website here: The Cloud

Let us know how you get on.

Kind regards,

Max Munroe
For Forex Round-Up

That’s the vibe we’ve been picking up lately. That came in from a fellow reader. And it’s something I see in forums too. People aren’t necessarily after 100-pip trades.

And you know what, that makes utter sense. Because if you can make 5 pips a day, 5 days a week, 40 weeks a year, work it out…

That’s 1,000 pips right there or £1,000 at £1/pip trading. Not to be sniffed at.

In fact, this is a really interesting point. But is it possible? (Keep reading…)

A few things to think about…

Look, I know there are a few strategies out there which can make 10 to 15 pips on a semi-regular basis. But definitely not daily.

If they promise this, they should be ringing alarm bells. Markets just aren’t consistent enough with their patterns for that kind of return.

It’s also true to say that 5 pips a day could make you a very wealthy person just by the end of year one with simple compounding. So if you can get a strategy that offers you that, take a good look!

However, there are a few things to realise.

In order to run proper money management, a strategy that takes profit at 5 pips would need a very small stop loss. Either that or it would need to guarantee an extremely high level of accuracy. Preferably both.

Let’s take the accuracy argument first.

The problem with highly accurate systems is that they tend to be what is referred to as ‘curve fitted’.

This means they are designed for a very specific set of circumstances or market conditions. In these conditions, the system will work extremely well.

However, as soon as markets move out of these conditions, these systems do very badly. They start blowing up people’s accounts as the wide stops required versus the small profits taken result in a very quick reduction in capital.

So if we are unable to have wide stops, then we need proper risk management.

Be careful: The spread can kill you!

That’s where the idea of having a stop less than 5 pips from our profit target comes in.

But there’s more to think about here. This is where the spread comes in.

The spread is the difference between what you buy a currency pair for and what you sell a currency pair for.

The ‘Ask’ price is what people are selling the currency pair for and therefore the price you will pay to buy it (the higher price of the spread).

The ‘Bid’ price is the price people are buying the instrument for and therefore you will sell it at (the lower price).

Let’s take EURUSD as an example. After all, it’s one of the most popular forex pairings to trade. You probably trade it yourself.

Now for a typical retail trader (i.e. you), the average spread on EURUSD is between 1 and 2 pips with spread betting company.

So think of it like this. You will automatically be 1 to 2 pips down on the trade when you enter it. If you bought and then sold right away, even without any movement, you’d be 1 or 2 pips down.

Taking that thought further, this means your stop loss will actually be 1 or 2 pips smaller and your profit target will be 1 or 2 pips further away.

And the chances are you will end up hitting your stop before your profit target. SO if you’re not careful, the spread can kill your chances of making profits.

So it becomes a highly complex game in order to make strategies that take 5 pips a day actually work. You’d need high end broker feeds with limited lag time and guaranteed fills.

But there’s still a way you can make money at this…

A better way to go for long-term forex profits

Instead of focusing on a strategy that makes 5 pips a day, concentrate on running appropriate money management and a consistent strategy.

It doesn’t matter if it is 10 pips a day or 10 pips a week, if you achieve that level of consistency the money will soon follow.

Spending a few minutes at your charts each night looking over daily charts is easier than 30 minutes each night on 1 minute charts scalping 5 pips. And a lot less stressful!

On the daily charts you may win only 30% of the time. But your winnings will be three times larger than your losers.

Plus… you won’t have to worry about those killer spreads as much.

Now, keep reading Forex Round-Up. There’s a very simple strategy we know about. It averages 5 pips a day over 6 years. I’m not talking scalping for 5 pips at a time. But that’s what it averages out at.

If that sounds of interest, look out for it in a future issue.

Meantime, any thoughts, comments or suggestions, leave them below.

Good trading,

Max Munroe
For Forex Round-Up

Russ and I agree on two key points.

One: You should always have a stop loss.

Two: we both know stop hunting is not just a ‘bogeyman’ myth to scare traders. It really exists and can trip up your trading.

Question: Has this ever happened to you? You get stopped out of a trade… only to see the market reverse right afterwards and move in the direction you predicted?

Chances are, you’ve been the victim of stop loss hunting. And it happens all the time.

The good thing is, there are a few tricks you can play to try and help you avoid it. And it’s those I want to talk about today.

How brokers steal your pips

Stop hunting is pretty simple. It’s an easy way for a market maker, broker or financial institution to make a nice tidy sum scalping some profit at your expense.

If they know where the orders are in the market, they can target key areas of bunched up retail orders (e.g. you and me) in order to make a small amount of profit.

Once those stops are hit, the big player can then make the market move in the direction retail traders were placed originally.

This is dead easy for them as they can directly see where orders are placed in the market. Easy money.

Now these guys are never going to go after your single stop on its own. But if enough retail traders all place their stops in the same place, it’s easy pickings.

However, there are a couple of tips for how to avoid this.

1. Stop placing stops on round numbers.

It may look neat and tidy, but stop bunching stops on large round numbers. Anything ending in two or more zeros is a definitely no-no.

2. Everyone looks for swing highs and lows.

These are the highs and lows over a given period. It’s a really common place to stick stops exactly (or even within a pip or two) of swing highs and lows.

So you should always ensure that your stop is placed above this (if you’re short) or below (if long), with enough room to breathe.

I know you’ll want me to be more precise. But it will depend on your stop strategy. We’ll come back to this in more detail and look at specific strategies another time, though.

For today, let’s get on to the good stuff and something Russ also pointed out.

Let’s assume markets are in a downtrend. We get a retracement and price moves up.

Look at where retail trader stops are likely to be for those trying to trade the down turn. You can almost bet money that market makers, financial institutions or smart money will be looking for that level.

They want to clear those stops out and give themselves a great price. Then the market will drop back down again.

It’s a trick many traders use, and a great way to get a nice entry price. Let me show you.

Put your short limit order (assuming a downtrend) just at the beginning of where the orders are likely to be placed.

Then, instead of sticking your stop in amongst all the other retail traders, stick it higher up, but complying with the rules above.

To see what I mean, have a look at the chart below of a trade I did personally. I was shorting the Aussie dollar. My stop was at 1.05067 exactly – above the bunched orders. My entry on the trade was 1.0480.

See that big circle? By that time, I already knew it was a key level because of the previous move lower from it (back on 27 March).

This time it tests, pulls back from the pivot line and then pops higher to break that level and test stops. It knocks a lot of those stops out and we get a dimple in the order book (you can see it in the indicator at the bottom – that small circle).

Then the price hovers as a few retail buyers step in to go long on a “breakout”-style strategy. And then it drops.

The instant reversal of the pop higher was a big clue and it only found minor support for buyers once it had broken that level. And then it gave way.

So a nice trick for finding an entry point. And it can be a great little way to capture a decent move.

A few key areas to look out for

So now hopefully you are saying something along the lines of “That’s great Max but how do I spot where retail traders’ orders are without access to the order book?”

Well, Frank and I are looking into whether we can do this for you in some way, even if it’s a daily email briefing or similar. We’ll let you know how we get on.

However, here are a few things to look at in the meantime…

• Swing Highs and Lows; lots of orders are bunched at these.
• Round numbers.
• Exactly on pivot lines (or exactly 5/10 pips above or below).
• Exactly on Fibonacci retracement levels.
• Any points which hit multiples of these.

At these areas, we start to get bunching of orders and stops. So think about how you can use them to your advantage.

Another way to find out is to check out some of the pro traders on Twitter or in a Live Trading Room. They will often let people know of order book positions as most of them will have access to a feed or an order book to give you a view.

Follow these guys for a while and get a sense of whether they are accurate, and you’ll get some valuable trading insights.

And keep reading Forex Round-Up. We’ll have more tricks you can use on this topic in future issues. So don’t miss any of our emails.

For now, thanks to Russ for his thoughts on this one. And please, keep that feedback coming in. You can leave your thoughts and ideas here.

Best wishes,

Max Munroe
For Forex Round-Up