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Expert Speak

Smart Investing with Forex, Stocks and ETFs in the Stock Market


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Category:  Market  
| 10-06-2016 03:36 PM


Forex, ETF and Equity

Through the course of this article, we would be looking at a strategy that is best known to be most effective for trading in leveraged markets. The obvious reason behind this increased efficacy is the fact that you can hope to control large positions, from a relative perspective. Therefore, once you have been able to make a successful trade, you can expect your leverage to magnify your returns, which makes intra-day trading an extremely attractive option. With that said, it cannot be contradicted that leverage is a double-edged sword. It is capable of hurting you just as much as it is capable of benefiting you. In other words, the higher the expected rewards are, the higher is the risk you have taken.

Trading With Stocks And ETFs

If you feel that ETFs or trade stocks are better options to explore as compared to leveraged markets, you can modify the strategy given in the following manner for maximized benefits.

Be Sure To Consider Gaps

Before anything else, let us define the term gaps for you, in the present context. The closing value of a trade on the previous day can be different from the opening value of the same on the following day. This difference in value is referred to as a gap. Now, why do these gaps occur? Overnight trading causes movements in the market, which eventually leads to the occurrence of gaps.

You will be in the best position to keep a tab on these movements if you have a look at the 24-hour trading chart. In addition, the most recent market moves are taken care of in the calculations made for indicators. So, a quick look at them can also be of great value to you, as a trader.

However, if you are using a chart that only shows trading indicators and patterns for the U.S. session, you can safely assume that the next day’s indicators, right when the market opens, will inevitably be calculated using the values taken from the previous day’s last session. It is obvious that the calculations are made from outdated values. Therefore, the resulted computed may not be exact and in fact be misleading in some cases.

The one thing that is certain to make matters worse for you, as a trader, is that some traders decide to place trades, with the expectation that the gap will fill up on its own. This uncertainty leads to greater indecision at the start of trade as the session opens of the next day. To help you deal with this multi-faceted scenario, here are a few filters and rules that you must consider, particularly if you are trading with ETFs and stocks.

1 .What if the gap is greater than your stop loss?

The first thing that you need to do is to make a comparison between the gap value and your stop loss value. If you find that the gap value is greater than the stop loss value, then you can safely skip the trade. More precisely, in such a situation, you must wait for the black bar to arrive before you decide to enter the trade.

Here, the black bar is indicative of uncertainty and change in the direction of trade. You must be wondering as to why we are waiting for the black bar here. Well, when the black bar arrives after a gap, you can expect the arrival if a stronger entry. Moreover, it is also indicative of the fact that the trend shall continue for some more time.

2. What if the gap is filled or the gap is smaller than your stop loss?

Contrary to the previous case, if your stop loss is higher than the gap value or the gap value is filled during trade sessions, you can go ahead with the standard trading strategy. Since, there is minimal pressure from the traders to try towards filling the gap, chances that the trend will take off are significantly higher. In other words, you just need to wait until the gap is filled and consider the entry signal that comes after gap filling.

3. What if the session’s first bar is a reversal bar?

If the first bar for a session is an aggressive bar or a reversal bar, you can safely disregard gaps, in entirety. A reversal bar is witnessed when the market gaps higher. In this case, the market closes at a higher value than the opening value on the first bar of the next day’s session. On the other hand, when the market gaps lower, the market closes at a value higher than the opening session’s first bar value.

In such scenarios, it has been seen that the market is under immense pressure to fill the gap. Therefore, the possibility of finding a signal that we are looking for as part of our standard strategy is rather low. However, if the market proves to be strong enough to fight right back and reverse the course, this is certainly a positive trend for you. There is no doubt about the fact that this setup is far more aggressive than waiting for the gap to fill or looking for the black bar to arrive. Despite this, you can be sure to find some good entries when you look for a signal similar to the one that we need for the strategy right after the reversal bar terminates.

Modified Entry Rule For Trading Stocks

If you are trading stocks using range bars, then you can go ahead with the same rules that we have already discussed. However, if you are using time bars for trading, anticipating the close of the time bar can be a tricky point to pick. The chapter on time bars can be used as a reference for comprehending how time bars and Bollinger bands can be used for trading.

You can safely apply the same rules for trading stocks. However, there is another method called the breakout method that has got immense attention and popularity from stock traders. To ensure that you have information about all the methods and techniques available to you, we shall now discuss the breakout method in greater detail.

When the first bar of the session closes, instead of entering with a market order, you must place a buy stop order at a value, which must be one cent higher than the bar high. As the market progresses, if it is seen that the market is moving through your order, you can enter the trade. However, if the market movements are found to be lower and as a result, you entry falls under the classification of invalid order, you will need to cancel your order.

Similar rules apply during the downtrend with the only difference that you will need to place a sell stop order with a value, which is one cent lower than the value of the bar low. As a rule, you will need to place your sell stop order one cent lower than the low of the bar depending on the breakout entry. There is an inherent advantage that this breakout entry method offers. Unlike other cases where breakout is the time when your orders will be filled, in this case, as the market moves higher, the sell stop order will never be triggered. So, as the market turns and change its ways, the breakout entry will allow you to remain out of trade. However, with this approach, you might have to sacrifice a better entry price at times.


Trading With Forex

The strategy that we discussed in one of the previous chapters remains completely valid for Forex trading. So, before moving any further, let us take a look back at the steps that you need to undertake for Forex Trading strategy.

1. Using MACD, you need to first determine the underlying direction of the market.

2. Use the Bollinger band as an entry signal and as price tags the lower and upper Bollinger bands, you must look for signals to buy and sell.

3. Compute the ADR or average daily range value. Now, keep your stop loss value fixed at 10% of ADR and profit target value at 15% of ADR.


To help you comprehend how the strategy for Forex works in real, let us consider an example in which the initial 5-minute bar for the session closes right at the upper Bollinger band. From the rules, you know that you will need to use a buy market order for entering the market at the value corresponding to the value of the upper Bollinger band (say x). In this case, you will need to set your profit target and stop loss values as 15% and 10% of the ADR. 

However, if you enter the market at a value higher than the x, then you will need to make adjustments to your stop loss and profit target values as well.

Conclusion

The rising numbers of Forex charting platforms are making all the more easy for traders to plot range bars. However, there is a possibility that your present charting software may not allow range bar plotting. If that is the case, you may consider upgrading it or choose to work with time bars instead.


Nisha Kutty N
www.stockmarketsignals.com

Nisha is a Senior Analyst at Stock Market Signals, India. She is an enthusiastic writer and spends most of her time reading or travelling. She is a Research Scholar who works extensively with Women’s writing in India and has written several articles for social media platforms like Youth Ki Awaaz.

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