Tag archives for Forex

The topics of projected targets and entries for shorter term CFD trading are covered by two experienced traders, Stuart McPhee and David Jenyns.

David: We have been asked the question: ‘Do you use projected targets such as Fibonacci expansion to anticipate price projection?’

Stuart: No. I don’t like the idea of targets because of that whole idea of forecasting. It’s the idea of, I think the index will be at x in three months’ time. As a technical analyst, I want to identify high probability trading opportunities. There’s no certainty. If it only goes up x percent or if it goes up y percent which is a lot greater, then that’s just the way it happens. I’ve never tried to determine what that might be, I’ve just got mechanisms in place that when the price does certain things I get out when I have to, or I stay in.

David: There are points where you have control over the market. That’s obviously just when you get in and when you get out. What you do not have control over is what the market is going to do. By picking a point where you are going to get out, I feel as if you are trying to gain control over something you can have no control over.

I like the idea of, you have to cut your losses short and let you profits run. Setting a price projection is not letting your profits run because you’re capping your price potential. For most people letting your profits run is more powerful, and that’s done by setting trailing stops.

The next part of the question is: ‘You talk much about the entry strategy on the medium to longer term trading but you didn’t really expand on the entries used for shorter term CFD trading. Could you please indicate these?’

Stuart: I focus on the medium term because it is a very simple methodology that everyone can understand.

David: When everybody’s new and starting out in trading they are somehow lured into CFD trading and trading the forex. People trade these exotic instruments because of the high chance of reward, forgetting that there is a high chance of risk as well. Unless you are successful trading stocks unleveraged you probably shouldn’t look at CFDs.

Stuart: Too many people lose money trading these shorter term instruments. It happens all the time and it’s because they have not mastered the fundamentals by trading simple stocks. Stocks are the easiest.

I use a very simple approach for my short term trades and it’s just short term reversal signal, using basic individual bar analysis. It’s short term reversal signal, as long as the parent, the medium term trend is also heading in that direction. It’s a very simple approach for my CFD trading.

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Introducing the weight of evidence approach to trading – a golden ticket for trade entry.

There are numerous factors to consider when deciding to enter a trade or not. You may consider the trend, volume, the present chart pattern, or a recent company announcement for example. Many traders know that there are no perfect entry signals, but there some underlying principles that do work. What you may also do over time, is to gain more confidence in some of your rules over others. This may also come about through some form of methodical back testing.

Using a ‘weight of evidence’ approach can add to the effectiveness of your share selection process. What this means is that you may place greater emphasis on certain conditions over others. For example, you may have a potential company to purchase shares in and it has met most of your criteria that you have set, except two.

Those two conditions that the company has not met may not be that important to you. Even though it has not passed all of your entry criteria, it may still be determined as a suitable purchase.

Another example may be that a company ranks very highly in most of your criteria but just fails two others. The two others however, may be of utmost importance to you in your share selection process.

As you may use weight of evidence, even though most conditions rate very highly, you would not consider purchasing shares in the company because you place such great emphasis (weighting) on those particular areas.

You could facilitate this process using a decision matrix. This matrix would list all of your criteria in the first column and in the second column, you would list each criterion’s weighting (i.e. how important it is to you). For each possible trade, you could allocate a score of between 1 to 5 for example, and then multiply the score by the relevant weighting. For each possible trade, you would then sum the scores and be in a position to rank all of your possible trades based on your entry criteria.

After a period of time trading and developing your trading system, you will develop a certain level of intuition and this will assist you in determining what conditions are more important than others. Over time, this will be a natural progression and will only make your selection process easier and more efficient.

A weight of evidence approach and you deciding what is important to you will assist with filtering through potential companies when the number is large. You will be able to very quickly whittle the number of potential companies for purchase down to a more manageable number.

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