Learn To Trade – Part 6

1. Learn To Trade – Part 6 TheARTof the Trade Account, Risk, Trade Management

2. What is a Trade? Each Trade is an educated and researched market experiment rooted in mathematics that has an expected outcome greater than just chance. All the analysis we do is designed to provide a positive expectancy on each trade…THUS Capital protection on each market experiment is required.

3. Why is Risk Management So Important? Nick Leeson – Lost $1.3 billion dollars, broke Baring Investment Bank; a 233 year old institution. The Retail Trader – Has lost unknown $$$’s trading without proper risk management. Jerome Kerviel – Lost $4.9 billion trading at Societe General.

4. Why is Risk Management So Important? Once losses cross 30-40% of capital, recovery becomes extremely difficult.

5. Why is Risk Management So Important?

6. The Golden Rule of Risk Management Always Use Stop Losses! If you follow this one rule consistently, you will be better positioned than the majority of FX traders.

7. Guidelines of Risk Management Define your trading plan before taking the trade. Plan your trade, trade your plan. A complete trading strategy defines entries, stops, limits & position sizing. Only move stops in your favor. If you move your stop to take on additional risk it changes your risk profile therefore changing your trading plan. Use positive Risk/Reward ratios Consistently require trading plans to offer higher reward than risk.

8. Guidelines of Risk Management Be aware of fundamental market events. Consider how long you expect to be in a trade and what major fundamental market announcements could effect it (NFP, Fed, etc.) Actively manage your trade. “Set it and Forget it” doesn’t work. If price action doesn’t move as you expected it’s ok to cut trades short. If the market does move in your favor, consider raising stops after strong moves. Forex trading involves significant risk of loss and is not suitable for all investors. Past performance is not indicative of future results.

9. Defining Position Size Per Risk We have devised a language to convey our conviction in the trade Tier 4 Tier 3 Tier 2 Tier 1 Your everyday average trade size that is used to “probe” the market with minimal exposure. A trade size that is only moderately aggressive and is used for trades that are slightly better than your every day trade. A very high conviction trade that seeks to aggressively position within ideal trading conditions for maximum gain. The highest conviction trade we have. Essentially the planets are aligned on this trade and we are prepared to risk a significant amount of capital on this trade

10. Defining Position Size Per Risk Defining risk tolerance is a very personal choice. Investor Tier 1 = 2% Tier 2 = 1.5% Tier 3 = 1% Tier 4 = 0.5% Portfolio Speculator Tier 1 = 5% Tier 2 = 4% Tier 3 = 3% Tier 4 = 2% Aggressive Trader Tier 1 = 8% Tier 2 = 7% Tier 3 = 6% Tier 4 = 5%

11. Performance ‘09-’13

12. Wave Count Stop The stop loss must go at the point where the wave count is no longer valid

13. Wave Count Entry An entry is triggered only on a test of a Fib support / resistance zone. There is a good chance of a missed entry if the market does not reach the ideal zone.

14. Two Schools Of Trading Wave Count Traders Bar Pattern Traders This stop loss is placed at a level that invalidates the Elliott wave count of the pattern you are trading Less frequent trades – usually one Larger stop losses Less favorable risk reward ratio Stop loss is know ahead of time Often selling into strength, buying into weakness This stop loss is placed as a level that invalidates the bar pattern you are trading More frequent trades Smaller stop losses More favorable risk reward ratio Stop loss can be approximated ahead of time with ATR. Often buying into strength, selling into weakness

15. Bar Pattern Stop The entries are triggered on OHLC bar patterns. The stop loss must go at the point where the reversal or continuation bar pattern is no longer valid.

16. Two Trade Phases • Trend Reversal • Known as the “front half” of a trade • Designed to trade at the end of corrective , or motive wave structures • Can approach this in two manners: • Take numerous attempts with smaller risk on smaller timeframes • Take fewer attempts with larger risk on larger time frames • Trend Continuation • Know as the “back half” of a trade. • Designed to trade in the middle of motive waves • Place a maximum of 2 continuation trades with smaller size than original reversal size.

17. Two Trade Phases

18. Trend Reversal Entry 1) Identify a Fibonacci PRICE support zone that you believe will coincide with the completion of a correction. See green labels.

19. Trend Reversal Entry 2) Identify a Fibonacci TIME support zone that you believe will coincide with the completion of a correction. See purple colors.

20. Trend Reversal Entry 3) For longs use the greater Fib PRICE support as starting price in the input box. Usually the blue or green Fib price ratio. Use the lower Fib PRICE support, usually green or orange, as the “ending price”

21. Trend Reversal Entry 4) For longs use the earlier Fib time support as “Start Time” in the input box. Usually the blue or green Fib price ratio. Next use the later Fib Time support, usually green or orange, as the “Reversal End Time”.

22. Trend Reversal Entry • Motive Wave Tip • To access the dialogue box right click on your MotiveWave chart, select “Add Study”, select “TradingAnalysis” and then select “Wave Trader”. 5) Input these prices and times in the top 4 boxes as shown on the dialogue box.

23. Continuation Phase 6) This phase is meant to trigger additional trade signals shortly after the trend reversal / correction is complete and the new trend is upon us. Typically I will look for 1 or possibly 2 continuation signals to add to my existing position while still contained in the price area of the correction under study. In this case 1648.

24. Continuation Phase 7) Next do a Fibonacci time ratio study and look for an early ratio, usually a blue coded ratio, or a cluster of time ratios. This will serve as the end of your continuation scan zone. Write down the price and time. This price and time will tell the Wave Trader Module to stop scanning for continuation setups

25. Continuation Phase 8) Input all of the price and time parameters into the corresponding boxes.

26. Apex Buy / Sell • “Apex Buy / Apex Sell” • Longs • The lowest-low compared to the 2 prior bars. Makes a new low but closes above the prior bar’s close and the current bar’s open. • Shorts • The highest-high compared to the 2 prior bars. Makes a new high but closes below the prior bar’s close and the current bar’s open. • Stop loss – one tick beyond the reversal bar extreme.

27. Psycho Buy / Sell • “Psycho Buy, Psycho Sell” • Longs • Bar 1 – is the lowest-low compared to the 2 prior bars. Makes a new low with an open in the higher 1/3rd of the bar’s range and the low in the bottom 1/3 of the bar’s range. • Bar 2 – the open is the bottom 1/3rd of the range, and close is in the top 1/3rd of the bars range. • Stop loss 1 tick below the lower of the two bars

28. Explosion Buy/ Sell • Longs • Current bar is the lowest-low of prior 10 bars • Daily range must be largest range in prior 10 bars • Close must be in the top 25% of Explosion bar • Bar following Explosion buy, buy stop entry 1 tick above high of Explosion bar • Stop loss – 1 tick below the low of the Explosion bar

29. Outside Bar Trend Reversal • This is the only trigger that is not initiated at the close of the bar. This is in an intra-bar entry. • Longs • Is an outside bar and is the lowest-low compared to the 2 prior bars • Entry – 1 tick above the high of the bar prior to the outside bar • Stop loss – 1 tick below the low of that entry bar • Exit on close of bar if current bar close is below current bar open and prior bar’s close.

30. Shy Guy Buy / Sell • Longs • Enter only direction of trend (since last pivot reversal) • Provided the low of the bar prior to the inside bar has not been exceeded, on the bar following the inside bar, buy 1 tick above the high of the bar prior to inside bar. Basically stop and entry are determined by bar prior to inside-bar. • Stop loss 1 tick below the lower of the low of the inside bar or low of entry bar.

31. Shadow Buy, Sell • Longs • Enter only direction of trend (since last pivot reversal) • If market exceeds the low of the prior bar without having exceeded the high of the prior bar, buy 1 tick above the high of the prior bar. • Sell stop loss 1 tick below the low of the entry bar up to the time the trade is entered. • Exit the trade on the close if the close is below the current bar’s open and prior bar’s close. Momentum failure.

32. Ice Breaker Buy, Sell • Longs • Trend reversal is suspected of having taken place, but no actual trend reversal patterns occurred • Signal bar’s low is higher than both of the prior 2 bar’s lows • Buy on close if the close is above the current bar’s low and prior bar’s close, and the entry bar high is higher than the prior bar high. • Stop is either above the pivot extreme, or just beyond the Ice breaker