On Monday, the price spiked up and opened all of my positions but one. The price then fell somewhat putting my account negative for a while. Then early this morning (Tuesday), the price spiked up again and missed the weekly pivot by 1 pip. Yes, 1 pip, then fell like a stone and nearly margined my account before coming back somewhat. Now, this trade may yet work out. If you've looked at the way price moves in relation to the pivot point you'll know that it very often comes in contact with the pivot more than once. So I'm riding this out. But this is an example of why this trading method is not for everyone. It can be volatile and frightening. If you fear losing your account, don't trade this way. We'll see how the trade works. I'll report when it closes.
The key is to trade the pair to the pivot. In the example above, I traded two sets of stacked trades, one down to the weekly pivot point and one stack down to the monthly pivot point. My stacks are simply one trading unit each 10 pips above the pivots. I stack no more than 20 positions on any pivot trade and I trade two units for the first 10 positions and 1 unit for the second 10 positions. In the above trade, for the weekly pivot, I had 10 two unit orders and 2 one unit orders. For the monthly pivot, I had the full 10 orders for two positions and 10 orders for one unit. Both closed profitably (weekly on Jan. 4 and monthly on Jan. 5) for a total of 1330 pips on the weekly trade and 2650 pips for the monthly pivot trade (the total pips were actually 3864.8 for both trades due to the spread and slippage).
As I indicated in my earlier post, I have changed the focus of my trading from straight support and resistance to a pivot point based system. What are pivot points? Pivot points (or as I sometimes call them, Pivots) are simply mathematically derived price points based on the previous period's price movement. The simple calculation for pivots for any period is to add the High, Low and Close for the previous period, and divide by three. The result is the pivot point for the current period. For example, if you are trading the GBP/JPY and are looking for today's daily pivot, you would look at yesterday's High, Low, and Close, add them together and divide by three (High=148.63, Low=146.64, and Close=147.33). In this case the calculation would result in a daily pivot point of 147.53.
What is the significance of the pivot? Quite simply, the price in a given period almost always hit the daily pivot (or comes very close). It seems as if the price of a currency pair is drawn to the pivot point. Missed pivots are rare and can themselves give rise to great trading opportunities. The way I'm trading now, for the most part, is by placing orders from the pivot point toward the current price when, on a weekly or monthly timeframe, the pivot has not yet been hit.
The order style I use is also different than the way I was trading support and resistance before. Where I would enter into a single position for and S/R trade and have a stop loss that trailed behind the price as it moved toward my profit target (a legitimate way to trade by the way), now I stack orders from the pivot point toward the price. For example, using the GBP/JPY as an example, if the weekly pivot were at 147.50 and the price was below the pivot at 146.00, I would place a buy order, starting at 147.40 every ten pips down toward the current price. I leave a little room for the price to move so that the chance of an order opening while the price is moving away from me is minimized. So, in this example, I would place 10 orders, 10 pips apart from 147.50 to 146.50 with the pivot as the profit target. Then I would wait.
That is it. That is the trading style I use most often now. I intend to post the trades I'm making here so that those of you who care to can follow along. I will also post a few additional trading tips this week so that the trading style makes more sense. I'll be talking about stops and losses in the next post.
One very important thing I need to say before signing off today is that I've spent the last 6 months or so backtesting this trading style and trading small lots to see how it works in real money situations. I encourage you to do the same. Never take someone else's word that a system works. There are plenty of tools for backtesting out there. Take the time to test these ideas, then try them using small lots. Only when you are convinced that they will work for you should you commit significant resources.
Happy Trading!
When you trade in the Forex Market, you will trade "Currency Pairs". This is the source of a lot of initial confusion for new traders. "Why Pairs? Why can't I just trade Dollars, or Euros or Francs?" is a question you hear often. The answer is easy, every exchange on the Forex Market (or at any border exchange kiosk for that matter) involves two different currencies. You are trading US Dollars for Canadian Dollars, British Pounds for Euros, Euros for Japanese Yen, Australian Dollars for Mexican Pesos or one country's currency for another's. This exchange is done on the Forex Market by trading currency pairs. For instance, when you are trading the EUR/USD pair, you are exchanging Euros and US Dollars. If you believe that the Euro is going to strengthen against the US Dollar, you buy the pair. If you believe that the US Dollar is going to strengthen against the Euro, you sell the pair.
In each pair, the first pair is the primary currency, or the currency against which the other is denominated. This means that in any quote for the EUR/USD, the EUR number is always 1. So if the quote for the EUR/USD is 1.3547, that means that it takes 1.3547 US Dollars to purchase 1 Euro. If you are following the USD/JPY and the quote is 112.58, that means that it takes 112.58 Japanese Yen to purchase 1 US Dollar. For the GBP/CHF, if the quote is 1.5128, it takes 1.5128 Swiss Francs to purchase on British Pound. You get the idea.
When you are "buying the pair" you are, in effect, borrowing the second currency to buy the first. So, if you are buying one standard lot of the EUR/USD, and the quote is 1.3547, you are borrowing USD $135,470 in order to purchase €100,000. Your hope is that the Euro will strengthen and you will sell your Euros and get more US Dollars for them. For example, if the pair rises to 1.3850 and you sell your position, you will get USD $138,500 for the €100,000 you bought. After repaying the loan of USD $135,470, you will net USD $3,030, which is your profit for the trade. To give an example of how the other side would work, if you think that the Australian Dollar is going to weaken against the Japanese Yen, then you would sell the AUD/JPY pair. Suppose that the quote for the pair was 71.60 (meaning that 1 Australian Dollar cost 71.60 Japanese Yen), you would borrow 100,000 worth of Australian Dollars and purchase ¥71,600,000. If the AUD did weaken and the price for the pair fell to 69.90, you would sell your Yen and pay off the loan to your broker and have ¥1,700,000 in profit, which would be converted to whatever currency you trade in and credited to your account (in US Dollars you might get $17,000, in Euros you might get €13,000).
