Trade Timing — How to Decide Entry/Exit Points

If money management is one half-of trading, determination of entry/exit points constitutes the other half. No amount of successful analysis will be useful if we can't determine good trigger points for our trades. Even if we know that the value of a currency pair will appreciate in the future, unless we have a clear conception of when that appreciation will occur, and where it will end, our knowledge is unlikely to bring us great profits. Similarly, even in the unfortunate situation where the analysis that justified the opening of a position is false, mastery of trade timing might allow us to register positive returns due to the high volatility in the forex market. Clearly, we need powerful strategies to help us calculate the best trigger values for a trade justified by careful and patient analysis.

We have discussed the various ways of creating stop-loss orders on this website, and in this article we'll continue on that theme by handling this subject in a more general way by identifying some principles for the management of our positions. The opening and closing of a position are the most frequent activities of any trader; it is obvious that this should also be the subject to which we devote the greatest attention. However, as in the case of a doctor or an engineer, the final task that is performed routinely and most frequently depends on certain skills, education and study which for the most part lack any obvious relationship to it. Thus, it is important to note that the study of trade timing is one of the final lessons for which the trader must prepare himself. The other courses that would lead us to this subject, such as technical and fundamental analysis, may not always have clearly definable benefits at first sight, but they pave the way to our ultimate goal of timing our trades successfully and profiting from them.

Before going into the technical aspects that complicate our trading decisions, we must say a few words on the necessity of emotional control in ensuring a successful and meaningful trading process. Let's repeat again, as we've done many times on this site, that without proper control over our feelings not a single word in this text would help us to trade profitably. The psychological endurance necessary for achieving a successful trading career is an important precursor to both money management and trade timing. Consequently, even before beginning the study of trade timing, we must concentrate our energies toward the goal of understanding and restraining our emotions, and gaining control over the psychological aspects of decision-making in a trading career. The Main Principle of Trade Timing

The first principle of trade timing is that it’s impossible to be certain about both the price and the technical pattern at the same time. The trader can base his timing on the actualization of a technical formation, or he can base it on a price level, and he can ensure that his trade is only executed when either of these events occur, but he cannot formulate a strategy where his trade will be executed when both of these occur at the same time. Of course it is possible that by chance a predefined price level is reached precisely at the time that the desired technical pattern occurs, but this is rare, and unpredictable.

Supposing that the trader is desiring to buy one lot of the EURUSD pair, he has the option of basing his entry point on the realization of a technical pattern, or the reaching of a price. For example, he may decide that he’ll buy the pair when the RSI indicator is at an oversold level. Or he may decide, for money management purposes, that he’ll buy it at 1.35, to reduce his risk. Similarly, he may choose to place his stop-loss order at the price point where the RSI reaches 50, or he may choose to enter an absolute stop-loss order at 1.345, to cut losses short. But due to the unpredictability of the price action it is not possible to define an RSI level, and a price level at the same time for the same trade.

We may examine this further on a chart.

This is an hourly chart of the GBPUSD pair between 5 December 2008 and 5 January 2009. We’re supposing that we opened a long position at around 1.5, where the RSI registered an extreme value at 24. In this case we expect to close our position when the value of the indicator rises above 50, to acquire healthy profits while not risking too much by staying in the market for long. We could have alternatively placed a real stop-loss order at 1.48, for example, but we decide not to do so because of the high volatility in the market. However we do expect that if the RSI rises, we will not need a stop-loss order, because the price would have been at a higher level indicating a profit, since it’s supposed to rise with a rising price.

But such is not the case, as we can see in the picture above. When the RSI had risen to 49.35 on the chart, which is a close enough point for our goal on the indicator, our position is, surprisingly, in the red. Not only do we fail to match our stop-loss to a lower price, but we actually match a lower price with our take profit point, which was 50 as mentioned. To put it shortly, the indicator converged on the price action, contrary to our expectation that it would move in parallel.

How to time our trades: Layered trade orders

What are the lessons derived from this example? First, the correspondence between technical values and actual prices is weak. And as we stated in the beginning, it’s not possible to base our trade timing on a price and an indicator at the same time. Second, technical indicators have a tendency to surprise, and how much a trader relies on them will depend on both his risk tolerance and trading preferences. Lastly, technical divergences, while useful as indicators, can also be dangerous when they occur at the time when we are willing to realize a profit.

So what is the use of technical analysis in timing our trades? Most importantly, how are we going to ensure that we don’t suffer great losses when divergences on the indicators appear and invalidate our strategy, and blur our power of foresight?

The potential of the divergence/convergence phenomenon for creating entry points has been examined extensively by the trader community, but its tendency to complicate the exit point has not received much attention. But it is just one of the many aspects of trade timing that is complicated by the unexpected inconsistencies which appear between price and everything else. So if we had the choice, we would prefer to exclude price from all the calculations made in order to reduce the degree of uncertainty and chaos from our trades. Unfortunately that is not possible, as price is the only determinant of profit and loss in our trades.

In trade timing, the trader has to take some risk. The best way of taking the risk and avoiding excessive losses is using a layered defense line, so to speak, against market fluctuations and adverse movements and we discussed how to do this in our article on stop loss orders. The best way of taking the risk and maximizing our profits is the subject of entry timing, and the best way of doing so is using an attack line that is also layered. What do we mean by that?

In ancient warfare, it was well-understood that the commander must keep some of his forces fresh and uncommitted to exploit the opportunities and crises that arise during the course of a battle. For instance, if the commander had run out of cavalry reserves when the enemy launched a major charge against one of his flanks, he might have found himself in an extremely unpleasant situation. Similarly, if he had no rested and ready troops to mount a charge at the time his opponent demonstrated signs of exhaustion, a major opportunity would have been lost.

The layered attack technique of the trader aims to utilize the same principle with the purpose of not running out of capital at the crucial moment. In essence we want to make sure that we commit our assets (that is our capital) in a layered, gradual manner for the dual purpose of eliminating the problems caused by faulty timing, and also outlasting the periods associated with greatest volatility. By opening a position with only a small portion of our capital, we ensure that the initial risk taken is small. By adding to it gradually, we make sure that our rising profits are riding a trend that has the potential to last long. Finally, by committing our capital when the trend shows signs of weakness, we build up our own confidence, while controlling our risk properly by placing our stop-loss orders on a price level that may bring profits instead of losses.

To sum it up, the golden rule of trade timing is to keep it small, and to avoid timing by entering a position gradually. Since it is not possible to know anything about the markets with certainty, we will seek to have our scenario confirmed by market action through gradual, small positions that are built up in time. This scheme will eliminate the complicated issues associated with trade timing, while allowing us great comfort while entering and exiting trades.

Of course, there are cases where the risk/reward ratio is so positive that there is no great necessity for gradual entries. In such cases, the exact price where the position is opened is not very important. So we will not be discussing such situations in this article.

Conclusion

In surveys on what traders find most difficult about trading, timing often comes up as the top issue. Since timing is the only variable that directly influences the profit or loss of a position, the emotional intensity of the decision is great. While it is expected that every successful trader will achieve a degree of emotional control and confidence, the pressures of trade timing are often so severe for many beginners that the process that leads to a calm and patient attitude to trading never has a chance to develop.

To avoid this problem, the role of trade timing must be minimized, at least at the beginning of a trader’s career. And this can only be achieved if the size of the position is built up along with the trader’s confidence in it, and stop-loss orders are created where the closing of the position may result in gains, albeit small. All these factors lead us to consider the gradual method to the best one for trade timing, while minimizing our risk.

The Power of Fundamental Analysis: George Soros and the Bank of England

Fundamental analysis examines the reasons behind the price action. The analyst uses economic indicators and news flows to decide on the causes behind price movements. Since one cannot determine the cause of something which has not yet happened, the causal relationships demonstrated by fundamental analysis are always about present market behavior. Nonetheless, economic events move slower than market developments, and this is the real cause of the great predictive and interpretative power of fundamental analysis.

Technical analysis is a relatively new phenomenon. It has been developed mostly in the last century, for the most part by US-based traders, for providing some clarity to short term price actions. Fundamental analysis, on the other hand, has been with us for many centuries. The ancient speculator of the Peloponnesian War in Classical Greece used news flow (hearsay, public meetings) and economic data on supply and demand (starvation, poor harvest) for stockpiling resources and for deciding when to sell them. The ancient Chinese classic Shiji, which records the lives and exploits of important personages two millennia before our time, reports on successful traders and speculators who traded wartime shortages, or the needs of warlords for massive profits. Some of these people were middlemen who exploited the inefficiencies of ancient markets, others were producers themselves with good insight into macro-scale developments, and patience allowed them to successfully utilize their analytical capabilities. But all of them used news and analysis to profit from fundamental developments, without any tool other than common sense to help them.

During the Middle Ages there were the Fugger and the Medici families who took advantage of their good relationships with royalty and governments to stay one step ahead of the markets. The Rotschild family of the 18th-19th centuries also used fundamental imbalances created by warfare to undertake contracts with sovereigns states and for maximizing profits. The twentieth century, of course, has had more than its fair share of traders and speculators capitalizing on market distortions, imbalances and bubbles for very large profits. But at the basic level, the tools of the successful investor, trader or speculator are the same: a good understanding of fundamental data, deaf ears to hyperbole, euphoria and panic, and the strength of will to act when the time is right.

Human life and natural phenomena move on causal relationships. Causality is a major principle of scientific study. And, given how our brains function, it is not possible to make any meaningful decision, judgment or choice without backing it with sensible causes. This is also where the power of fundamental analysis originates. The charts of the technical analyst may give all kinds of profit alerts, signals and alarms, but there’s little in the charts that tell us why a group of people make the choices that create the price patterns. Ultimately, most transactions in the financial markets have reasons that are independent of technical values in the long-term. If a stock goes down in response to a temporary bout of panic among traders, the price will rebound once the dust settles; or, if a currency pair plummets in value because of a false rumor or a temporary squeeze of capital, the situation will inevitably be corrected once a stream of concrete data establishes the false nature of the fears.

Fundamental analysis allows us to decide on the value of an asset. We are unable to be certain about the future value of an asset, and past value is never a good indicator for future prices. But, by all means, we posses the faculties and resources necessary for deciding if the price of an asset is expensive or not, and that is the basis on which the fundamental analyst bases his choices. We can establish the causes behind a trend, we can establish if they are ongoing, and we can exploit that knowledge to bring us profits.

There are many traders who successfully used fundamental analysis to obtain great wealth, but the exploits of George Soros, and his Quantum Hedge Fund have made them household names in our era, particularly after the notorious Black Wednesday on which Britain was forced to drop out of the European exchange rate mechanism. In the rest of this article we will examine this interesting event to drive home the great power of fundamental analysis and how accurate and profitable its predictions can be.

Most traders today know that the British pound is not a part of the Eurosystem. It is an independent currency managed by its own central bank. While some may attribute this fact to the insular mentality of the British and their typical desire for independence from continental customs and habits, this is not the real cause of the existence of the pound today. The real reasons are to be found in the developments of September 16th 1992, and the events leading up to them.

Before it was launched, the nations which today share the Euro as their national currency had to abide by an agreement known as the European Exchange rate mechanism (ERM) which was the precursor to the eventual unification of currencies. The ERM stipulated a fixed currency exchange rate between each national currency and the ECU (the European currency unit, which would eventually be called the Euro), but bilateral currency values were allowed to float within a margin of 2.25 of the the fixed rate. The ERM was created in 1979, and Britain was one of the later members of the EU to join the mechanism in 1990.

At the time Britain joined, the government of Margaret Thatcher was lost in intrigues and disputes about the benefits and the need for ERM. With inflation at 15 percent, to restrain the expansionism of the previous era, the British government had for a while been mirroring the Bundesbank’s policy rates. The decision to join was partly taken to formalize this policy of copying the central bank rates of Western Germany, and also as a result of an argument between the chancellor of the exchequer (the equivalent of the Treasury secretary), Nigel Lawson and the prime minister’s economic advisor, which resulted in the resignation of Lawson. He was replaced by the future prime minister John Major, who in turn finalized the entry of Britain into the ERM in 1990 at a rate of 2.95DM to the pound, with commitment to intervene at 2.778.

As we just mentioned, at the time of Britain’s entry inflation was quite high, due to the expansionist policies of Nigel Lawson. The easy money policy had created a period of boom at the end of the 80’s, but it had also created a property bubble and high inflation which had to be restrained by higher interest rates and a period of economic downturn. Thus, when the crisis struck two years after UK’s adoption of the ERM, economic conditions were already far from being ideal. Unfortunately for the British, this was also a time when German interest rates were even higher than the British rates, as the Bundesbank tried to control the inflationary impact of reunification-related spending.

Mr. Soros, who enters the scene at about this point, had established his Quantum Fund in the early 1970s in partnership with the equally famous Jim Rogers, his initial capital being provided by a number of wealthy acquaintances including the aforementioned Rotschild family. Before his rise to notoriety through his role in the British debacle, he had already made massive profits in trading the collapse of currency pegs and economic deregulation of the 70s. He and his analysts had impressive skills in analyzing the fundamental factors that drive the international economy. Indeed, apart from being a rich financier, Mr. Soros has books published on philosophy and politics, and he is equally well-known as a philanthropist and for his contributions to liberal movements around the world.

Upon analyzing the fundamental situation of the British economy and the increasing gap between the performance of the British and German economies at the time of Britain’s adoption of the ERM, Mr. Soros was increasingly convinced that the British would drop out of the system regardless of the choices they made. The fundamental health of the UK economy was incapable of coping with the demands of matching Germany at the time. Thus, he began shorting the pound as early as spring 1992, in anticipation that high interest rates would eventually deepen the recession in the UK economy, and the resulting fall of asset prices would prove unpalatable to the government authorities. It is thought that he accumulated short positions reaching 6.5 billion pounds (about 10 billion USD), at a leverage of 1:10.

Meanwhile, the situation of Britain continued to deteriorate as the USD kept depreciating, making British exports less competitive on a global basis. The breaking point came, as it often happens, through political turmoil. When in spring 1992 the Danes refused to join the ERM, and it was decided that France would have a referendum on the issue as well, the resulting nervous atmosphere reached climax in a general distrust of the currency pegs of nations that were suffering the worst of the ERM.

On Wednesday, 16th September 1992, as speculators kept selling the pound, the British cabinet held meeting after meeting on how to defend the nation’s currency. They first raised the main rate to 10, then to 12, eventually promised to raise to 15 percent in order to convince the speculators that they were facing the full determination and might of the UK government. The government also bought billions of pounds to prop up the currency, but all that was in vain. Heedless monetary expansionism of the Lawson Boom had created massive imbalances in the British financial system, and the British economy would never be able to function under such a high interest rate burden. Speculators like George Soros had already made their calculations and had discovered the untenable nature of the British peg a long time ago through fundamental analysis, and they would not be cowed into submission by the frantic, but ultimately futile endeavors of the John Major Government.

By 19:00 it was already clear that the peg couldn’t be defended, and the Chancellor of the Exchequer had to declare that the government would leave the ERM framework, and the main interest rate would remain at 12 percent. The credibility of the British government was destroyed in a few hours, the speculators left for new hunts, and George Soros pocketed an estimated 1 billion USD in the process. As the person who took the largest bet, he was instantly notorious across the globe, and to this day he’s known as "the man who broke the Bank of England".

Later, it was also admitted that the 15 percent promise was just a ruse created to calm the markets, and as many speculators believed, the government had no intention of holding the rates at such a high level given the difficulties the British economy were going through.

It is an exciting story, but the sensational value of the events has no use for our trading practices. What are the lessons that we gain from this disaster for the UK economy?

1. Fundamental analysis is always right. Imbalances will always be corrected. But it takes time and patience to exploit them successfully. Mr. Soros held his position for months before market developments confirmed his expectations.
2. Neither government authorities, nor company heads are immune to the temptation of lying, or “bluffing” as it’s sometimes called. If you’re a speculator, nobody will have any sympathy for you if you lose money, and the only person you can blame is yourself. So be careful about your leverage, your risk and who you believe.
3. Macroeconomic events are often triggered by political developments. Political events rarely cause major economic shocks by themselves alone, but accumulated imbalances are usually balanced as a result of political shocks.
4. The payback time of expansion fueled by monetary expansionism is exceptionally destructive in any economy. If the economic leadership of a nation is constrained by political obstacles when the payback time arrives, the results are doubly disastrous.

If you intend to use fundamental analysis in the way George Soros used it, you will need a good understanding of both politics and economics. Achieving such a skill is not that hard, provided you have the commitment and the patience to complete your task.

The Biggest Secret to Forex Profits

There is one secret that will allow you to make big money in forex. There is one thing, just only one thing, that if you fall to do it, you've guaranteed yourself failure.

That secret is to stay in the game. If you can get your capital to last long enough, you will be able to turn a profit. Most traders lose their account, and then start a new one. This is madness.

You must stay in the game. You see, picking winners isn't so hard. You've done it. So have I. The real key is being able to outlast the losing trades. If you can, then you are using the secret to forex profits.

So how do you outlast the bad trades?

It's all about controlling your leverage. The broker may offer you 100:1 leverage. How much of it do you use?

For example let's say you have a mini-account, and you've deposited $1000 dollars. You trade one mini lot of EUR/USD. That mini lot is worth $10,000. You only have $1000 in your account. Sure you've only used 10% of your margin. However, you're trading at 10 to 1 leverage. You're controlling $10,000 worth of currency, and you're doing it with $1000. $10,000 / $1000 = 10.

Professional traders won't ever trade over 3 to 1. Rarely are they ever over 1 to 1.

Why?

The smaller your leverage, the less you'll lose per bad trade. The less you lose per bad trade, the more of them you can absorb.

The more you can absorb, the more likely you are to outlast them, and that leads to forex profits. See?

So, if you have a small account, ask several brokers if they offer micro lots (or fractional pips). That will allow you to trade like professional traders. Eventually, it will allow you to profit like one too.

What are commonly traded currency pairs (Majors) in forex trading ?

The most popular currencies along with their symbols are shown below:

Symbol	Country	Currency	Nickname
USD	United States	Dollar	Buck
EUR	Euro members	Euro	Fiber
JPY	Japan	Yen	Yen
GBP	Great Britain	Pound	Cable
CHF	Switzerland	Franc	Swissy
CAD	Canada	Dollar	Loonie
AUD	Australia	Dollar	Aussie
NZD	New Zealand	Dollar	Kiwi

Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.

When is the time to trade forex ?

Forex can be traded 24 hours a day and 5 days a week. The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. The biggest foreign exchange trading centre is London, followed by New York and Tokyo. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the US session and then back to the Asian session, excluding weekends.

The following approximate market schedule is based on New York local time: japan forex markets open at 19:00 followed by singapore and hong kong that open at 21:00. European markets open in frankfurt at 2:00, while london opens at 3:00. New york forex markets open at 8:00. European markets close at 12:00 and australian markets start again at 18:00.

Forex Wealth Builder

If you really want to take control of your trading, make thousands a week and do it all spending less than 10 minutes in front of your charts everyday, then you Need to read this letter..

- 2 revolutionary underground forex trading methods, which are the result of 9 years hard work, proven to pinpoint huge currency moves up to 24 hours in advance.
- Price driven entry techniques used by some of the worlds elite forex traders now revealed for the first time to a few lucky people..

- The forex guru conspiracy, The forex gurus are force feeding you blatant lies. Discover exactly what they don't want you to know!

Visit Site

Suggested Forex Robots (Awesome!!)

This is the best of all robots... Sure is

"Autopilot, Dual-Tested Forex Robot
Turns $10,000 Into $59,494 With
7 Easy Click & Profit Trades..."

I've waited 7 years to write this letter...

You see, that's how long it's taken me to find a "Forex robot" which safely and consistently pulls in the cash... and can be used so that others can easily swipe and profit on a massive scale.

It doesn't matter if you're starting from scratch or an experienced trader who hasn't had the success you're looking for...

I'm certain you'll be amazed by how quickly you're able to make profitable trades.

So, how do I know without a shadow of a doubt, that my plug 'n play Forex robot absolutely blows any other 'system' out there completely out of the water?

Visit Site