Wednesday, January 18, 2012

18 January 2012 trades & swing trading

I opened two trades today. I entered a pinbar on a 50% retracement and lost 14 pips. The second trade was based on an inside bar and finished marginally above breakeven when a retracement hit my trailing SL (won 1 pip!).

I've also been doing some analysis on trading the higher timeframes. At the moment I'm focusing on the 1H timeframe but am giving serious thought to the 4H and daily timeframes.

The forex market consists of three sessions - the Asian, European and American sessions. Each session has their own pecularities. For example, the Asian market tends to be quiet, European goes gangbusters, and the US starts lively but gradually fizzles. Trading on the lower timeframes can be problematic due to the shifting profile of the market. For example, suppose I see a large candle during the US session, followed by a small inner bar. Looks like market indecision, right? Not really. If the inner bar is located in the Asian session, it rather indicates a loss of traders rather than indecision. If you then tried to trade the inner bar as a potential breakout, you'll be disappointed as prices during the Asian session tend to range instead.

However, you won't encounter this problem on the daily chart. Each candle on the daily chart entails all three sessions, so the price you're looking at is the consensus of Asian, European and American traders for the entire day.

Not only that, but the larger timeframes are less susceptible to "noise", making the placement of stop loss and take profit targets a little easier. Since we are also dealing with large pip movements, you pay less spread as a % of your profits.

The downside of the larger timeframes? You have less opportunity to trade. Suppose I focus on the 1HR timeframe. That means I get 24 "chances" each day to identify a candle or chart pattern to trade with. If I stick to the daily chart, I only get ONE chance. The key to being a successful trader is taking full advantage of the phenomenon of compounding. A daytrader who achieves the same level of success as a swing trader will reach wealth sooner simply because their trades are compounding sooner.

I think I've blabbed enough. But my backtest of pinbar swing trades is looking very nice at the higher timeframes.

Entry is at 50% retracement of the pinbar on the 4HR TF, EURUSD. No trailing SL is used. Months are July and December 2011.

29 trades initiated.

1:5 Risk:reward ratio
Win % = 0.28
Fail % = 0.72

1:4 Risk:reward ratio
Win % = 0.31
Fail % = 0.69

1:3 Risk:reward ratio
Win % = 0.41
Lose % = 0.59

1:2 Risk:reward ratio
Win % = 0.55
Fail % = 0.45

1:1 Risk:reward ratio
Win % = 0.62
Fail % = 0.38

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