How to Trade FX with 10 pip stops
Expert: Abdul Khan, Tricom Futures & Foreign Exchange
Start: March 7, 2006 - 7:30GMT 02:30EST
End: approx. 8:30GMT 03:30EST
Topics that will be covered for above session are:
- How to find useful breakout levels
- Which crosses are best to trade
- Which economic figures are best to trade-off
Who is Abdul Khan?
Abdul Khan is a Senior Client Advisor with Tricom Futures and Foreign Exchange in Australia . Abdul is licensed to advise in Futures and Margin FX, and has been advising in the finance industry for over 10 years. He employs a great deal of technical analysis in his recommendations, but understands that fundamentals also play an important role in trade selection.
Tricom is Australia's largest private client advisory, and has recently celebrated its 10th birthday.
While Abdul is based in Australia, his clientele range from accounts in Europe, the Middle East, and South-east Asia. When Abdul's not in the office, Tricom's 24 hour dealing desk ensures all clients receive a professional and efficient level of service at all times.
Abdul last presented an on-line seminar in April last year suggesting Gold would break above US$500 by the end of 2005. We all know what happened!!!.
Speech Material:
I’ve been advising in the markets for over 10 years, and the two most common questions I have been asked most often are: “Where do I place my stops?” and “Why do I keep on getting stopped out?” Let me say this from the outset – the market does not know where your stops are, nor is the market looking to stop you out. This only appears so, because you have placed your stop in the wrong place (above a support level, or under a resistance level).
Most small traders select their stop levels according to how much money they are willing to risk. This is fine, but where they go wrong is that they place their stop order, after they have entered the trade. The key is to workout your stop-loss before you enter the trade, and to work-out your entry level based on where you would place your stop, and based on how much you are willing to risk. For example, if you want to buy the EUR/USD, first work out how much you want to risk, for example US$500. Based on a 100k parcel, you are willing to risk 50 pips on the trade. Now look at the chart and assess where the best support area is to work out your entry level. From this you will also be able to workout where you will place your stop-loss. Lets assume the market is around 1.2060, and support is around 1.2020-30. You should now look to buy around 1.2030, which will allow you to place a stop loss around 1.1980. This will be well under the support at 1.2020, and the strong support at 1.2000. It will also be a level at which if you did get stopped out, the market would most probably continue to head lower. In addition, this easy method will allow you to place a profit target of at least 50 pips, if not 70-80 pips, allowing you to maintain a risk/reward ratio of at least 1:1 at worst.
Now, lets look at another method of trading which can allow you to place tight stops, and improve your win/loss ratio. This method is primarily used with stop-entry orders, whereby you are looking to take advantage of breakouts in the trading range. Before we move on, if you have access to some charts, can I suggest you open them up, as I may suggest a couple of charts to look at during the Q&A session.
How to Find Useful Breakout Levels
It all stems from analysing the charts, and knowing your support and resistance levels. I use mainly Daily charts, as I’ve found using a smaller time frame can give you to many false signals, and trade appears too whippy. If you don’t know what support and resistance is, or how to look for it on a chart, I suggest you close you trading account, and log-out of this seminar now. This is the single most important tool of trading you need to ensure you can get ahead. Without it, you might as well be playing the roulette wheel at the casino.
We all know that FX is the biggest market in the world, and as such is looked at by everybody. Given that the market is so widely watched it trades large volumes each day, and so trends well. Generally, support levels tell us where the market’s buyers are gathering, while resistance levels tell us where the market’s sellers are grouped. What I always look for is that level at which the market would move beyond its support/resistance level. Under this method, you are looking to go with the momentum, rather than buying a dip, or selling into strength as you do with limit orders.
Not only does the support and resistance levels tell you where the buyers and sellers are, but it also gives you a clue as to where the stops are. Traders who are long, will have placed their stops under the support level, while shorts, will have placed stop-losses above the resistance. You are looking to place your stop-entry orders among these stops, ensuring that when they are triggered, you will be taken along for the ride, just like surfing onto the crest of a wave, and letting the wave take you back into the shore.
Aside from doing your own analysis, alot of the market reports around will also give you an insight into what we’ve just discussed. These reports will tell you where they think strong support and resistance is, and many chat rooms/news pages will mention where they think the stops are placed. Again, because the market is so big, and so widely monitored, the support and resistance levels won’t vary too much amongst the reports.
So, what do you do when you find the support/resistance levels? You need to see how much the market could move if these levels were to be broken. If there is sufficient room, then look to place your stop-entry order 5-10 pips away from the support/resistance level. For example, EUR/USD is trading around 1.2040, and we know support is around 1.2020-30. I would be looking to sell on a break under 1.2013, with a stop-loss at 1.2023.
This strategy allows you to sell if the support at 1.2020 is broken, and you would look to give the market some further room, just in case it trades a few pips under 1.2020 before then going back up. Assuming the market breaks under 1.2020 and moves lower, the previous support at 1.2020 now becomes resistance. As such, your stop-loss at 1.2023 will now be above the resistance at 1.2020.
Another strategy is to find a market which is in a current down/uptrend, and then look to jump on board when this trend is about to be broken. For example, the market is making higher highs and higher lows each day, and so is in an uptrend. What you are looking for is when the market is either near the previous day’s low. Look to place a sell stop a few pips under the previous day’s low. If this previous day’s low is broken, you can bet that there will be other sell stops under this level, allowing you to in the momentum selling which will ensue.
I look to set my profit target for half the position at 10-15 pips from entry, and then lower the stop-loss on the balance to my break-even level. I know that it looks like we’re not going for much of a profit, but given that you are working with just 10 pip stops, you can look to increase the size that you normally trade, and thereby the return is also increased. Also, this is only half the position, should the market continue to move lower, we can then use the stop as a trailing stop, locking I profit as the market moves lower.
The use of such tight stop-losses is best used with this breakout methodology. The conventional way of trading involves buy dips, or selling rallies. That is, you place limit buy order around support, or a limit sell order around resistance. If the market was to move 10 pips beyond this level, as it more than often does, you will be stopped out, and then have to watch the market turn around and go in your direction. If you are looking to use this 10-pip system in this manner, not only will you be constantly stopped out, but also you will be under pressure to constantly buy the low of the day, or sell the high. This is just about impossible.
Which Currency Crosses are Best to Trade
A good rule to follow here is: The more volatile the cross, the better the result. You want to find crosses, which move out of their ranges constantly, and are influenced by more than just one other cross. Based on this, I have found that the following crosses work well: EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY. The last 2 mentioned work particularly well, because movements in the GBP/USD, USD/JPY, and EUR/USD influence them. For this reason they will move on news from the UK, EUR, and Japan. In addition, they will trade off technical levels. Also, sometimes the volume is lower than the average, particularly in the case of GBP/JPY and EUR/JPY, so any movements will be exaggerated, making it easier to pull out 10-20 pips before the market rebounds.
Which Economic Figures are Best to Trade-off
Here, the best rule to follow is: Choose the data set which tends to come out of line with expectations. I know it’s a bit hard to know when the data is going to be not within expectations, but what I mean is that over time you will see that some data just never comes out as expected. Previously, the US Payrolls data was a good number to watch. It rarely came out as expected, and didn’t give conflicting signals. Just before the data’s release I would place a buy stop 30 pips above the current market, and a sell stop 30 pips below. When the number came out, the market would move in one direction for upto 200 pips, ensuring a good day’s work with little risk. Now ofcourse, the number comes out close to expectations, the previous month is revised in an opposite direction to the current month, and the market movements are too whippy to trade this breakout system.
Looking elsewhere, I particularly like the UK data at the moment. In particularly, the GDP, CPI, and Retail Sales numbers provide good fodder for this system. Immediately after the data’s release, you can expect 30-40 pip movements, followed by a continuation of the move for the next few hours, if not the remainder of the day, depending on what is out in the US later in the day.
Japan’s economic data is also worth a look, especially now that it is starting to show that the Japanese economy is starting to grow again. We can look to play the Yen from the long side immediately before the data’s release, with a tight stop and reverse strategy, just in case the data comes out softer than expected. In Japan, I like the Industrial manufacturing data, the Tankan survey, the CPI, and the Retail Sales.
Finally, the minutes from the UK and US central bank meetings are also good to trade off. The comments are not going to be conflicting, so the market will move in one direction, and so you can expect to hit your first profit target of 10-20 pips fairly quickly, and then look for the move to continue, depending on the comments.
Conclusion
So, there you have it. It’s not rocket science, it just common sense. Unfortunately, the only problem is that it’s not very common amongst traders. I’m not saying this is the holy grail of trading, nor do I guarantee you will make money on every trade. This is just another trading tool you can look to stick in your trading toolbox, and if the opportunity presents itself, feel free to implement it.
Previous to late last week, the markets were trapped in a tight range, and this method was good for when we had those little breaks on either side. Also, when a developing up/downtrend was about to break, this method proved worthwhile.
Above all, please be patient with your trading, the market always comes back after its initial move, so just wait, and this will allow you to place your stops at sensible levels, while risking the same amount of capital.
Session Transcript:
Fxstreet Moderator (Mar 7, 2006 2:27:43 AM)
Thank you all for joining Todays session
Fxstreet Moderator (Mar 7, 2006 2:28:17 AM)
Please begin reading the speech material on the left handside and posting your questions for our guest to answer
Fxstreet Moderator (Mar 7, 2006 2:28:45 AM)
If you have any concerns about the session please ask the moderator at any time.
Fxstreet Moderator (Mar 7, 2006 2:29:06 AM)
Our guest will begin by answering some of the questions that have been posted by you during the week
Fxstreet Moderator (Mar 7, 2006 2:29:21 AM)
Then we wil proceed to open the floor to Live questions
Fxstreet Moderator (Mar 7, 2006 2:29:46 AM)
While reading the speech please post any questions or queries you may have
Fxstreet Moderator (Mar 7, 2006 2:30:18 AM)
At the end of the session the transanscript will be AVAILABLE to those who would like to read it
Fxstreet Moderator (Mar 7, 2006 2:30:40 AM)
With our further a do Please welcome our guest speaker along today
Fxstreet Moderator (Mar 7, 2006 2:31:09 AM)
Abdul Khan, of Tricom Futures & Foreign Exchange
Abdul Khan (Mar 7, 2006 2:31:36 AM)
Hello everyone and thank you all fro joining me here Today
Abdul Khan (Mar 7, 2006 2:31:46 AM)
Can I start by thanking Claire and Fxstreet for inviting me to present this seminar today.
Abdul Khan (Mar 7, 2006 2:31:59 AM)
The guys at Fxstreet continue to impress me with their professionalism, and to have my commentaries on their site is an absolute pleasure.
Abdul Khan (Mar 7, 2006 2:32:12 AM)
Thank you and good morning/afternoon/evening all.
Abdul Khan (Mar 7, 2006 2:32:37 AM)
I hope you have all had a chance to read the material I posted it earier
Abdul Khan (Mar 7, 2006 2:33:01 AM)
Please dont hesistate to ask me questions I will do my best to answer as many as i can in the time permitted
Fxstreet Moderator (Mar 7, 2006 2:33:20 AM)
Thank you and welcome back Abdul
Fxstreet Moderator (Mar 7, 2006 2:33:43 AM)
Lets begin with some pre reg questions from during the week while we await the live questions form our attendees this morning
Abdul Khan (Mar 7, 2006 2:34:24 AM)
Ok lets start some pre reg questions:
Abdul Khan (Mar 7, 2006 2:34:28 AM)
Q1:How could one define a breakout from a level? is it a candle closing outside the level or certain number of pips out of level like 20 pips for example
Abdul Khan (Mar 7, 2006 2:34:42 AM)
nswer to Q1: there’s no real definition of a breakout. I think it’s rather subjective, as all technical analysis tends to be
Abdul Khan (Mar 7, 2006 2:34:55 AM)
t comes down to your ability to interpret the charts. Only thru experience will you pick it up.
Abdul Khan (Mar 7, 2006 2:35:11 AM)
This is where a good broker can come in handy, helping you to learn the ropes. I will detail some areas to watch on the chart for a breakout level during the seminar
Abdul Khan (Mar 7, 2006 2:35:28 AM)
Q2: How do candle sticks influence short trading? Do they work and how?
Abdul Khan (Mar 7, 2006 2:35:46 AM)
Answer to Q2: I do not use candlesticks.
Abdul Khan (Mar 7, 2006 2:35:59 AM)
There is too much terminology, and again it comes down to interpretation
Abdul Khan (Mar 7, 2006 2:36:10 AM)
You could spend a great deal of time trying to work out what sort of candle has just developed, and end up missing the trade
Abdul Khan (Mar 7, 2006 2:36:30 AM)
how can you guess in advance about the timimg of break out either north of south?
Abdul Khan (Mar 7, 2006 2:36:43 AM)
I see it as a calculated guess using technical analysis, and reading various reports which suggest levels of support/resistance, as well as areas where the stops are.
Fxstreet Moderator (Mar 7, 2006 2:37:07 AM)
Attendees please begin posting your questions now
Abdul Khan (Mar 7, 2006 2:37:23 AM)
is there any technical analysis which will help to to find out or make me alert in advance the direction of breakout?
Abdul Khan (Mar 7, 2006 2:37:39 AM)
a good technical analysis tool is the use of trendlines. This includes downtrend/uptrend lines. Quite often a break of these will lead to the market breaking out of its current trend
Abdul Khan (Mar 7, 2006 2:38:15 AM)
Q5: why all of sudden break out takes place
Abdul Khan (Mar 7, 2006 2:38:29 AM)
a breakout can occur for many reasons. Mainly, on the back of economic data which comes out unexpectedly low or high
Abdul Khan (Mar 7, 2006 2:38:36 AM)
Also, a critical support/resistance level is broken, and the stops around these areas are triggered
Fxstreet Moderator (Mar 7, 2006 2:39:39 AM)
Thank you for taking the time to answer some of those questions fromm during the week Abdul
Fxstreet Moderator (Mar 7, 2006 2:40:07 AM)
NOW lets turn to the Live questions that you guys have been posting
Fxstreet Moderator (Mar 7, 2006 2:40:31 AM)
Remember Interaction is the the key to a successful and educational session
Fxstreet Moderator (Mar 7, 2006 2:40:41 AM)
Please post any doubts or queries you may have now
fx-fx (Mar 7, 2006 2:42:20 AM)
Any suggestions on Gold for the rest of the year? and oil? thx
Abdul Khan (Mar 7, 2006 2:42:30 AM)
gold and oil will remain well supported.
Abdul Khan (Mar 7, 2006 2:42:41 AM)
the Iran issue will not go away quickly
Abdul Khan (Mar 7, 2006 2:42:53 AM)
nor will talk of china and various central banks expanding their foriegn currency holdings beyond the USD
mike (Mar 7, 2006 2:44:22 AM)
Stocastic oscillator optimized settings?
Abdul Khan (Mar 7, 2006 2:45:04 AM)
i do not use this stochastic oscillator. i merely use daily charts
Abdul Khan (Mar 7, 2006 2:45:16 AM)
and draw as few as possible trend lines.
Abdul Khan (Mar 7, 2006 2:45:26 AM)
i do certainly use the Fibo. retracements, and find the 61.8% level as a great indicator for an impending reversal
koffee (Mar 7, 2006 2:45:59 AM)
What are your views on USD/JPY?
Abdul Khan (Mar 7, 2006 2:46:28 AM)
can see usdjpy going lower, along with the rest of the USd crosses.
Abdul Khan (Mar 7, 2006 2:46:38 AM)
However, it probably wont happen till later in the year.
Abdul Khan (Mar 7, 2006 2:46:47 AM)
we need to get a signal from the Fed that it has ended its rate rise cycle
Abdul Khan (Mar 7, 2006 2:46:55 AM)
also we need to see some indication from the BOJ of higher rates in Japan
GN (Mar 7, 2006 2:48:04 AM)
what is the best way to avoid being whipsawed in a trade/? gn
Abdul Khan (Mar 7, 2006 2:48:14 AM)
best way to avoid being whipsawed is to select your trade location better. if you persist in buying/selling in the middle of the trading range
Abdul Khan (Mar 7, 2006 2:48:27 AM)
you will continue to be whipsawed. also tight stops will make the pain lighter
Angelika (Mar 7, 2006 2:49:08 AM)
What about stop running? I hear again and again about stop running. Any way to protect myself?
Abdul Khan (Mar 7, 2006 2:49:21 AM)
a way to protect yourself from stop running is to not place your stop in the same area as all the other stops
Abdul Khan (Mar 7, 2006 2:49:33 AM)
we all have a fair idea where the stops are, and this is where the big boys come looking to run some stops
breck (Mar 7, 2006 2:50:48 AM)
When a currency pair is trending, are there any signals you use to anticipate a turn or rebound?
Abdul Khan (Mar 7, 2006 2:50:57 AM)
i dont use many signals in my trading
Abdul Khan (Mar 7, 2006 2:51:06 AM)
i find they are too late,
Abdul Khan (Mar 7, 2006 2:51:14 AM)
and the early ones give you too many false signals.
Abdul Khan (Mar 7, 2006 2:51:24 AM)
as i mentioned previously i like to use trendlines, and fibo levels
mike (Mar 7, 2006 2:52:25 AM)
Todays news vs Friday News - what will have more impact on USD?
Abdul Khan (Mar 7, 2006 2:52:33 AM)
without a doubt friday's data is the main attraction.
Abdul Khan (Mar 7, 2006 2:52:43 AM)
saying that, it's been a long time since the payrolls data played a major role in forming market opinion.
Abdul Khan (Mar 7, 2006 2:52:52 AM)
these days it tends to come out close to expectations
Theuns (Mar 7, 2006 2:53:46 AM)
How long do wait after data come out before entering
Abdul Khan (Mar 7, 2006 2:53:56 AM)
i place my stop-entry orders in the last minute before the data comes out,
Abdul Khan (Mar 7, 2006 2:54:08 AM)
and cancel them shortly after the data is released.
Abdul Khan (Mar 7, 2006 2:54:18 AM)
especially if the data is close to expectations
Fxstreet Moderator (Mar 7, 2006 2:58:28 AM)
Please bear with us one moment
Fxstreet Moderator (Mar 7, 2006 2:58:46 AM)
Techincal problem Abdul will be right back
Gaby (Mar 7, 2006 3:00:04 AM)
what is your outlook for the GBP/USD on the short term? tnx
Abdul Khan (Mar 7, 2006 3:00:13 AM)
short-term for GBP/USD is that the GBP will remain pressured as long as the UK economy does not show signs of strengthening
koffee (Mar 7, 2006 3:00:51 AM)
BOJ keeps pumping money into the system. How does that work and what does it mean?
Abdul Khan (Mar 7, 2006 3:01:01 AM)
the BOJ pumping money into the system is like cutting rates. it's a method of giving consumers more money to spend with, and thereby trying to kick start the economy
raju (Mar 7, 2006 3:02:04 AM)
Please advise on NZD & CAD
Abdul Khan (Mar 7, 2006 3:02:12 AM)
NZD is heading lower. the central bank there has hiked rates too much,
Abdul Khan (Mar 7, 2006 3:02:23 AM)
and too quickly. the economy is starting to show signs of slowing too quickly,
Abdul Khan (Mar 7, 2006 3:02:33 AM)
and the current account deficit is unsustainable. they may have to start cutting rates sooner than expected
Abdul Khan (Mar 7, 2006 3:02:42 AM)
CAD i think is also heading lower as the central bank signals they have finished hiking rates
mike (Mar 7, 2006 3:03:53 AM)
today at 14:00 gmt there is a big Canada News rate decision - will u trade the usd/cad for that?
Abdul Khan (Mar 7, 2006 3:04:03 AM)
i am already long USDCAD from over night around 1.1390-95.
Abdul Khan (Mar 7, 2006 3:04:11 AM)
i believe the charts pre-empt the fundamentals
Abdul Khan (Mar 7, 2006 3:04:25 AM)
and as such, i expect the post-meeting comments to be not as hawkish as expected, and as such the CAD should be weaker as a result
raju (Mar 7, 2006 3:04:41 AM)
What is your view on Commodity currencies ?
Abdul Khan (Mar 7, 2006 3:04:56 AM)
ommodity currencies will remain rangebound while we have gold and oil doing what they did overnight.
Abdul Khan (Mar 7, 2006 3:05:04 AM)
overall though, as long as China continues to have demand, these currencies will be well supported
fx-fx (Mar 7, 2006 3:07:40 AM)
Anything on AUD?
Abdul Khan (Mar 7, 2006 3:08:33 AM)
the AUD will be well supported by commodities, but while the central bank sits on its hands over rates, traders will search for other higher yielding currencies
GN (Mar 7, 2006 3:09:02 AM)
where is the support and resistance of BPG VS USD.. any further upside for BPG in the short term? GN
Abdul Khan (Mar 7, 2006 3:09:11 AM)
I take it you mean GBP
Abdul Khan (Mar 7, 2006 3:10:13 AM)
GBP is well suported around 1.7445, and with today's UK retail sales out
Abdul Khan (Mar 7, 2006 3:10:25 AM)
i would look to sell a break under 1.7435, with a stop at 1.7445. but place the order just before the data's released
Fxstreet Moderator (Mar 7, 2006 3:11:22 AM)
Last question time is running out!
raju (Mar 7, 2006 3:13:22 AM)
What is the intra-month range for NZD/USD & USD/CAD ?
Abdul Khan (Mar 7, 2006 3:13:41 AM)
Intra-month range for NZDUSD: .6700-6400. For USDCAD: 1.1350-1.1650
Fxstreet Moderator (Mar 7, 2006 3:14:44 AM)
Thank you Abdul Thats all we have time for today thank you hosting this session
Fxstreet Moderator (Mar 7, 2006 3:14:55 AM)
Thank you all for attending and interacting
Fxstreet Moderator (Mar 7, 2006 3:15:21 AM)
The transcript will be availble in 1 hour for you all ro read at this link
Fxstreet Moderator (Mar 7, 2006 3:15:41 AM)
http://www.fxstreet.com/chat/transcriptlist.asp
Abdul Khan (Mar 7, 2006 3:15:54 AM)
I’m looking to make this a regular forum in this time slot. So if any of you have ideas which you would like me to present, be they trading tips, or macro-economic topics feel free to email me directly on: abdul.khan@tricom.com.au.
Abdul Khan (Mar 7, 2006 3:16:24 AM)
Thank you once again to all the participants, and to Fxstreet for organising this seminar.
Abdul Khan (Mar 7, 2006 3:16:32 AM)
Good trading everybody!!
Fxstreet Moderator (Mar 7, 2006 3:16:46 AM)
be sure to join us next week at the smae time for another session
Fxstreet Moderator (Mar 7, 2006 3:16:53 AM)
Please register at this link
Fxstreet Moderator (Mar 7, 2006 3:17:18 AM)
W.D.Gann Trading Physchology Expert: David Burton, CEO & Founder of School of Gann Start: March 14, 2006 - 7:30GMT 02:30EST
Fxstreet Moderator (Mar 7, 2006 3:17:28 AM)
link: http://www.fxstreet.com/chat/chatsession.asp?id=283
Fxstreet Moderator (Mar 7, 2006 3:17:31 AM)
Thank you all
Fxstreet Moderator (Mar 7, 2006 3:17:41 AM)
Happy trading!
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