4 Tips to Increase Profitability

Expert: Raúl López, Analyst at StraightForex

Topics to be covered during the session:

- Effectively determine the trend
- Indicator Signals
- Price Behavior
- Consistency is the Key

Who is Raúl López?
Raúl López is a full time trader. He trades based on a price behavior approach: the market tells us everything we need to know about its future direction.

Raul is also the Founder of StraightForex, a company dedicated to provide high quality Forex training, helping traders to: find and trade low risk trading opportunities, improve their technical skills and incorporate price behavior as an important element in their strategy.

Raúl also has vast experience in other areas of trading: risk and trade management, money management, trading psychology and more.

Session Material:

4 Tips to Increase Profitability

Trading profitably the Forex market is no easy task. It is possible, definitely possible but in no way easy. For this reason we need to do everything in our hands to increase our results or our chance to become a profitable trader.

In this session I would like to give you some tips that will increase your chances of success.

Tip #1: Effectively Determine the Trend

Most experts say our job as traders is to identify the trend and trade only in its direction. I don't think this is accurate, the market only trends around 30% of the time, so are we only to trade 30% of the time? I don't think so. From my point of view, we need a way to objectively and effectively determine the trend and trade adapting our strategy to the market condition. This is, if the market is trending, then go with the trend, if the market has a trendless condition then trade accordingly.

How to determine the trend?

Let’s define some terms first:

PP→ Pivot point
LOPS1 → Low of the previous session
HOPS1→ High of the previous session
LOPS2→ Low of the session before the previous session
HOPS2→ High of the session before the previous session

Use the following guidelines to measure the trend:
• When the market is trading above the pivot point the market is considered to be in a possible uptrend with a range bound bias.
• When the market is trading above HOPS1 the market is considered to be in a strong uptrend.
• When the market is trading above both HOPS´s the market is in a very strong uptrend.
• When the market is trading below the pivot point, the market is considered to be trading in a possible downtrend with a range bound bias.
• When the market is trading below LOPS1, the market is considered to be in a strong downtrend.
• When the market is trading below both LOPS´s the market is in a very strong downtrend.
• When the market breaks up and down repeatedly the pivot point, and bounces off HOPS´s/LOPS´s the market is considered in a sideways condition.

Let’s take a look at some charts.

In this 15M EUR/USD chart, we take the previous session (Friday 5th) data to chart our levels. The market is trading below the PP but above the LOPS1 level, this gives us some insight: The market is in a possible downtrend with a range bound bias. And the market behaved as expected, what do we do in this scenario? We look for both, long (at the bottom of the range) and short positions (at the top of the range). If the market had broken the LOPS1 Level, we would only look for selling opportunities.

Tip #2: Indicator Signals

Once you have determined the trend, use your favorite indicator to get buy sell signals.

In this case the market is trading between the PP and HOPS1, this is a possible uptrend with a range bound bias. A simple strategy would be to use an oscillator to determine buy and sell signals (oversold and overbought respectively or divergence signals).

Tip #3: Price Behavior

A price behavior approach means you let the market tell you where it is heading. All information you need about the future direction of the market is obtained from price itself. The best way to measure price behavior is through candlestick patterns. Let’s take a look at the chart below.

This is the same chart we used in the example above. As you can see there are many indicator signals what would of ended as a negative trade (using only the indicator signal). But when we incorporate the price behavior approach most negative signals are filtered out. Signals incorporating price behavior: hammer while oversold, bearish piercing while overbought and another hammer in a divergence.

Incorporating price behavior into your strategy will increase its accuracy.

Tip #4 Consistency is the Key

If you are serious about trading consistency must be your primary goal. We don't want huge killings if we are not able to replicate them, we don't want to risk our whole account trading during news announcements because the risk of ruin is so high. We only want to trade when our system signals a trade, only there we are certain that probabilities are on our favor.

In order to become a consistent trader you must:

- Develop a trading system that fits your personality, risk profile and trading style.
- Apply money management, trade management and risk management techniques.
- Work on your discipline: there is no benefit on having the best system around if we are not able to follow our own rules

We never know it all; the market always has good lessons to teach us.

Good Trading

Session Transcript:

FXstreet Moderator (Jan 10, 2007 8:58:29 AM)
Good morning, good afternoon, and good evening to all of you joining us today from different parts of the world. I want to welcome all of you to today's Live Forex Expert Question and Answers session.

FXstreet Moderator (Jan 10, 2007 9:00:36 AM)
We recommend you to read the speech material that you can find on your left window.

FXstreet Moderator (Jan 10, 2007 9:00:46 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Jan 10, 2007 9:02:46 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Raúl López, Analyst at StraightForex.

Raúl López - StraightForex (Jan 10, 2007 9:03:11 AM)
Welcome everybody, thank you for being here today

Raúl López - StraightForex (Jan 10, 2007 9:03:28 AM)
Please send your questions at any time so we can cover them during the chat today.

Raúl López - StraightForex (Jan 10, 2007 9:03:48 AM)
Many of you already know trading successfully the Forex market is no easy task.

Raúl López - StraightForex (Jan 10, 2007 9:04:13 AM)
For this reason we need to commit ourselves to do anything in our hands to accomplish our main goal: Consistency

Raúl López - StraightForex (Jan 10, 2007 9:04:46 AM)
When you achieve consistency you will be ready to trade the Forex market for a living

Raúl López - StraightForex (Jan 10, 2007 9:05:16 AM)
In today’s session we will cover some aspects that will help you get closer to consistency.

Raúl López - StraightForex (Jan 10, 2007 9:06:11 AM)
Allow me to remind you to send your questions at any time during the chat

Raúl López - StraightForex (Jan 10, 2007 9:06:36 AM)
First: Go with The Trend, but if the market is not trending, adapt your strategy for other market conditions.

Raúl López - StraightForex (Jan 10, 2007 9:07:12 AM)
The market trends only around 30% of the time, it wouldn’t make sense to me only to trade 30% of the time.

Raúl López - StraightForex (Jan 10, 2007 9:07:52 AM)
This is the reason we need an objective way to measure the trend at any given moment so we can trade accordingly.

Firdaus (Jan 10, 2007 9:10:29 AM)
I have a problem with whipsaw how to overcome ? Is there any good indicators that i should use ?

Raúl López - StraightForex (Jan 10, 2007 9:12:19 AM)
Hello Fridaus, all indicators get whipsawed from time to time, I recommend you to use price behavior or candlestick patterns in combinations with your actual indicators. I believe that way you will increase the rate of winning trades.

Guest_rliekens (Jan 10, 2007 9:12:36 AM)
on what time frame do you look for the correct trend?

Raúl López - StraightForex (Jan 10, 2007 9:14:45 AM)
There is a trend for each time frame, so that would be dependant on your strategy. For instance, if you daytrade I recommend you using the daily values (explained on the material on your left), if you are position trader then you can use the weekly values. How about a scalper? Well you can use the 4H charts, even the 1H charts will work.

Firdaus (Jan 10, 2007 9:15:27 AM)
I know a little bit about trend change, i.e when parabolic sar touches the candle and MACD crosses . . .the trend changed, Iused to this observation for quite sometimes. . .any best suggestion from you ?

Raúl López - StraightForex (Jan 10, 2007 9:18:02 AM)
Hello Firdaus, the methodology I use to measure the trend is based on pivot points, HOPS and LOPS, if the market is trading above the PP then I consider it a possible uptrend, if trading below it then a possible downtrend, once the market breaks either HOPS1 or LOPS1, a trend is consolidated (uptrend above HOPS and downtrend below LOPS)

Raúl López - StraightForex (Jan 10, 2007 9:18:30 AM)
By the way, HOPS stands for: High of the previous session and LOPS: low of the previous session.

Guest_rliekens (Jan 10, 2007 9:19:00 AM)
In your example about determing the trend you mention the PP. How do you define the PP?

Raúl López - StraightForex (Jan 10, 2007 9:20:29 AM)
Hello rliekens, The PP is calculated: (High + Low + Close)/3, all these levels from the day before.

Firdaus (Jan 10, 2007 9:21:47 AM)
but the problem is, too often I was misleaded into a diferent direction. . .I buy, price goes down, I sell price goes up . . so how to measure the trend in the proper way ?

Raúl López - StraightForex (Jan 10, 2007 9:25:57 AM)
Hello Fridaus, We all suffer from the same, sometimes as soon as we get in the market, it goes the other way. What you need is an objective way to measure the trend. If the market is above the PP you then the sentiment is slightly bullish, if it is trading below the PP then the sentiment is slightly bearish, but the market reversed say at HOPS1 the session before, we don't know the reason but we know that the market will resist at that same level again, if it breaks it then we only think on long opportunities, and so on.

Raúl López - StraightForex (Jan 10, 2007 9:26:23 AM)
simple but effective

Guest_tye (Jan 10, 2007 9:26:36 AM)
Any metrics available on the percentage of wins to losses on the pp strategy? - for short and long term.

Raúl López - StraightForex (Jan 10, 2007 9:28:04 AM)
Hello tye, that would depend on your trigger signal strategy. Incorporating price behavior into the PP strat, the percentage of wins to losses is around 60%.

Firdaus (Jan 10, 2007 9:29:11 AM)
candlesticks do not seem to help most, reasons are sometimes the formation is quite misleading and too complicated . . I loose more money when i refer to candlesticks

Raúl López - StraightForex (Jan 10, 2007 9:30:25 AM)
Hello Fridaus, You need some more rules than sole candlestick patterns, for instance: was it formed at an important level? Is the pattern more significant then previous candlesticks?

Guest_tye (Jan 10, 2007 9:31:55 AM)
Is there a exit strategy in case of trending mkt?

Raúl López - StraightForex (Jan 10, 2007 9:33:12 AM)
Hello tye, the rule of gold for exits during trending markets is trailing stop. Let the market stop you out when it reverses, but if the market keeps going keep riding it.

DerekS (Jan 10, 2007 9:33:24 AM)
Mr Lopez, a 2 part question; when trading a situation which by your criteria would be classified as a strong trend where would you recommend placing a stop loss relative to your LOPS/HOPS levels? Wouldn't any stop placed within the LOPS - HOPS range be at a greater risk of being taken ? Thank You

Raúl López - StraightForex (Jan 10, 2007 9:36:40 AM)
Hello Derek, you don't need to place the stop within the LOPS1 – HOPS1 range, your stop loss level can be placed for instance at the swing low/high, a multiple of ATR, but not necessarily within the mentioned range. I always recommend using a Risk reward ratio of 2:1

ali (Jan 10, 2007 9:37:01 AM)
Hi Raul, which sessione do you consider, time and location wise?

Raúl López - StraightForex (Jan 10, 2007 9:38:27 AM)
Hello ali, in my opinion the European session is the best on to trade, smoother and less fundamentally driven (i.e. news announcements).

Guest (Jan 10, 2007 9:38:50 AM)
Thank you Rau'l, but do you suggest that you calculate the PP each day manually and draw a line on the chart or is their some pivot indicator to recommend (I use dealbook)

ali (Jan 10, 2007 9:39:03 AM)
apart from technical indicators, how can we effectively incorperate other indicators such as us$ index, CRB into our decision making?

ali (Jan 10, 2007 9:39:23 AM)
I mean the time for PP calculation

Raúl López - StraightForex (Jan 10, 2007 9:40:29 AM)
Ok, I calculate the PP from 00:00 GMT to 23:59

Raúl López - StraightForex (Jan 10, 2007 9:43:12 AM)
Hello ali, you could use for instance the US$ as strength or weakness indicator for your USD positions

Guest (Jan 10, 2007 9:43:49 AM)
As a possible turning point you indicate the "hammer" in your chart example. Hammer occour frequently in my opinion, in different chapes. How do you define that you have the correct hammer, because as far as I know a hammer is indicating indecission.

kjunnarkar (Jan 10, 2007 9:43:59 AM)
Do you also use S1, S2, S3, R1, R2, and R3 of the previous daily candle in addition to your HOPS and LOPS?

Raúl López - StraightForex (Jan 10, 2007 9:48:13 AM)
Hello kjunnarkar, No, I don use them. The reason is simple, the fact that the formula popped out those levels, does not necessarily mean that they will play an important role as support or resistance. The levels I use (HOPS, LOPS, etc) the market actually reversed from those levels before, they are measured “objectively”.

Guest_tye (Jan 10, 2007 9:48:54 AM)
Would you enter immediately on the break of HOPS1/LOPS1 or give a percentege move before jumping in? - assuming indicator+price clears the trade as well...

Raúl López - StraightForex (Jan 10, 2007 9:51:00 AM)
Hello tye, depends on the candlestick formation and its strength (i.e. I would go in if a marubozu candlestick is formed).

ali (Jan 10, 2007 9:51:12 AM)
Raul, what does it mean '' sell the rumours buy the news" or a similar phrase, I can not remember cas i can not understand it

Raúl López - StraightForex (Jan 10, 2007 9:54:03 AM)
Hello ali, I thought it was “Buy the rumor and sell the news” If I am correct, what it means is that at the time the news comes out, probably all traders that could be in the market are already in, so the is no one left to buy, and vice versa.

Firdaus (Jan 10, 2007 9:54:26 AM)
Can we use USDX as another indicator for a change of trend, for I can see that US$ is very influential on other currencies. Could you give me some tips ?

Raúl López - StraightForex (Jan 10, 2007 9:56:49 AM)
Hello Fridaus, The USD index is very influential in every currency pair where the USD is involved. And of course, you could use it for a change of trend, for instance, we follow divergences between the USDX and currency pairs where the USD is involved.

FXstreet Moderator (Jan 10, 2007 10:00:24 AM)
LAST QUESTION

Firdaus (Jan 10, 2007 10:00:32 AM)
If USDX change trend, which currency pairs wil be affected, the one with US base or quotes ?

Raúl López - StraightForex (Jan 10, 2007 10:03:19 AM)
Hello Fridaus, Both of them. When ever you see a change in trend in the USDX, most of the time, you will be able to see it in the EUR/USD or the USD/JPY.

FXstreet Moderator (Jan 10, 2007 10:03:57 AM)
That’s all we have time for Today .Thank you very much for that Raúl.

Raúl López - StraightForex (Jan 10, 2007 10:04:24 AM)
Thank you very much for attending, I hope this session has been helpful. If your question was not answered please drop me an email: raul@straightforex.com

Raúl López - StraightForex (Jan 10, 2007 10:04:28 AM)
Good trading!

FXstreet Moderator (Jan 10, 2007 10:06:19 AM)
Thank you all for your participation. See you soon!