The Dollar Cost Averaging Pivot Point Tr
Therefore, I thought I would take some time to outline my guide to the basic pivot point trading method that I use every day to take advantage of intraday price movements between pivot points.
I have been posting about this method on DailyFx's Trading Journal forum for several months. Originally, the purpose of my journaling was to evaluate and test the "free" automated strategies of the Mirror Trader platform and see if I could develop a method of selecting and using them that would be profitable, save me time, and, honestly, if they were valuable given that they were "free."
Much to my chagrin, I wasn't able to have consistent success using the entire suite of strategies they offered, and some of the trading decisions I made with the strategies I set up to run often irritated me. However, to be fair, within a month of carefully picking, implementing, and managing my chosen strategy, I actually gave up on trading with the mirror trading strategy, mainly because (1) I'm a control freak; (2) I learned almost nothing of value from the trades the strategy made, as their methods were opaque and not always obvious from charts; (3) I didn't understand why certain strategies were passing 50 points of gain, only to have the trade slide into the red and be stopped out, ultimately determining that these strategies were - to use a baseball metaphor - hitting the wall, when all I wanted to do was hit a well-placed grounder to first base. I'm simply not the type of trader who can tolerate or wait for a strategist to make a killing on a 2-1 risk/reward plus trade to offset their slow torture of my stock, especially in these low volatility markets where one inevitably takes fewer trades.
I also think that Forex Factory tends to be a bit more active as a trading community than DailyFx, as I imagine the vast majority of users there are because they are associated with one broker, FXCM, whereas there are people here who use a large number of brokers, so I thought I'd start a thread here.
anyway,...
As with any methodology, I may adjust these rules or guidelines from time to time or use common sense and judgment on individual transactions. I know this approach may violate several basic rules. However, the method tells me when to enter; I call this method "Dollar Cost Averaging" because essentially the lot size of the currency pair you buy remains constant within the trade at the cost of the fixed size lot at the time of purchase.
For example, does it sometimes have large internal trade retracements? certainly. Would you add a position to a trade that traditional traders would label as "bad"? Yes. Is it crazy not to use a stop loss? Yes, to some this is crazy; however, one of the things about this system is that the position sizes are actually very small compared to those I have seen traders use. Of course, if you're going to use 10 times your equity (10%) of your margin on each trade, you're going to run into trouble pretty quickly this way, so you'd better move on. But I imagine you, like me, are tired of having your trades forced out, only to have the price move in the direction of your original trade and then hit your price target in a short period of time. Again, I'm not hitting a wall; I'm trying to get singles....stops are blocking relatively small moves and I want to take advantage of the intraday and add to an otherwise good trade option when the only thing lacking is precision in my entry timing.
in short:
The basic setup is a 1-hour chart with the following indicators: Fib Retracement Pivot Point (Daily) and 200 SMA. You can also use RSI, other MAs or indicators to help in your decision-making process regarding trade direction. If your platform does not have Fibonacci retracement pivot points, you can also use Classic or Camarilla pivot points as guidelines for entry points and take-profit prices.
Small batch entry/small batch position: 0.25-0.5 times the net value for each entry. For example, if you have $10,000 worth of equity, your lot size per entry should be between 2 and 5K. Keep in mind that if the target price is not reached immediately and the setup is still in effect, you may want to add to a given position. If possible, keep the total size of any position to less than 1x equity. The most important thing for me is that I do not want to be subject to a margin call under any circumstances, otherwise the devastating result would be the system closing the position. You may be happy with a larger position; this size works for me, at least for now.
My practice is to check what's on the economic calendar first, focusing on mid-level or high-level reports; generally speaking, low-level reports don't have much of an impact on the market. I generally want to avoid the pairs that are most likely to be affected by a given report.
Then, shortly after the New York close (because this is when the "new" daily pivot points are formed), I start scrolling through the chart, usually looking for a 200 SMA with a fairly flat pattern, price action moving back and forth on the SMA, or price hugging the SMA. I might also look at the behavior of the RSI to try and validate the direction I think it should go. Additionally, I will also look at the price action at the highs and lows of the swing to see how well those levels are respected. In other words, I generally look for range-bound currency pairs, at least in the short term. Additionally, I will use multi-time frame analysis to examine the price performance of this pair relative to the 200-period moving average. Generally speaking, I would consider opening a sell order if the price is below the 200 SMA on the 1 hour and 6 hour time frames; if it is above, I would consider buying.
Additionally, I might look at a higher time frame (8 hourly, daily) to see if the pair is within a discernible range, short term or otherwise. Of course, if it was within the range, but within the broader range, I might choose to wait until price moves further to the top or bottom of the range to consider taking the trade.
Buy: The pending order price is 0.236 and the target price is 0.764. For sells, the entry price is 0.764, with a target price of 0.236. I almost never set a stop loss unless it is to secure a profit or avoid a loss after the price enters the profit.
If a position is opened and the target price is not reached by the close of the next day, reset the target price to the new level established by the newly formed pivot point and, assuming that the setup is still valid, create appropriate pending orders to add positions in the direction of the original trade if it makes sense (again, sell at 0.764, buy at 0.236). If resetting the price target to a new pivot point would result in a loss, I usually set the price target to a gain of at least 10 points.
If the order for the additional leg fills, the price target is adjusted to the greater of the appropriate pivot point or 10 points, whichever is greater.
Use common sense to avoid situations such as doubling of currencies or closely related pairs, onerous swaps that will cut into your profits, and pairs that are not worth dabbling in due to their narrow trading range. For example: (1) If you have a 1 Yen long cross, keep that cross. There is little point in going long CHF/JPY and EUR/JPY; they are basically the same thing. Doing so can amplify your gains, but it can also land you in multiple "dog" trades that you have to exit gracefully, rather than just one. Looking for other settings for other currencies. They're almost always there. (2) Swap fees for short NZD positions are currently high. Since you cannot be absolutely certain that you will be able to exit before a negative swap occurs, it is best to avoid shorting the NZD for now. Looking forward to the future development of the New Zealand dollar bull pattern. (3) There are several currency pairs that move very slowly and are not worth worrying about. For example, against my better judgment, I entered a EUR/CHF trade earlier today that had a potential range of less than 5 pips between 0.736 and 0.234. The pair crossed my range and I gained a few pips (2.7 to be exact), but honestly, are you really that desperate? (Well, I guess I was, because I took the deal).
* * *
I will point out that I frequently violate some common rules of risk management and risk/reward ratio using this approach. First, I almost always don't apply a stop loss. However, the lot size was so small that I had to endure a 200 pip spike before I started feeling the pain. Use common sense; if you add a position thinking your setup is still valid and your position is close to 1x equity, you can set some kind of reasonable stop loss (if you don't need to, lest you have a heart attack). Second, while the risk-to-reward ratio is sometimes quite good to begin with (for most pairs, going from 0.236 to 0.764 is a pretty good gain), if the pivot box shrinks due to less volatility or the currency pair moves against you, the ratio will shrink. Again, though, you're looking for singles; not home runs.
In some cases, you may want to keep certain transactions going. However, if this is the case, you would at least consider taking some meat at 0.764, 1, or 1.272 (in the case of a buy) and set your stop loss in the same manner as if you were trading your own funds at that point.
As with all things, some patience is required. In my case, I would check the charts, place a pending order, and then try not to look at the charts again until the next morning or evening. After all, some currency pairs can move like crazy in the short term, either because they move very slowly (EUR/CHF) or because they seem to be bouncing all over the place (GBP/JPY). There's no point staring at the screen; it won't help the price move in the direction you want. Trust me, I've tried it. Additionally, many times, you may have to hold on to a position longer than you would like. Ideally, you would like to close your position before the weekend so that you can sit back and relax and not have to think about the stress of the "dog" trade you made, but this is not always possible. Sometimes you may need to wait for the right moment to add one or more legs to the position so that you can exit with a profit from the net position; don't panic, currency pairs are in ranges 70% of the time, sometimes all it takes to successfully get a net position is time and for the pair to fall back into the range or start to consolidate.
* * *
Finally, unfortunately I'm a Mac user and don't use Metatrader, I find it unstable. Therefore, I can't set up Trade Explorer (at least for now, the tech guys here tell me), which would save me a ton of time. I will try to post examples of trades and results here regularly. I’m not here to push a system or advocate a particular way of doing things. This is just one idea you can look at and consider, along with countless others posted around the web. Also, this is not the only tool I have in my toolbox; I see a lot of trading setups that involve some complex charting and checking the precise points at which I will consider buying or selling, which can take weeks waiting for the setup to form. This is what I use on a daily basis.
Whatever system you use, happy trading! (Or, at least, a heart disease free deal).
Mike the zebra squirrel
I have been posting about this method on DailyFx's Trading Journal forum for several months. Originally, the purpose of my journaling was to evaluate and test the "free" automated strategies of the Mirror Trader platform and see if I could develop a method of selecting and using them that would be profitable, save me time, and, honestly, if they were valuable given that they were "free."
Much to my chagrin, I wasn't able to have consistent success using the entire suite of strategies they offered, and some of the trading decisions I made with the strategies I set up to run often irritated me. However, to be fair, within a month of carefully picking, implementing, and managing my chosen strategy, I actually gave up on trading with the mirror trading strategy, mainly because (1) I'm a control freak; (2) I learned almost nothing of value from the trades the strategy made, as their methods were opaque and not always obvious from charts; (3) I didn't understand why certain strategies were passing 50 points of gain, only to have the trade slide into the red and be stopped out, ultimately determining that these strategies were - to use a baseball metaphor - hitting the wall, when all I wanted to do was hit a well-placed grounder to first base. I'm simply not the type of trader who can tolerate or wait for a strategist to make a killing on a 2-1 risk/reward plus trade to offset their slow torture of my stock, especially in these low volatility markets where one inevitably takes fewer trades.
I also think that Forex Factory tends to be a bit more active as a trading community than DailyFx, as I imagine the vast majority of users there are because they are associated with one broker, FXCM, whereas there are people here who use a large number of brokers, so I thought I'd start a thread here.
anyway,...
As with any methodology, I may adjust these rules or guidelines from time to time or use common sense and judgment on individual transactions. I know this approach may violate several basic rules. However, the method tells me when to enter; I call this method "Dollar Cost Averaging" because essentially the lot size of the currency pair you buy remains constant within the trade at the cost of the fixed size lot at the time of purchase.
For example, does it sometimes have large internal trade retracements? certainly. Would you add a position to a trade that traditional traders would label as "bad"? Yes. Is it crazy not to use a stop loss? Yes, to some this is crazy; however, one of the things about this system is that the position sizes are actually very small compared to those I have seen traders use. Of course, if you're going to use 10 times your equity (10%) of your margin on each trade, you're going to run into trouble pretty quickly this way, so you'd better move on. But I imagine you, like me, are tired of having your trades forced out, only to have the price move in the direction of your original trade and then hit your price target in a short period of time. Again, I'm not hitting a wall; I'm trying to get singles....stops are blocking relatively small moves and I want to take advantage of the intraday and add to an otherwise good trade option when the only thing lacking is precision in my entry timing.
in short:
The basic setup is a 1-hour chart with the following indicators: Fib Retracement Pivot Point (Daily) and 200 SMA. You can also use RSI, other MAs or indicators to help in your decision-making process regarding trade direction. If your platform does not have Fibonacci retracement pivot points, you can also use Classic or Camarilla pivot points as guidelines for entry points and take-profit prices.
Small batch entry/small batch position: 0.25-0.5 times the net value for each entry. For example, if you have $10,000 worth of equity, your lot size per entry should be between 2 and 5K. Keep in mind that if the target price is not reached immediately and the setup is still in effect, you may want to add to a given position. If possible, keep the total size of any position to less than 1x equity. The most important thing for me is that I do not want to be subject to a margin call under any circumstances, otherwise the devastating result would be the system closing the position. You may be happy with a larger position; this size works for me, at least for now.
My practice is to check what's on the economic calendar first, focusing on mid-level or high-level reports; generally speaking, low-level reports don't have much of an impact on the market. I generally want to avoid the pairs that are most likely to be affected by a given report.
Then, shortly after the New York close (because this is when the "new" daily pivot points are formed), I start scrolling through the chart, usually looking for a 200 SMA with a fairly flat pattern, price action moving back and forth on the SMA, or price hugging the SMA. I might also look at the behavior of the RSI to try and validate the direction I think it should go. Additionally, I will also look at the price action at the highs and lows of the swing to see how well those levels are respected. In other words, I generally look for range-bound currency pairs, at least in the short term. Additionally, I will use multi-time frame analysis to examine the price performance of this pair relative to the 200-period moving average. Generally speaking, I would consider opening a sell order if the price is below the 200 SMA on the 1 hour and 6 hour time frames; if it is above, I would consider buying.
Additionally, I might look at a higher time frame (8 hourly, daily) to see if the pair is within a discernible range, short term or otherwise. Of course, if it was within the range, but within the broader range, I might choose to wait until price moves further to the top or bottom of the range to consider taking the trade.
Buy: The pending order price is 0.236 and the target price is 0.764. For sells, the entry price is 0.764, with a target price of 0.236. I almost never set a stop loss unless it is to secure a profit or avoid a loss after the price enters the profit.
If a position is opened and the target price is not reached by the close of the next day, reset the target price to the new level established by the newly formed pivot point and, assuming that the setup is still valid, create appropriate pending orders to add positions in the direction of the original trade if it makes sense (again, sell at 0.764, buy at 0.236). If resetting the price target to a new pivot point would result in a loss, I usually set the price target to a gain of at least 10 points.
If the order for the additional leg fills, the price target is adjusted to the greater of the appropriate pivot point or 10 points, whichever is greater.
Use common sense to avoid situations such as doubling of currencies or closely related pairs, onerous swaps that will cut into your profits, and pairs that are not worth dabbling in due to their narrow trading range. For example: (1) If you have a 1 Yen long cross, keep that cross. There is little point in going long CHF/JPY and EUR/JPY; they are basically the same thing. Doing so can amplify your gains, but it can also land you in multiple "dog" trades that you have to exit gracefully, rather than just one. Looking for other settings for other currencies. They're almost always there. (2) Swap fees for short NZD positions are currently high. Since you cannot be absolutely certain that you will be able to exit before a negative swap occurs, it is best to avoid shorting the NZD for now. Looking forward to the future development of the New Zealand dollar bull pattern. (3) There are several currency pairs that move very slowly and are not worth worrying about. For example, against my better judgment, I entered a EUR/CHF trade earlier today that had a potential range of less than 5 pips between 0.736 and 0.234. The pair crossed my range and I gained a few pips (2.7 to be exact), but honestly, are you really that desperate? (Well, I guess I was, because I took the deal).
* * *
I will point out that I frequently violate some common rules of risk management and risk/reward ratio using this approach. First, I almost always don't apply a stop loss. However, the lot size was so small that I had to endure a 200 pip spike before I started feeling the pain. Use common sense; if you add a position thinking your setup is still valid and your position is close to 1x equity, you can set some kind of reasonable stop loss (if you don't need to, lest you have a heart attack). Second, while the risk-to-reward ratio is sometimes quite good to begin with (for most pairs, going from 0.236 to 0.764 is a pretty good gain), if the pivot box shrinks due to less volatility or the currency pair moves against you, the ratio will shrink. Again, though, you're looking for singles; not home runs.
In some cases, you may want to keep certain transactions going. However, if this is the case, you would at least consider taking some meat at 0.764, 1, or 1.272 (in the case of a buy) and set your stop loss in the same manner as if you were trading your own funds at that point.
As with all things, some patience is required. In my case, I would check the charts, place a pending order, and then try not to look at the charts again until the next morning or evening. After all, some currency pairs can move like crazy in the short term, either because they move very slowly (EUR/CHF) or because they seem to be bouncing all over the place (GBP/JPY). There's no point staring at the screen; it won't help the price move in the direction you want. Trust me, I've tried it. Additionally, many times, you may have to hold on to a position longer than you would like. Ideally, you would like to close your position before the weekend so that you can sit back and relax and not have to think about the stress of the "dog" trade you made, but this is not always possible. Sometimes you may need to wait for the right moment to add one or more legs to the position so that you can exit with a profit from the net position; don't panic, currency pairs are in ranges 70% of the time, sometimes all it takes to successfully get a net position is time and for the pair to fall back into the range or start to consolidate.
* * *
Finally, unfortunately I'm a Mac user and don't use Metatrader, I find it unstable. Therefore, I can't set up Trade Explorer (at least for now, the tech guys here tell me), which would save me a ton of time. I will try to post examples of trades and results here regularly. I’m not here to push a system or advocate a particular way of doing things. This is just one idea you can look at and consider, along with countless others posted around the web. Also, this is not the only tool I have in my toolbox; I see a lot of trading setups that involve some complex charting and checking the precise points at which I will consider buying or selling, which can take weeks waiting for the setup to form. This is what I use on a daily basis.
Whatever system you use, happy trading! (Or, at least, a heart disease free deal).
Mike the zebra squirrel
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