Defining Risk in Your Trading

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Defining Risk in Your Trading

Do you know exactly how much you risk each time you place a trade?

In his recent article ‘The Commitment Secret’, Dr. Kenneth Reid challenged us to commit to an ongoing process of self-improvement. In today’s article, we want to consider the topic of trade risk.

Do you clearly define the point at which you will exit a trade if it goes against you?

If we trade without pre-defined exit points, our risk is infinite. As such, it is impossible to calculate the financial risk of that trade, and exposes our entire account to risk. Not only is this extremely bad for our pocket,  but it’s also a source of a immense emotional pain and psychological damage.

In this scenario, where would we exit the trade, and by then how big will that loss be?

Do you clearly define how much of your account you will risk on each trade?

If I enter a trade with the same lot size for each currency pair, then I am not defining my risk. Why? Because each currency pair has a different cost per pip. For example, one standard lot on the EURGBP is around $12.80 per pip, whereas one standard lot on the GBPAUD is around $7.50 per pip. So the risk on the two trades is not the same with an equal lot size.

Why should we define the risk on each trade?

If we consider how we bet on a horse race then the answer is quite simple.

The odds are calculated on the probability of a horse winning and we use those odds to define our trade parameters. So, for example, if the odds are 10:1 and I bet $1, then a win would return my $1 stake and $10 in profit. However, if my horse does not win then the bookie keeps my $1 bet. In this scenario, I fully understand that I will lose $1 if my horse does not win and I have considered it a worthwhile trade as I have the chance to make $10 by risking $1.

Now, if the bookie couldn’t tell me how much I will lose if the horse fails to win, but that it might be all the money in my account, (which, incidentally, he holds for me in his own bank account) would I then take a bet on that horse? I certainly wouldn’t – but yet, surprisingly, many traders do.

What are the benefits of defining and accepting the risks on each trade?

How about I say you can be the bookie (to define the trade odds) and then also the customer to take that trade? Well, that is just what we do when we trade.
So, for example, I could set a stop loss at -50 Pips and take profit at +100 pips (1:2 risk to reward) and then risk $100 on the trade. If the trade stops out I lose $100 but if the trade is a winner I will gain $200.

But just remember, as the bookie or as the customer, I have no way to determine or influence the outcome of the race, I am just defining my trade parameters and must accept the outcome.

The skill in trading is then to find high probability trades and to pre-determine the exit, which is the subject for another day.

How do we determine the risk in Hawkeye Tomahawke FX?

Hawkeye Tomahawke Chart

Using the Tomahawke method, we use a trade execution tool to place our trades quickly, as we are trading the shorter time charts.

This tool makes us place a stop in the charts. We think about and determine the point to exit that trade should it go against us. In the settings, we also pre-determine how much of our account we wish to risk on each trade (normally  ½ percent on each trade).

When we take a trade, the software automatically calculates the lot size given the number of pips to the stop and the total value we are risking on that trade. So, for example, if we are risking $100 on a trade with a 10 pip stop, then we risk  $10 per pip. The software calculates that as a lot size and enters the trade. Should the stop be hit, we will lose $100 and no more. We accept this as our defined risk.

I hope this article helps you to think about risk in your trades and how to become a better trader.

 


 

Join Me in the next free LIVE Hawkeye Demonstration Room held every Wednesday at 9.30am EST US. You will learn more about volume and volume price analysis and see more examples and live trade setups. It is open to all.

Click this link for more information or to join us in class.

Learn to trade the Hawkeye way.

Good trading,

Randy Lindsey
Hawkeye Traders, LLC

Part II – Why Volume is So Important

In last week’s video newsletter, I highlight a short trade in GBPJPY which was a beautiful example of volume leading the way to price action. In that example, I used a lot of the Hawkeye tools in harmony to show volume and price action working together (the edge using volume).

Today, I want to show you “Part II of Why Volume is So Important” from the perspective of Hawkeye Volume tools ONLY. You should see quite easily how understanding Hawkeye Volume can give you a distinct advantage (the EDGE) in your trading.

Why Volume Is So Important - Part II (Video)

Last week’s video newsletter was shown on the NinjaTrader Platform. Therefore, this week’s video newsletter was shown on the MT4 platform. Hawkeye tools work in any market and any timeframe, to give you the volume edge you are looking for.

Join me in the next free LIVE Hawkeye Demonstration Room held every Wednesday at 9.30am EST US. You will learn more about volume and volume price analysis and see more examples and live trade setups. It is open to all.

Click this link for more information or to join us in class.

Learn to trade the Hawkeye way.

Good trading,

Randy Lindsey
Hawkeye Traders, LLC

You Must Learn This Entry Technique

I always preach that you are trading risk rather than a market and the example below highlights just that.

EURUSD Chart Setup

Look at the slowest time frame (bottom left). The Heat Map on the bottom stayed red, both bright and dark, throughout the whole day, indicating the bias was to the downside.

The other two time frames, especially the faster (on the right hand side), gave buy signals. But they were not elected as the slow time frame indicated too much risk.

Hawkeye Perspective

Using triple time frame entries filters the potentially negative trades and ALWAYS  keeps you the right side of the market. 

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Fortune,

Nigel Hawkes
Hawkeye Traders

[The red arrows are for illustration only and do not form part of the software]

Who Would Have Thought It?

The Crude market is showing weakness in all time frames. If you were using Hawkeye, your positions would be extremely profitable. So let’s go and do our volume analysis using our Hawkeye tools.

Crude Monthly Chart

Crude Monthly Chart
As you can see, price was rejected by the Hawkeye Zones, and where I have placed the magenta arrow shows Hawkeye Volume indicating selling for the last two months. Great signs of crude oil weakness are evident.

Crude Weekly Chart

Crude Weekly Chart
The magenta arrow shows selling last week. The trend is down, and the bottom of the Zone at 38.50 is the next area of resistance. Again, great signs of crude oil weakness.

Crude Daily Chart

Crude Daily Chart
The story unfolds. For the last seven days sell/no-demand Volume has been dominant, and where the magenta arrow is you can see the red Trend dot has broken out of congestion to the downside.

Hawkeye Perspective

All time frames are short. The weekly bottom of Zone at 38.50 must hold or the market will be in serious danger of free fall. These are all great signs of crude oil weakness.

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Fortune,

Nigel Hawkes
Hawkeye Traders

[The magenta arrows are for illustration only and do not form part of the software]

Get Ready for a Potentially Great Trade

Are you ready for a potentially great trade? The dollar index is breaking out of an 8-month trading range. This is happening on some of the strongest economic numbers since 2009. The Fed was requiring stronger economic data – and that arrived on Friday.

The sentiment is that there will be a rate raise at the next Fed meeting. If this is the case the dollar rally is just starting and Hawkeye will show the way.

Dollar Index Monthly Chart

Dollar Monthly Chart
We are now approaching the high that was established 8 months ago and a Hawkeye Zone at 104.13, but we require more volume to provide the market energy to breach this overhead resistance.

Dollar Index Weekly Chart

Dollar Weekly Chart
Price is now in a Hawkeye Zone, with the top side being 101.45. However, attendant volume is not rising, which it needs to do to be able to break out to the upside.

Dollar Index Daily Chart

Dollar Daily Chart
Now this really tells us the story: Good increasing daily volume on a Hawkeye Wide Bar on Friday. As a result, price should retrace back into the Wide Bar in the early part of the week.  Then, look for volume to push price up to the Hawkeye Zones area

Hawkeye Perspective

A potentially great trade is in the making. If 101.45 is breached we should be on our way to a substantial Dollar rally, and a potentially great trade. Overhead resistance has to be taken out, so no maverick trades please. But have this on the radar as a potentially extremely profitable trade is being set up.

And remember, if the dollar goes up look to a short bond trade… yet another potentially great trade.

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Fortune,

Nigel Hawkes
Hawkeye Traders

[The magenta arrows are for illustration only and do not form part of the software]

Which Market Shall I Trade?

I often get asked which is the best market to trade; my reply is Bonds. They are world’s largest market by volume of trades (contracts), and have extended trends. As always, look for the longer time frames and here Hawkeye’s Gearbox does the trick.

Bonds – Yellow Time Frame

Bonds Hawkeye GearBox Yellow Timeframe

Here, on the left of the chart, you can see the Hawkeye Gearbox producing the correct tick speed to set your charts to every day, and below is the Gearchanger showing you during the day which speed to trade i.e. yellow = the yellow tick speed etc.

Now look at the chart, you can clearly see where the magenta arrows are indicating where to go short with a full Hawkeye setup.

Bonds – Red Time Frame

Bonds Hakweye GearBox Red Timeframe
The magenta arrows show Hawkeye entries. There is a minus trade (indicated by the cyan arrow), but students of 6 ways a market moves would probably exit when the price entered the congestion zone (indicated by the red circle)

Hawkeye Perspective
Bonds give extended trends. And Hawkeye, using the yellow and red tick speed, gives many swing trade positions

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Fortune,

Nigel Hawkes
Hawkeye Traders

[The cyan and magenta arrows are for illustration only and do not form part of the software]

Is this the start of US Dollar strength?

The euro had a break down on Thursday and Friday. Why? Well, Europe is a mess – with the huge number of immigrants from the Middle East, the European Central Bank hinting at more QE, and exceptionally high unemployment.

Technically? Well, let’s look at the charts, starting with the EURUSD monthly.

EURUSD Monthly

Since July 2014, there has been selling volume (indicated by the lower magenta arrow) as price exited the Hawkeye Zones (the upper magenta arrow), red selling volume continued and Hawkeye Trend went to bearish.

EURUSD Weekly Chart

In the weekly chart we can see that since early August the euro has been in congestion (indicated by the cyan arrow), price went to the Hawkeye stops (indicated by the magenta arrow) – which, as I have pointed out many times, is an area of resistance.

On Friday Hawkeye showed selling volume, and is now indicating a further bias to the downside.

EURUSD Daily Chart
The daily chart shows us how price has tested the Hawkeye Zones and been rejected (indicated by the upper magenta arrows), volume has been short all week (indicated by the lower magenta arrow), and the Wide Bar (indicated by the yellow arrow) has been taken out with a lower close on Friday.

Hawkeye Perspective
Weakness across all time frames. Look for support at the Zone areas shown on all time frames, but a test of the monthly Hawkeye Zone area is on the cards.

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Fortune,

Nigel Hawkes
Hawkeye Traders
Understanding Price and Volume: Now that’s trading!

[The cyan and magenta arrows are for illustration only and do not form part of the software]

Hawkeye Tips for Consistent Trading Success.

Digital-vs.-Analog-free-license-CC0
Below are some “tried and true” Tips we use for consistent trading success.

  1. Clear your head before you start trading . Keep yourself well hydrated with clean fresh water. If you are really having a bad day, don’t trade.
  2. Take a step away until you are able to come back with a clear mind.
  3. Take a moment and think about your trades before you execute. You will need lot of patience to wait for the right setups. A good trade is worth waiting for.
  4. Focus on the quality of trades, not quantity of trades. Trade less, but win more!
  5. Use a trade journal. It serves as a tool to reveal past mistakes and enables you to identify weaknesses or strengths in your day-to-day trading. Without an accurate trade journal, common mistakes are often repeated.
  6. Develop a trading plan that works with your trading style and stick to it. Understand it is YOU making the mistakes not the market and not your indicators! Practice and strive for FLAWLESS EXECUTION.
  7. Trust your setups. Don’t abandon the weeks and months of work invested in building your trading plan. If you start doubting your signals or trades, go back to a simulated account until you build the confidence you need to trade your plan successfully. Once you begin to “cherry pick” your trades, you are done for.
  8. Develop multiple trading strategies for varying market conditions. For example, have a strategy for trading trending markets, and have a different strategy for choppy market conditions.
  9. Be flexible and practice trading multiple markets. This will broaden your trading skills and present you with more trading opportunities.
  10. Read the news of the day before you start trading, and know when major news events are being announced so you are not caught in a trade during an announcement.
  11. Practice sound money management principles. Begin small and don’t increase your lot size until you have earned the right to do so. You earn the right to increase your lot size by showing consistent trading profits.
  12. Never add to a losing position (unless that is part of your strategy).
  13. Pactice your trading plan in a simulated account until you are consistently successful for a minimum of 3 weeks. Adjust it as necessary until you prove that you can show weekly profits for 3 straight weeks minimum.
  14. Remember that trading is your business profession. Give yourself time to learn the skills needed to get the job done.
  15. Find a good trading “buddy” to help you focus on success, and help keep you accountable to following your trading plan.

We demonstrate this and many other methods in our live demonstration room held every Wednesday, and this is open to everyone. Click this link for more information or to join us in class.

Good Trading,

Randy Lindsey
Hawkeye Traders
Understanding Price and Volume: Now that’s trading!

Forecast for the GBP/JPY

gbp/jpy daily chart
GBP/JPY – Daily Chart

With the US markets closed today for the annual Thanksgiving holiday, focus in the currency markets has centered around the Japanese Yen once again, as money flows continue to move into other currencies ahead of the Japanese elections in December. Both the USD/JPY and several of the cross currency pairs have seen sharp moves higher, with the GBP/JPY one of these, and climbing on the daily chart once again today, following yesterday’s wide spread up bar, which added further impetus to the move.

Following the breakout above the 130.00 price level, the bullish trend is now firmly established, with both the daily and three day trends firmly established. The Hawkeye Heatmap has also returned to bullish, following a period of transition, and with sustained and rising buying volumes on the daily chart, supported by buyers on the three day chart, the outlook for the GBP/JPY remains very positive. Finally of course, Hawkeye has delivered a conservative entry signal this week giving a solid entry for longer term trend traders in this currency pair.

Oil continues to trade in congestion

oil futures chart
January WTI Oil Futures – Daily Chart

January oil futures closed marginally higher yesterday, closing the oil trading session at $87.38 per barrel, having touched an intraday high of $87.89 per barrel, before ending the oil trading session just 10 cents per barrel higher. The current lack of direction for crude oil has been a feature of many markets over the last few weeks, as commodities in general trade in a consolidation phase as we move towards the year end, with the price congestion for oil clearly defined by the pivots above and below this current range.

To the upside, we have two isolated pivot highs, just below the $90 per barrel level, and below, two isolated pivot lows in the $85 per barrel price area, which define the limits of the current congestion phase. The most recent of these was on Tuesday, which is pushing the market lower as a result.

The Hawkeye widebar of early November was never validated, suggesting a lack of downside momentum, with the market pulling back to trade within the spread of the bar and failing to continue the bearish trend, with the daily trend now in transition to white. The three day trend however remains firmly bearish, with no transition as yet, and supported by heavy selling volumes in this time frame.

On the daily chart buyers have returned, but counterbalanced by yesterday’s rising selling volume in a narrow spread day. The Hawkeye Heatmap is in transition from bearish to bullish, but has yet to complete the full cycle, and the key now for the oil market, is whether we see a break above or below the current congestion. For a move higher, the $90 per barrel level is now key, and if this holds then we can expect to see a retest of the deep price congestion in the $92 per barrel area and beyond. A break below the $85 region, could see the market sell of sharply again, and test the $78 per barrel level in due course. As always, Hawkeye will reveal the future direction of the market, using volume as the only leading indicator.