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Forex Sailing FOREX SAILING “Long Lasting Trades For Maximum Profits ‘Working’ as Little as 5 Minutes a Day!” eBook By Robert Borowski © 2005 Evergreen Forex Inc. Read Legal Info & Disclaimers at end of Document 1 Forex Sailing As the concepts taught in this eBook are about long-term interactions with the market that grow over time I’d like to dedicate this eBook to my beloved family that is my most significant long term “investment”, which continuously rewards me richly with love, joy, and an abundance of blessings. Thank you Mama for all your love and encouragement throughout my life. You have been my most significant influence in my life, and considering how I turned out I’d say you did a fantastic job of nurturing me. I love you very much too. By the way, you were absolutely right when you kept affirming to me that “books make you smart” – look, now I’m writing them! Thank you for being proud of me. Violetta, thank you for your “unconditional” love, and for supporting my dreams. You are truly a “trophy wife” – beautiful of course, but more so because you have such a gorgeous soul that makes marriage to you bliss. I am honored and blessed indeed to “invest” my life’s journey with you. I love you shmorgasborgally! My son Christiam, you have just recently gotten here but I can’t imagine my life without you. Your boundless enthusiasm and abundant smiles makes my heart rejoice everyday. You are so precious to me and are my most significant “long term investment”. I love you beyond comprehension, and I look forward to exploring the world with you. Bonnie & Garry, you are family to me. My life has been immeasurably enriched thanks to you. Your goal of “touching hearts and empowering others” has been accomplished in me. I love you, and may God bless you on your journey. Lomamy Aleaha 2 Forex Sailing TABLE OF CONTENTS Introduction Prerequisites Some Basics Getting Help Equity Management About P/L Trading Ratios Reason For Broker’s Policy Change Overnight Interest New Broker Instructions Market Order Concept of Stops & Limits Entry Orders – Stops vs. Limits If-Done Order OCO – One Cancels the Other If-Done OCO Trailing Stop GTC vs. GFD Changing Orders Caution Reason For Multiple Brokers Volatile Asset Protection Charts Charts For Sailing ACM Charts Broker Lag Corporations Tradable Pairs Things To Watch ATR - Average True Range Weekly & Monthly Summary of Data Moving Averages S.E.X. Lines S.E.X. Variation 1 S.E.X. Variation 2 S.E.X. Lines Techniques 1 3 Forex Sailing Bunched Trending Ended Additional Notes S.E.X. Variation 3 S.E.X. Variation 4 Wrapping Up Friendly Trend Fractals Trend Channels Curved Trend Ends Previous Support/Resistance Extrapolated Lines Diamonds & Triangles Candlesticks Sailing Techniques Looking For Reasons Netless Straddle Trading Regular Straddles The Netless Straddle Technique Advantages Disadvantages Forex Roulette Specifics of “Forex Roulette” Rules & Logic for “Forex Roulette” Roulette Step 1 Roulette Step 2 Roulette Step 3 Roulette Step 4 The Incredible Scalp Netless Candles Netless Teeny Days Fibonacci & Modified Trend Trading General Sail Trading Extra Thoughts KISS – Keep It Simple Smart Split Exit Method Trailing Stops Scale Shifts Effect Of World News 4 Forex Sailing Showing Off Holographic Mindset So Long! 5 Forex Sailing INTRODUCTION Why did I call this eBook “Forex Sailing”? I think of the Forex market as the Sea; it is as large as the ocean (after all it is larger than any other financial market). In my previous eBook, “Forex Surfing” I used the analogy that the techniques contained within it are similar to surfing little waves in the ocean (I enjoy body boarding which is a kind of surfing). Surfers only play in the ocean for a short period of time, maybe a few hours at a time, much like the trading concepts taught in that eBook. There are other people who like to spend time on the ocean in a sailboat (I’m not a sailor, but would gladly go if invited). Because of the nature of their watercraft they can spend significantly more time out in the Sea. They can stay out on the water for a whole day, even for multiple days. Whereas a surfboard is only suitable for a relatively short ride (few pips), someone in a boat can travel great distances (hundreds of pips). Thus the concept of this eBook, “Forex Sailing”, is to show you techniques that are better suited for longer term trading. The objective is therefore to teach you how to chase profits of 100 pips or more (typically hundreds, but occasionally even a thousand pips). Most people who trade larger moves in the Forex market typically trade fewer lots with larger stops paying more attention to the higher time frame charts exclusively. In this eBook I’ll definitely teach you some techniques that accomplish this, but I also have a different trading methodology that I will also be introduced to you here in this eBook. Years ago when I started trading I had a limitation that turned out to be a very big blessing (Napoleon Hill, author of the classic “Think and Grow Rich”, was right when he stated that adversity can be an advantage). When I first got into Forex I didn’t have much money and so placing trades that required large stops (of 100, 200 or even 300 pips) was simply out of the question for me (a few bad trades could have wiped out my trading account). The cliché is that “necessity is the mother of invention”, and so I proceeded to devise strategies that would allow me to enter into those larger trades but with a significantly reduced stop requirement. What my countless hours of watching charts, brainstorming, and “trial & error” trading resulted in was a series of trading strategies that not only 6 Forex Sailing worked well, but actually worked exceptionally well – better in many cases than the standard trading techniques most Forex people teach. Because of the way these simple concepts work a trader using these methodologies can gain more profits from the same market move as another trader would catch using the standard technical analysis methods taught just about everywhere. What is the “secret”? It is simply using smaller trades, properly timed, to enter into much larger trading opportunities. Imagine a guy on a surfboard hitching a ride pulled along by a sailboat. Want an example of what I mean? Imagine that you’ve found some kind of trade opportunity that requires a 200 pip stop according to the standard methodologies of technical analysis trading. Following proper equity management of course let’s say you can trade one lot for that trade. Well what if you knew how to properly enter that same trade using a “surf” with a 20 pip stop, then couldn’t you trade 10 lots maintaining proper equity management? If you were to scalp your entry with a 10 pip stop then you could conceivably do as many as 20 lots. Let’s use the “surfing” example to contrast a comparison with the standard method. Let’s say, hypothetically, that the market was to move in our favor just 300 pips. Obviously the person trading the standard method made a profit of $3,000 representing a 1:1.5 risk-to-reward ratio. Our surfer however, starting with the same account size, and trading in the same market conditions succeeded in capturing $30,000 representing a risk to reward ratio of 1:15. Sure, our surfer had to work a little harder for this trade, but let me ask you, would a significantly better return such as that not be worth a little extra effort? I sure hope you think so! Let’s not even discuss the returns someone using a scalp could have captured. In this eBook I give you a mixture of methodologies - some straightforward “standard” kinds of techniques that are easy to implement, and some ingenious ways to tweak your trades to score even better returns. Some of the ideas presented in this eBook will take as little as five minutes of your time each day to work with, but some others may require more effort. I explain a few indicators that you’ll find helpful, including one that I’ve invented myself (S.E.X. lines) so you won’t learn this anywhere else. You’ll learn some more advanced ways to use brokers, and this eBook also explores some other topics pertinent to your trading. On a more personal note I declare that I do love trading Forex. I consider 7 Forex Sailing myself a “joyful trader” (except on some days ;P ) and I hope that my enthusiasm comes through in these eBooks that I share with you. I am thrilled that you bought these eBooks (thank you very much by the way) not because of the few coins I earned from you (which I consider to be a “gratuity” for the job “well done” in sharing all this stuff with you) but rather because you’ve given me a venue to share my wisdom and my passion for Forex trading. I have relatively few people in my personal life who have little more than a passing interest (fascination) with what I do, and my heart has yearned to be able to express this zeal to someone… anyone. Unbeknownst to me at the very beginning of my days as a trader, Forex was to become a major blessing in my life. Forget about the financial rewards this path has brought (which is pleasant indeed), my “hobby” has prompted me to have many awesome life experiences, learn exciting new things, meet truly exception and inspiring people, find a fantastic “best friend”, and grow fat (ok, I’ll have to work on that one). The best blessing Forex has been able to provide me with is the privilege of being able to have my wife & I stay home, rather than going to some job we dislike, to watch as our beloved son plays, grows and sleeps (though since I do the trading I’ve convinced my wife that it’s only fair that she does the diapers). Throughout my life I’ve had one intense passion even greater than business; my spirituality. I can’t even begin to share the immense blessings that it has gifted me with, nor can I possibly express the depth of my gratitude. As I have learned from “A Course In Miracles”, I am entitled to miracles, and I am enriched by the peace, love & joy my spiritual path has bestowed. Having the time freedom to spend more leisurely hours reading, sitting on a beach, meditating, or just simply appreciating things is another gift made more accessible thanks to my “hobby”. It is my sincerest wish for you that you too cultivate a passion for Forex. May it endow your life with the financial rewards that has originally attracted you to it, but more so may it touch your life in yet unforeseen ways. May your heart’s deepest desires be fulfilled in some way aided by your new “hobby”. Let me share with you one more little secret before I end this “introduction”. There is a philosophical truth that you get back what you give, and that it is the teacher, not the student, that in fact learns the most through the process of teaching. Thus through the process of committing my thoughts and trading methodologies in writing I have learned a tremendous amount about trading. Writing forced me to clarify my own understandings in order to be able to concisely explain these concepts to you, and it also prompted me to refine some of my ideas to some powerful conclusions. This 8 Forex Sailing whole experience has been a catalyst to make me a better trader, and with this wisdom I leave you with a lesson – find someone to whom you can attempt to teach Forex trading (regardless of how inexperienced you are there is someone even less knowledgeable who would love an introduction). It is an enjoyable and rewarding endeavor to share a skill such as Forex, and in the process of explaining things to your friend you’ll find that you’ll integrate the lessons better yourself. Richard Bach said in his book Illusions, “You teach best what you most need to learn”. I must say, before you commence reading, that this eBook came out a bit “holographic”, meaning that it has a slightly abstract (non-linear) approach to the ideas presented. You’ll find places where I assume you have already read other relevant topics from other places within this eBook (sometimes from later sections) and even from other eBooks. I hope you’ll be able to follow my train of thoughts and understand everything. So now let us mutually embark upon the journey of learning “Sailing” techniques. I hope you will find reading this eBook to be both informative and enjoyable. Most of all I hope you become proficient in trading with these methods. Good luck and good trading! Robert PREREQUISITES This eBook is assumes that you have already read the following prerequisite eBooks: Forex Surfing Forex Scalping Forex Classics (suggested) Many of the methodologies taught in this eBook are extensions, or make use of, concepts discussed in those other eBooks. If you have not already read those eBooks then please stop now and read those before continuing with “Forex Sailing”. 9 Forex Sailing SOME BASICS GETTING HELP How do you get help when you need it? Wouldn’t it be nice to have me, or another experienced trader, around to answer questions when you need some guidance? Well unfortunately (for you) I can’t be around for you to pick my brain (my current rate for consultations is $300/h, and lately I’ve been refusing most requests), but there is good news for you… there are trained professionals ready at your beck & call 24 hours a day just waiting around to answer Forex related questions for you. Best of all, it’s FREE! Yes it’s true. All of the top Forex brokers (like FXCM, RefcoFX, Forex.com, CMS Forex, and there are others) provide a wonderful service called “Live Help”. They are paid (and trained) to sit there waiting for you to initiate contact with them to discuss your questions. As you can see from the above picture it’s a kind of “online chat” – you type to “talk” with the help representative. What are they there for? They are really there to answer all of your questions about how to use their trading software (and all client related questions), however they can also be helpful with questions regarding how to use charts, 10 Forex Sailing and sometimes (explained below) even to discuss trading techniques. Are you unsure about how to enter trades, apply or change stops, limits, or entry orders? Confused about ANYTHING about using your trading station software? If so then drop them your questions and they’ll be delighted to answer them to help you understand. Remember, it is their job to be helpful. If you are confused about anything at all then don’t hesitate to chat with them. It is important as a trader to be very familiar with the tools you work with so please feel free to ask them anything you need to understand. Keep in mind that the person at the other end is a real live person, and so they can behave like real live people. By this I mean that sometimes you’ll get someone who is extremely knowledgeable and will be happy to answer your question with a smile, however sometimes you might land upon someone who is in training (and will seem to be unsure of the answers provided), and sometimes you can land upon a person who is apparently having a bad day. If you find that you are somewhat displeased or uncertain of the information provided to you then simply initiate another contact a few hours later asking the same question(s). If you ever get different answers to a question then be sure to ask a minimum of three times to make sure you have the correct answer. An important consideration to getting quality attention is to ask at the right time. There are times when they are busy, being flooded by questions, and times that they are less busy and more willing to spend more time with you. If you want to ask questions that are less related to their specific services, and especially if you want to discuss trading related topics then it is best to contact them when they are less busy. Obviously around huge Fundamental Announcements (especially the “Freaky First Fridays of the month”) they’ll be very short and to the point with you, and they certainly won’t waste their time answering questions pertaining to trading techniques. They’ll usually be happy to help you to understand how to use the charts that they recommend on their site. If you need help with anything about using the charts then just feel free to ask them. For the above-mentioned stuff just feel free to ask. That is what they are there for. Don’t feel stupid about asking any of your questions. Remember, we all have our beginnings and have to ask “basic questions”. Even once you are far more experienced don’t be afraid to ask them questions… heck even to this day I still ask them the occasional question (it’s better to know than to risk not knowing). 11 Forex Sailing EQUITY MANAGEMENT Yup, let’s revisit this fun topic about “Equity Management”. There are a few important points to make here for “Forex Sailing” in contrast to what I’ve already mentioned in “Forex Surfing”. This concept is the key to being an overall successful trader, and is what ultimately separates unsuccessful traders from the successful ones. If you know proper equity management principles, and, more importantly, IMPLIMENT (!) those principles, then you too can be one of the “elite” traders that are ***consistently*** profitable, making some excellent ‘cha- ching’. I’ll have some comments along these lines in the next pack I produce titled “10% to 30% Monthly ROI”, but here I’ll stick to what is necessary to know for the techniques presented here in this eBook, “Forex Sailing”. The strategies presented in this eBook are drastically different than what was presented in “Forex Surfing” (though there are many similarities in techniques). The difference is primarily in the scope or size of the trades sought after. In “Forex Surfing” most of the strategies required tiny stops of say 20 pips, however in “Forex Sailing” most of the strategies require significantly larger stops of 100 pips or more. Don’t let the fact that the “Sailing” techniques require larger stops scare you off because the target gains are proportionally larger as well for excellent risk to reward ratios. It is important to realize two things here: (1) Following proper equity management principles (which will be elaborated upon shortly) you should only trade the primary techniques taught in “Forex Sailing” if you have a minimum of $5,000 in your trading margin account (preferably $10,000 or more). (2) For those of you who have less than the required minimum then you can use a modified technique by combining the strategies learned in “Forex Surfing” to use as an entry technique into trades more appropriate for “Sailing”. More about this will be discussed later in this eBook. Here is a thought for you: Trading one regular lot for 20 pips is the same thing as trading 1 mini lot for 200 pips, 2 mini lots for 100 pips, 4 mini lots for 50 pips, etc. Bottom line is to just think of these types of larger trade risks as being the same thing just scaled differently. Back to our discussion about proper equity management applicable to the techniques in this eBook. 12 Forex Sailing The most common mistake made by rookie traders (of Forex, Stocks, Commodities, or whatever) is that they fail to understand the purpose of setting “Stops”. Many seem to think that a stop is placed to limit how bad a trade can go based on what they can afford to loose. The mentality is that if they can only afford to loose a specific amount of money then they place their stops there. This is complete “bovine excrement” and is a surefire way to loose your money as a trader. The market couldn’t care less about what you can afford to loose, and it certainly won’t stay away from your stop price just to be nice to you. Your stops must be set at prices not based on what you can afford to loose, but rather based on strategic price levels, that indicate to you that your original assumptions about the direction the market will move in were wrong. One thing I always strive to make sure you are aware of in all my materials is at what strategic price level to cut your losses and the logic behind the reasons for those price levels. The other most common mistake made by rookies (I’m not really sure which is more common than the other, but they both happen) is that they DON’T use stops. YIKES!!! Just the thought of this makes scenes of horror movies and the theme song of the movie “Jaws” flash through my mind. I’ve heard people say stupid things like “don’t worry, I’m watching what’s going on and can manually exit a trade if things go sour”. Folks, trading without a stop is one of the dumbest things you can possibly do (other than deliberately trying to loose money by trading). What could happen if you loose your Internet or electrical power while in the middle of the trade and can’t sit there to baby-sit your computer watching to see what happens? Even worse, what if the market dives sharply & quickly due to some unforeseen news? Bottom line is a “stop loss” is there to protect yourself from unnecessary losses. Just do yourself a favor and ingrain the following thought into your mind. NEVER EVER EVER TRADE WITHOUT A STOP. Now having a stop loss set is of course a very good idea, but you need to be aware that since September 2004 most Forex brokers now have a new policy that they’ll guarantee stops under all market conditions except in circumstances of extreme market volatility (the reason why is explained as a supplementary information at the end of this section). What this means is that the only time that your Forex broker might (and the key word here is “might” because they still often do) not honor your stop loss is if a Fundamental Announcement blows the current market price (a gap) way far beyond your set stop loss level. Knowing this you need to be aware of when FAs are being released so you can make the appropriate decision whether to engage/remain in the trade or not. 13 Forex Sailing Now that you know that you should always trade with a stop in place you also have to know how much you are willing to loose on any one trade. Again, as stated above, where (at what price) you set your stop is not arbitrary but at a strategic price level that would prove that your original assumption of which direction the market will move in was wrong. What I am meaning here how much of your margin account balance may be risked for any single trade. 2% is the ideal risk level for most traders. Less than 2% (i.e. 1% or 0.5%) is even safer, and it is usually what professional traders stick to, but significantly less than 2% will usually yield to small gains for the tastes of most solo speculators. What does 2% mean? Simply put, for ever $100 you have in your trading account you should not risk more than $2 on any trade. If you have $1,000 then $20 is your maximum risk, if you have $10,000 then $200, if you have $100,000 then $2,000, and so on. You can do the math to figure out what your maximum risk amount should be based on how much money you have in your trading account by simply dividing by 50. Usually traders that have small trading account balances bend this rule to have their accounts grow larger faster, and also simply because they simply wouldn’t be able to engage in some trades. Thus they take bigger risks, which is fine, but if you are one of them then realized that your account balance will swing wildly rather than experience a nice steady climb. Only half of the equation of being a profitable trader is having cultivated the skill of consistently picking trades that out perform the inevitable losses. The other half is consistent application of equity management strategy. Why limit yourself to 2%? Simply because this is an important part of being a successful trader. If you were to “bet the farm” (bet all or a huge percentage of your equity) on one trade then you could possibly walk away triumphantly, but chances are you would loose terribly and will abort your career as a Forex trader. Maximizing your losses at 2% means that you can weather out a series of potential losses (also known as “draw down”) to allow you to stay in the game long enough to catch some winners. Remember that the deeper you “go into the hole” (loose equity) the harder it’ll be for you to just recover to the breakeven point. For example, if you were to loose 50% of your account then you’d have to shoot for a 100% gain just to recover. You’ve heard the cliché, “a dollar saved is a dollar earned”, well a part of the overall success of a trader is to protect your equity and not to squander it. Protect your balance from significant losses – not loosing much is part of the overall strategy of building 14 Forex Sailing your trading balance. “Well what about what you teach in your eBook Forex Freedom?” Obviously if you are following that plan you would be breaking the above stated 2% rule. That is true, but in some circumstances rules are meant to be broken. When your account is tiny, as it would be if you started with a meager mini account, you would simply have to break the 2% rule otherwise you couldn’t even trade. Think about it… 20 pips (stop & limit) is just about the smallest trade you could possibly engage in (don’t argue with me that you’d scalp trade for just 10 pips), so the above rule could only be followed if you had a minimum of $1,000 in your trading account! (Explanation = 1 mini lot x 20 pips = ~$20 which is 2% of $1,000). “Forex Freedom” was designed to quickly accelerate account growth by taking greater risk in compensation of quickly turning an insignificant amount of money into something significant. Face it, if you were to loose $300 due to highly leveraged trading then “so what”. I apologize to you if that was insulting to you because $300 could be a seemingly significant amount of money to you… but come on, it really is chump change. What is important to notice about what was taught in that eBook is that once you reach $10,000 you are then scaled close to an appropriate 2% risk limit, and after $30,000 you should DEFINETELY stick to the 2% rule. It is also important to remember that in that eBook I refer to making trades with a 20 pip stop loss, so if you start trading engaging in trades with larger required stops then you MUST adjust how many lots (mini or regular) you may trade. I should also state here that how you trade a mini account (in light of what I just said above) is also contingent of what your purpose is for trading it. If you are just trying to build up your account quickly then the above statements is fine for you. Some people, however, trade a mini account not because it is all they can afford to trade with, but rather because it is a training tool to practice proper trading techniques (including equity management). If this describes you then please do limit yourself to the proper rule of 2% (assuming you have enough in your account to be able to trade at 2%) while you develop your trading skills and disciplines. Later in “10% to 30% Monthly ROI” (bundled with this Rapid Forex package) I further discuss the upside of sticking to the 2% rule, because by following it (along with the trading strategies you’ve learned from me so far) you can easily make 10%, 30% or even more rather easily! Please listen to it as soon as you finish reading this chapter. Think about it… if you can manage to catch a 20% net profit per month (YES! IT IS REALISTIC) and let’s say you have a meager $30,000 in your account then you’ve made over $6,000. The 15 Forex Sailing fun really begins once you’ve built up to over $100,000. Ok, so we’ve touched on one of the reasons when it is “ok” to break the 2% rule – when you have too little money in your account to be able to trade at 2%, or if you have less than $10,000 and are trying to build your account somewhat faster (following the “Forex Freedom” strategy). There are two other times when it’ll be somewhat ok for you to break the 2% rule. (1) Many of the techniques contained within this eBook, Forex Sailing, are designed to have significantly larger stops. Some of the largest stops condoned in this eBook would be up to 200 pips. Following the 2% rule this would mean that to trade just ONE mini lot you would need a minimum balance of $10,000. Here is your “permission” to bend the rules and let yourself go up to 5%… BUT PLEASE USE THIS WITH UTMOST CAUTION!!! Only trade at 5% when you think that the opportunity you are looking at is superb. Try to limit yourself to “allowing” yourself this luxury to just once a week MAXIMUM!!! Really “cherry pick” your trades. (2) Some of the techniques contained in this eBook are to enter into trades that should last for long periods of time. Different traders would define “a long time” differently. I define anything lasting over a week to be a long-term trade – some traders (position traders) would laugh at me considering a week to be “short term”. Well, some of the trades you’ll do will last for several weeks, possibly even months (obviously this would only happen if it is running profitably), and simple logic would dictate that the “set up” for such opportunities doesn’t happen every day, every week, and not even every month. Because such trades happen rather infrequently many traders increase their percentage to better capitalize on those rarer opportunities. Some traders go as much as 10% (there are even other eBooks on the market that teach going for higher – just stupid), but generally speaking I like to go higher leveraged into those trades to a limit of 5%. Yes, the risk for the trade is higher, but generally speaking when engaged in such a trade you are shooting to score multiple times your risk, so it is worth it (risk to reward ratio of 1:2 or better). Remember, as stated above, this is a rather rare event that doesn’t happen every week. Let’s wrap up this discussion about “Equity Management” for “Forex Sailing” by summing up the important points we’ve covered. Your stops must be set at prices not based on what you can afford to 16 Forex Sailing loose, but rather based on strategic levels, or price points, that indicate to you that your assumptions about the direction the market will move in were wrong. THEN based on proper equity management principles you decide how much you can stand to loose on that one trade. Then based on the required stop size and based on how much you can afford to loose (according to proper equity management principles) you decide how many lots you may commit to the trade. Never EVER trade without a stop loss! Protect your account from losses as the deeper down you go the harder it is to just come back to break even. Even with a stop set still be cautious of significant Fundamental Announcements (i.e. “Freaky First Fridays” of each month). Limit yourself to only risk a maximum amount of 2% of your equity on any single trade. Except for the following circumstances… o If you are following the rules set in “Forex Freedom”. o If your account is less than $10,000 you may ONCE A WEEK (maximum, but preferably less often) risk up to 5% to go after larger trades requiring larger stops. o Once in a long while when there is a great set up for a potential long-term trade you may trade up to 5%. ABOUT P/L TRADING RATIOS There are two primary methods to profiting by trading in the Forex markets (or any other market for that matter). Method one is when the target profits are equal to the target loss (P=L). Method two is when the target profits are greater than the target loss (P>L). There is actually a third, but this is insane to do; target profits are less than the target loss (P<L). Some traders prefer one of these approaches over the other but either is good. It is best to use both approaches for various trading styles. The “Forex Roulette” method in this eBook is an example of “P=L” (there are other technique variations that I teach here & in my other eBooks that are also 17 Forex Sailing “P=L”). The trick to having trades with equal profit targets and loss targets is to have more than 50% of your trade picks be correct. The challenge is of course to be skillful at your technical analysis to improve your percentage of wins. The second method of trading is to let your profits run and far exceed your potential losses (P>L). With this approach you can be wrong (yes WRONG) most of the time and still be profitable! For example, if you were to have trades that are three times more profitable than your set losses you could be wrong 70% and still be profitable! (i.e. losses = 100 units, profits = 300 units … 7 losses x 100 = 700 units, 3 wins x 300 = 900 units, net 200 profit). Usually trades that follow the “P=L” model employ a fixed target limit, whereas usually trades that follow the “P>L” model achieve that result by using a trailing stop letting the profits run their course. Some traders use a clever combination of both of these approaches to gain the benefits of each method. A simple way to do this is to set up two trades (each trade is for half of your permitted trade amount based on equity management principles. Both trades together equal your full risk permitted). Each of the two trades represent half of your whole trade (obviously each using half of the amount of lots you could allocate to the whole trade). Half of your trade them is set to have a fixed limit equal to your stop. The other half of your trade is set without a limit (but of course you have a stop!) and you simply employ a trailing stop to see how far you can let your profits run. For each trading technique presented in this eBook (and my other ones) it should be obvious which of the above two methods is implied to be used. Though I usually don’t specify, for most trading techniques you could adapt the combination of using both “P=L” & “P>L” and this should work advantageously for you for most styles of trading. One more “method” exists, but this one is insanely stupid. Though it is crazy to implement it is unfortunately used by many newbie traders when they begin trading. The cliché rule of thumb for traders is to “cut your losses short and let your profits run”, however many people new to trading often do the opposite of taking their profits quickly, but letting their losses run far longer than they should. There are many reasons why they do this (mostly psychological), which I won’t elaborate upon here, but it is a sure sign of an amateur trader not properly educated. This method of having target profits be less than target losses (P<L) is a surefire way to loose money fast and to have your career as a trader be ended very quickly. Bottom line is to always set 18 Forex Sailing your stops at appropriate levels and to only engage into trades that are expected to yield a profit that is equal to or greater than your potential loss. REASON FOR BROKERS’ POLICY CHANGE The following is just interesting reading for you. Above I promised you that I’d elaborate on this subject here. Why did the brokers change their policy regarding honoring stops & entry orders? Well, here is the short version of the story. Some really smart guy (whose name we won’t mention here) came up with a truly genius trading strategy that proved to be an Amazing System for capturing humongous profits off of Fundamental Announcement moves. The technique was a killer method that worked for him like something other traders could only dream. This wise guy began wondering why nobody else seemed to have discovered the principle behind this marvelous trading method. This brilliant person turned into a bonehead when he decided to let his altruistic personality that cares about other people convince him to write this technique down to share with other people so that they too can experience fantastic explosions in their profits. Rather than keeping this amazing system to himself so that he could use it for years and years he wrote a book titled “Explosive Profits” (the original edition) and unleashed this dynamite out into the world. The people who got their hands on this document quickly proclaimed him to be a saint, blessing him, even prayed for him when he got injured. They made huge amounts of money very quickly and they were grateful to this guy. More and more people learned of this amazing Forex system, and more and more people were making money, but the Forex brokers started getting nervous because apparently they were loosing money because of this new technique people were using. In September of 2004 there were a couple of Fundamental Announcements that moved the markets HUNDREDS of pips in the matter of just a few minutes (actually seconds), which of course was good for the traders using the “Explosive Profits” technique (we were happy), but the Forex brokers got very scared and even lost their tempers… so they revised their policies regarding how they honor stop, entry and limit orders around the times of big FAs. OVERNIGHT INTEREST 19 Forex Sailing In my previous eBooks I typically omitted the topic of overnight interest because most of the trades I taught you were “day trades” meaning that you entered and exited the trade all in the same day. Because “Sailing” involves trades that last for multiple days (hopefully weeks or even months) then you should now be made aware of what overnight interest is and how it affects you. When you trade Forex what you are actually doing is you are entering into a contract to exchange currency with someone else in the world. Essentially you are agreeing to deliver (for each lot traded) $122,000 USD cash in exchange for €100,000 EUR (assuming an exchange rate of 1.2200). The reason why an armored truck doesn’t drive up to your door to deliver all this money, and no one is mad at you for not having delivered them their money is because your broker automatically “rolls over” your trade into the next day as they assume that you don’t actually intend to deliver nor take delivery of actual currency (if you really want to do this then contact your broker to not automatically roll over, but I doubt that you’d want to do this). Ok, so why do you have to pay “overnight interest”? It is because nobody expects you to drop-ship the money today (you have two days to settle the trade), thus while the money is still in your hands they’ll be charging you interest for holding onto it, but you also get to charge them interest for holding onto your money. If worldwide interest rates were all the same then we wouldn’t need to worry about “overnight interest”, because what you would owe them would be cancelled by what they owe you. In the real world, however, there are different interest rates imposed by the various world governments, and so what you have to observe is the net difference in interest. Note that on Wednesday you get charged (or credited) three times the regular overnight interest because the settlement period (if you were to actually deliver the cash) would happen over the weekend, so you get a “3-day rollover” from your broker, hence why the Wednesday overnight interest is three times as large as normal. So how do you calculate the interest? The formula is simple: (1 day interbank deposit rate for the base currency) minus (1 day interbank deposit rate for the counter currency) = equals interest rate differential 20 Forex Sailing then divide the interest rate differential by 365 and that gives you the daily differential then multiply the daily differential by the total open position in currency pair, then divide by 100 If I just lost you then don’t worry about this stuff, your broker will calculate all this automatically for you anyhow. Brokers usually post the interbank rates somewhere on their websites so you can go to look it up if you want to. The reason why I’m not providing you with the interest rates here is because they change from time to time. Ok, say you’ve made a trade on EUR/USD. Today the interbank deposit interest rate for EUR is 2.00% and USD is 3.50%. Let’s say you traded one lot (100k) and were long EUR, short USD, then this is how it would look: Long EUR (2.00) – Short USD (3.50) = -1.50 -1.50 / 365 = -0.004110 (-0.004110 x 100,000) / 100 = 4.11 Therefore 4.11 EUR would be debited from your account. If you were to trade in the opposite direction then 4.11 EUR would be credited to your account for the overnight interest. Assuming an exchange rate of 1.2200 then 4.11 EUR equals 5.01 USD. If you are trading in a mini account, or with some brokers even a regular account, then regardless of whether you should be receiving overnight interest or be paying a small amount they will ignore what you should either receive or pay out and simply charge you a flat 1 pip overnight interest. This is a rip- off! Some brokers will charge/credit you appropriately, but some brokers will nail you with the 1 pip charge regardless. For the above reason you should carefully select the broker you’ll engage in “Sailing” trades with (I later suggest a good broker for this). This can make a huge difference for you! Let’s say that you entered into a trade on EUR/USD that lasted 60 days (counting weekends). If your broker charges you 1 pip per day then you’ll pay them $600 per lot traded! If you were long EUR/USD with another broker then you would earn $300.60 in interest (meaning you would do $900.60 better on that trade than with the other broker), or you would only pay $300.60 interest if you traded in the opposite direction (saving you $299.40, roughly half, from what that other broker would have 21 Forex Sailing charged). Either way it is far preferable to trade with a broker that charges you overnight interest like this. NEW BROKER INSTRUCTIONS In my previous eBooks I recommend that you use either FXCM or RefcoFX as your Forex trading broker. As I’ve stated in “Forex Scalping” that recommendation isn’t because I consider them to be the best brokers overall, but simply because they are the best brokers, in my opinion, to use for a new trader. Other reasons aside, the primary reason that I suggested you use them is because their trading platform is so easy to use. A newbie trader with limited understanding should relatively easily figure out how to place market orders, entry orders, stops and limits. Other brokers’ trading platforms are more complicated and far less intuitive for implementation of trades. When you are learning about Forex trading it is better to stay with the simpler to use brokers (FXCM & RefcoFX) as you don’t need to clutter your mind with the mental gymnastics needed with the more complicated brokers. But by the time you are reading this eBook, “Forex Sailing”, I would now consider you to be somewhat more advanced in your understandings and ready to learn about the more complex brokers’ trading platforms. There are two additional reasons why it is important to learn how to work with these more complicated trading stations. 1. Some other brokers offer you a more competitive pip spread on currency pairs. If you are utilizing tiny-stop trades that are better suited for currency pairs with smaller spreads then you’ll have more currency pairs available to you to trade with. For example, one of my favorite pairs to trade is GBP/USD, however I get a 3 pip spread with other brokers whereas FXCM currently gives a 5 pip spread on this pair. Obviously I wouldn’t trade that pair with FXCM if I can get a more competitive spread. 2. In the eBook “Forex Scalping” I promised to share the secret of which broker (at the time of this writing) still guarantees stop orders under all volatile circumstances (i.e. FA), which means that you can sleep easy at night not worrying that something bad could happen to blow out your account. I will discuss this topic and reveal the broker a little later in this section. 22 Forex Sailing Before you continue reading this section please be aware that at first reading this can seem quite confusing. If you are new to Forex and are already feeling a little overwhelmed with all that you are learning then it may be best to skip reading this section for now. If it takes you a while to grasp these concepts then don’t worry about it. It took me a long time to wrap my brain around these ideas when I was learning it (and sometimes I still have to pause to think about it). Most authors who have explained these steps seem to explain it clear as mud and you have to really think about it. I’ve thought about how to explain this stuff to you in the easiest way I think I can so that you’ll have a somewhat easier time learning this. I hope the above paragraphs didn’t scare you off, as it is not my intent to do so. After a little while all this will become easy for you. In this section I’ll explain to you how to place the following order types: Market, Stop, Limit, Trailing Stop, OCO, If-Then, If-Then OCO, and explain GTC & GFD. That stuff is relatively easy to understand but more importantly I’ll explain how to understand “Stop vs. Limit” orders (it’s not what you think). I am showing snapshots from the broker “ACM”, but the general ideas shown here will work the same with most other brokers. MARKET ORDER Let’s start off here with placing a “Market Order” since it is the simplest thing to show you, and this is a no-brainer for you to grasp. The easiest way to place such an order at the current market price is to click either the red area to sell a lot to “go short” (you can change the quantity of lots in the Qty field) or to click the blue area to buy a lot to “go long”. This is called “One Click 23 Forex Sailing Dealing”, and as soon as you click you’ll instantly have a trade activated. As you can see from the above picture the price is displayed in the colored areas, and the price you click on is the price you get (FYI – also notice that here I get a 2 pip spread on EUR/USD). That is pretty much it. Once you do this you have an active trade BUT realize that you DON’T have a stop set! CONCEPT OF STOPS & LIMITS Ok, here comes the fun part. Before I explain the other order types (i.e. OCO, If-Then, etc…) you need to grasp the concepts of “Stops & Limits”. Whenever you make a trade you will always be doing these three things. Let’s pretend you’ve gone “long” on a trade (you bought going up) then sooner or later you must exit that trade, and to exit a position that you’ve bought then obviously you need to sell your position. When you “sell” to exit your trade then you’ll either sell it for a profit or for a loss. As by now you should already understand, if you were to set an order to sell at a higher price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to sell at a lower price for a loss then you would accomplish this by setting a “stop order”. All this should be obvious to you as well for the opposite direction if you were to go “short” on a trade (you sold going down). Sooner or later you must exit that trade, and to exit a position that you’ve sold (shorted) then obviously you need to buy your position. When you “buy” to exit your trade then you’ll either buy it for a profit or for a loss. If you were to set an order to buy at a lower price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to buy at a higher price for a loss then you would accomplish this by setting a “stop order”. Here is a diagram to show you this visually. 24 Forex Sailing So if you are already in a trade, either long or short (for example by doing a market order) then you will need to place at the very least a stop order (to protect you from unlimited loss) and possibly a limit order (to automatically exit at a predetermined profit). You can accomplish either individually or better yet by doing an “OCO” order (explained later). It is important to understand that you CAN NOT place a Sell-Stop order or a Buy-Limit order above the current market price, nor can you place a Sell- Limit order or a Buy-Stop order below the current market price. If you attempt to do so then your broker will return an error and the order won’t be entered. The correct order needs to be placed on the correct side. If you understand what I just said then congratulations for you (you’re a Mensa candidate), but if you are confused then just reread the above a few times until it sinks in. ENTRY ORDERS - STOPS vs. LIMITS In the above example we assumed you already had an active trade, and we just looked at how to exit that trade with either a stop or limit order. You might have entered that trade, for example, by simply doing a market order. But what if you want to do an “Entry Order” (the broker will automatically enter you into a trade once the market hits your predetermined price)? If you’ve played with FXCM’s trading platform then you know that they let you do so very easily, however with other brokers you need to do a little mental gymnastics. I’ve decided (after thinking about whether to do it or not) to not explain to you the reasoning behind why what I’m about to tell you is the way it is, as I think that it might only confuse you (at first). All that is important to understand is 25 Forex Sailing the HOW (not the why). Once you grasp the “how” later you’ll figure out the “why”. There are four (4) variations for placing an “Entry” order that you need to know, and here they are: 1. If you want to enter to Buy (go long) once the market hits a predetermined price that is ABOVE the current market price then you do so with a “Buy-Stop” order. (used if you believe that if the market moves up to that price that it’ll continue in that direction – example used: “Surfing” a wave top; pattern breakout) 2. If you want to enter to Buy (go long) once the market hits a predetermined price that is BELOW the current market price then you do so with a “Buy-Limit” order. (used if you believe that if the market moves down to that price that it’ll bounce back up – example uses: within-range trading; buying at the 62% Fibonacci retracement) 3. If you want to enter to Sell (go short) once the market hits a predetermined price that is BELOW the current market price then you do so with a “Sell-Stop” order. (used if you believe that if the market moves down to that price that it’ll continue in that direction – example used: “Surfing” a wave bottom; pattern breakout) 4. If you want to enter to Sell (go short) once the market hits a predetermined price that is ABOVE the current market price then you do so with a “Sell-Limit” order. (used if you believe that if the market moves up to that price that it’ll bounce back down – example uses: within-range trading; buying at the 62% Fibonacci retracement) Here is a diagram to help you understand this visually: 26 Forex Sailing The above can be used to place either a “Stop Order” or a “Limit Order”, but realize that once it is activated that you don’t have either a Stop set for loss, or a Limit set for profit (which you should have at least a stop set). What you have to realize is that though the words “Stop” and “Limit” are used to define those order types for entry you MUST understand that you shouldn’t confuse them with being a “Stop” for loss or a “Limit” for profit. The fact that those words are used to define two different concepts is what leads many people to confusion, so be sure to get these ideas straight in your mind. Here is what an order box looks like for this type of order: 27 Forex Sailing IF-DONE ORDER The “If-DONE” order is the simplest of the “conditional” orders. “Conditional” means that IF the first order is entered (i.e. your Entry order) DONE then activate the following secondary order. The most common application is IF your Entry order is triggered (say the market reaches the peak of a Surfable wave) THEN place a second order to act as a Stop for loss (incase the market reverses back down to the bottom of your wave and keeps going in a losing direction). Alternatively, the second conditional order could be made to act as a Limit for profit, but as I’ve adamantly told you in my previous eBooks that you should always have a Stop set for loss, so you would typically use an “IF-DONE” only for that purpose. The “IF” part is your Entry order, so you would use the rules described in the above section on how to place your entry order. The “DONE” part is where you set your Stop or Limit order (for a Stop-Loss or Limit-Profit) as described in an earlier section. Here is what an order box looks like for this type of order: 28 Forex Sailing OCO – ONE CANCELS the OTHER Earlier I explained the variations of exiting a trade once you are already in a trade. The two ways to exit is to Stop for loss or Limit for profit. If you have a trade already engaged (say you manually entered at current market price) and if you want to have both a Stop for loss and a Limit for profit placed on that trade then you would use an “OCO”. OCO places the two entry orders (that would cancel the existing trade, either for profit or for loss) and once one of those two orders gets triggered then the other one just disappears (since it is no longer needed). This is why this form of order is called “OCO” because one of the orders will cancel the other (One Cancels the Other). If, for example (this is one of the four variations explained earlier), you are active in a trade going long (up) then you will set the OCO to have two orders; one as a Sell-Limit (above current market price – this is your Limit for profit), and the other as a Sell-Stop (below current market price – this is your Stop for loss). Here is what an order box looks like for this type of order: 29 Forex Sailing IF-DONE OCO This order type combines the “IF-DONE” and the “OCO” into one. Basically this is used if you want to place an Entry order (accomplished in the “IF” part) that has both a Stop set for loss and a Limit set for profit (accomplished in the “DONE – OCO” part). Just apply all the rules I’ve explained earlier for each part. Here is what an order box looks like for this type of order: 30 Forex Sailing TRAILING STOP One thing that I love about FXCM is that they have (relatively recently) added the ability to trail stops automatically against the trade you have entered. This is a wonderful feature that is very useful for a few types of strategies. Unfortunately not all brokers have automatic trailing stops, and those that do have different ways that they are implemented. ACM, the broker whose platform I am showing you here does have an automatic trailing stop, except that it is a separate order, thus you can’t tie it in with an Entry order (IF DONE OCO). Oh well, here is what it is and how it works (with them). You simply set a Stop order (as you’ve learned earlier) except here you have an additional option to set how many pips behind the market it is to trail. If for example you were to set a trailing stop behind your long trade (going up) for say 30 pips, then as the market moves up your stop will automatically readjust itself to remain that far away, so if the market eventually reverses you would get stopped out about 30 pips away from where the market peaked. Here is what an order box looks like for this type of order: GTC vs. GFD 31 Forex Sailing You’ll notice that the order windows have an option between “GTC” and “GFD”. GTC means “Good Till Closed”. That means that your order will remain in effect indefinitely until it is either completed or you manually cancel it. If you placed an order that didn’t get triggered today the order will remain pending for days, weeks, months or however long it takes until the market moves to trigger it, or if you simply close it. You should certainly have your stop loss orders set with this option because the market might not reverse today to stop you out, but it could tomorrow, and you want the protection of your stop loss orders indefinitely. Furthermore, certain types of trades might require you place an Entry order that might not get fulfilled today, but you want it to be fulfilled whenever the market eventually does what you expect it to. The GTC is the default option when you are placing orders, and for most purposes you can simply leave it as it is. GFD means “Good For Day”. That means that your order will remain in effect today until it is either completed, you manually exit it, or the day ends. If the market conditions don’t trigger the order today then it will automatically abort and the end of the day. You might want to use this for short-term day-trade Entry orders or for conditions that only apply for today (i.e. for the “Netless Candle” technique you’ll learn later in this eBook). CHANGING ORDERS If you have pending orders (of any type) then if you change your mind about the order you can either cancel it or modify it. To cancel a pending order simply right-click on it and select “Cancel Order”. To modify a pending order simply right-click on it and select “Modify Order”. You will now be able to change the variables of the order such as the strike price. CAUTION If you’ve been trading with FXCM or RefcoFX for a while then you might have become accustomed to the fact that your stops and limits are tied to your trade, and that by manually exiting the trade those other things are automatically canceled as well. You need to be cautious however when using 32 Forex Sailing these other types o
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