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How To Use Volume In Day Trading

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How To Use Volume In Day Trading

how to use volume in day trading by Top Dog Trading
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The analysis of volume you’ve been taught for trading stocks, Forex and futures is generally designed for trading daily charts, so when learning how to use volume in day trading, you must use a little different technique.

Volume patterns on intraday charts are much different than they are on daily, weekly and monthly charts.

The reason? Before you can use volume signals for day trading, there’s a “metapattern” of volume to every intraday chart that must be understood. Watch the brief video below for more details.

You can email me at barry@topdogtrading.com and I’ll be happy to show you how to get my Free Cycle Indicator to help you with your day trading strategies.

Enjoy the video and please leave your comments below.

You’ll find the text below this video if you want to follow along.

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons at the very bottom of this post.

VIDEO TEXT:

Welcome to this Day Trading Tips Video. And today we are going to talk about how to use volume in day trading.

You know it’s interesting that a lot of people read about volume and get very enamored with the interpretation of volume patterns. And that’s a good thing. It’s good to learn how to read volume for sure. But there’s a big difference in how to use volume in day trading, as opposed to how to use volume on daily charts, where each bar represents one day of activity. And I’m going to show you why that is.

So first of all, let’s take a look at what we’ve got here. We’ve got a nice move up this day, then goes sideways, and then from there it just goes up the rest of the day. During the sideways time we got big volume in here. And that includes this section where the market is retracing. So it’s actually retracing on very high volume. In fact some of highest volume of the day if we take this across.

Then when it goes sideways, volume kicks in to roughly about this level here. We get a little bit of a volume spike in this section, and if we carry that up to the price action nothing really happened in price. It just still stayed within that consolidation. Then we do get a nice little volume spike here, and that does help to propel the market into a new uptrend.

But a lot of people would think then that volume should say strong, in order to sustain that uptrend. And it does not. In fact it stays below the level that we had earlier in the morning. And it stays down into about this zone, until about 30 minutes before the close. So the sustained uptrend, if you notice that, for the majority of the day, stays below the previous volume. Actually it stays about equal to the volume of the contraction period. And it stays below the volume of the morning.

INTRADAY DAY TRADING VOLUME METAPATTERN

So some people might wonder, well that seems strange. How can that be? Alright. There are a couple of reasons for that. Number 1 is that as I said. Intraday volume is interpreted differently than the volume on daily bars, weekly bars and monthly bars. And the reason for that is that intraday, there is what we call a metapattern of volume. And that volume metapattern is basically this …

The key to learning how to use volume in day trading is to understand the intraday volume metapattern.

It will be high in the morning, and then it will kind of come down like this, and then towards the close it goes back up. And that’s your basic metapattern. It’s almost like a saucer but it’s a little more weighted toward the end of the day, and it’s that saucer pattern that is your metapattern. That when you read the individual bars, volume bars with the associated price bars, you have to take into account the metapattern that is fading against the individual pattern for each bar or set of bars.

Not knowing this, is what makes traders stumble when trying to figure out how to use volume in day trading.

You have that on intraday charts because you have most of the volume is on open. And then in the first hour or two of the day, we get a burst of volume at the end of the day, and then during the middle of the day, during lunch and even after lunch. Normally not as much.

IT HAPPENS MOST DAYS, BUT NOT ALL DAYS

Now it’s a metapattern, it’s not true every single day. But it is true most days. That’s surely a general pattern. So this is a general pattern that’s going on, that really doesn’t mean much with regard to interpreting price action. It’s just that’s how the number of participants time their participation in the market, during the day, during day between the open and the close.

So the patterns are skewed a bit by that metapattern. In other words, the smaller patterns, the micro patterns on volume are skewed by the overall metapattern. So when you’re studying volume, make sure that you are, if you are an intraday trader, if you are a day trader, make sure that you are reading volume patterns that are specifically designed for day trading, and not for longer term charts. Now let me show you one more thing while we are around this topic.

So that’s the key to How To Use Volume In Day Trading.

HOW TO READ PURE PRICE/VOLUME ACTION

Now that you understand how to use volume in day trading, let’s look at how to read volume on a daily chart.

Now I have switched it over to a daily chart. And now volume becomes much more meaningful because we are not fighting that metapattern. We are able to just read pure volume patterns based on how price is acting.

So here we get an obvious peak in volume. And the market head going down dramatically, so that’s an exhaustion pattern. And that’s very good. Now here is the key, so we look at that, we mark that and then we look here and we see that the market comes back to retest this low over here.

Now what happens with volume, it’s much lower, much lower. So that’s a signal and you can read this purely with price and volume without having to worry about battling that meta pattern we have in intraday charts. And that’s a good signal that that market is probably going to put in a low there because you don’t have as much strength going down.

Now interestingly, as the market goes up, a lot of people would think, okay that’s a very nice move. That’s a big climb. Why isn’t volume going up? So this is where lot of people misunderstand volume. You don’t always want a dramatic increase on volume to continue a trend, in order to sustain the trend. And the reason for that is that if it’s too strong early on, then all the market participants that want to participate already are in. and there’s not a lot of people to come in later. So a gradual addition of volume over time actually helps to sustain trends.

THE VOLUME PATTERN YOU DON’T WANT TO SEE

Now what’s interesting though, which is we don’t want to see is this. So market comes back down, and then it goes back up. Retest this high. Now when it retest this high, what happened with volume. Okay now volume went actually down. That’s not a good sign for the sustaining of an uptrend. In other words, you want it to maintain but you don’t want it to be too dramatic. So like over here, we were so dramatic and that was the end. Right. That was capitulation.

So you want a nice, steady continuation of line to come into sustain a trend but you definitely don’t want it to decrease. And when the market’s decreasing in volume, and comes back up, retest a high, when ones already been established. That’s not a bullish sign.

Then we get an increasing volume here. Again volume decreases here, alright. And that lines up with this move here. Then we get another increase in volume. We actually make highest high in volume since over here. And when does that happen, that happens right here. That move starts there. And so once again, we get a nice move of volume. Remember it’s an increase in volume, even though the price is going down. So you don’t necessarily want the volume histogram moving in the same direction as price. If you want to see a strong move, you just want to see good volume.

And again, because it reaches up to this high, it’s an exhaustion pattern. It’s an over extension of volume. And again, it’s coming back down to this support level over here. Which is already established. So that support level combined with an exhaustion pattern of volume indicates that that’s a very high probability low and that’s probably going to be at at least for now.

So that’s how you read volume when you are just reading it purely. Just understand that when you study volume, whether it’s in the book or course whatever, you have to study the patterns and volume for daily charts and then you have to also be sure that if you want to know how to use volume in day trading, you’re studying different patterns.

Pay It Forward My Friend

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons below.

Leave a comment below telling me what other stock market trading strategies you’d like me to teach in the future.

Also I am giving away one of my favorite day trading strategies. Just fill out the yellow form at the top of the side bar on the right. Once you do that, I’ll personally send you an email with first video.

For another video on volume strategies, Simply click here:
http://www.topdogtrading.com/trading-volume-on-day-trading-and-swing-trading-charts/

Go here to Subscribe to my YouTube Channel for notifications when my newest free videos are released:

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Day Trading Strategies – Invisible Support/Resistance

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Day Trading Strategies – Invisible Support/Resistance

Day Trading Strategies with Barry Burns
Barry Burns at the Nasdaq

This article and video give you “Invisible” Support and Resistance levels for Day Trading Strategies that can really help your trading. I call them “invisible” because most people don’t see them – giving you the all important “EDGE” in trading because now YOU will see them!

Support and resistance levels provide price levels we look to potentially buy, short, or take profits. They must be used with other tools however, such as trend, cycles and momentum.

You can email me at barry@topdogtrading.com and I’ll be happy to show you how to get my Free Cycle Indicator to help you with your day trading strategies.

Enjoy the video and please leave your comments below.

You’ll find the text below this video if you want to follow along.

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons at the very bottom of this post.

VIDEO TEXT:

Hey my friend. Doctor Barry Burns here with Top Dog Trading. Today we are going to talk about Day Trading Strategies, specifically the mid pivots. Now mid pivots are something that not very many people use, and I love them. I find they work really really well. But there is a time to use them and a time not to. And I’m going to share all that with you here in just next few minutes.

So let’s talk about pivots first of all and how they are used in day trading strategies. When I’m talking about pivots right now in this context, I’m not talking about what I would refer to as swing highs and swing lows. Some people call these pivots just because it made a high and low, swing high and swing low. And that’s perfectly fine. And there is a context for that. But what I’m talking about today are what I call floor trader pivots which is a formula and its based off of the previous day’s high, low and close.

3 OF THE MOST IMPORTANT DAY TRADING PRICE LEVELS

When you’re using day trading strategies specially. Three of the most important levels you should always be aware of is the previous day’s high, that’s right here, yesterday’s high. Yesterday’s close, and you can see that over here. And then Yesterday’s low. And the reason you need to be have watching these and have these on your charts is because, well pretty much everybody else does. So they have a self-fulfilling prophecy to them in the sense that people are looking at those levels as being major levels of value. So that’s all fine.

Now the floor trader pivots, its basically a formula that’s based off of those 3 values. So it forms a, let me take this off first, so we can focus on the pivots. It creates a pivot point that’s your central pivot, that’s considered the neutral zone, the kind of the line on the sand between the bull and bear market.

Then you have resistance levels and they are called R1, R2, R3 and they be above the pivot point, or sometimes called central pivot. And then below that you have your support levels and so those are S1, S2, S3. And so those are below your pivot point or your central pivot. Those are in your bearish area.

Okay. Now, what I do is, and that’s very common. A lot of people do this. Very very common. And again as part of the reason it works is because so many people use them. So for example, when we look at S1, you know the market bounced off a bit here. R1, the market bounced off of it there, went back into the previous day’s high, came up to it there. So yes provides support resistance. It’s not enough to trade with, but it’s part of a trading methodology.

HERE ARE THE “INVISIBLE” DAY TRADING LEVELS

Now the other thing that I do though, that’s rather unique and I’m certainly not the only one who does this, but not many people do it. So here we have your pivot point and here we have your R1. What I do is, I put mid pivots in there. So as you can see, I have it labelled R1-PP (Pivot Points) so that’s the 50% level, very simple to calculate. Just 50% between the pivot point and R1. And that’s it. Its not brain surgery.

And then same thing going down. So between the pivot point and S1, 50% level there and get my mid pivot. Now very simple and lot of the best things in trading are simple. But I just draw extra support resistance levels. And as you can see the market indeed. After it came off of R1. It came back up and where did it find resistance, at that mid pivot. Boom. Right there. There was no regular pivot point there, just the mid pivot. Same thing down here. We came down, went down to S1, then where did we come back up to? Well, we went to yesterday’s low, and then we kind of hovered around that. But then we went back up, and where did we go? We went to the mid pivot. So, and by the way as it came down from there, same thing, where did we end up? Down to the another mid pivot. This one’s between S1 and S2. And we found support there. So they are good levels to have. And again the market really does respond to them.

WHEN TO USE THEM AND WHEN NOT TO USE THEM

Now to finish up, I told you that I would tell you when to use them, and when not to use them. So because pivot points are calculated on the previous day’s high, low and close. If the previous day was a narrow range day, then don’t use the mid pivots. I don’t use the mid pivots.

Why? Because then your regular pivot lines will be very close together. And you’ll just have two new lines that are all close together, and it just looks messy. And there is really not much room for the market to move. It’s normally going to move between its regular pivot levels and not the mid pivots. So the mid pivots work best when the previous day was a wide range day. And you have a lot of space between the regular pivots.

Between pivot point, R1, R2. As you can see, it even goes off of the chart here. So we’d have to go all the way up here for R2, all the way up there for R3. See how far those are apart. So to put mid pivot there, gives us some support resistance levels in that wide space.

So that’s it for today. And I invite you to add those to your charts. Test it out. See it for yourself. And see if it makes sense to you. And I think you are going to find that they provide great support resistance levels that you haven’t seen before, Invisible Support Resistance. That you’ll see and people on the other side of your trade, they won’t see it. Gives you an edge. It gives you an advantage.

Pay It Forward My Friend

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons below.

Leave a comment below telling me what other stock market trading strategies you’d like me to teach in the future.

Also I am giving away one of my favorite day trading strategies. Just fill out the yellow form at the top of the side bar on the right. Once you do that, I’ll personally send you an email with first video.

For another video on support/resistance strategies, Simply click here:
http://www.topdogtrading.com/forex-charts-support-resistance-tricks/

Go here to Subscribe to my YouTube Channel for notifications when my newest free videos are released:

https://www.youtube.com/user/TopDogTrading?sub_confirmation=1

Stock Market Trading: Support & Resistance Strategies That Work

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Stock Market Trading with Top Dog Trading
Top Dog Traders are the coolest!

Stock Market Trading: Practical Support and Resistance Techniques You Can Use In Real Trading

The video below demonstrates how to use support/resistance levels in your stock market trading. BTW, these also work for trading futures, E-minis and Forex.

Support and resistance levels establishes the price at which you may want to buy, sell or take profits in your stock trades. For best results, you’ll want to also incorporate a timing tool (that measures cycles) and look for the confluence of time and price.

You can email me at barry@topdogtrading.com and I’ll be happy to refer you to some free videos on how to time your entries, and even provide you with my Free Cycle Indicator to help you with your stock market trading.

Enjoy the video and please leave your comments below.

You’ll find the text below this video if you want to follow along.

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons at the very bottom of this post.

Video Text:

Hey everyone. Doctor Barry Burns here with Top Dog Trading. And today I’m going to share with you a stock market trading strategy that is very simple, but very, very good. And you know, lot of times, the simple stuff is the best. I think we try to overcomplicate things, so today, let’s stick with the basics, but give you something that actually works.

So let’s get into it. What we are looking for are major swing highs and major swing lows. Now, I have this automated. I created an indicator here, Top Dog Swings, and it’s got a very specific mathematical formula to it. It automatically draws these horizontal blue lines on my stock market trading chart. So it’s beautiful, because it’s automated. I don’t even have to think about it.

THE LOGIC BEHIND SUPPORT/RESISTANCE FOR TRADING THE STOCK MARKET

The basic premise behind it, the logic behind it, is to find major swing highs and major swing lows. Like that major swing low there. This major swing high here. That would really stand out visibly to anybody trading this particular timeframe, this happens to be a 30 minute chart. But you do this on a daily chart, weekly chart, 2 minute chart, 1000 tick chart. Whatever timeframe you’re trading, the concept is to mark the visible highs and lows that really would standout to just anybody looking at a chart.

So those are what I call horizontal support resistance levels or swing, highs and lows. And then those becomes supportive resistance. So, now here is what happens in real life, okay. Let’s talk about, that all sounds great to trade support resistance but here’s what happens in real life.

So we got this swing low here, that low definitely stands out very dramatically. And then you’re going to say, okay well I’m going to buy when the market comes down to that support level. And then guess what, they gap the market through it. This by the way, very very common. And it’s the professionals who do this.

The reason is because they see that, they see that support level, and they basically just don’t want to deal with it, because they know when lot of people see that support level, people will be buying off of it, or taking profits into it. And that will reduce the energy, the selling energy coming into it, and if they would want to create a lower price for this stock, they just don’t want to deal with it, so they gap it through the next day. Isn’t that nice? Yeah, they’re nice guys.

So it looks like it’s an untradeable situation and essentially that is. But there’s still a trade opportunity and that is the very basic principle, lot of you have heard of which is support becomes resistance. So now its overhead resistance, so we can still use it to trade, we still keep our line on there. And we wait for the market to come back into that, what was supporting this, now resistance.

So now we can take a short trade off of that. And we’re going to need some other things because we need to look at trend, momentum and cycles but that is one of the energies, that we look for support resistance. We look to short off resistance and buy off support. So that’s how we trade that type of dynamic when they gap it through the major support level. We’ll look to buy off of that same level, or in this case, short off of that same level, but as resistance.

STOCK MARKET TRADING – “THE PRINCIPLE OF 3”

Now, let me teach you one more technique that’s also very very powerful. This technique is called the Principle of 3. This is a little different, but equally as important. So here we go.

The market has come up. We have, well actually here with the high little bit, but this is our real major swing high here. Now, will this resistance level be broken and market go above it or will it hold and the market move back down? That’s the question.

So one of the things we do and again there is a market psychology behind this. when I talk about market psychology by the way, what I’m referring to is that the market is not all about mathematics. It’s about how human beings and the computers that they’ve programmed behave in an auction place. The bid and ask auction place that’s the basis of stock market trading.

There’s a mass psychology element to it, and yes even with trading programs there is, because it’s people who program them, use it personally strategy for that. That they believe has a logic to it.

Here we put in a major swing high. Alright, we come back to test it. Here and here. And this is the principle of 3. So market comes up, initiates the swing high, comes back down. Retest that price and its same now, essentially it’s the next day.

Hmm, yesterday the market said, now the stock’s not worth more than you know dollar 98 and a few cents. What about today. And then, when the market comes back down, they say, oh I guess it didn’t. And then they try one more time.

There’s the third time at this price level, and if the market, meaning the masses, the thousands, the millions of people who are all trading this and their little computers and their big computers. All say no. No, we are not paying more than that. After the third time, the market gives up. Everybody kind of, there’s a collective movement of people saying, ‘Alright we get it. We’ve tried 3 days in a row, 1, 2, 3.’

This a 30 minute chart but these are 3 separate days, delineated by these vertical lines here. And they say, ‘Gosh! Okay, I guess nobody is going to buy at this higher level.’ and therefore what, People get a bearish sentiment.

And so therefore the market goes down and people will short, and yes. That’s what happens. Glad that happened. Okay, indeed it gapped down even here. Didn’t it? So we get another gap and see what happens. Comes right back to that level, and provides a resistance level. And then we gap up above it.

So again these gaps, they like to gap above and below the supportive resistance levels. Remember that’s principle number 1 today, that’s lesson number 1. Got 2 lessons today, our stock market trading video. And then the other is the principle of 3, for whether to determine if support resistance levels are going to hold, or if they are going to be broken.

Also, I am giving away one of my favorite trade strategies. It’s called the Rubber Brand Trade. It has an extremely high win loss ratio. And I’ll give that strategy to you absolutely free. You can learn it about in 20 or 25 minutes. It’s really quick. I’ve made a video explaining this trade strategy. You can get it absolutely free, by clicking on the image in the top left corner. Or if you are on a mobile device, then click the little ‘I’, with a circle around it, at the top right hand corner of this video. And once you do that, I will personally email the video to you.

Pay It Forward My Friend

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons below.

Leave a comment below telling me what other stock market trading strategies you’d like me to teach in the future.

Also I am giving away one of my favorite trade strategies. Just fill out the yellow form at the top of the side bar on the right. Once you do that, I’ll personally send you an email with first video.

For another video on support/resistance strategies, Simply click here:
http://www.topdogtrading.com/forex-charts-support-resistance-tricks/

Go here to Subscribe to my YouTube Channel for notifications when my newest free videos are released:

https://www.youtube.com/user/TopDogTrading?sub_confirmation=1

Forex Strategies – How You Can Use Trailing Stops Profitably

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Forex Strategies: How To Use Trailing Stops

Forex strategies from Top Dog Trading
Bottom Dog Traders don’t use trailing stops so they lose a lot of money when the market moves against them!

This brief tutorial shows how you as a trader of stock, futures or Forex can use trailing stops to manage your risk as part of your Forex strategies.

This is one of the most important Forex strategies, but it applies equally well to trading the stock market, futures and E-minis.

Using stops not only helps protect you against losses when the market moves against you. They can also help you maximize gains when the market moves in your direction.

WHICH TYPE OF STOP TO USE?

Some traders like to use limit orders for their stops. I prefer using market orders to assure that my stop is filled (though it may not be at the price I prefer).

How do I protect against getting filled at a much worse price than I want? That’s where hedging with options come in.

I also place those orders in my execution platform (called a “hard stop”) not just in my head. Some people don’t like to place hard stops because they’re worried that it makes them vulnerable to stop running. I have no concern about that at all.

The brief video below demonstrates how to employ trailing stops in your Forex strategies like a pro!

Enjoy the video and please leave your comments below.

You’ll find the text below this video if you want to follow along.

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons at the very bottom of this post:

Video Text:

Hey traders. Doctor Barry Burns here with Top Dog Trading. And today we are going to talk about Forex Strategies. Specifically how to use Trailing Stops.

Trailing stops are stops that you move as the market continues to go in your direction so that if the market goes against your position, you don’t lose so much money.

Let’s get right into it. And here is one technique, there are several techniques that could be used. I’ll talk a little bit about the principles I believe in, and then also share with you one specific technique that I use all the time.

If you went long, and we just use this example over here, and let’s say you went long there. Alright. We had a momentum shift pattern and we are now looking to go to the long side. Okay, so my initial stop would be immediately underneath this low. The reason for that is, this is my cycle indicator, my timing indicator.

CYCLE INDICATOR FOR YOUR FOREX CHARTS

It’s very important to have a timing indicator on your charts. Here’s why:

What is a chart? A chart is a 2 dimensional object. Right, so we have, down here at the bottom, if you can see this. So down here, at the bottom, we have the x axis, which is time, and over here we have the y axis, which is price. And that’s it. A chart is a 2 dimensional object.

A lot of people look at price, they look at volume. And that’s all great, you should. But it’s very interesting to me that very few people actually have an accurate timing tool. And if you don’t have an accurate timing tool, and know how to use it, that means you are neglecting 50% of the information on that 2 dimensional object, we call a chart.

Well, how in the world can you establish a probability scenario for yourself, if you are eliminating, not even considering 50% of the information on the 2 dimensional chart? So that’s why you must absolutely positively have an excellent timing tool, so you know when to get in, when to get out. And we use that, not only for when they get in, when they get out. But also for our trailing stops.

By the way, if you are interested in my timing tool, my cycle indicator here. It’s not the topic for today but send me an email or click one of the links here, and I’ll invite you to webinar. I will give you the indicator for free, and teach you how to use it for free as well.

TRAIL THOSE STOPS

Okay, so anyway, what we are doing then basically is we are just moving trailing stops as one of our Forex strategies, since we are long under a cycle low. Now the cycle low is determined when the colored line gets down here to about 55. So this would be your next cycle low.

After the market goes up here, it’s a cycle high area, then I would move my trailing stop once that cycle low is established. I would move my stop from here, take it away from there and I put it right underneath that low. Usually with Forex, I’m going to do it one pip plus the spread.

Then, let’s see, our next cycle low is over here. So it would go right below these bars here. Okay next cycle low comes in here, so here is the marking on the indicator. Next one’s over here. So we put it under here. The next one is here, the next cycle low indication, and so we put it there. So as you can see, as long as record is trending, putting in basically higher highs higher lows, we are going to be able to stay in the trade.

THE TREND IS YOUR FRIEND UNTIL THE END

Now it’s not exactly quite that simple, because trends have a certain average length of time that they last. And so we are taking that statistically into consideration as well. We don’t want to overstay our welcome.

But the point is, once we make a profit, I usually will lock in some profits, if I buy here, or I got some profits in the very next cycle high. And that does 2 things:

  1. Put some money in my pocket, and then if I get stubbed out for some reason, then I am not getting stopped out on as many lots, not as much size. So my losses remain small. And that’s critical. Absolutely critical.
  2. So another thing we do is not only use our trailing stops in our Forex strategies, but we also look for targets, meaning that as the market reaches certain levels, we will go ahead and take some profit. And the reason for that is, because if you only use trailing stops to get out, then you’re giving back a lot of money, as the market retraces down. So targets allow you to attempt to lock profits in at the highs.

So it’s a money management technique, which all Forex strategies should have. Part of the money management that I teach in the course, again beyond the scope of this particular video. Which is specifically on trailing stops.

That’s one type of trailing stop, and of course there’s others. And let me just finish up by saying two things.

THE LOGIC OF STOP PLACEMENT

This type of trailing stop is based on a very very specific principle. And that principle is this, ‘Stops go where you are wrong’. That’s the basic principle of stops.

So what we mean by, ‘where you’re wrong’? What I mean by, ‘where you’re wrong’ is, when the reason for you getting in the trade no longer exists, your trade should no longer exist. You should be out.

For example, if we bought this cycle low here, our market goes up a little bit, maybe it hits the moving average, and comes down and takes out this low. Well then the reason for me being in this trade long, no longer exists, because I was buying a cycle low. And that cycle low was violated, therefore I need to be out right below that. So the reason for being in the trade no longer exists, therefore the trade should no longer exist.

THE POPULAR TYPE OF TRAILING STOP I HATE

A very popular type of trailing stop used in Forex strategies is using average true range (ATR), meaning that you incorporate volatility in determining how far to keep the stop away from the current market position. I don’t like personally, those types of trailing stops. And there are two reasons:

  1. They’re usually too far away from my entry. And therefore I can’t hold to the critical principle of keeping your losses small, and letting your winners run. But the losses end up being big instead of small. Doing it my way, my losses are puny, tiny.
  2. Also, I don’t like it because there’s a natural cycle in the market, of the market going between expanding volatility and contracting volatility. So the problem is by the time, an expanded volatility is measured, by whatever indicator you’re using, to get an updated measure of that expanded volatility. Often you are about to go into a cycle of low volatility. And therefore those, those stops can be taken out or vice versa.

Worse is actually vice versa, when your measurement is of low volatility and the market is going to go into a high volatility and take you out. So for that reason, because it’s based on historical volatility, there is a cycle between changing from high to low, I don’t find them to be helpful, moving into the future in real time.

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