Chapter 7
Trade Parameters for Various Market Conditions

After learning about the emergence of the foreign exchange market, who the major players are, significant historical milestones, and what moves the markets, it is time to move on and discuss some of my favorite strategies for trading currencies. However, before I even begin going over these strategies, the most important first step for any trader, regardless of the market that you are trading in, is to create a trading journal.

Keep a Trading Journal

Through my experience, I have learned that being a successful trader is not about finding the holy grail of indicators that can perfectly forecast movements 100% of the time, but instead, to develop discipline. I cannot undermine the importance of “the journal” as the primary first step to becoming a successful and professional trader. While working on the Inter-bank FX trading desk at J.P. Morgan and then on the Cross-Markets trading desk after the merger with Chase, the trading journal mentality was engrained into the minds of every dealer and proprietary trader on the trading floors, regardless of rank. The reason was simple—the bank was providing the capital for trading and we needed to be held accountable, especially since each transaction involved millions of dollars. For every trade that was executed, we needed to have a solid rationale as well as justification for the choice of entry and exit levels. More specifically, you had to know where to place your exit points before you placed the trade to approximate worst case losses and to manage risk.

With this sort of accountability, the leading banks of the world are able to breed successful and professional traders. For individual traders, this practice is even more important because you are trading with your own money and not someone else's. Bank traders are trading with someone else's money so regardless of how poorly they perform over a one- or two-week basis, they will receive their paycheck twice a month. At a bank, traders have plenty of time to make the money back without any disruptions to their daily way of life—unless of course they lose $1 million in one day. As an individual trader—you do not have this luxury. When you are trading with your own money, each dollar lost is a dollar less that you own. So even though you should only be trading with risk capital, or money that would not otherwise be used for rent or groceries, one way or the other, the pain is felt. To avoid repeating the same mistakes and taking large losses, I cannot stress enough the importance of keeping a trading journal. The journal is designed to ensure that as a trader, you only take calculated losses and learn from each mistake. The trading journal setup that I recommend should be broken up into three parts:

1. Currency pair checklist
2. Trades that I am waiting for
3. Existing or completed trades

Currency Pair Checklist

The first section of your trading journal should consist of a spreadsheet that can be printed out and completed every day. This purpose of this checklist is to get a feel of the market and to identify trades. It should list of all of the currency pairs that are offered for trading on the left column, followed by three columns for the current, high, and low prices, and then a series of triggers laid out as a row on the right hand side. Newer traders should start with following only the four major currency pairs, which are the EURUSD, USDJPY, USDCHF, and the GBPUSD, and then gradually add the AUDUSD, USDCAD, and NZDUSD, followed by the nondollar pairs. Although the checklist that I have created is fairly detailed, I find that it is a very useful daily exercise and should take no more than 20 minutes to complete once the appropriate indicators are saved on the charts. The purpose of this checklist is to get a clear visual of which currencies are trending and which are range trading. Comprehending the big picture is the first step to trading successfully. Too often have I seen traders fail because they lose sight of the overall environment that they are trading in. The worst thing to do is to trade blindly. Trying to pick tops or bottoms in a strong trend or buying breakouts in a range-bound environment can lead to significant losses. Just take a look at Figure 7.1 of the EURUSD. If you tried to pick bottoms in this pair, it would have led to an entire year of frustrating and unsuccessful trading. In trending environments, traders will find a higher success rate by buying on retracements in an uptrend or selling on rallies in a downtrend. Picking tops and bottoms should only be a strategy that is used in clear range trading environments and even with that, traders need to be careful of contracting ranges that can lead to breakout scenarios.

Figure 7.1 EURUSD Chart

Source: eSignal

A simplified version of the daily market overview sheet that I use is shown in Figure 7.2.

Date - Time

Trending

Range

Currency Pair

Current Price

Daily High

Daily Low

10-day High

10-day Low

Bollinger Band Up

Bollinger Band Down

(14) above 25

Crosses 50-Day

Crosses 100-day

Crosses 200-day

Bollinger Band Range

ADX (14) below 25

RS1 (14) Greater than 80

(14) Less than 80

Stochastics > 70

Stochastics < 30

EURUSD

1.105

1.1144

1.0923

X

X

X

X

GBPUSD

USDJPY

USDCHF

AUDUSD

NZDUSD

USDCAD

EURJPY

EURGBP

EURCHF

AUDJPY

CHFJPY

GBPJPY

GBPCHF

AUDCAD

EURCAD

AUDNZD

Figure 7.2 Currency Checklist

As you can see in Figure 7.2, the first two columns after the daily high and low prices are the levels of the 10-day high or low. Recording this price helps to identify where current prices are within previous price action. This helps traders get a gauge of whether we are pressing toward a 10-day high or low or if we are simply trapped in the middle of the range. Yet the prices alone do not provide enough information to determine if we are in a trending or a range-bound environment. The next five indicators is a checklist for determining a trending environment. The more X marks in this section, the stronger the trend.

The first column in the trending indicator group is the “ADX (14) above 25.” ADX is the Accumulation Distribution Index, which is the most popular used indicator for determining the strength of a trend. If the index reading is above 25, it indicates that a trend has developed. Generally speaking, the greater the number, the stronger the trend. The next column is Bollinger Bands. When strong trends develop, the pair will frequently tag and cross either the upper or lower Bollinger Band. The next three trend indicators are the longer term moving averages. A break above or below these moving averages may also be indicative of a trending environment. With moving averages, crossovers in the direction of the trend can be used as a further confirmation. If there are two or more Xs in this section, traders should be looking for opportunities to buy on dips in an uptrend or sell on rallies in a downtrend rather than selling at the top and buying back at the bottom of the range.

The last section of the trading journal is indications of range. The first indicator is also ADX, but this time, we are looking for ADX below 25, which signals that the currency pair's trend is weak. Next, we look at the traditional oscillators, RSI and stochastics. If the ADX is weak and there is significant technical resistance above, provided by indicators such as moving averages or Fibonacci retracement levels, and RSI and/or stochastics are at overbought or oversold levels, we identify an environment that is highly conducive to range trading.

Of course, the market overview sheet is not foolproof, and just because you have a lot of X marks in either the trend or range group doesn't mean that a trend will not fade or a breakout will not occur. Yet, what this spreadsheet will do is prevent traders from trading blindly and ignoring the broader market conditions. It provides traders with a launching pad from which to identify the day's trading opportunities.

Trades That I Am Waiting For

The next section in the trading journal lists out the possible trades for the day. Based on an initial overview of the charts, this section is where you should list the trades for which you are waiting. A sample entry would look like the following:

April 5, 2015

1. Buy AUDUSD on a break of 0.7850 (previous day high)
2. Stop at 0.7800 (50-day SMA)
3. Target 1—0.7925 (38.2% Fibonacci retracement of Nov-Mar bull wave)
4. Target 2—0.8075 (Upper Bollinger)
5. Target 3—10-day Trailing Low

As soon as your entry level is reached, you know exactly how to take action and where to place your stops and limits. Of course, it is also important to take a quick glance at the market to make sure that the trading conditions that you were waiting for are still intact. For example, if you were looking for a strong breakout with no retracement to occur at the entry level, when it does break, you want to make sure that the break has decent momentum. This exercise will help you develop a plan of action to approach your trading day. Before every battle, warriors will regroup to go over the plan of attack—in trading, you want to have the same mentality. Plan and prepare for the worst-case scenario and know your plan of attack for the day!

Existing or Completed Trades

This section is developed and used to enforce discipline and to learn from your mistakes. At the end of each trading day, it is important to review this section to understand why certain trades resulted in losses and others in profits. The purpose of this section is to identify trends. To understand why this is important, let's look at an example that is completely unrelated to trading. On a normal given day, most people will subconsciously inject a lot of “ums” or “uhs” into their daily conversation. However, most of these people do not even realize that they are even doing so until someone records their conversation and replays it back to them. This is one of the ways that professional presenters and newscasters train to kick the habit of using placeholder words. Having worked with over 65,000 traders, too often have I seen these traders make the same mistakes repeatedly. This includes taking profits too early, letting losses run, getting emotional about trading, ignoring economic releases, or entering a trade prematurely. Keeping a record of previous trades is like keeping a recording of your conversations. When you flip back to the trades that you have completed, you may have a perfect map of what strategies have or have not been profitable for you. The reason why a journal is so important is because it minimizes the emotional intervention of trades. I frequently see novice traders take profits early but let losses run. The following are two samples of trade journal entries that could have provided learning opportunities:

February 12, 2015

1. Trade: Short 3 lots of EURUSD @ 1.1045
2. Stop: 1.1195 (former all-time high)
3. Target: 1.0800
4. Result: Trade closed on Feb 13, 2015—stopped out of the 3 lots @ 1.1195 (–150 pips)
5. Comments: Got margin call! It broke the all-time high, I thought it was going to reverse, did not stick to stop—kept letting losses run, eventually margin call closed out all positions. Note to self: MAKE SURE STICK TO STOPS!

April 3, 2015

1. Trade: Long 2 lots of USDCAD @ 1.2135
2. Stop: 1.2000 (strong technical support—confluence of 50-day moving average and 68% Fibonacci retracement of Feb—March rally)
3. Target: First lot @ 1.2295 (upper Bollinger and 5 pips shy of 1.2300 psychological resistance)
4. Second lot @ 1.2450 (Former head and shoulders support turned resistance, 100-day SMA)
5. Result: Trade closed on April 5, 2015—stopped out of the 2 lots at 1.2000 (–135 pips)
6. Comments: USDCAD did not continue uptrend and was becoming overbought, I didn't see that ADX was weakening and falling from higher levels, there was also a divergence in Stochastics. Note to self: MAKE SURE TO LOOK FOR DIVERGENCES NEXT TIME!

Unlike many traders, the best trades in my opinion are the trades where both technicals and fundamentals support the trade. In general, I prefer to stay out of trades that contradict my fundamental outlook. For example, if there is a bullish formation in both the GBPUSD and the AUDUSD due to U.S. dollar weakness, but the Bank of England has finished raising interest rates, while the Reserve Bank of Australia has full intentions of tightening to tame the strength of the Australian economy, I would most likely choose to express my bearish dollar view in the AUDUSD rather than the GBPUSD. My bias for choosing the AUDUSD over the GBPUSD would be even stronger if the AUDUSD already offered a higher interest rate differential than the GBPUSD. I seen technicals thwarted by fundamentals so often that now I always incorporate both into my trading strategy. I use a combination of technical, fundamental, and positioning, and am generally also a trend follower. I also typically use a top-down approach that involves the following:

1. I will start by taking an overall technical survey of the market and pick the currency pairs that have retraced to attractive levels for entry in order to participate in a medium term fundamentally supportive trend.
2. For currencies with a dollar component (i.e., not the crosses), I determine if my initial technical view for that pair coincides with my fundamental view on the dollar, as well as my view on how upcoming U.S. releases may impact trading for the day. The reason why I look at the dollar specifically is because 80% of all currency trades involve the dollar, which makes U.S. fundamentals particularly important.
3. If it is a cross, I will proceed by determining if the technical view coincides with the fundamental outlook using Fibonacci retracements, ADX, moving averages, oscillators, and other technical tools.
4. Then I like to look at positioning using the Commitment of Traders Report or the FXCM Speculative Sentiment index to see if it supports the trade.
5. If I am left with two equally compelling trade ideas, I will choose the one with a positive interest rate differential.

Have a Toolbox—Use What Works for the Current Market Environment

Once you have created a trading journal, it is time to figure out which indicators to lay on your charts. The reason why a lot of traders fail is because they neglect to realize that their favorite indicators are not foolproof. Buying when stochastics are in oversold territory and selling when it is in overbought territory is a strategy that is used quite often by range traders, to a great deal of success, but once the market stops range trading and begins to trend, then relying on stochastics could lead to tremendous amount of losses. In order to become consistently profitable, successful traders need to learn to be adaptable.

One of the most important practices that every trader must understand is to be conscious of the environment that they are trading in. Every trader needs to have some sort of checklist that will help to classify the trading environment so that they can determine whether the market is trending or range bound. Defining trade parameters is one of the most important disciplines of trading. Too many traders have tried to pick the top within a trend, only to wind up with consistently unprofitable trades.

Although defining trade parameters is important to traders in any market (currencies, futures, equities), it is particularly important in the currency market since over 80% of the volume is speculative in nature. This means that currencies can spend a very long period of time in a certain trading environment. Also, the currency market obeys technical analysis particularly well, given its large scale and number of participants.

There are basically two types of trading environments, which means that at any point in time an instrument is either range trading or trending. The first step every trader needs to take is to define the current trading environment. The shortest time frame that traders should start looking at when their trading day starts are daily charts, even if you are trading on a 5-minute time frame.

Step #1: Determine the Trading Environment

Rules to Determining Trading Environment

There are many different ways that traders can determine whether a currency pair is range trading or trending. Of course, many people do it visually, but having set rules will help to keep traders out of trends that may be fading or to prevent traders from getting into a range trade in the midst of a possible breakout. In Figure 7.3, I have outlined some of the rules that I look for in order to classify a currency pair's trading environment.

Trade	Rules	Indicators
Range	ADX < 20 Decreasing implied volatility Risk reversals near choice or flipping between favoring calls and puts	Bollinger, Bands, ADX, Options
Trend	ADX > 25 Momentum consistent with trend direction Risk reversals strongly bid for put or call	Moving averages, ADX, Options, Momentum

Figure 7.3 Trend/Range Trading Rules

Profiling a Range Environment

Look for:

1. ADX (Average Directional Index) less than 20—The Average Directional Index is one of the primary technical indicators used to determine the strength of a trend. When ADX is less than 20, this suggests that the trend is weak, which is generally characteristic of range-bound market. If ADX is less than 20 and trending downward, it provides a further confirmation that the trend is not only weak but will probably stay in a range-trading environment for a while longer.
2. Decreasing implied volatility—There are many ways to analyze volatility. What I like to do is actually track short-term versus long-term volatility. When short-term volatility is falling, especially after a burst above long-term volatility, it is usually indicative of a reversion to range trading scenarios. Volatility usually blows out when a currency pair experiences sharp, quick moves. It contracts when ranges are narrow and the trading is very quiet in the markets. The lazy man's version of the way I track volatility is Bollinger Bands, which is actually also a fairly decent measure for determining volatility conditions. A narrow Bollinger Band suggests that ranges are small and there is low volatility in the markets, while wide Bollinger Bands are reflective of large ranges and a highly volatile environment. In a range-trading environment, we are looking for fairly narrow Bollinger Bands, ideally in a horizontal formation similar to the USDJPY chart in Figure 7.4.
3. Risk reversals flipping between calls and puts: A risk reversal consists of a pair of options, a call and a put, on the same currency. Risk reversals have both the same expiration (1 month) and sensitivity to the underlying spot rate. They are quoted in terms of the difference in volatility between the two options. While in theory these options should have the same implied volatility in practice, these volatilities often differ in the market. Risk reversals can be seen as having a market polling function. A number strongly in favor of calls or puts indicates that the market prefers calls over puts. The reverse is true if the number is strongly in favor of puts versus calls. Thus, risk reversals can be used as a substitute for gauging positions in the FX market. In an ideal environment, far out of the money calls and puts should have the same volatility. However, this is rarely the case, since there is generally a sentiment bias in the markets that is reflected in risk reversals. In range-bound environments, risk reversals tend to flip between favoring calls and puts at nearly zero (or equal). This indicates that there is indecision among bulls and bears, and there is no strong bias in the markets.

Figure 7.4 USDJPY Bollinger Band Chart

What Does a Risk Reversal Table Look Like?

According to the risk reversals in Figure 7.5, we can see that the market is strongly favoring yen calls (JC) and dollar puts over the long term. EURUSD short-term risk reversals are near choice, which is what you are looking for when profiling a range-bound environment. Risk reversal information used to be readily available but is more difficult to find these days. Currently, the only place we know of that provides this information is the Bloomberg Professional Terminal, which costs over US$1500 a month.

14:40 GMT April 19th
1 Month To 1 Year Risk Reversal
Currency	1M R/R	3M R/R	6M R/R	1YR R/R
USDJPY	0.3/0.6 JC	0.7/1.0 JC	1.1/1.3 JC	1.3/1.6 JC
EURUSD	0.1/0.3 EC	0.0/0.3 EC	0.0/0.3 EC	0.1/0.4 EC
GBPUSD	0.0/0.3 SP	0.0/0.3 SC	0.0/0.3 SC	0.0/0.3 SC
USDCHF	0.2/0.2 CC	0.0/0.3 CC	0.0/0.4 CC	0.1/0.5 CC
* JC = Japanese yen call			* SC = Sterling call
* EC = Euro call			* CC = Swiss call
* SP = Sterling put

Figure 7.5 Risk Reversals

Identifying a Trending Environment

Look for three things:

1. ADX (Average Directional Index) greater than 20—As mentioned earlier when we talked about range-trading conditions, the Average Directional Index is one of the primary technical indicators used to determine the strength of a trend. In a trending environment, we look for ADX to be greater than 25 and rising. If ADX is greater than 25 but sloping downward, especially off of the extreme 40 level, you have to be careful of aggressive trend positioning since it may indicate that the trend is waning.
2. Momentum consistent with trend direction—In addition to using ADX, I also recommend looking for confirmation of a trending environment through momentum indicators. Traders should look for momentum to be consistent with the direction of the trend. Most currency traders will look for oscillators to point strongly in the direction of the trend. For example, in an uptrend, trend traders will look for the moving averages, RSI, stochastics, and MACD to all point strongly upward. In a downtrend, they will look for these same indicators to point downward. Some currency traders use the momentum index, but in my experience, it is less popular and reliable. Instead, one of the strongest momentum indicators is a perfect order of moving averages. A perfect order is when we have the moving averages line up perfectly: that is, for an uptrend, the 10-day SMA is greater than the 20-day SMA, which is greater 50-day SMA. The 100-day SMA and the 200-day SMA are below the shorter-term moving averages. In a downtrend, a perfect order would be when the shorter-term moving averages stack up below the longer-term moving averages.
3. Options (risk reversals)—With a trending environment, we are looking for risk reversals to strongly favor calls or puts. When one side of the market is laden with interest, it is usually indicative of a strong trending environment or that a contra-trend move may be brewing if risk reversals are at extreme levels.

Step #2: Determine the Time Frame for Trade

Once you have determined that a currency pair is either range-bound or trending, it is time to determine how long you plan on holding the trade. The following is a set of guidelines and indicators that I use for trading different time frames. Not all of the guidelines need to be met, but the more guidelines that are met, the more solid the trading opportunity.

Intraday Trade (Range)

Rules:

1. Use hourly charts to determine entry points and daily charts to confirm that a range trade exists on a longer-time frame.
2. Use oscillators to determine entry point within range.
3. Look for short-dated risk reversals to be near choice.
4. Look for reversal in oscillators (RSI or stochastics at extreme point).
5. Trade stronger when prices fail at key resistance or hold key support levels (use Fibonacci retracement points and moving averages).

Indicators Used:

1. Stochastics, MACD, RSI, Bollinger Bands, options, Fibonacci retracement levels

Medium-Term Range Trade

Rules:

1. Use daily charts.
2. There are two ways to range trade medium term—position for upcoming range trading opportunities or get involved in existing ranges.
3. Upcoming range opportunities: Look for high-volatility environments, where short-term implied volatilities are significantly higher than longer-term volatilities. Seek reversion back to the mean environments.
4. Existing ranges: Use Bollinger Bands to identify existing ranges.
5. Look for reversals in oscillators such as RSI and stochastics.
6. Make sure ADX is below 25 and ideally falling.
7. Look for medium-term risk reversals near choice.
8. Confirm with price action—failure at key range resistances and bounces on key range supports (using traditional technical indicators).

Indicators:

1. Options, Bollinger Bands, stochastics, MACD, RSI, Fibonacci retracement levels

Medium-Term Trend Trade

Rules:

1. Look for ranges on daily charts and use weekly charts for confirmation.
2. Refer back to the characteristics of a trending environment—look for those parameters to be met.
3. Buy breakout/retracement scenarios on key Fibonacci levels or moving averages.
4. Look for no major resistance levels in front of trade.
5. Look for candlestick pattern confirmation.
6. Look for moving average confluence to be on same side of trade.
7. Enter on a break of significant high or low.
8. The ideal is to wait for volatilities to contract before getting in.
9. Look for fundamentals to also be supportive of trade—growth and interest rates. You want to see a string of economic surprises or disappointments depending on directional bias.

Indicators

1. ADX, Parabolic SAR, RSI, Ichimoku Clouds, Elliot waves, Fibonacci

Medium-Term Breakout Trade

Rules:

1. Use daily charts.
2. Look for contraction in short-term volatility to a point where it is sharply below long-term volatility.
3. Use pivot points to determine whether a break is a true break or a false break.
4. Look for moving average confluences to be supportive of trade.

Indicators

1. Bollinger Bands, moving averages, Fibonacci

Risk Management

Although risk management is one of the more simple topics to grasp, it is also one of the most important. Too often we have seen traders turn winning positions into losing positions and solid strategies result in losses instead of profits. The fact of the matter is that regardless of how intelligent and knowledgeable a trader may be about the markets, their own psychology will cause them to lose money. Why does this happen? Are the markets really so enigmatic that few can profit? Or is there simply a common mistake that virtually all traders are prone to making? The answer is the latter. And the good news is that the problem, while it can be an emotionally and psychologically challenging, is ultimately fairly easy to grasp and solve.

Most traders lose money simply because they have no understanding or place no importance in risk management. Risk management involves essentially knowing how much you are willing to risk and how much you are looking to gain. Without a sense of risk management, most traders simply hold on to losing positions for an extremely long amount of time, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: The trader ends up having more winning positions than losing ones, but ends up with a negative P/L. So, what can traders do to ensure they have solid risk management habits? There are a few key guidelines that every trader, regardless of their strategy or what they are trading, should keep in mind:

• Risk-reward ratio. Traders should look to establish a risk-reward ratio for every trade they place. In other words, they should have an idea of how much they are willing to lose, and how much they are looking to gain. Generally, the risk-reward ratio should be at least 1:2, if not more. Having a solid risk-reward ratio can prevent traders from entering positions that ultimately are not worth the risk.
• Stop-loss orders. Traders should also employ stop-loss orders as a way of specifying the maximum loss they are willing to accept. By using stop-loss orders, traders can avoid the common predicament of being in a scenario where they have many winning trades but a single loss large enough to eliminate any trace of profitability in the account. Trailing stops to lock in profits are particularly useful. A good habit of more successful traders is to employ the rule of moving your stop to break even as soon as your position has profited by the same amount that you initially risked through the stop order. At the same time, some traders may also choose to close a portion of their position.

For those looking to add to a winning position or go with trend, the best strategy is to treat it as if it were a new trade of its own, independent of the winning position. If you are going to add to a winning position, perform the same analysis of the chart that you would if you had no position at all. If a trade continues to go in your favor, you can also close out part of the position while trailing your stop higher on the remaining lots that you are holding. Try thinking about your risk and reward on each separate lot that you have bought if they are at different entry points as well. If you buy a second lot 50 pips above your first entry point, don't use the same stop price on both, but manage the risk on the second lot independently from the first.

Using Stop-Loss Orders to Manage Risk

Given the importance of money management to successful trading, using the stop-loss order is imperative for any trader looking to succeed in the currency market. Stop-loss orders allow traders to specify the maximum loss they are willing to accept on any given trade. If the market reaches the rate the trader specifies in his/her stop-loss order, then the trade will be closed immediately. As a result, using stop-loss orders allows you to know how much you are risking at the time you enter the trade.

There are two parts to successfully using a stop-loss order: (1) initially placing the stop at a reasonable level and (2) trailing the stop—or moving it forward toward profitability—as the trade progresses in your favor.

Placing the Stop Loss

We recommend two ways of placing a trailing stop-loss order:

• The first is a two-day low method. These volatility-based stops involve placing your stop-loss order approximately 10 to 20 pips below the two-day low of the pair. For example, if the low on the EURUSD's most recent candle was 1.1200, and the previous candle's low was 1.1100, then the stop should be placed around 1.1090—10 pips below the two-day low—if a trader is looking to get long. This type of trailing stop allows you to keep tight control of the position and minimizes the time in trade. The downside is that it can be closed prematurely during a brief period of consolidation.
• Parabolic SAR. Another form of volatility-based stop is the parabolic SAR, an indicator that is found on many currency trading charting applications. This indicator graphically displays a small dot at the point on the chart where the stop should be placed. The benefit of parabolic SAR is that it is dynamic and generally further away from the current price.

There is no magic formula for what works best in every situation, but the following is an example of how these stops could be used.

Upon entering a long position, determine where support is and place a stop 20 pips below support. For example, let's say this is 60 pips below the entry point. If the trade earns a profit of 60 pips, close half of my position using a market order, then move the stop up to the entry point. At this point, trail the stop 60 pips behind the moving market price. If the parabolic SAR moves up so that it is above the entry point, you could switch to using parabolic SAR as the stop level. Of course, during the day, there can be other signals that could prompt you to move your stop. If the price breaks through a new resistance level, that resistance then becomes support. You can place a stop 20 pips below that support level, even if it is only 30–40 pips away from the current price. The underlying principle you have to use is to find a point to place your stop where you would no longer want to be in the trade once the price reaches that level. Usually it falls at a point where the price goes below support.

Aside from employing proper risk management strategies, one of the other more crucial yet overlooked elements of successful trading is maintaining a healthy psychological outlook. At the end of the day, a trader who is unable to cope with the stress of market fluctuations will not stand the test of time—no matter how skilled they may be at the more scientific elements of trading. Here are some tips:

• Practice emotional detachment. That is, traders must make trading decisions based on strategies independent of fear and greed. One of the premiere attributes a good trader has is emotional detachment: While these traders are dedicated and fully involved in their trades, they are not emotionally married to them; they accept losing, and make their investment decisions on an intellectual level. Traders who are emotionally involved in trading often make substantial errors, as they tend to whimsically change their strategy after a few losing trades, or become overly carefree after a few winning trades. A good trader must be emotionally balanced, and must base all trading decisions on strategy—not fear or greed.

• Know when to take a break. In the midst of a losing streak, consider taking a break from trading before fear and greed dominate your strategy.

  Not every trade can be a winning one. As a result, traders must be psychologically capable of coping with losses. Most traders, even successful ones, will go through a stretch of losing trades. The key to being a successful trader, though, is being able to go through a losing stretch unfazed and undeterred. If you are experiencing a string of losing trades, it may be time to take a break from trading. Often, taking a few days off from watching the market to clear your mind can be the best remedy for a losing streak. Continuing to trade relentlessly during a tough market condition can breed greater losses and ruin your psychological trading capacity. Ultimately, it's always better to acknowledge your losses rather than continue to fight through them and pretend they don't exist. Make no mistake about it: Regardless of how much you study, practice, or trade, there will be losing trades throughout your entire career. The key is to make them small enough that you can live to trade another day and allow your winning trades room to breathe and flourish. You can overcome a lot of bad luck with proper money management techniques. This is why we have stressed a 2:1 reward to risk ratio, and why we recommend not risking more than 2% of your equity on any single trade.

Whether you are trading forex, equities, or futures, there are 10 trading rules that successful traders should live by:

1. Limit your losses.
2. Let your profits run.
3. Keep position sizes within reason.
4. Know your risk versus reward ratio.
5. Be adequately capitalized.
6. Don't fight the trend.
7. Never add to losing positions.
8. Know market expectations.
9. Learn from your mistake—keep a trade log.
10. Have a maximum drawdown.