Sigma-D: A Simple Approach to Trading Forex


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I'm going to outline my approach to trading forex (primarily). The techniques and methods I utilise and the specifics with regard to setups, entry, in-trade management and exit. I will discuss with systematic and discretionary factors.

When I use the word 'you' I am talking about myself (to myself?) only and whatever it is I'm saying need not necessarily apply to any other trader. If it strikes a chord with you too, that’s great.

As a guiding principle: Before accepting anything offered by anyone else, test it, challenge it, pick holes in it and think it though. [Including stuff on this thread of course.] If something isn't immediately obvious, intuitive, simple and employable - treat it with great suspicion. Doesn’t mean it’s wrong in any absolute sense, just that if it doesn’t work for you for whatever reason, simply don’t use it.

Only use in live trading what you have been able to demonstrably prove works for you initially on a test basis and then with fractional stakes to test it ‘under fire’. Then and only then will it have a chance of being considered for your trading toolkit.
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Traders: Most retail traders of Forex will be doing so purely on a directional basis and will rarely move into more ‘exotic’ plays involving derivatives or structured trades or even into other markets, asset classes and instruments. This is a big mistake. It’s my belief that those who ONLY trade spot forex do so in the belief it is an easy and quick road to riches. They are not traders. Those who trade or are at least interested in and utilise data from other markets because they are genuinely enthused with trading in the sense of a global marketplace where everything has a price and is related and impacts upon and from every other asset – these are traders. The former have little chance of success, the latter much more so.

The Need for Speed: There are times of low volatility which means there isn't going to be much worth trading. Sitting out is more sensible than getting into a marginal trade just for some ‘action’.

Diversification (in the narrowest sense): Usually, when you have one specific currency showing strength/weakness, it is doing so against a number of others which are showing the opposite. It makes sense to trade the basket rather than attempt to guess which pair will yield the greatest movement.

Greed & Fear: The biggest cause of failure is not inability to recognise an obvious trend, but of setting/moving stops too close to the action.
If you don't get taken out from having your stop too close, you exit too soon, you don't allow the trade to develop.

While a 15 pip stop might be more attractive with regard to position size than a 50 pip stop, if the 50 pip stop lets you make a successful trade with a 10 pip profit with a position size 5 times smaller than the 15 pip trade that cost you all your risk, where’s the sense in minimising your probability of success and making a profit?

Targets and Why You Need One (at least one)
: Regardless of chosen trading timeframe, having carried out your analysis of directional bias, factors in place to recommend entry and expended the energy to make the entry, if you don't allow the price to move, if you start getting nervous or twitchy and exit, you'll deprive yourself of the reward for your hard work.

The problem with sitting in a trade and where nerves and twitch come from is from uncertainty - not knowing where you should sensibly be expecting to exit i.e. a target.

Many will suggest that you should allow price action to tell you when enough is enough , but they stop short of telling you how you recognise this delightful state of affairs. This is where having a target takes a large chunk of stress out of the game.


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Reward/Risk: There is a delusion that reward/risk has to be a multiple for a trade to make sense; It doesn't. A self-serving industry has grown up around performance metrics. You need a high win rate for both financial and emotional comfort. You may think you and your system can handle 100 small losses and the one big win which dwarfs them - but you can't.

Indicators: There is a delusion that complex and tailored indicators are essential for success. They are not. Another self-serving industry has grown up around this myth. If you can get by without any or just a moving average or whatever - you're probably on the right track.

Intellectual, Social, Personal and Financial Requirements for Success in Trading: There is a delusion that trading is complex, takes years of study and experience and significant capital to become an accomplished and consistently profitable trader. It isn't and it doesn't. Again, another industry (totally self-serving) has grown up around this canard.


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Don't chase the Price versus It's never too late to get on board. Which is Correct?

This apparent paradox disappears when you have a clear take on where the stop needs to be and where the most viable target level sits. Going back to an above observation on reward/risk, it isn't a matter of the relative distance to each of these levels which decides the viability of the trade, but the probability of price reaching your target.

e.g I've got 40 pips to stop and a 85% probability of making it to target in 15 pips - will I take this trade? Of course I will. Even those hypnotised with the delusion of positive expectancy would (in theory) go for that trade.

But what about a 100 pip stop with an 85% chance of 15 pip target? The +ve expectancy crowd would suggest not - but they aren't looking at what the price has to do to move all the way back through that 100 pips of pain compared with the ease with which it'll slip into profit with the target that much closer.


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Introductory Summary

The ability to trade with consistent success and to produce and compound profits over the longer term does not requires years of experience and study, nor unlimited capital, nor any special skills.

You don’t need thousands of hours screen time or thousands of trades or to have lost thousands of pounds in order to learn the basics. There are no dues to be paid.

You don’t need any special indicators or software or tips services or inside information.

You do need to ignore all the hype, the unnecessary complications and complexities dreamt up by those who themselves don’t understand it or have a separate agenda in designing such unnecessary complexities.

So what is required?

You require an ability to recognise an opportunity:

You require an ability to recognise when your trade is no longer viable:

You require an ability to recognise when to stay put and let your trade develop:
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