Analyzing The Trading Day - Part IV

Let me go over the post Analyzing The Trading Day - Part II one more time and then I’m going to show you how to program your computer to do all the math.

See the Chart 4. P1 equals 45.5. P2 is 23.5. The difference is 22. 22 pips times .25

is 5.5 pips 

As prices rise from P2 to P3 (which is unknown at this point) we keep subtracting 5.5 from each successive high being made.

 Now, notice prices approaching the moving averages. The EMA’s are declining and they’ve crossed over. At P3 prices reach their high point of 1.36356 and start declining (P3 to P4). We subtract 5.5 from 35.6 and get 30.1. That’s where we’ll enter the trade. 

We place a limit order to sell short X number of units at 1.36301 by pressing the F5 key (see help=>keyboard shortcuts) or the “sell” button at the bottom of any chart. In a second I’ll show you how many units we should use based on how much money we can afford to lose. 

Now, what if prices turn around after we’ve been filled. They start going up . . and up . . and up until we realize they’re going higher. P3 is not yet the high and we can’t let prices go too far. We’re losing money on every pip that goes higher. If we don’t have a stop loss order in place we’re going to be hurt. That’s especially so if our PC restarts or crashes before we can place our stop loss. 

I use a formula that makes it simple. I take the high (P3) and add two times the spread. If it was a sell stop I would subtract two times the spread from the low point. 

In this example, since the spread is 1.2, the stop loss is 2.4 plus 1.36356 (35.6) which puts the stop at 1.36380.

Now, how do we figure how much we’ll lose? It’s going to be the difference between the entry point and our stop, times the number of units we’re using. 

If we were using 20,000 units ($2 per pip) it would be $15.8 (1.36380 minus 1.36301 times $2). The difference is 7.9 pips. Keep that figure in mind.

If that’s too much of a loss we would work backwards to determine the number of units we should actually use. Let’s say our loss should be no more than ten dollars. 

We take $10 and divide it by 7.9. We get 1.2658. This is equal to 12,658 units, which I would round off to 12,000 units since I’m a conservative trader. If needed we could check this by multiplying $1.20 by 7.9. We get $9.48. That checks. 

The FIG-2 is a form I’ve drawn that helps me keep track of all the numbers we’ve been talking about. 

Using this form I know where to get in (EP - entry point), where to get out (TGT), where I want to abandon the position (STOP), and how many pips I’ll make (GAIN) if I’m successful. 

I’ll also know how many pips my entry point is from the high or low (PTE - pips to entry), as well how many units I want to use. The PTE is helpful when you’re trying to follow a high or low up or down. 

Now take a look at the display below. Wouldn’t it be nice to have all these numbers all figured out for you and listed in a neat little package? Well, you can. And it’s free!

FIG-1

FIG-2