Only trade when price reaches the extremes of the range

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How to Use Stochastic Oscillator in Trading

Stochastic can be an effective technical analysis tool but at the same time it is hard to master. Read the following article to learn more about the Stochastic and ways to improve your results.

Stochastic Techniques

The Stochastic Oscillator is one of the most popular tools used by traders. It is among the most versatile indicators in the technical analyst’s arsenal but comes with a warning. Don’t be fooled by it. The tool’s versatility is a two-edged sword, it will display bullish and bearish signals in either type of the market and can easily lead traders astray. The key to understanding what this great indicator is telling is understanding market conditions. Market conditions dictate price action and by extension the types of trading tactics traders want to use with the Stochastic indicator.


The most basic signal the Stochastic can provide is a crossover. This indicator can give several types of crossovers and all of them have different meanings. The most basic crossover is when the %K line, the shorter term of the two lines, crosses over the %D line, the signal line. This type of signal is very short-term in nature, relative to your chart time frame, and may result in a very brief move. For better results consider trend-following crossovers.

Another type of crossover is when the %D crosses above the upper or lower boundary line, usually set at the 20 and 80 levels within the oscillator’s range. A cross above one is bullish and a cross below is bearish, but of course, relative to which line it is crossing and the underlying trend driving stocks. Again, for higher accuracy results, only trend-following crossovers should be considered.


Where crossovers indicate where the market is going now convergences are the means of identifying what the market has been doing over the past few days, weeks or months. As the %D line tracks along with an assets price it will make peaks and troughs in tandem with the underlying asset. If an asset is in rally mode and making new highs with each successive peak and the Stochastic peaks are also successively higher this is called convergence. Convergence is a sign of strength in a market and an indication of continuation.

For traders this means that asset prices should be expected to continue moving higher or, if there is another trough, that the assets prices will retest the previous high AT LEAST, if not continue moving higher. If a convergence forms with asset prices bumping up against a resistance target the trader can expect that resistance level to be broken and surpassed.


Divergences are the exact opposite of a convergence. If an asset price makes a new high, or a new low, and the stochastic fails to make a new high, or a new low, it is in divergence. This is an especially hard signal to trade because it signals weakness in a market and the potential for reversal, but not the timing of it. Divergences may carry on for many minutes, hours, days or weeks relative to your time frame. The key to using them is support and resistance targets. Support and resistance targets are prime price levels to target for potential price reversal.


Stochastic is very useful in trend following situation but those signals may fail in a no-trend situation. But don’t worry, stochastic is good for that too. When asset prices are ranging the upper and lower signal lines switch from indications of strength to indications of reversal. In a trading range price action moves from one extreme to another.

If prices move up to the upper extreme they are said to be overbought and overbought markets are ripe for reversal. If prices move down to the lower extreme they are said to be oversold and oversold markets are also ripe for price reversal. If an asset is in a trading range and there is no expectation for a break-out (convergences), any time price reaches the overbought or oversold level fade the move and trade for a reversal.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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Reading time: 11 minutes

Let’s consider the following statement. If it’s true that the market can only go up or down over the long-term, then using the most basic 1:1 risk/reward ratio, there should be at least 50% winners, shouldn’t there? Well, there isn’t. This article debates in favour of the notion that a trader is their own worst enemy, and that human error is at the root of most problems. In short, the main reason why Forex traders lose money is no rocket science. It’s the traders themselves.

Financial trading, including the currency markets, requires long and detailed planning on multiple levels. Trading cannot commence without a trader’s understanding of the market basics, and an ongoing analysis of the ever changing market environment. For those interested in investing and trading, read through the suggestions below and you will learn how to avoid losing money in Forex trading.


Overtrading – either trading too big or too often – is the most common reason why Forex traders fail. Overtrading might be caused by unrealistically high profit goals, market addiction, or insufficient capitalisation. We will skip unrealistic expectations for now, as that concept will be covered later in the article.

Insufficient capitalisation

Most traders know that it takes money to make a return on their investment. One of Forex’s biggest advantages is the availability of highly leveraged accounts. This means that traders with limited starting capital can still achieve substantial profits (or indeed losses) by speculating on the price of financial assets.

Whether a substantial investment base is achieved through the means of high leverage or high initial investment is practically irrelevant, provided that a solid risk management strategy is in place. The key here is to ensure that the investment base is sufficient. Having a sufficient amount of money in a trading account improves a trader’s chances of long-term profitability significantly – and also lowers the psychological pressure that comes with trading.

As a result, traders risk smaller portions of the total investment per trade, while still accumulating reasonable profits. So, how much capital is enough? Here it is important to learn how to stop losing money in Forex trading due to improper account management. The minimum Forex trading volume any broker can offer is 0.01 lot.

This is also known as a micro lot and is equivalent to 1,000 units of the base currency that is being traded. Of course, a small trade size is not the only way to limit your risk. Beginners and experienced traders alike need to think carefully about the placement of stop-losses. As a general rule of thumb, beginner traders should risk no more than 1% of their capital per trade. For novice traders, trading with more capital than this increases the chances of making substantial losses.

Carefully balancing leverage whilst trading lower volumes is a good way to ensure that an account has enough capital for the long-term. For example, to place one micro lot trade for the USD/EUR currency pair, risking no more than 1% of total capital, would only require a $250 investment on an account with 1:400 leverage. However, trading with higher leverage also increases the amount of capital that can be lost within a trade. In this example, overtrading an account with 1:400 leverage by one micro lot quadruples potential losses, compared to the same trade being placed on an account with 1:100 leverage.

Trading Addiction

Trading addiction is another reason why Forex traders tend to lose money. They do something institutional traders never do: chase the price. Forex trading can bring a lot of excitement. With short-term trading intervals, and volatile currency pairs, the market can be fast paced and cause an influx of adrenaline. It can also cause a huge amount of stress if the market moves in an unanticipated direction.

To avoid this scenario, traders need to enter the markets with a clear exit strategy if things aren’t going their way. Chasing the price – which is effectively opening and closing trades with no plan – is the opposite of this approach, and can be more accurately described as gambling, rather than trading. Unlike what some traders would like to believe, they have no control or influence over the market at all. On certain occasions, there will be limits to how much can be drawn from the market.

When these situations arise, smart traders will recognise that some moves are not worth taking, and that the risks associated with a particular trade are too high. This is the time to exit trading for the day and keep the account balance intact. The market will still be here tomorrow, and new trading opportunities may arise.

The sooner a trader starts seeing patience as a strength rather than a weakness, the closer they are to realising a higher percentage of winning trades. As paradoxical as it may seem, refusing to enter the market can sometimes be the best way to be profitable as a Forex trader.

If you feel confident that you can avoid trading addiction when trading, why not open a Forex trading account with Admiral Markets? Traders who choose Admiral Markets can trade with an award-winning, fully regulated broker that provides access to over 40 CFDs on currency pairs, tight spreads, fast deposits & withdrawals, and so much more! Click the banner below to start trading Forex today!

Building patience is rather the biggest asset when you don’t want to get addicted to trading, but what should you do if you are already addicted to trading? An expert’s opinion is always the best guidance. The following free webinar is hosted by experienced trader, coach and mentor – Markus Gabel – where he explains how you get trading addiction and what you can do about it.

Not Adapting to the Market Conditions

Assuming that one proven trading strategy is going to be enough to produce endless winning trades is another reason why Forex traders lose money. Markets are not static. If they were, trading them would have been impossible. Because the markets are ever-changing, a trader has to develop an ability to track down these changes and adapt to any situation that may occur.

The good news is that these market changes present not only new risks, but also new trading opportunities. A skilful trader values changes, instead of fearing them. Among other things, a trader needs to familiarise themselves with tracking average volatility following financial news releases, and being able to distinguish a trending market from a ranging market.

Market volatility can have a major impact on trading performance. Traders should know that market volatility can spread across hours, days, months, and even years. Many trading strategies can be considered volatility dependent, with many producing less effective results in periods of unpredictability. So a trader must always make sure that the strategy they use is consistent with the volatility that exists in the present market conditions.

Financial news releases are also important to keep track of, even if a selected strategy is not based on fundamentals. Monetary policy decisions, such as a change in interest rates, or even surprising economic data concerning unemployment or consumer confidence can shift market sentiment within the trading community.

As the market reacts to these events, there’s an inevitable impact on supply and demand for respective currencies. Lastly, the inability to distinguish trending markets from ranging markets, often results in traders applying the wrong trading tools at the wrong time.

Poor Risk Management

Improper risk management is a major reason why Forex traders tend to lose money quickly. It’s not by chance that trading platforms are equipped with automatic take-profit and stop-loss mechanisms. Mastering them will significantly improve a trader’s chances for success. Traders not only need to know that these mechanisms exist, but also how to implement them properly in accordance with the market volatility levels predicted for the period, and for the duration of a trade.

Keep in mind that a ‘stop-loss to low’ could liquidate what could have otherwise been a profitable position. At the same time, a ‘take-profit to high’ might not be reached due to a lack of volatility. Paying attention to risk/reward ratios is also an important part of good risk management.

What is the Risk Return Ratio?

The Risk/Reward Ratio (or Risk Return Ratio/ RR) is simply a set measurement to help traders plan how much profit will be made should a trade progress as anticipated, or how much will be lost in case it doesn’t. Consider this example. If your ‘take-profit’ is set at 100 pips and your stop-loss is at 50 pips, the risk/reward ratio is 2:1. This also means that you will break-even at least every one out of three trades, providing that they are profitable. Traders should always check these two variables in tandem to ensure they fit with profit goals.

The best way to avoid risks completely in Forex trading is to use a risk-free demo trading account. With a demo account you can trade without putting your capital at risk, while still using the latest real-time trading information and analysis. It’s the best place for traders to learn how to trade, and for advanced traders to practice their new strategies. To open your FREE demo trading account, click the banner below!

Not Having or Not Following a Trading Plan

How else do Forex traders lose money? Well, a poor attitude and a failure to prepare for current market conditions certainly plays a part. It’s highly recommended to treat financial trading as a form of business, simply because it is. Any serious business project needs a business plan. Similarly, a serious trader needs to invest time and effort into developing a thorough trading strategy. As a bare minimum, a trading plan needs to consider optimum entry and exit points for trades, risk/reward ratios, along with money management rules.

Unrealistic Expectations

There are two kinds of traders that come to the Forex market. The first are renegades from the stock market and other financial markets. They move to Forex in search of better trading conditions, or just to diversify their investments. The second are first-time retail traders that have never traded in any financial markets before. Quite understandably, the first group tends to experience far more success in Forex trading because of their past experiences.

They know the answers to the questions posed by novices, such as ‘why do Forex traders fail?’ and ‘why do all traders fail?’. Experienced traders usually have realistic expectations when it comes to profits. This mindset means that they refrain from chasing the price and bending the trading rules of their particular strategy – both of which are rarely advantageous. Having realistic expectations also relieves some of the psychological pressure that comes with trading. Some inexperienced traders can get lost in their emotions during a losing trade, which leads to a spiral of poor decisions.

It’s important for first-time traders to remember that Forex is not a means to get rich quickly. As with any business or professional career, there will be good periods, and there will be bad periods, along with risk and loss. By minimising the market exposure per trade, a trader can have peace of mind that one losing trade should not compromise their overall performance over the long-term.

Make sure to understand that patience and consistency are your best allies. Traders don’t need to make a small fortune with one or two big trades. This simply reinforces bad trading habits, and can lead to substantial losses over time. Achieving positive compound results with smaller trades over many months and years is the best option.

In Summary

There we have it, the main reasons why Forex traders fail and lose money, along with the steps traders need to take in order to prevent them from occurring. Studying hard, researching and adapting to the markets, preparing thorough trading plans, and, ultimately, managing capital correctly can lead to profitability. Follow these steps and your chances for consistent success in trading will improve dramatically!

Furthemore, to increase those chances even further, you should consider upgrading your MetaTrader trading platform with the ultimate enhancement – MetaTrader Supreme Edition! This free plugin offered by Admiral Markets enables you to boost your trading experience by adding excellent features such as the regular technical analysis updates provided by Trading Central, global opinion widgets, FREE real-time news, and so much more!

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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

This Blog is Systematic.

Also hydromatic, automatic: Rob Carvers blog. “It’s Geeks Enlightening”

Friday, 20 May 2020

A simple breakout trading rule (pysystemtrade)

B reakout. Not the classic home arcade game, seen here in Atari 2600 version, but what happens when a market price breaks out of a trading range.

The Atari 2600 version was built by Wozniak with help from Jobs exactly 40 years ago. Yes that Wozniak and Jobs. Source: wikipedia

In this post I’ll discuss a trading rule I use to look at breakouts. This will be an opportunity to understand in more general terms how I go about designing and testing trading rules. It will be fascinating for those who are interested in this, and full of mind numbing detail it you’re not.

I’m also doing this because I’ve talked about my breakout rule a bit on Elite Trader, and there’s been quite a bit of interest in understanding it further. Although the rule isn’t by any means some kind of magic bullet to take you on the path to fabulous wealth, it does add some diversification to the basic meat and potatoes moving average and crossover technical trend following system.

This, along with a bunch of other stuff, is in the latest version of my open source python backtesting engine pysystemtrade. The release notes will tell you more about what else has been put in since you last checked it. You can see how I did my plots in the messy script here.

As usual some parts of this post will make more sense if you’ve already read my book; and indeed I’ll be referring to specific chapters.

Initial development


The idea of a breakout is simple. Consider this chart:

This is crude from 2020 to last year. Notice that the price seems to be in a range between 80 and 120. Then suddenly in late 2020 it breaks out of this range to the downside. In market folklore this is a signal that the price will continue to go down. And indeed, as you’d expect given I’ve cherry picked this market and time period, this is exactly what happens:

This “big short” was one of the best futures trades of the last 18 months.

Introducing the simplest possible “breakout” rule

So to construct a breakout rule we need a way of identifying a trading range. There are an infinite Spending 5 seconds on google gave me just 3: Bollinger Bands, STARC bands or the commodity channel index (CCI). I have no idea what any of these things are. Indeed until I did this “research” I had never even heard of STARC or CCI.

It strikes me that the simplest possible method for identifying a range is to use a rolling maxima and minima, which handily the python package pandas has built in functions for. Here’s the first crude oil chart again but with maxima (green) and minima (red) added, using a rolling window of 250 business days; or about a year.

Notice that a range is established in 2020 and the price mostly stays within it. The “steps” in the range function occur when large price changes fall out of the rolling window. Then in late 2020 the price smashes through the range day after day. The rest is history.

Why use a rolling window? Firstly the breakout folklore is about the recent past; prices stay in a range which has been set “recently”; recently here is over several years. Secondly it means we can use different size windows. This gives us a more diversified trading system which is likely to be more robust, and not overfitted to the optimal window size.

Thirdly, and more technically, I use back adjusted futures prices for this trading rule. This has the advantage that when I roll onto a new contract there won’t be a sudden spurious change in my forecast. In the distant past though the actual price in the market will be quite different from my back adjusted price. If there is some psychological reason why breakouts work then the back adjustment will screw this up. Keeping my range measurement to the recent past reduces the size of this effect.

So the formulation for my breakout rule is:

forecast = ( price – roll_mean ) / (roll_max – roll_min)

roll_mean = (roll_max + roll_min) / 2

You may also remember (chapter 7 again) that I like my rules to have the right scaling. This scaling has two parts. Firstly the forecast should be “unit less” – invariant to being used for different instruments, or when volatility changes for the same instrument. Secondly the average absolute value of the forecast should be 10, with absolute values about 20 being rare.

Because we have a difference in prices divided by a difference in prices the forecast is already invarient. So we don’t need to include the division by volatility I use for moving average crossovers (Appendix B of my book).

Notice that the natural range for the raw forecast is -0.5 (when price = roll_min) to +0.5 (price = roll_max). A range of -20 to +20 can be achieved by multiplying by 40:

forecast = 40.0 * ( price – roll_mean ) / (roll_max – roll_min)

If the distributional properties of the price vs it’s range are correct then this should give an average absolute forecast of about 10. I can check this scaling using pysystemtrade, which will also correct the scaling if it’s not quite right. I’ll discuss this below.

The forecast in the relevant period is shown below. It looks like the absolute value is about 10, although this is just one example of curse. Notice the “hard short” at the end of 2020. At this stage I’m still not looking at whether the rule is profitable, but seeing if it behaves in the way I’d expect given what’s happening with market prices.

Now arguably my rule isn’t a breakout rule. A breakout occurs only when the price pushes above the extreme of a range. But most of the time this won’t be happening, yet I’ll still have a position on. So really this is another way to identify trends. If the price is above the average of the recent range, then it’s probably been going up recently, and vice versa.

However the “breakout” rule will behave a bit differently from a moving average crossover; I can draw weird price patterns where they’ll give quite different results. I’ll examine how different these things are in an average, quantitative sense, later on.

I should probably rename my breakout rule, or describe it as my “breakout” rule, but I can’t be bothered.

Extreme TMA System

Hello everyone. My name is Alfredo. You can call me Al.

At the request of many of you, I am starting today what I hope will become a thriving laboratory of ideas that will make each of us, each day, a little better trader than we were. Firstly, I must say that I have never done something like this and I will rely on the help and contribution of you to make it a success.

The history of a trader, like my own, is a tough road full of failure, despair and loneliness, as well as fulfillment, excitement and triumph. It is a hard road full of obstacles and temptations to lead you astray from the path and in the end, only a determined few will succeed in conquering the many mines and potholes in the way and acquiring the discipline and knowledge necessary to succeed.

As I look back now, I believe the difficult years were necessary to forge the discipline and determination necessary to succeed. Yes, there are some traders that have never experienced the bad times, but they are few and far between. For the rest of us the way is hard but full of promise and a daily constant battle to control one’s ego and remember the lessons learned. After 30 years, I can say I have learned a bit, but there is more to learn every day. The finish line is never reached and that is the wonder and thrill of this profession.

Up front I ask for your help and contribution. Let us be constructive and share our knowledge. If we do, this will have been worth while.

The market is cyclical and like a pendulum, is a never ending sequence of extremes. It forever tries to reach the mean but never succeeds, constantly overshooting its mark, reversing and trying it again but always failing to reach balance. This system attempts to capture those extremes. It is a compendium of my understanding of the market, brought to its simplest expression.

The principles are not complicated. The main indicator, the TMA shows us the average of the path that the price action in the market is following. As such, it is a backward looking indicator and attempts to determine the future from the recent history. It corrects itself by repainting itself. It has two outer bands that show us the outer boundaries of price movement that we are searching for. Our second indicator, the ExtremeTMA info panel shows the TMA slope angles of all time frames. It determines in which direction a trade must be placed.

MTF TMA: Included in the template are 7 TMA indicators. The M1 TMA (Aqua), M5 (Gold) and M15 (White) are used for scalping. The H1 (DarkOrange), H4 (Magenta), the D1 (Aqua), the W1 (Green) and MN (Sienna) are used for normal trading. Higher TF TMAs are only visible in lower TF charts. For Example: If you set the chart to H4, you will only see the H4, D1, W1 and MN TMAs. You can change the time frames in which the different TMAs are visible in the Visibility tab of each FastLineTMA indicator.

I recommend the use of the H4 TMA for opening trades and the D1 and W1 TMAs for trend direction.

Having several TMAs on one chart is extremely helpful for determining longer time frame trends and combined, they have high predictive value of future market moves.

Stop Loss Use: There are various options in this department and I won�t recommend any particular one. A natural level to place your SL would be above a previous high for a short and below a previous low for a long. I myself use only an emergency SL very far away from the PA (100 Pips).

Entry Rules (For H4 Trading):

1- Determine the H4, D1 and W1 TMA slopes by using the TMA Info Panel indicator values:

Ranging TMA (Slope between -0.30 to 0.30): Trades can be placed in both directions.
Buy Only TMA (Slope higher than 0.30): Place ONLY BUY trades.
Sell Only TMA (Slope lower than -0.30): Place ONLY SELL trades.
H4, D1, W1 slope values must be either Ranging or higher for Buys or Ranging or lower for Sells.

2- Wait for price to climb above the top band of the H4 TMA, before placing a SELL trade or below the bottom band of the H4 TMA, before placing a Buy trade.

3- The Trigger: After rules 1 and 2 are complied with, then Buy when price breaks the High of the previous H4 candle or Sell when price breaks the Low of the previous H4 candle.

Even though not explicitly mentioned in the rules, it is always a good idea to sell from under tested resistance and buy from above tested support. This is always a good rule to follow. It will prevent getting into a trade too early and will increase your percentage of winners. Valid support and resistance areas are: 50 or 200 MAs, TMA centerlines, daily, weekly and monthly pivot lines, etc.

Safest Exit: Close the trade when price reaches the H4 TMA center line.

Standard Exit: Close the trade when price reaches the opposite H4 TMA band or set a tight trailing stop (10 pips) until stopped out.

SuperTrend: Slopes lower than -0.60 or higher than 0.60 are usually very persistent and can continue for a long time. You may want to hold your open trade when in a SuperTrend.

That�s it ! The system is simple in concept and easy to trade. I recommend that you handle it with care. Use demo accounts or small lots until it shows itself to be consistently profitable and you acquire confidence in it. A trading system will only work consistently if you truly believe in it. As we move forward, I�m sure we will improve it and make it ever more reliable.

Good luck and welcome to our New Adventure !

Hall of Fame: The following members have collaborated or have made a positive impact on making this system a better one. The underlined names have made extraordinary contributions:

Crodzilla , shahrooz67, Paradox, lologo, NanningBob, Zznbrm, X-Man, Favorite, EasyRyder, mladen, Argonod, Olarion1975, Ever E. Man, Faxxion, flaw, Riddermark, slowpokeyjoe, beto21 cwb, Trainman, Baluda, bassramy.

(7-18-2020) Update: During the many months of development of the Extreme TMA system a lot of evolution took place. Indicators that we started with were later substituted with others we developed especially for the system. The rules changed also several times. When you begin reading the thread, there will be posts that refer to items that are no longer relevant. Just skip those and keep reading. There is a lot of information that will help you in your everyday trading. It certainly helped me a lot to listen to what these many intelligent members brought to the table. As you progress through the many pages, it will all make sense and you will be witness to the making of a system, that today is still a critical part of my trading methodology.


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