The Trading Process

The overall ethos is to enter the market after it has gone against the Economic Direction and therefore brought about an Acceptable Time to enter.

To identify Economic Direction, you go through the process of Fundamental Analysis, details of which can be found here.

Entering the market is done at the Acceptable Time to enter which is determined through the process of Sentiment Analysis, details of which can be found here.

With an Acceptable Time to enter, you will be getting ready to enter the market and need to decide on how much to trade. This is calculated through the process of Risk Analysis, details of which can be found here.

The final step is to place the trade order at the Entry Price and plan the Abort Price and Exit Price. These are calculated through the process of Technical Analysis, details of which can be found here.

Fundamental Analysis

Fundamental Analysis is needed to determine the Economic Direction.

Economic Direction is calculated by reviewing the direction of high level data that a country makes available and sorting by category and importance. An average of this data will determine the Economic Direction.

  • GDP Growth Rate
    • The GDP growth rate measures how fast the economy is growing.
  • Unemployment Rate
    • The unemployment rate is the share of the labor force that is jobless, expressed as a percentage. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them.
  • Inflation Rate
    • In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time
  • Interest Rate
    • Interest rates are crucial to day traders on the forex market for a fairly simple reason: the higher the rate of return, the more interest accrued on currency invested and the higher the profit.
  • Balance of Trade
    • the difference in value between a country’s imports and exports
  • Government Debt to GDP
    • Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

 

Sentiment Analysis

Sentiment Analysis is needed to determine the current Economic Condition.

Economic Condition is calculated by reviewing Economic Indicators and then Political Risk from the previous weeks and forecasting what is ahead for the next day.

The indicators are grouped into categories:

  • GDP – growth
  • Labour – workforce
  • Prices – inflation / deflation
  • Money – Interest rate
  • Trade – imports / exports
  • Government – cost to run the country
  • Business – PMI’s
  • Consumer – Retail sales
  • Housing – housing growth
  • Taxes – revenue collected

 

Technical Analysis

Technical Analysis is needed to determine an Acceptable Entry Price.

 

Find the time frame that has a trend to support the direction of Economic Direction.

Swing High Swing Low

Support Resistance Test Zone – high risk entry

Find the time frame that has a trend to support the direction of Sentiment Condition

Swing High Swing Low – Low Risk Entry

 

 

Risk Analysis

Risk Analaysis is needed to determine the Abort price and Lot amount for a trade.

 

Low Risk Entry using lowest term trend
* If match then on test
* If different then on test of next lowest
term

High Risk Entry using highest term trend
* If match then on test
* If different then no entry

Abort
* on break of trend used for High Risk Entry or
100 pips above/below High Risk Entry

Introduce an exit point around the test’s during Fundamental Events. ie lower the Stop Loss.

Identify Trade

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Technical Analysis

  • Open the 4 hour candlestick chart
  • Overlay Fibonacci retracement on the current trend.
  • Highlight the lines that if crossed, will break the trend, this is known as Trend Break Point (TrBP).
  • Switch to Line chart view
  • Identify turning points and highlight them as Support and Resistance.
  • Support Resistance zones can be no more than 25 pips wide.

Sentiment Analysis

  • Research the recent significant events using the following resources:
    • Economic Calendar
    • Forexlive
    • Squawk
    • Bloomberg
    • Daily FX
  • Review upcoming events of significance using Economic Calendar.
  • Analyse the data and subjectively decide on sentiment as Strong, Neutral  or Weak.
  • Document the strength in the Sentiment Analysis report.

Fundamental Analysis

  • Report on the fundamental data of the economy by researching the following categories
    • Interest Rate
    • Labour Market
    • Inflation
    • Growth
  • Analyse the 5 year average of each category and report the strength as Strong, Neutral or Weak.
  • Calculate the strength by totalling up the categories with weights as :
    • Interest Rate x4
    • Labour Market x3
    • Inflation x2
    • Growth x1
  • Document the strength in the Fundamental Analysis report.

Plan Trade

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Planning is entering the order after reviewing the Technical Analysis and determining the:

Target Abort Price

This should be placed beyond the TrBP.

Target Entry Price

At a maximum this should be 150 pips away from Target Abort Price.

Target Exit Price

Just before a previously tested level is usually a good place to decide on the Target Exit Price.

Risk

Risk is calculating by firstly determining the Percent of account to risk:

  • 5% total risk for Technical Analysis
  • 10% total risk if Sentiment supports the direction of Technical Analysis
  • 20% total risk is Fundamental and Sentiment support the direction of Technical Analysis

Calculating the Lot to trade is done by dividing cash value by pips to risk.

For example on a £500 account and a Stop Loss of 100 pips. ,Risking 10% is £50. The Lot to trade is £50 / 100 = 50p per pip so 0.05 lots.

Manage the Trade

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Entered trades will have been carefully planned and it is desirable to leave them to run to the Exit Point or Stop Loss.

Each day, continue to run Technical, Sentiment and Fundamental Analysis and make decision to scale out risk or reduce the Stop Loss to lock in profits.