Trade review - USDCAD (closed 2016-12-14)
In trading it is important not only to learn from our mistakes, but also to know exactly what we did right when we got our big wins. This way we can focus on repeating our success in the future. This review is meant as a reminder of our strategies and trading principles, and it might help explain how an actual recent trade worked.
Details for the USDCAD trade:
Trade entry triggered 11-Dec-2016
"Set & Forget" method target hit: in 2 days. (Standard reward ratio 1:1, always position-sized properly).
"Advanced Manual Trading" method result: 180 to 260 pips (out of 336). Reward ratio: almost 5:1.
The original trade setup report is freely available in the result commentary section here: https://www.enhancersignals.com/past-signal-result-commentary/archive-usdcad/signal-2016-10-30-12-31-usdcad
Let's start by looking at the original trade setup screenshot (USDCAD 8H):
The above Demand level was created on October 19, 2016 (it could be seen on the charts for more than 1.5 months), and initiated a move that reached its top on November 14, 2016, almost four weeks later. During this time the Demand level was validated by the price action which met our minimum requirements (the various “Enhancers”), so we sent a signal with the trade setup and we placed our pending orders when price started returning back to the level. This allowed us to obtain a low-risk, high-probability trade when price reached the level, and we enjoyed a great trade as a result.
We maintain a large panel containing all such identified levels on different pairs so that we can trade them whenever price returns to those levels. Sometimes price returns back to the level with a day or two, while some other times it can take months. So we don't keep all the orders in the platform, only the ones that are about to be triggered (i.e. for levels that are being approached by price and could be triggered in the next few hours/days).
This specific trade was special not only for the great reward ratio it achieved (almost 5:1), but also for the simplicity of the move (rising straight for about 300 pips once the trade started running in our favor). But that wasn't all! Here is a copy of the commentary as post in our trade archive:
"An excellent trade that deserves our "Golden" award as it made available more than 300 pips and almost reached a 5:1 reward ratio. Our predefined entry was triggered when the market opened with a novice gap right into a Demand level. We call this gap a novice gap due to being a gap lower after a significant move lower has already occurred during the preceding days, and with an opening exactly at the boundaries of a large Demand level that was visible on the charts for more than a month. Conveniently (but probably not so "accidentally") this Demand level was hit just before the most important USD interest rates announcement of the year, trapping the masses in the wrong direction."
So not only the setup was triggered very close to big announcement, but the market also opened with a gap directly at the boundaries of our Demand level. This trapped the masses in the wrong direction (panic selling into Demand) which ended up badly for them after the announcement as price run 300+ pips in our favor.
But how did this happen? Where there some Buy orders still waiting patiently there to be filled during all this time? Definitely NOT. No one keeps orders in the market for so long. As explained before, what creates the move is NEW institutional orders trading an OLD imbalance level. The usual "Supply and Demand traders" around the world (from banks, brokers, institutions, large companies etc) can all see and identify an old level of imbalance, and as you guessed, they gladly trade the level when the time comes. The masses are going one way (using indicators and oscillators or whatever else these days), while professional traders go the other way by looking at pure Supply and Demand and taking a high-probability pre-planned trade.
In the above screenshot, the level is a drop-base-rally formation with a strong break-out, suggesting there was a Supply/Demand imbalance within the level (between the grey lines). The large distance to the top confirms this and also gives the level a better placement as seen in the "big picture", i.e. the larger timeframes.
So by this point during our pre-evaluation we have already identified a level which shows signs of Supply/Demand imbalance, and we can see that it also has an acceptable placement within the bigger picture, i.e. it is placed low for a Demand level, or high for a Supply level, as compared to the recent past on higher timeframes. If price is already on the way back to the level we also check for possible opposing levels (in order to confirm that our profit margin is viable). We are now ready to mark this level as valid for a future trade (whenever price returns to the level for the first time). We only trade the first return of price because that's when the Supply/Demand imbalance is at its highest point. If a level has been touched by price before, then it has been used and should be considered invalid (some or all of the imbalance has already been absorbed).
So, lets fast forward to Dec 11, 2016, the day we got our entry (green circle just above the Demand level):
Screenshot USDCAD 8H taken on 2016-12-16 (a few days after our entry). The green circle represents our entry just above the pre-identified Demand level.
Now to the main point, which is exactly the same as in previous trade reviews:
Ok, so we bought above a level that indicates Demand exceeds Supply, in a well-placed area in the big picture. But who did we buy from? Who would be selling above such a Demand level? Only a novice trader would sell right above a level where Demand very likely exceeds Supply, and that's exactly who we bought from. The novice trader(s) selling to us in the green circle (screenshot) were probably selling out of emotion due to the sharp drop, or due to their indicators and oscillators flashing red, or due to any other equally arbitrary tool. In doesn't matter which of the countless tools they were using, it only matters that they couldn't identify a potential Supply/Demand imbalance on their charts. This level was visible on the charts for almost a month and a half before price actually returned back to it, and it required absolutely no special tools to identify! Some of our currently active levels have been created many months ago and price still has not managed to return back to the imbalance level. When it does, we will gladly take the trade, and we will need no indicators or oscillators to do that.
So do these levels work 100% of the time? Of course not, nothing does. But they work with enough consistency for us to make a profit out of Forex and that's what matters.
Even for our basic "Set & Forget" strategy which uses "easy" reward targets (1:1), we only need an above 51% to 55% win ratio in order to make a profit. But that's just the minimum. The higher the win ratio, the better the performance obviously, and our Win-Ratios are significantly higher than that (see our past performance reports). And don't be fooled by the low 1:1 reward ratio. Reward ratios only mean something in combination with a win ratio. For example, not even a 10:1 reward ratio can save you if you only win 1 out of 11 trades. But if you win 6 out 11 trades (i.e. above 50%), then you can make profit even with a 1:1 reward ratio. So these go hand-in-hand, and although high reward ratios are generally considered good, they are only good when combined with an appropriate win ratio, otherwise they are meaningless.
(If you need more details about the illusion of reward ratios, we suggest you read the following great Investopedia article: http://www.investopedia.com/articles/forex/07/profit_loss.asp )
But remember this crucial point: we always position-size our trades properly. This means that ALL our trades risk the SAME account percentage regardless of the number of pips between our entry and our stop. We risk the same account percentage whether we trade a 30 pip level or a 100 pip level, by adjusting (position-sizing) the amount we trade depending on the number of pips required by the setup. This is even more important for the "Set & Forget" trades in order to monitor your performance accurately.
Also, if you don't use position-sizing, then you could win more than 50% of the trades and still lose money. Just imagine that your thicker setups (requiring more pips) happened to lose, while your thinner setups (requiring fewer pips) happened to win. What's the point of winning if you still manage to lose money? With proper position-sizing you could even be negative in pips and still be positive in profit, as long as your win ratio is acceptable. Of course we always aim to be positive both in pips and in profit at the same time. So keep in mind that you will not find ANY true professional who doesn't use some sort of position-sizing, and there is a reason for that.
Now as far as the "Advanced Manual Trading" commentary for this trade is concerned (which is where the trade received its "golden" award), the main reasons for giving this trade a distinction were:
a) Great reward ratio, in this case almost 5:1, much further than the simple "Set & Forget" target.
b) The way the trade unfolded: relatively easy and straight-forward trade, no major complications along the way, although a bit slow start.
The novice gap and the news announcement were a great help to make this happen.
We hope you found this review useful and informative.