Golden trade review - EURAUD (closed 2016-10-28)
Intro note:
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.
Trade details for EURAUD (signal-2016-04-21-14-35-euraud):
Trade entry triggered 26 Oct 2016
"Set & Forget" target hit: within a few hours. (Standard reward ratio 1:1, always position-sized properly).
"Advanced Manual Trading" result: 190 to 280 pips (out of 358). Reward ratio: more than 4:1.
Review:
Let’s start by looking at the original screenshot (EURAUD 8H):
The above Demand level was created on May 27, 2015 (it could be seen on the charts for more than 1.5 years!), and initiated a move that reached its top on June 09, 2015, almost two weeks later. This does NOT mean we were actively waiting for when the level will be triggered, it just means that when we saw price approaching it we knew we could use it to obtain a low-risk, high-probability trade. This means we placed our pending orders a few days before price reached the level and we enjoyed a professional-grade trade as a result.
We maintain a large Panel containing all such identified levels so that we can trade them whenever price returns to those levels. Sometimes price returns back to the level within 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).
This specific trade was special not only for its great precision, excellent reward ratio, and even the simplicity of move (rising for 3 straight days), but also for another reason:
the level that triggered this large move could be seen and identified on the charts for more than 1.5 years. Yes, a Supply/Demand imbalance left its traces on the chart a long time ago, and we were able to profit as result much later. But how did this happen? Where there some Buy orders still waiting patiently there to be filled for all this time? Definitely NOT. No one keeps orders in the market for so long. As explained in the Free educational material on the website, what creates the move is NEW institutional orders trading an OLD imbalance level. 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.
In the above screenshot, the level is a rally-base-rally formation with a strong break-out, suggesting there is 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 good placement as seen in the "big picture", i.e. the larger timeframes.
So by this point 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. 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.
So, lets fast forward to Oct 26, that's the day we got our entry.
Screenshot EURAUD 1H on 2016-10-28 (3 days after our entry):
The green circle represents our entry just above the pre-identified Demand level.
Now to the main point, which is similar to our 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 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 potential Supply/Demand imbalances on their charts.
This level was visible on the charts for almost a year 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 50% 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. 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 good, they are only effective when combined with an appropriate win ratio.
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 our 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 above 4:1 (despite the thick level), much further than the "Set & Forget" target. Also great in terms of pips with 190 to 280 pips profit (out of 358 that the trade achieved).
b) Accuracy of entry (optimal entry, while price did not even get close to our stop order on the other side of the level)
c) The way the trade unfolded: relatively easy and straight-forward trade, no major complications along the way.
We hope you found this review useful and informative.
Happy trading,
Enhancer Signals