Jan 162014
 

High Probability Snap-Back Strategy For Forex and Binary Options

One of the most high probability trades occurs when a strong reversal is in effect. Few people are even aware the trend has changed direction, but as they realize it, it often creates another strong surge in price. If you know what to look for, you can get in before the crowd and ride the next price wave on a high probability trade.

Snap-Back Forex and Binary Options Strategy Setup

The snap-back refers to the first very strong move against a prior trend. It must be strong enough to indicate at least a short-term change in direction, and that another strong move will follow in the same direction as the snap-back.

Forex Snap-backs are usually two or more price bars, although there is no fixed number of bars that works best.

Chart 1 shows a snap-back lower and a snap-back higher. The snap-back is an aggressive sharp move against the prior direction. The price falls away in the first example, and rallies sharply in the second example; it is only a snap-back if the movement is very strong (no drifting) and it is the first very strong move against the prior direction.

The strategy can be applied on any time frame.

Chart 1. Snap-Backs – EURUSD

snap back forex strategy chart 1

The time and price scales have been removed in the candlestick chart 1, as the total movement or time isn’t of concern, rather, only relative movement matters. The two snap-backs marked clearly show aggressive first movement against the prior direction. This could be a 1-minute chart or a weekly chart, the set-up is still the same.

Taking a Trade

Chart 1 shows the “snap-back” we looking for. Following the initial snap-back move there is usually a pause–often moving mostly sideways–which is then followed by another strong move in the same direction as the snap-back. This can be thought of as “snap-back, pause, and follow-through.”

The pause provides the entry point. It must be two or more bars, which shows the price has actually slowed. The exact entry point is beyond the scope of this article, although the strategy is still highly effective if entering anywhere in the pause. If you have a bit of patience and don’t mind missing the odd trade, you can let three (or more) bars develop on the pause, and then place an entry order near the top of the pause if the snap-back was lower, or near the bottom of the pause if the snap-back was higher.

This keeps risk extremely small and maximizes return.

 

Chart 2. Snap-Back Trading – EURUSD

snap back forex strategy chart 2

Chart two shows a snap-back lower, followed by two pauses which occurred back-to-back. Both pauses are fine to enter short on, as the expectation is still that the price will continue to drop.

The rectangles mark ideal entry areas. The second pause provided ample opportunities to get short near the top of that pause.

Stops and Targets

If trading binary options you don’t need to worry about stops and profit targets, although you will need to choose an expiry time. Choose an expiry time that is about 5 to 7 “bars” away from your entry time. For example, if you are monitoring a 1 hour chart, your expiry should be 5 to 7 hours away (5 to 7 bars). This gives enough time for the price to follow-through, but not enough time for it to start reversing. You may wish to adjust this based upon any tendencies in the price action at the time of the trade.

If trading traditional markets, place a stop loss just above the pause in a snap-back lower, and just below the pause in a snap-back higher.

The target is based on the original move. In chart 3 we measure the profit based on the high of the first red bar (start of down move) to the low of the first pause. If that is 100 pips, then we are looking for the price to continue to drop 100 pips from the top of the first pause.

In Chart 3 I have drawn a trend line to provide the distance (high of down move to low of pause case) of the snap-back. The line is then simply copied and moved (top of line at top of first pause) to provide the target for the trade.

Chart 3.  Stops and Targets

snap back forex strategy chart 3

Snap-Back Forex and Binary Options Strategy – Final Word

These sharp moves against the trend catch most traders off guard, which is probability why it is such an effective trade. You will need to determine for yourself, possibly with the help of forex indicators, what exactly constitutes “strong” or “aggressive” to you. Define your own personal parameters for how you will handle these situations. Keep in mind, the profit target is set regardless of your entry point. You may wish to hold a trade a bit longer if the price is moving well in your favor, but avoid getting greedy–usually the method outline for profit taking is quite effective.

Jan 152014
 

Forex Day Trading with $1000 (or even less)

Forex Day Trading with $1000 (or even less)Forex day trading with $1000 (or even less) is possible. It even offers good profit potential, because you can control your position size down to  precise levels, and also take advantage of leverage. When trading stocks, this is a bit more difficult. You need to trade larger amount of shares. Plus… in order to establish and maintain a day trading account in the US you need to have a minimum capital of $25,000 in the “pattern day trading account”. Forex accounts allows you to start day trading with $1000 or even less. That does NOT mean you’ll be able make a consistent living from your forex trading right away, but you can build your account by following proper risk management, using a broker that offers low spreads  and placing a few quick, but well planned  day trades in the span of a few hours. Here’s a strategy for doing it.

 

Trade Setup – Account Type and Forex  Broker

If you are  trading with less than $1000 and you still want to increase the size of your account quickly I would highly recommend trading through an ECN broker. They offer very small spreads in general as well as trading on a short time-frame (such as a 1-minute chart) with a trend following strategy.

I like using an ECN broker because I can capitalize on short-term opportunities and still manage my risk. Using a normal broker with a 2 pip spread on the EUR/USD means that you’re paying 4 pips to get in and out of a trade. If you are trading a mini lot, each pip is worth $1, so that trade is really costing you $4. It is an opportunity cost, because it eliminates the possibility of you making those four pips. On the other hand, my ECN broker charges  about $2.5 on 100K, so a forex mini lot (10K) only costs me about $0.25 to get in and $0.25 to get out (that’s only $0.50 in total). A micro lot (1K) only costs about $0.05 to get in and out.

So my ECN broker  is way cheaper. During active times, such as during the US and London session the spread is typically around 0.1 pips (and quite often 0 pips).  if you open a demo account and make a  few trades you’ll see that it’s a huge advantage when you don’t  havin to worry about the spread.

When dealing with an account less than $10,000 (and especially $1000 and under) always make sure you have the ability to trade micro lots, also referred to as “0.01 lots”. Micro lots give you the ability to really fine-tune your position size and risk.

I also recommend using 40:1 or 50:1 leverage. You’ll see why later…

Why trade the 1 Minute Forex Chart?

With no spread, I can actively trade price waves which are usually about 8 to 15 pips from start to finish. I set a profit target of 6 to 9 pips (potential more on certain trades), and a stop loss of 3.5 pips (maximum, but can be reduced once the price moves in my favor) and am able to trade those price waves you see on the 1-minute chart during the London or early US session. If paying a 1 or 2 pip spread, this is virtually impossible, because just by getting in and out half the price move is eaten up.

I believe in never risking more than 1% of capital on a single trade, which means if I trade off a 15-minute chart I may only get a couple trades in each day, and I need to spend most of my day watching to make 4% maximum (if I win two trades with a 2:1 risk-to-reward ratio). Now 4% is a great daily return, but that is best case scenario. Now, check out a 1-minute chart in the EUR/USD and you’ll often notice these nice rhythmic and repeating trends during the London and early US session (don’t trade around major news alerts!). When you don’t have to worry about the spread you can get about 4 to 6 trades in within a few hours. Let’s assume you win all those trades, your looking at a 12% gain in a matter of a couple of  hours (assuming all trades win and a 2:1 reward to risk).

It’s ridiculous to even assume you’ll win all your trades and make 12% per day. You will NOT, but your upside potential is greater by taking a few more trades (which are still high probability though), confining your trading to a few hours only and being able to capitalize on the 8 to 15 pip waves that occur regularly during the London and early US Forex session.

Also, by trading on a smaller time frame you can still risk 1% of your account and try to make 1.5% or 2% on the trade (1.5 or 2:1 reward-to-risk), which means you potentially make a 1.5% to 2% profit (on your account) in 10 or 15 minutes instead of a couple hours trading a longer-term forex chart. The small time frame combined with well controlled risk also allows leverage to be utilized effectively to produce an income.

Forex Day Trading with $1000 (or even less) – What to expect…

If you really put in some work on a demo account practicing strategy implementation, and stick to not risking more than 1% of your account, you can steadily grow a $1000 account day trading forex, and potentially even make an income from it.

Assume a win percentage of 55% (with strategy implementation + refinements, this can be increased over time), 4 trades a day, and using a stop of 3.5 pips and a target of 6 pips. I actually find 7 to 9 pips to be quite realistic using a trend following strategy on the 1-minute EURUSD chart, but to be conservative we’ll use 6 pips.

If you trade your $1000 account for 20 days out of the month, and use a fixed position size of 27 micro lots (which keeps risk below $10 or 1% of the account), here’s what you can potentially make in a month:

20 days X 4 trades = 80 trades

55% of 80 trades are profitable = 44 winning trades and 36 losing trades

A winning trade is 6 pips ($0.60 per micro lot) X 27 micro lots = $16.2

A losing trade is 3.5 pips ($0.35 per micro lot) x 27 micro lots = $9.45

Winning trade total is 44 trades X $16.20 =  $712.80

Losing trade total is 36 trades X $9.45 =  $340.2

Monthly profit (excluding commissions) is $712.80 – $340.20 = $372.60

Total commissions are 80 trades X 27 mirco lots X $0.05 (round trip) = $108

Monthly profit (including commissions) is $372.60 – $108 = $264.60

Forex Day Trading with Less than $1000 – 26% per month!

That is 26% per month. That seems very high, and for most traders it is. Take a step back though and realize leverage is being used extensively. The account is only $1000, but we are taking positions of $27,000 (the 27 micro lots). In other words we are leveraged 27:1 to make these returns. Therefore, the account should be leverage about 40:1 or 50:1, although there is no need for more leverage than this. Without leverage you’d be making less than 1% a month because you couldn’t take the larger position size, but with leverage you make 27%. Trading this way allows leverage to be utilized effectively to increase returns.

I have no problem with leverage because each trade has a stop loss on it and I never trade within about 5 minutes of news releases. Therefore, while I may get some small slippage on the odd trade, it is very unlikely the slippage is even enough to hurt my trading day, let alone the account (but yes, it could happen). I also generally only trade the EURUSD (or other very popular pairs) during the late London session or early US session when liquidity is at its peak.

My broker also provides a MetaTrader plugin which automatically places stops and targets. I set what I want the stop and target be (in pips) and when I enter a trade the stop and target are automatically set. If I want to adjust the target slightly once in a trade I can just drag the order to the price I want, right on the chart.  I strongly encourage this type of plugin so risk is controlled as soon as the order goes out, and trades can be made very quickly.

Forex Day Trading with Less than $1000

It is unlikely most traders will ever reach a level where they can make a profit of 26% per month (even with the use of leverage), even though the simple math here makes it look considerably easy. The point is, it’s possible to make a consistent and also  large return even with a $1000 account.

I strongly believe you do actually need to control your risk and keep it small – risking 1% of your capital or less per trade –  in order to make good and consistent profits. By using an ECN broker and placing your trades on a very small time frame, you can make about 4 to 6 trades within a few hours. Since the risk is kept quite small (about 3 to 5 pips) you can increase your position size with leverage which allows for larger returns overall (including added risk), assuming of course your trades are  profitable overall.

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Cory Mitchell, CMT

Dec 182013
 

Benefits Of Trading The EUR/USD Pair:  Higher Potential To Profit

The best currency pair that new forex traders are recommended
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