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A respite for the Greenback

Despite a break from the incessant waves of US dollar selling, there remains a skittish overtone in the currency markets as the fear of the unknown set’s in with US political uncertainty accentuating the current market unease. Treasuries traded down after a consensus PCE, but market sentiment quickly shifted driving prices up and yields down, as the market again emphasises the US political morass.

The US political crater and lack of fiscal stimulus from Washington will continue to be the primary catalyst for dollar declines. While the market is cautious about a possible USD risk reversal, searching for the key triggers are like looking for a black cat in a coal cellar.

US economic data had little impact on the December rate hike probabilities. But the fact remains investors believe the current political tumult in Washington will lessen the chances of another Federal Reserve rate hike in 2017

The perpetual Oil price roller coaster is adding to market jitters as WTI dropped 2.0% today on a Reuters report that OPEC production rose in July. Adding more fuel to the fire was the increase in US crude inventories reported by the American Petroleum Association at the end the NY session

Equities, on the other hand, continue to flourish as earning reports drive stocks to new highs. The Dow reached a new-all time high for a fifth consecutive session, nibbling at the key 22k mark

EURO

The Euro has traded marginally lower overnight but for the most part, has been trading sideways. The position overhang from month end activity with US payrolls around the corner has dealers adopting a more cautious tact as they look for more clues amidst the foggy US economic and political landscape.

Australian Dollar

While there was nothing particularly dovish in the RBA statement, there was also nothing that screamed AUD higher other than USD weakness. The Aussie has plunged lower overnight as the market is inferring that provided the currency remains elevated the RBA stays in the low-interest rate for the longer mode.

Japanese Yen

Very choppy session overnight as the Greenback traded with mixed sentiment. There was little news behind the overnight currency moves other than to speculate its a bout of nervous position nellies in summer thinned trading condition.

The Canadian dollar gave back gains from the previous day as the turmoil surrounding the Trump Administration were given lower priority as the US employment releases this week will start with the release of the ADP on Wednesday.

The Canadian dollar has been appreciating against the USD since the Bank of Canada (BoC) changed the tone from neutral to hawkish in June. The central bank followed through with a 25 basis points rate hike in July. The loonie has taken advantage of USD softness as political uncertainty in Washington have impaired the greenback.

Canadian employment data will be released on Friday at the same time as the biggest indicator in the market, the U.S. non farm payrolls (NFP) at 8:30 am EDT. Canadian jobs have far exceeded expectations in the last two reports by quadrupling the forecast. Canada is forecasted to gain 11,000 jobs on Friday, but investors will be focused on American wages for signs of a pick up in inflation that would keep the Fed on the current path of rate hikes.

The USD/CAD gained 0.574 percent on Tuesday. The currency pair is trading at 1.2543 after the USD has recovered ahead of US jobs reports. Canadian data has boosted the loonie this year and the manufacturing purchasing managers’ index (PMI) rose to 55.5 earlier today. A strong first quarter could be followed by another solid gain that could keep pushing the currency higher.

The Bank of Canada (BoC) cut rates twice in 2015 to soften the blow to the economy from a drop in oil prices, but as crude has stabilized thanks to the efforts of the Organization of the Petroleum Exporting Countries (OPEC) the central bank had a quick turnaround in June and is now expected follow the July interest rate hike with another in October. The timing of the decision makes sense if the Canadian central bank wants to see if the Fed decides to start reducing stimulus in September and a Canadian rate rise could preempt a rate hike by the Fed in December

Oil prices lost 2.078 percent in the last 24 hours. West Texas Intermediate is trading at $49.06 as details of a rise in OPEC production as published by Reuters. The deal between major producers has kept prices in the current range, but there are cracks starting to appear on the sustainability of the agreement.

Saudi Arabia has capped production more than any member to cover the gap left by nations that could not cut as quickly or a deep. Disruption issues in Nigeria and Libya exempted the producers from participating but as they get close to recovery their production pressures prices.

Weekly oil reports have dictated the direction of energy prices as lower inventories have given way to a surge in oil prices, but demand remains stagnant limiting how high prices could really go.

Market events to watch this week:

Wednesday, August 2
4:30 am GBP Construction PMI
8:15 am USD ADP Non-Farm Employment Change
10:30 am USD Crude Oil Inventories
9:30pm AUD Trade Balance

Thursday, August 3
4:30 am GBP Services PMI
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:30 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
10:00 am USD ISM Non-Manufacturing PMI
9:30 pm AUD RBA Monetary Policy Statement
9:30 pm AUD Retail Sales m/m

Friday, August 4
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change

Employment data to guide USD this week

The Dollar is higher across the board versus the majors ahead of the start of American jobs reports this week. The ADP private payrolls will be the first of three employment data points with the weekly unemployment claims and the U.S. non farm payrolls (NFP) having a lot of say in where the USD is headed. The headline number of jobs gained is important but the market will be even more focused on evidence of higher inflation. The U.S. Federal Reserve has already hiked interest rates two times in 2017, but could reduce the pace of monetary policy tightening if there is no proof of higher wages as part of this week's reports.

The ADP Non-Farm Employment Change survey will be published on Wednesday, August 2 at 8:15 am EDT. US corporations are expected to have created 187,000 jobs and the release will create a baseline for the NFP report to be published on Friday. Economic indicators in the US have been mixed, political uncertainty in Washington and some hints of a more cautious U.S. Federal Reserve have put the dollar under pressure.

The Energy Information Administration (EIA) will publish the weekly US crude inventories at 10:30 am EDT. Oil stocks are forecasted to drop for the fifth straight week. The slowdown in US production added to the efforts of the Organization of the Petroleum Exporting Countries (OPEC) and other major producers to limit output. The oil rally faced a tough test on Tuesday as prices fell close to 2 percent as OPEC production could rise despite the agreement in place.

The EUR/USD fell 0.242 percent on Tuesday. The single currency depreciated versus the USD after the price had hit a 15 month high. Profit taking ahead of the US employment data releases weakened the EUR. The USD has been on the back foot for the past five months losing as much as 9 percent as political drama in Washington has stolen the spotlight away from fundamentals and monetary policy. Low inflation remains a concern but with steady growth and rising spending the Fed could raise the US benchmark rate once again in 2017.

The CME FedWatch tool is showing a 98.6 percent probability of the Fed funds rate staying at 100–125 in September but the December Federal Open Market Committee (FOMC) meeting is now 50/50 to end with rates going to 125–150 basis points. The Fed moved away from the patient mode it had displayed in the previous two years and has already hiked twice in 2017 and has signalled it will start to reduce the balance sheet it accumulated starting this fall.

The USD has been supported by the central bank, but the Trump administration has lost credibility after squandering important political capital by failing to push through health care reform. The market was pricing in tax reform and infrastructure spending in what was called the Trump trade, but as those policies kept being pushed back the USD depreciated. Tax reform is back on the agenda, but there are serious questions on how optimistic the Administration is when it talks about a obstacle free path for the policy.

Oil prices lost 2.078 percent in the last 24 hours. West Texas Intermediate is trading at $49.06 as details of a rise in OPEC production as published by Reuters. The deal between major producers has kept prices in the current range, but there are cracks starting to appear on the sustainability of the agreement.

Saudi Arabia has capped production more than any member to cover the gap left by nations that could not cut as quickly or a deep. Disruption issues in Nigeria and Libya exempted the producers from participating but as they get close to recovery their production pressures prices.

Weekly oil reports have dictated the direction of energy prices as lower inventories have given way to a surge in oil prices, but demand remains stagnant limiting how high prices could really go.

Market events to watch this week:

Wednesday, August 2
4:30 am GBP Construction PMI
8:15 am USD ADP Non-Farm Employment Change
10:30 am USD Crude Oil Inventories
9:30pm AUD Trade Balance

Thursday, August 3
4:30 am GBP Services PMI
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:30 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
10:00 am USD ISM Non-Manufacturing PMI
9:30 pm AUD RBA Monetary Policy Statement
9:30 pm AUD Retail Sales m/m

Friday, August 4
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change

The RBA statement on Tuesday highlighted the conundrum at central banks – they're feeling better about growth and inflation but don't want a higher currency. Lowe did his best to salt in some jawboning and AUD/USD fell in the aftermath of the decision but the decline may have been less about his anti-AUD comments than the RBA's forecasts. NZD is falling fast in early Wednesday Asia after NZ Q2 employment contracted 0.2% q/q vs expectations of +0.8%.The chart belows shows all currencies are up vs the USD so far this year, with the euro the strongest, franc the weakest and silver the weakest metal, well underperforming gold.

US data were neutral to negative. June core PCE price index held at 1.5%. July manufacturing ISM slipped to 56.3 from 57.8, with prices paid up to 62 from 55.0 and employment off to 55.2 from 57.2. June construction fell 1.3% vs expectations for a rise with net downward revisions, which means a negative contribution to the Q2 GDP revision.

The RBA statement said a stronger Australian dollar would restrain growth and inflation. It's not as strong as previous comments that explicitly warned of the perils of a high currency but it still helped to set a cap on the Aussie. It means that if AUD/USD rises further, rate hikes will be pushed out further, thus suggests the RBA's reaction function.

The other standout in the RBA statement is downcast commentary on wage inflation. Lowe made several references to low wage growth and said it will continue for a while yet.

A widening gulf between central banks may be growing -- Some have grown tepid on wage growth, despite all the traditional signs of a tighter job market. That's a reflection of a change in global dynamics, offshoring and automation. Other central banks believe it's only a matter of time until wages pick up, as the traditional rules kick in.

Since the same factors are in play everywhere, both sides can't be right. What strikes us is that forecasting low wage growth may be more effective in restraining FX than jawboning. The risk is that if you're wrong about wages, you might have an inflation problem. That's a risk worth taking or at the very least, it may mean more central banks take a wait-and-see approach.

Such a collective shift to the sidelines could have the greatest impact on FX, weighing particularly on currencies with the most tightening priced in. That said, we don't see signs of strong or shifting rhetoric on the wage inflation debate just yet.

In the previous article, we covered the two main reasons why traders often end up losing money. The first being the chase to catch tops and bottoms, which can be lucrative but also comes with big risks. The second mistake being, making use of improper money management techniques or entering a trade too late into the trend.

Despite coming up with a good analysis, when traders put aside their trading plan and focus instead on chasing the trade, it can lead to serious mistakes.

In this second part of the series, we look at some of the other commonly made mistakes in trading, continuing from part I.

3. Cutting winners too early

Cutting winners too early and leaving losing trades running too late are often associated with emotions of fear and greed. The best way to overcome this is to ensure that you follow a trading plan.

A trading plan should ideally tell you which levels to take a position in the markets, which levels would invalidate your trading bias and of course, the money management aspect so that you do not expose all your trading equity in just one trade.

The above mistakes can also be made when your trading strategy is either new or that you do not have enough confidence in your trading set ups. Try to get familiar with your trading strategy and learn to be more objective with your analysis.

When your trade reaches a level of invalidation, cut your losses and move on. When your trade is working in your favor, always make it a point to make use of trailing stops or breaking down the positions so that you book profits are regular intervals.

A trading plan will not only tell you how to navigate the uncertainty from a trade but also helps to bring about some level of objectivity into your analysis. Even if the trade goes against you and you are stopped out, you would know the reason why, rather than let emotions rule the outcome.

4. Peer Pressure

Peer pressure goes by many other terms. Being influenced by what's being said in the financial media. Most of these gurus often sound confident in their analysis and trade calls that they make and at times when your trading confidence is at an all time low you can end up basing your trades simply by what the pundits are saying.

The best way to overcome this is to build familiarity with your trading system, which is nothing but practice and more practice. Another factor to bear in mind is that when a trading guru speaks about a trade set up, the finer elements are missing.

A hedge fund with $100k in trading capital can well manage a 100 - 500 pip drawdown in their trade, but not so much a retail trader who trades with just $5000 or lesser. Always learn to take any trading advice with a pinch of salt.

5. Being married to your bias

As a trader flexibility is what you need but within balance. Staying committed to your trading bias can be disastrous leading you to continue adding to a losing position which could eventually affect your bottom line equity.

On the same note, trying to be too flexible by switching between positions whenever the markets make strong turn can also be disastrous. When it comes to trading, traders need to find a balance between staying committed to a bias but only so long as the markets prove you wrong which is when you need to accept the fact and cut your losses.

It is only but obvious that as humans, mistakes do happen. That said, as a trader it is your imperative that you identify these mistakes, especially if you find yourself repeating them frequently. Even the best of traders make mistakes, but the difference between a successful trader and the rest is that mistakes are weeded out early and corrected.

Trading can be quite a challenge for most, regardless of whether you are a novice or an experienced trader. Emotions, analysis, trading strategy all play a role when it comes to executing the picture perfect set up.

But more often than not, traders tend to end up making mistakes which often can be decisive between increasing your bottom line trading equity and erasing your gains completely. No matter how good a trader you are, here are five most commonly made trading mistakes along with some suggestions on how one can avoid or deal with them more objectively.

1. Tops and Bottoms

Let's start with the obvious.

The temptation to catch a top or a bottom is quite tempting, not just for beginners but even experienced traders as well. There is a certain appeal in taking a contrarian approach to the markets, but unless you really have a strong reason and backed up by adequate money management, it can be a disaster if you try to chase the tops and bottoms in the market.

The reason why traders often tend to chase tops and bottoms in the market is because of the psychology behind it. Traders believe that the markets, especially after a strong trend will turn around and the temptation to get in early in the new trend often leads to traders taking a wrong position in the markets.

The truth is that trends are validated only after the price has moved a considerable period, and even the best analysts or traders find it hard to call a top or a bottom in the markets.

Take for example the Gold chart below which shows the strong trend. Prices briefly topped out before falling back but soon enough rallied back to take out the previous high. Traders who would have entered at the first high that was formed near 1263.44 would have been sorely disappointed as Gold yet again rallied back to post a new higher high at 1283.65.

To deal with Tops and Bottoms, traders need to set aside their emotions and impulse and rather look at it from a more objective point of view.

Picking tops and bottoms is something that is common with traders, due to the fact that it can be very rewarding. But the risks are also equally big. Traders can look at using other strategies such a divergence, high/low methods or Bollinger bands which can be useful in predicting exhaustion to the momentum.

2. Improper Risk Management

An interesting bit is that in most cases, traders are quite right in their analysis. What they often get wrong is the money management aspect of it. Opening a big position right away because your analysis tells you that prices are likely to turn the corner would leave you at the risk that prices could continue to move higher.

By having too much exposure in the first position itself, it becomes difficult to manage the trade if prices continue to push higher for a short period of time, often leading to margin calls or being stopped out due to price spikes.

For example, the chart below of USDCAD shows how one would typically trade. Say your trading strategy was based on divergence setups. Here you can see that the new high in price saw the Stochastics making a lower high and indicating price will turn lower.

Now you sell after the short term support was broken at 1.4507. But soon enough prices started to push back higher. Looking at the chart below you can see that after a brief push higher, price moved lower just as you expected.

Adding too much of a short position near 1.4507 could have resulted in the spike higher taking out your position by hitting the stops or a margin call. On the other hand, if you had used a 1% money management rule, your trade would have had a decent breathing space instead.

In this first part, we have learned how chasing the tops and bottoms and using improper money management methods, and trade levels can impact the outcome from a trade. In the next part of this series, we look at another three sets of issues that are common to traders and how these mistakes can be avoided.

What is Forex swing trading?

Swing trading simply describes a method of approaching the market where the trader is seeking to capture percentage moves in a currency pair, referred to as "swings". Trades taken in this manner are usually at a reduced position size to account for the large trade parameters and can last anywhere from a day to several weeks and are typically entered on the daily time frame and above though some traders so use the 4hr charts also.

This method of trading is distinctly different from other, more short-term approaches such as scalping where the trader looks to capture profits as quickly as possible and is usually only in the market for a few seconds to a few minutes looking to capture a very small amount of pips using a large position size to make the trade effective.

Why would traders choose this style of trading over other shorter term, more active types of trading?

One of the main benefits is the relatively small amount of time that swing trading requires compared to trading styles such as scalping. Typically swing traders will review the markets each night and track the daily closes placing trades each night when the daily candle closes. This is distinct from all forms of intraday trading where traders will be tracking price movements on charts as low as the 5 and 1 minute charts, but even on higher timeframes such as the 1 hour and 4 hour.

Using a swing trading approach on the daily timeframes gives traders much more time to plan their trades as moves take far longer to play out, and traders have more time to mark out their levels of engagement than if they were trading on the lower timeframes where intraday volatility, news releases can mean that trading is often fast and furious and traders have much less time to plan and execute their trades.

So, for example, a swing trader might look at a chart like this and think ok, the price has traded up to reach a prior high and we've put in a bearish candle. I think this is going to be a double top so I will set a short on the break of this bearish candle and I will hold the trade down to this swing low. So the trader will look to take the market from swing to swing - selling from the high, and holding it down to this low.

Once the trade is placed, the trade can simply check their chart each day to see how the market is moving or simply wait until either their stop or their target is hit.

So, in this instance, the trader is looking to capture a roughly 500 pip move. Whereas in a scenario like this for example. So here on the 5 minute chart the trader can identify a clear resistance level at this point and sees that the market is moving quite strongly up to it, so they might look to place a breakout trade targeting just a quick burst beyond that level, looking to bank 5 - 10 pips as price explodes out past the level.

So as you can see, these two approaches to the market are completely different and have totally separate objectives and motivations.

Now of course, for the majority of retail traders who work and have families, a swing trading approach fits perfectly into their schedules meaning that they don't have to be sat in front of their screens all day and can simply check the charts when they wake in the morning and or when they get home from work in the evening. For many traders, it can be hard to fathom that this type of trading, and spending so little time infront of the charts can actually generate success because their idea of a successful trader is a trader working in a bank sat in front of their screens all day frantically placing trades.

The thing that is important to remember here is that the trader in this image, the bank trader is trading flow which means they are simply executing client orders. So, a hedge fund or another bank will call them up to place an order, and they have to execute the trade, filling as much of the order as possible at the best price possible.

These traders are not placing trades based on their analysis of where the market is going, and these traders, called proprietary traders are an extreme minority in banking now following and overhaul of regulations, many of these traders have now left and set up their own funds. So, when asked the question, can a regular person, who goes to work and has a family, actually succeed in the markets just by checking their charts for maybe an hour a day - the answer is categorically yes.

Using a forex signals provider can be exciting for some. For others, having used a forex signals service already and having met with some disappointments, one can get skeptical about using such a service already.

This brings the question whether one should use a forex signals service. It also prompts the question whether a forex signals provider can generate profits or equity growth for you.

So what are the factors to look for when choosing a forex signals provider? This article explores in detail and gives a few tips on how to choose a forex signals provider.

Age of the account

Seasoned traders will know that at some point in trading, a trader will no doubt undergo a winning streak. This is often followed by a losing streak. It takes a lot of experience to be able to maintain consistent profits when trading forex.

Therefore, the first thing to look for when choosing a forex signals provider is the age of the account. Start by looking at signal providers who have a track record of at least three years. This will tell you the experience of the trader themselves who is managing the signals. It will also show you how consistent the signals provider has been in the past three years of trading.

Money management

Some forex signal providers actually use a forex cent account. A cent account, as the name implies allows you to trade in cents. This means that there is very little risk. Copying traders from a cent account to your real trading account with even $500 in equity can be a bad bet.

Pay attention to the trading equity of the forex signals provider. In most cases, you will already know upfront on the ideal trading capital and leverage that you should use. This ensures that the lot sizes are appropriate. It will also ensure that your account is closely mirrored to that of the signals provider.

Understanding how the signals provider trades (based on their history) will give you a lot more insight. For example, signal providers typically trading in single lots. However, you might find someone scaling in or out of a position. The bottom line is that traders need to also focus on the money management skills of the signals provider and not just how much returns they generate.

The broker

Not all forex brokers are the same. Therefore, you must ensure that the signals provider and you use the same forex broker. This will ensure that the slippage and spreads will not influence your bottom line profits. The speed of execution also matters.

Using a different broker from the one the forex signals provider is using can result in the target levels not being hit and so on. This can quickly translate to losing positions merely due to the spreads involved.

However, if you come across a signals provider that does a splendid job but trades with another broker, then you can always ensure to adjust your trade levels by considering the spreads to minimize losses.

Don't fall for 150pips marketing hype

It is common to come across signal providers who advertise on the average number of pips they make. This can be a great way to attract gullible traders into signing up for the forex signals service.

Instead of focusing on the number of pips a signal provider makes, consider the overall profits that they have made. Paying attention to metrics can also help. Drawdown is an important metric that should not be ignored when choosing a forex signals service.

The drawdown will tell you the potential losses your account might make in pursuit of the profits.

Automation

There are different types of forex signal providers. Some send the trades via SMS or email while others fully automate the process. You would just have to install an EA or a script to automate the trading.

Choosing one of the above is a matter of personal choice. Therefore, traders should explore these options very carefully. No matter whether you want manual forex signals or automated signals, ensure that you always stay in control of your equity and the risks.

There are quite a few successful forex signal providers out there. It is somewhat akin to finding the best forex broker. For traders, this means that they need to put in some work and research into the forex signal providers in order to find a service that best matches their interests.

Did you know that you do not have to be right each time you interact with the market? Heck, you don't even need to be correct 50% of the time to bank a profit in this business! Once one has mastered a setup with an edge, trading should, to a point, be no more than a repetitive chore. However, because of our natural tendency to always want to be correct, we make trading difficult.

This is where thinking in probabilities comes into the picture. By switching one's mindset to this way of thinking, it will not only help your trading psychologically, but also your bottom line. We understand that this may seem somewhat of a paradox, but by detaching yourself and letting go of whether or not the next trade will be a winner or a loser, is exactly what's required to achieve consistent profits you can rely on. Hopefully, the following article will provide a clearer vision on how to begin accomplishing this…

Trading expectancy

Trading expectancy or, if you prefer, statistical expectancy, essentially provides one an effective and objective way of evaluating a trading method's performance. In simple terms, your trading expectancy is the average amount you can expect to win/lose using a particular method. While the probability of each individual trade cannot be calculated, the statistical measure can be applied to a large sample size of trades. We recommend at least fifty trading examples to be statistically significant.

The following components are needed to calculate this:

• Firstly, you'll need to estimate the win/loss ratio i.e. how many trades produced a winning reaction. Then, from your trade samples, divide the value of winning setups by the total number of trades taken. This will give the win/loss ratio. By way of example, let's say that you have recorded 100 trades, and out of those 100, 40 came in as winners. The win/loss ratio for this segment would therefore be 40/60, or 40%. However, although the method produced 60 losing trades, it does not invalidate the approach. As a matter of fact, some of the most profitable systems have win/loss ratios that are less than 50%.
• Secondly, the risk/reward ratio needs to be considered. This is the average size of a profitable trade divided by a typical losing trade. As an example, say that on average your winning trades register $200 and the losers come in at $100. With that in mind, we can see that we have a risk/reward ratio of 2:1, meaning that on every winning trade, the method yields two times its risk.
• Finally, we have to merge the two aforementioned ratios to reach an expectancy ratio i.e. the trading expectancy. We know that the method has a 40% chance of producing a winning trade. We also know that on average the winners achieve two times the risk. So, let's calculate this.

$200*40 winning trades = $8000.

$100*60 losing trades = $6000.

Trading profit = $2000.

With the above calculation, we can see that we have a method with a positive expectancy, even though it lost 60% of the time. In addition to the above, you can, if you prefer, also calculate It as such (reward/risk ratio * wins) – losses = trading expectancy ratio. In this case the ratio would come in at .20 (2*40 – 60). Anything above 0 is positive. So, on average, this method will return .20 times the size of the losing trades.

While the above illustrates a profitable method, one must also take into account that there will be trading fees and commissions which, of course, will reduce profits. Furthermore, historical calculations are not a guarantee that the method will produce the same results in future trades. Nevertheless, this is the best alternative we have when formulating a trading method.

What is crystal clear from the above calculations, however, is that it is not necessary to win every trade. In fact, if a method is able to generate 3 times its risk on winning trades, meaning you'll have a risk/reward ratio of 3:1, one can afford to lose 70% of the trades and still come out on top: 10 trades risking $100 on each: ($300 win * 3) = $900 – $100 * 7 = $700 = $200 profit.

Unfortunately, trading expectancy is not a widely discussed concept. It SHOULD be though! Not only is calculating expectancy a fantastic way to analyse and compare trading methods, it also does wonders for one's psychology.

Thinking in probabilities rather than focusing on each individual trade

Probability is the measure of how likely an event is to occur out of the number of possible outcomes. Therefore, if we know that the method we're trading has a positive expectancy i.e. it has a high probability of making money over the long term, is there really any need to place emphasis on whether or not the next trade will be a winner? Absolutely not!

We all know of traders who get furious at the sight of a losing trade. Unfortunately, these are the same traders who usually sit glued to their screen talking, sometimes even shouting, at their monitors urging the market to move in their desired direction! We are fairly confident that the majority of experienced traders have also faced this same dilemma in the early days of their trading journeys. As you become more experienced, you'll understand that there is really very little point in getting excited over your next trade. Shouting at the screen, trying to jeer the market on, will have absolutely no effect whatsoever!

We understand that to think in probabilities is easy in theory, but a rather difficult approach to implement, especially when your hard-earned money is on the line. What we have found that helps is using analogies:

• A good visual for this is to imagine that your holding a small bag of rice. In this bag of rice there's around 1000 grains of rice, and let's say that each grain represents an individual trade. Assuming that one knows how to size positions correctly and is thinking in probabilities, how significant is that one trade in the grand scheme of things? Negligible is a word that springs to mind!
• Let's look at another simple analogy: a train ride. This may be considered a little cheesy, but it is certainly a valid example, in our view. The train journey has two central destinations, three if the tracks change due to adverse weather conditions (you move your stop to breakeven). However, let's just focus on the main two destinations for now. Destination A is named 'target hit' and a destination B is called 'stop-loss hit'. The train has no driver. It's also automated and random. Using our trading expectancy calculations from above, we know that every time one boards the train they have a 40% chance of reaching destination A. Now, let's imagine that before the crowds boarded the train, the platform conductor (we can think of him as a typical market guru who proclaims to know where the market is headed at each swing) announces that there's a very good chance that the train will reach destination A today because on the past two journeys, the train managed to clock in at this platform. When you think about it though, does that really matter? Considering that the passengers know over the course of 100 journeys (trades), they'll reach that destination at least 40 times? Of course not!

With two analogies under our belt, let's check out the equity curve below:

Over the course of 220 trades, the account grew massively. Now, this could have been over a year, five years or even the span of a trader's career. This does not matter. What does matter though is understanding that each individual trade should, as long as you keep to your trading rules and money management strategy, have little effect on the collective outcome. Do we panic if we have a loss, do we panic if we have two, or even three consecutive losses? Absolutely not. Remember, there is no way of knowing the outcome of each trade you take! Do you think the trader who managed the account pictured above panicked when the equity curve started to turn south (see black arrows)? Highly unlikely given the results.

In our humble opinion, trading a method that has a clear edge and following it religiously, while thinking in probabilities, is key to a successful trading career. This type of thinking will not happen overnight. It takes time to develop, but we're sure you'll agree with us that it is certainly worth pursuing!

Unlike support and resistance levels, trendlines are drawn at an angle. These widely used technical lines are, first and foremost, used to determine the trend. By drawing these lines one can establish whether a market is in the process of rallying north (an uptrend), dropping south (a downtrend) or in the phase of a consolidation. 

However, not all technicians draw these lines in the same manner. Like all things trading, we prefer to keep it simple. At least two swing highs or lows are needed to draw a trendline. The more times a line is respected, nevertheless, the more valid it becomes.

Ascending trendlines

An ascending trendline has a rising angle. As long as price remains above the trendline, the uptrend is considered intact.

To draw an ascending trendline on a chart, at least two/three subsequent higher lows are required. To begin with we would recommend looking for an extreme low. An extreme low is where price has aggressively rallied and took out several highs along the way. This would be considered a good starting point. Check out the chart below. Using April's low (2015) as an anchor point (the extreme low), and the mid-July low (2015) to form our line, we can see that price respected the trendline in August (2015). It was only once the EUR closed below this barrier in October 2015 did the market suggest that the bears may be gaining the upper hand.

Descending trendlines

A descending trendline has a declining angle. Similar to the ascending trendline, we look for two/three subsequent lower highs as well as a reasonably extreme high to begin with. Looking at the chart below, we can see that the descending trendline is drawn from an extreme high point. The pair has respected this line numerous times and was aggressively whipsawed on November 8th 2016, which, if you remember, was the date of the US Presidential election. As of current price, it looks as though the unit will be crossing swords with this line again in the not so distant future.

Do we use the candle wicks/tails or the bodies to draw these lines?

This is a question we see cropping up all the time. And the answer is simple: use both! Adopting both the candle extremes and the bodies allows market participants to pencil in a buffer, so to speak. On the chart below, we have plotted a few buffer zones to demonstrate this in action. In our humble opinion, traders should never consider a trendline to be a definitive line in the market. It should always be considered an area. And by drawing buffer zones, this helps accomplish this.

Once a trendline is broken

When a trendline is consumed, does it have any more use? Yes! Let's say that a trendline support is taken out in the shape of a full-bodied bearish candle. If/when the market revisits this line, the base often provides resistance. You'll be surprised how effective this technique is. In fact, remember the very first chart we looked at in the beginning of this article? This is a perfect example of this. The close below the trendline support was strong. Rather than continuing to plummet south, a few days following the break, price retested the underside of this base as resistance and then proceeded to clock fresh lows.

Additional points to consider

• The slope of a trendline determines the strength of the trend at hand.
• Check correlating markets to confirm the break of a trendline. For example, say that you witness price breach a H1 trendline resistance on the EUR/USD pair, and considering that the USD/CHF is a negatively correlated market to the EUR, we would expect to see a break of support on this pair, be it a trendline support, a demand zone or a support level.
• Is there a best timeframe to trade these lines on? The short answer is no. However, some technicians favour higher-timeframe structure over the lower timeframes as they feel it's more reliable.
• While we do like trendlines, trading solely on the basis of this approach is not recommended. When these lines merge with other technical tools such as, support and resistance, psychological numbers and supply and demand, the probability of a reaction being seen increases dramatically. Remember, the more reasons there are to buy or sell, the more likely it'll happen, hence why we absolutely love trading points of confluence!