Page 11 - Module 6 Costly mistakes

Module 6 – How to avoid costly trading mistakes

moving averages and Bollinger Bands often lose their validity during ranging markets. Always add a
few points as buffer between the trendline and your stop.

Fibonacci levels
Fibonacci levels also act as support and resistance and, thus, the concepts of support/resistance stop
placement also apply to the Fibonacci method. After you have identified a potential trade entry and
found a reasonable sequence for your Fibonacci tool, you can use the retracement levels as Stop
Loss levels. The disadvantage is that you are not always able to find a 1-2 sequence, especially within
ranges or early on in a trend, and thus, using the Fibonacci method won’t work 100% of the time.

Moving averages
When price is in a trend, price pulls away from its moving average which makes sense. When the
trend slows and reverses, prices will revert to the average. “Well known” moving averages, such as
the 50, 100, 200 daily moving averages act as natural support and resistance. Thus, it can pay off to
have them on your charts and place your stops outside of those moving averages.

ATR
The ATR stop loss approach is a so-called dynamic approach since the size of the stop varies based
on market volatility. When the ATR is high, volatility is high, and price moves and fluctuates more;
this would lead to using a wider stop loss to avoid premature trade exits when volatility is high. When
volatility is low, you’d use a smaller stop loss and counter the effect of smaller price moves without
sacrificing your Reward:Risk Ratio. The benefit of the ATR approach is that it works well with almost
all other stop methods. If, for example, you are using support and resistance for your stops, you
would simply add a bit more padding when the ATR is high.

Price patterns and price formations – the natural price method
When you are trading pin bars, you just place your stop above/below the high. When you trade a
Head & Shoulders, you enter on a break of the neckline and place your stop on the other side of the
line. And traders who enter trades during pullbacks will typically place their stop just above/below
the high/low. This is a well-known methodology and often easy to spot. An obvious price pattern
followed by a clear signal, however the follow through makes it hard to trade.

13. murphy’s law in forex trading

▪ Do not over trader your account. Rule of thumb do not risk more than 10% of your trading
account on any trade
▪ There is no such thing as a Lotto Trade. Do not sell the farm or mortgage the house to enter a
trade.
▪ Do not add to a losing position!
▪ Do not trade emotionally. Trade logically!
▪ Understand slippage. Buy stops and sell stops will incur slippage
▪ Expect the market to move in the opposite direction as your trade.
▪ When you sell the market will rally. When you buy the market will react.
▪ Be strict. Follow your trading rules.
▪ Don’t let your ego trade.
▪ When in doubt get out and stay out!
▪ Never hedge a losing position.
▪ Do not trade without stops.
▪ Move your stops and lock in profit.

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