Blog - HEIKIN ASHI TRADER

HOW TO BECOME A
PROFITABLE TRADER

A Proven Way to Find New Trading Edge

7/22/2022

To become a successful trader it all comes down to finding a trading edge where the odds are stacked on your side.

The generally accepted belief is that our trading edge comes from mastering our trading psychology. Put it simply, that’s wrong because our edge comes from our ability to find unique patterns in the market that other traders are not capitalizing on yet.

This raises the question of how to find a unique trading edge?

The answer is to look at the price action distinctively, through your own eyes.

If you do the same things as other traders are doing, you’re not going to find a suitable trading edge.

Let’s say you observe your favorite stock has the tendency to rally during the final 30 minutes of the trading day. The next step you backtest this pattern to see if there is something you can profit from.

If the new pattern you have found has a positive expected return, you now can have the confidence to execute the trades based on your new edge.

The reality is that most professional traders look at the market different than the retail crowd. Over time, originality wins while conformity loses.

There is no secret or a magic formula that will instantly give you a trading edge. At the end of the day, it all comes down to your ability to think outside the box and hone your pattern recognition skills.

The ability to recognize new patterns is like the skill of a mechanical engineer, who understands how an engine works, performs maintenance, diagnoses malfunctions and performs required repairs. As in the case of the mechanical engineer who can assemble patterns of information into relevant diagnostic for the car, the pattern recognition skill of the trader works the same.

In summary, a unique trading edge comes from looking at the market distinctively, through your own eyes.

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How to Utilize News Feeds in Trading Efficiently

7/22/2022

The market is a living organism, with events impacting prices on the go. Let’s find out how to stay in tune with the market news to have an edge in trading.

How to choose the news feed?
Today there’s no lack of market information available. Breaking news gets known worldwide in a blink of an eye. What makes a difference is how you select what matters and treat it in decision-making.

The needs of a trader
What does a trader need to have the inflow of information helpful? Check out the list below.

Niche-focused sources: Follow news focused on the market you trade only
Actuality: This is a no-brainer – news must be timely
Visually appealing: Spotting and reading the release should be effortless

Of course, the points above are more of an absolute necessity for short-term traders.

News sites vs. aggregators
You must be wondering, “what’s wrong with simply checking Bloomberg-like media daily?” The answer is, due to the robust journalism, such news tycoons are likely to overwhelm you with extra information.

Suppose you trade Forex; look what happens when you click on the FX section on Bloomberg

How many of those would be potential currency-movers? Probably one or two.

Sorting out what matters takes an additional mental effort, which could be used for executing your trading system.

What’s the solution?

News aggregators!

Such services gather articles or any relevant updates from major agencies globally, presenting you with laser-focused data.

Best three news feeds and their perks
News aggregators or simply feeds can also vary. Below are some of the best ones and their features.

Investing.com
The site offers broad market data, but the news section for a specific market is saturated with the most relevant news from different sources.

Notice that the articles are posted by four distinct agencies: Investing.com, Bloomberg, Forexlive, and Reuters.

Financial Juice
Here’s a promising startup taking news feeds to another level. It doesn’t stop on merely gathering filtered news, but posts live highlighted commentaries from key entities, easily catching attention.

You can also track upcoming economic releases from the calendar on the same screen.

TweetDeck – top Twitter feeds in one place
The tweets management tool is perfect for organizing your informational flows – you can choose what to follow and how intensively.

You can see several feeds simultaneously. However, there’s a natural limit to how much information the mind can process. It would be healthy to stick to 2-3 accounts.

How to act on the news
It’s an art to be able to monetize news. Below are three essentials to turn news into opportunities.
Have fundamental biasBroad bias is essential to put your next trading idea in context. Gather several facts that may impact a general sentiment on a particular asset. As such, critical economic data releases or comments from the regulator can set the market tone for days to come.

Follow the price action
Regardless of the facts, the market may behave irrationally. One approach is to follow the price, seeing a data release simply as a catalyst in either direction. Another way is only to take price action setups that align with fundamentals.

Add to your trade conviction
Sometimes you may see a compelling setup but would hesitate to take it due to the lack of evidence for the preceding move. Look through the news feed; it might offer you a reason.

Suppose you were waiting for a bullish breakout of 1.03 in EURCHF below.

You might hesitate to buy due to the absence of euro-related news or the unimpressive ATR potential of the pair.

Here’s what Financial Juice tweeted right when the price was getting above the key level.

As you see below, the breakout turned into a nice intraday move.

Similarly, you can check the feeds to find intraday catalysts, boosting the market momentum.

Final words
Traders should take their attention limits seriously to avoid information overload. News aggregators are a prudent way to make informational flows digestible. Use live news updates to add odds in your favor while considering price action setups.

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Value-at-Risk: The Most Famous Risk Management Metric

7/22/2022

Risk Management remains one of the crucial functions of financial institutions. One of the most used metrics to measure risk is the Value-at-Risk, or VaR.

VaR measures the extent of potential loss, a portfolio of risky investments might face over a given time horizon.

Technical Explanation of VaR
Value-at-Risk expressed in dollars ($VaR) can be explained by the equation below:

Prob$Loss>$VaR= α

Let’s understand this equation first. If we choose a confidence level α, say 5%, and a certain time horizon, suppose 1 year, the equation above says that the probability of the loss on your risky portfolio exceeding $VaR will be 5%.

Having explained $VaR, VaR is a similar except that it is represented in terms of log-returns:

Probrw<-VaR= α

VaR can be understood by the distribution of log-returns of your portfolio over a given time-period as in the following graph.:

Measuring VaR:
There are 3 approaches to measuring VaR:

Historical method
Parametric method (also known as variance – covariance method)
Monte-Carlo method

Historical Method
Historical VaR, the simplest method to calculate VaR, assumes that past returns can act as a good proxy to understand future returns. To calculate Historical VaR, collect market data for a given time period. For example, if you own a portfolio of stocks, collect daily closing prices for the past 251 days. From prices, calculate daily returns and then log-returns of your portfolio. You’ll have 250 values of log-returns. Now sort the returns in ascending order. The daily VaR at a confidence level α is simply the return at αth percentile. For example, if you want to calculate VaR at 10% level, find the 25th log-return in your sorted data.

Parametric Method
Without going into much detail of this method, Parametric method assumes a normal distribution in log-returns. Expected return and standard deviation are estimated to compute VaR.

Monte-Carlo Method
As in a typical Monte-Carlo simulation, VaR is calculated by randomly creating a large number of scenarios for future rates using non-linear pricing models. Then, returns are calculated for each scenario, and worst losses are then used to calculate VaR.

Benefits of VaR:

Applicable on all risky asset classes
Universally understood and used
Arguably the easiest risk management measure

Drawbacks of VaR:

Different calculation methods give slightly different VaR values
For large portfolios, calculating individual and then portfolio returns is a lengthy task

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How Can I Get 50 pips per day? (and is it even possible?)

7/15/2022

Some forex traders want to get 50 or more pips per day out of the market.
I think that targeting a certain number of pips per trading day is unrealistic.
As a professional trader, I don't trade with X number of pips in mind.

Why?

Because I know that the markets do not move predictably. So, I can't bet on a specific number of pips per trading day.

The number of pips you can make in a day depends on your individual goals and strategy. Some traders aim for big profits by taking opportunities with position trades. Others scalp and try to make frequent small profits.

As we know, not all trades yield positive results. Therefore, if you try to meet unrealistic expectations by setting daily pip targets, you are doomed to fail.

It is better to trade more when your strategy works well and trade less when it fails.

Focus on what's more important: creating a winning strategy!

The more pips you try to achieve per trade, the lower the win rate will be. Conversely, if you bet on fewer pips per trade, your win rate will usually increase.

If you scalp, you can make significant profits even with 3-6 pips on average.
But you will succeed only if you know how to scalp the market with a profitable strategy.

So, you need to have a plan.

The biggest mistake that the majority of traders make (unknowingly) is “revenge trading”. Because they have set a certain target, after a few losing trades, they try to reach their pip quota with a "revenge trade". This is one big trade that is intended to fix the losses and save the day.

You can predict the outcome....

All this is of course the result of fixed goals.

And of negating the market situation.

Some days you can get 200 pips. But there are also days when you can't get anything.

So, the real work is to recognize what type of day it is.

Can you make money today (because the market is perfectly in line with your strategy), or are you better off walking the dog?

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Is scalping good for beginners?

7/15/2022

Most beginner traders think that the forex market is a quick money-making scheme and simple scalping is the only way to take an instant benefit from the market, but that is not correct.

Scalping is a process used to make money from the short-term price movement of a trading instrument. Scalpers usually wait for a specific market condition to appear and jump into the trade as soon as the market condition favors.

All beginner and expert traders see the same chart, and they probably even use the same strategy, but beginner traders usually lose money from scalping.

Why?

Let me explain the biggest mistake of beginner traders regarding scalping: Scalpers usually take trades on 5-minute or 1-minute charts and look for quick moves of 5-50 pips. But behind the story, professional traders spend a lot of time finding the market direction from a higher timeframe analysis.

For example, before taking a buy trade on EURUSD based on scalping, a good trader should find the price direction from daily to H1 and wait for an active session. Here the active session means the London and New York session when banks and other institutes remain open, which provides liquidity to the market.

On the other hand, if a new trader opens a position on EURUSD by looking at the 5 min chart only at a random time, he has a higher probability of failing.

What should a Beginner trader do?

The core part of scalping is understanding the market structure. If the overall market context based on technical analysis, fundamental analysis or market sentiment shows a buying possibility, only then should traders scalp on the bullish direction; otherwise, skip it and wait for another setup.

Besides, while taking trades, beginner traders should follow a profitable trading strategy. The strategy might be based on technical indicators or price action. But traders should confirm that the strategy has a good track record of providing profitable trades for at least three quarters.

Overall, scalping is the quickest way to earn money from forex, and many professional traders use it. However, beginner traders should do extensive research regarding how to get the price direction and match it with the right scalping strategy to get the maximum benefit.

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Praise of the trailing stop

7/15/2022

There are many arguments against the use of a trailing stop. This instrument does not have many friends.

I am thinking, for example, of the difficulty in assessing change in volatility, or momentum, once you are in the trade.

This makes setting the trailing stop correctly (or ideally) almost impossible.

But there is another aspect of the trailing stop that is often overlooked: The defensive power of this instrument.

Beginners in particular tend to give away accumulated profits.

Instead of realizing the gains...

Which is worse.

Accumulated profits still turn into losses if the trader is not careful.
In the long run, this behavior has a negative impact on trading results.
It is also difficult for a beginner to understand that trading is first and foremost a defensive game (the analogy to modern soccer or other similar sports is deliberate).

The main advantage of a trailing stop is this: it reduces your losses.
Suppose the trader opens a long position in EUR/USD and hedges it with a trailing stop set at 20 pips. His position initially goes into profit briefly (5 pips), but comes back down and is eventually stopped out. The trader has realized a loss.

If he works with a fixed stop, then he would have realized a loss of 20 pips.

If, on the other hand, he uses a trailing stop, his loss is limited to 15 pips.
Why?

The position was in profit for a short time at the beginning (5 pips). So, the trailing stop moved 5 pips with it and stood at 15 pips distance from the entry.

You might think that that is not much.

But if the trader does this systematically, then he can increase his net result substantially.

And this is part of the "real work" of a trader.

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High earners trade better

7/15/2022

According to a study on traders presented by Colin Camerer, Professor of Behavioral Economics at the California Institute of Technology, high earners trade better than low earners.

They had 20 subjects who were taught how markets work.

And then they started to buy and sell.

During the experiment, the brains of 3 subjects were scanned with an FMRI (functional magnetic resonance imaging) machine. This shows blood flow in the brain and shows brain activity.

The subjects were divided into 3 groups: high-earners, medium-earners, and low-earners.

What was interesting was that the high earners were actually the ones who bought low and then when prices began to rise, liquidated their positions at a profit.

The low-earners did the opposite: they bought into the rallies.

They tended to be "momentum players."

There's a brain region called the Nucleus Accumbens (NAcc) that lights up when it's time to buy and sell (the reward region!).

This region becomes active especially with the low earners.

The high earners showed brain activity mostly in what is called the insular cortex, or insula.

This latter region is more associated with uncertainty or risk-averse behavior. You could also call it a kind of early warning system.

Emotionally, high earners have to do something really hard, according to Colin Camerer, they have to sell going into a rising market.

And apparently the Insular Cortex helps them do just that. The early warning system helps them sell even though prices are still rising....

The high earners got out of the market early, which led to the bubble bursting, and made the most money. The rest exhibited what former Federal Reserve Chairman Alan Greenspan called "irrational exuberance" and lost their proverbial shirts.

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Asymmetric profits, are they even possible?

7/15/2022

Most traders think in symmetrical terms. If you lose 5 points in trading, you win 6, 7 or 10 and so on.

By symmetrical I mean there is no option to earn significantly more if you are right.

For example, if a forex trader is trading with a standard lot, 50 pips loss just means -$500. If he wins 50 pips, he "only" earns $500, and not $5000.

A trader with symmetrical results often needs to achieve a hit rate of over 50% to make a profit. In other words, he must make good predictions if he wants to trade profitably.

Asymmetric results are exceptionally high profits compared to the usual results. Although they might be rare, they can dramatically improve your profitability.

The problem is, if the trader tries to align himself on asymmetric results, they seem to miraculously elude him.

In other words, asymmetric profits hardly ever occur in most trading systems. At least not with conventional instruments such as forex or futures (which are inherently symmetric in design).

Options are an exception. These instruments are designed in such a way that asymmetric results are possible. Let us say gains of 500% or over 1000% with just one trade.

If for some reason you do not want to get involved with options, there are still ways to achieve asymmetric results.

Here are some suggestions:
Only enter trades where you have a risk reward ratio of at least 1/10, or better 1/15. You will have to find pivots in the market where you can make a high profit with a very tight stop. Such a strategy requires strong discipline. You must be able to wait for such moments.

A second possibility would be: the trader buys additional contracts when he has a winner.
Although this goes against the "emotions" of most traders, it seems to me to be one of the better methods to achieve asymmetric results.

Let us say a trader is trading the oil market. On average, he has winners of 10, 15 or 20 cents per trade. Every now and then he catches a bigger trend and can make over $1 profit.

Let us say he usually trades five futures contracts. But what would have happened if he had not traded with five contracts on the $1 trade, but with 25 contracts by simply adding to his position?

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Is it possible to make profits with a random entry system?

7/15/2022

A while back I wanted to know if it is possible to make profits by random entries on the Forex market.

This type of experiment has been tried by other traders, but I wanted to know for myself.

I conducted this experiment with the following currency pairs: EUR/USD, GBP/USD, AUD/USD, NZD/USD, EUR/JPY, CHF/JPY, and GBP/CHF.

The premise behind the experiment was that entry is unimportant. Most traders trade under the assumption that they make money based on their analysis (mostly technical analysis only). But is that the case?

It does not occur to them that other factors may determine whether they make money or not.

I was thinking of factors like risk-reward ratio, strict money management and finally exits.

I traded a pure "set and forget system." This means I was not getting involved in current trades or changing anything. I did not look at charts or any other data, so I just traded based on "chance." I also let the trade run over the weekend.

Each trade got a stop loss (50 pips) on the way and a take profit (100 pips). Either the trade ran into the stop or into the take profit.

Due to these rules the RRR for each trade was 1/2 (I do not count the spread, although it plays a role in the long run).

What did my random system look like?

1) I traded two currency pairs at the same time. If a pair were stopped out or ran into profit, a new trade could be started.
2) The choice of the currency pair was done according to the "lottery principle." The names of the pairs were on a slip of paper that I drew from a pot with my eyes closed. (I had some fun with that!)
3) Long or short? The decision was made via the “toss,” just like in soccer. I tossed a coin. On tails I went long, on heads I went short.
4) Time of the trade opening? Purely by chance. I looked in the account 1 to 2 times a day.

I had $10,000 in the account. After four weeks of "trading" there was a small gain of $100. After six weeks, $150 profit.
May I point out that this is 1% per month....
Now what was the reason for the profit?
To be honest, I do not know.

My guess was that it was thanks to the consistent risk-reward ratio (50-100). But I am not sure about that.

Nonetheless, I do not think you will make a profit in the long run with a purely random system. I think that at some point the hit rate will settle at 33.33%, right at the break-even point. This would mean that the profits and the losses will neutralize each other.

Still, I find this random system interesting because with it you first work on the robustness of the system before even thinking about which currency pair to buy or sell.

What does it take to make this system even more profitable?
I think just a little optimization.

And the question is whether this can succeed if you make entries based on technical analysis rather than randomness.

Here are some suggestions:
- Build in a time factor. Close the trade after X number of days. Or start moving the stop towards the entry after X number of days.
- Position size: Increase the position when the system makes money. Reduce the position in drawdown phases.

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Go for it!

7/15/2022

Anyone who analyzes his trading results will notice that profits always occur in clusters. The same is also true for losses. Of course, there are times when profits and losses are in balance. The trader can then be overcome by a feeling of futility in his “labor of love.” Why do profits not occur evenly: Winner - Loser - Winner - Loser - Winner - Loser, etc.?

Many traders make more profit than loss specifically at times when the market action fits well with their strategy. When this happens, it’s as if everything works by itself, and any difficulties from before are forgotten.

This phenomenon can be systematized or even exploited to some extent. Experienced traders start to work this way instinctively. When they get the feeling that the "market is good," they trade more intensively. On the other hand, when they get the opposite feeling, they reduce their number of trades or even do nothing. For a beginner this may sound a bit obscure, but this is how good trading works.

This is also an important argument against fully automated trading. The computer does not know when the market is "good." It happily continues to produce signals or accumulate losses without a second thought.

And now a second aspect comes into play, which is possibly even more important than observing market cycles: Experienced traders increase their bets "when they are good."

When they are not, they drastically reduce their position sizes. The result of this is that they may make most of their money in short periods of time. This might be in the first hour after important economic news, for example, or in very volatile times.
The Corona crash is a good example. In such periods, good traders can make a small fortune.

In such times I often have one winner after another. And not infrequently I have traded with 3 to 5 times the usual position size. Sometimes in just a couple of hours the whole profit of a week, or even a month, comes together.

The person who knows when to make big bets, but who also understands how to "keep the ball flat" at the other, less favorable times, has, in my opinion, a very good chance to succeed on the stock market.

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He traded for a hedge fund and then went on his own. He specializes in scalping and fast day trading. His scalping book "Scalping Is Fun!" is an international bestseller and has been sold more than 30.000 times. His books have been translated into 11 languages.

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