With the market still raging due to the comments by the various Finmin and others, lets analyse the supports and resistances for today. Today, was a perfect example of the concept of averaging, use of supports and resistances and money management.
Averaging is the concept by which you keep adding to losing positions (which you know will eventually turn in your favor) so that it becomes enough for the entity to recover even a small bit for us to make a profit. For eg. lets says that we buy at 10 and the price goes down to 6. Normally, for us to break even, the price needs to move up back to 10 which may or may not happen or even if it happens, it wil take a long time. Lets say that we know that there is strong support at 6. We buy one more at 6 so that the average value becomes (10+6) / 2 = 8. So now, it is enough if the price reaches 8 for us to break even. If price manages to reach 10, then we make a profit for 2 x 2 = 4 which is fantastic.
Likewise, lets take gbpjpy today for example. It went up till 243 which was a resistance. So we wait for it to drop or break that resistance. It dropped down to support at 242.5 and there we go long with 1 lot. Then it went down to 241.1 (as mentioned below in our daily updates on support and resistance) which is again a support and we buy one more lot and wait for it to recover. Price again dropped to close to 241.6 which was close to a support again and there we buy 1 more lot so that we now have 3 lots. So when the price retraced to 242.4 within an hr, one lot would have a profit of 80 pips, another 30 and another - 10 which means that we would have made 100 pips in an hour.This is the power of averaging and knowing the supports and resistances.
If we had done the above for all the crosses, we would have made a profit of 200 pips in an hour. That is the power. But here money management is also very important as you need to have enough money to buy the lots and also to sustain the losses. We also need to make sure that we do this only when we know that the rise or fall is due to a retracement and not a reversal in trend cos doing the above against the trend would be disastrous.
As can be seen below from the daily updates of supports and resistances, they held up fairly well for all the 3 pairs today as well. Tomorrow i would be back with my daily regular updates on supports and resistances. Happy trading!!
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2 comments:
I'm new to FX, started with $6,000 USD and went up to $16,000 in 1 month by trading GBP/JPY inside of known ranges and "averaging" like you mentioned. I've found that by only trading within a known range, you can ride out some otherwise negative trades and watch them become profitable if you don't get scared and close out too soon. Do you have any advice on setting stops for this strategy as the stops need to be VERY wide or you'll get stopped out and lose often. On the other hand, I'm afraid that one day, it will just keep going against me and not return and then ... bye bye account.
Thanks allot!! I was very scared that this would be a trend reversal and pulled out a few of my trades, but now that I hear that this just might be a correction, it makes me feel much more relax about seeing my account go in the negative. Thanks again.
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