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Old 03-11-2011, 09:00 PM   #1

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Key Level Adjustments

Key level adjustments fall into, what I would call, the 10% art to trading. They are often misunderstood, and if not thought through and put into context, they can become too subjective. Yet, they remain very important and can make a big difference to one's overall trade results.

One of the problems that arise is that they can often lead you to second guess the trade entry that your tradeplan, system, method, etc. says you should take. How do you know when to make an adjustment and when not to? The easy answer would be to simply say that it comes with experience. But, a lot of good that would do, right? How can you benefit from this idea NOW?

I have a simple way of doing it, that I've pretty much written into all my tradeplans. I have reduced it down to a very simple part of my every day trade decisions and have reduced my key level adjustments to hard and fast rules. If you think about it, I've actually taken what is part of the 'art' of trading, and have reduced it to a mechanical rule.

One of the concepts I try to be mindful of is to NOT let 10% art become 20%, or 30%. I want to keep it right at 10%. In other words, minimal. If I have a trade system that gives me a real good winning edge over a lot of trades, I have to 'listen' to what those results are telling me. If I can go back and improve that edge a little bit more, by making very 'minor' key level adjustments, then that is exactly what I'm looking for. Major adjustments 'change the actual system' and you wind up trading something else. I don't want that.

These are my typical key level adjustment guidelines that I have baked into my hard and fast tradeplan rules.

1. I always like to adjust around 0's and 5's. Let's use the Russell eMini as an example. If I have a long trade at either xxx.4 or xxx.5, I move my entry to xxx.6. Often I'll just give up a couple ticks and get triggered in anyway. Sometimes I might even get triggered in and it still loses. That's trading. Other times though I will avoid a losing trade and then catch the next winning trade and meet my quitting goals for the session. Sometimes I'll avoid a loss and stay in the winning trade I'm in.

I do the same thing with xxx.9 or xxx.0. I get long at xxx.1. For shorts of course, I do the opposite. I get short at .4 and .9. I do the same thing with forex.

2. For stops, I pretty much do the same thing. If my stop is at xxx.1, I'll move it down to xxx.9. If I have a stop at xxx.6, say a trailing stop even -- doesn't matter -- I'll adjust that stop to xxx.4. I don't even give it a 2nd thought. I've taken an 'art' thing and made it a mechanical, no thinking, rule.

3. I also am looking to make very small adjustments to get around obvious swing levels. I'm a big believer that you can't be intimidated by swing levels. They are obviously broken all the time. But if you have an entry to short at xxx.2, and there's a swing level at xxx.1, doesn't it make sense to ask for a little bit more confirmation, and make the price get to xxx.9? That's how I do it. I realize that nothing is perfect but I don't need it to be. I'm just looking to avoid 'some' losses.

Check out the EURUSD trade we took today with our 5 minute chart tradeplan. I put pink arrows to point out where we would have had to stop out of our long, prematurely, and reverse to short. We were in our 2nd long trade (yellow arrow) and had not quite hit our target objective, the 3rd dot. We got a short set up and the price actually came down and touched that entry price which would have ended the long trade and put us short. That entry level was 1.38726. Also, a few bars to the left, you can see a clear support level at 38714.

First of all, I use the 5th digit on the EURUSD as another confirmation tool. I always round it down for long stops. I look at 1.38726, and I instantly think 1.3872. That's just how I do it. For targets, I like to move it closer so it is easier to achieve, but for stops, I like to move it further so it gives the trade a tiny bit more room. For entries, I also usually move it further to the next 4th digit. Understand?

So when I saw the stop and reverse at 1.38726, I'm thinking 38720. Then I had to pay attention to the swing level at .38714. To me, that's 38710, right? I'm rounding it down to the 4th digit that pushed the entry a bit further. The only problem is that I won't get short at the .xxx1, .3871. I naturally adjust the entry down to .3869, as I described above.

Notice that when the price came down to touch the printed reversal short trade entry, it reached down to .3871 and that was as far as it would go. My adjusted 'stop AND reverse to short entry' was at .3869. The adjustment was enough to prevent the losing short AND stay in the winning long trade, which went on to gain quite a bit more pips with our standard two position approach.

A few more simple things. First, I'm looking to make very minor adjustments, like 1 or 2 ticks or pips. Sometimes 3 and rarely 4. Any more than that though, and I feel like it's time to just trust your trade system and don't adjust at all. Go with the next trade according to the tradeplan. If you doubt your system too much, by always over adjusting and being afraid of your trade set ups because of swing levels, than you probably are trading with scared money and you'll wind up losing anyway. You just can not be intimidated by swing levels if you hope to win in the end. Look to make small, minor adjustments.

An exception might be extreme swing levels on the much higher time frame. Those you have to be very careful of. But even they break. Especially when they are being approached and tested for the 4th time or more.

Also, sometimes your minor adjustment puts you up against another would-be key level, and then a few ticks after that, yet another, etc. I call those 'layered key levels.' The problem with adjusting is that you don't really know where to adjust to. After your initial adjustment, you're still faced with another key level. When I see that, I just go with the unadjusted entry set up OR I limit it to just one small 1 or 2 tick adjustment. That's it. A good example would be a short set up that comes up at 92.06 on crude oil futures. If I adjust down to .04, I've got the 92.00 just 4 ticks below that. If my trade profile only has me going for 24 ticks anyway, do I really want to adjust 25% out of my profit potential? My risk becomes that much larger too, right? That's an example where I would just take the short at .06. I'm looking to make 'small' adjustments only.

With swing trades and longer term, bigger trades, you kind of have to give a little bit more leeway. Keep it in perspective. Bigger trades might need bigger adjustments. Use common sense.

That's all I got. Hope it helps.
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Old 03-12-2011, 02:27 PM   #2

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A Word About the 'Extra' Digit

Many forex brokers have begun using a tick, or 10th of a pip, extra digit in their quotes. At first, this really bugged me. After creating a bunch of tradeplans and working with it for a while, I have decided to just think of it as an extra 'confirmation tool.' Let me explain what I mean. We'll use the GBPUSD as an example but the concept would apply to a USDJPY and its 3rd digit too.

We'll look at a long trade and you would just reverse everything for shorts.

Let's say I have an entry at 1.60358. That is easy because if you have learned about key level adjustments, you know that I would move my entry to .6036, 5th digit or no. I want to get above the '5,' right? But what if the entry was 1.60362 instead? In this case, I would not round it down to .6036. I would ask for a little more confirmation and look to get in at .6037. Add two pips of spread and my fill is at .6039.

Shorts would be the opposite. If my short was at .60358, I would first look to get down to .6035, and then adjust one more pip below the '5.' So my entry would be at .6034. Perhaps many of you are thinking that I'm giving up unnecessary pips in the process and in some cases, as it would turn out, you would be right. But in many other cases, using that extra digit to force the price to stretch out a little bit more prior to letting you into the trade, will save you a lot.

What about stops? I use the same concept. I let the extra digit be an excuse to push the stop out, a little further away, to the next pip and then will adjust even further to get around 5's and 0's. Again, I'm willing to pay a little bit extra to help stay in a trade that could knock the runners home. Let's look at a recent trade. In fact, since I just published a 9 pip momentum range bar tradeplan the other day, let's look at a long trade from yesterday's session.

See the Image Below for the GBPUSD 9 pip Range Example; 3/11/11

The first trade was a basic long trade that set up earlier than our 9:30 start time, but then allowed us to get in synch and take the trade. That trade was unable to go the distance and stopped out with a small profit. That led us to the 2nd trade, a yellow reentry trade. Look on the data window and notice how the entry was our example above, 1.60358. The next bar stabbed up through .6036 and the trade was triggered in at our adjusted entry.

At the time the trade hit the entry and went live, the stop moved up, cutting risk. It moved to 1.60139. I put a yellow dotted line so that you could see the stop and its price level. Going with what I described above, we would use the 5th digit, the '9' as an excuse to push the stop a little bit further away, down to the next pip. So the stop gets adjusted to .6013. I do not move it up to the closest pip of .6014. I want the extra space on the trade and I'm willing to sacrifice a pip or two (or in this case 9/10 of a pip) to give the trade a little more room to breath. The price came down actually to .60137 and in fact two bars later, touched down to .60135. However, .6013 even, was NOT touched and the trade was able to hang in there, and stay alive, even if it was just with a tiny part of one nostril gasping for air. I put a yellow dotted line to show you the actual unadjusted stop level. The tiny 9/10 of a pip adjustment allowed the trade to survive by 1/2 a pip. That counts!

Targets are easy. I just move it down, to one pip closer on longs, and up to one pip closer on shorts. I want to give the trade every chance for success and I'm willing to shave a fraction of a pip up to 2 pips off, in order to exit at a full fixed target. See on the data window how this target's exit (Target3) was .60754. I would be out at .6075. Some traders like to even adjust down off of the 5 to .6074. That's fine. Often the price will get up to .60748 for example, and just miss the 5. If you didn't make that adjustment, you wouldn't get filled at the full target. I usually don't adjust my target off of the 5's and 0's like I do with entries and stops, if I am present when the trade is in progress. Instead, I'll let the trade try to get to its full target but also, I'll be aggressive to exit if it struggles. If I do have to step away from my computer for a bit, I'll make the adjustment down, off of the 5 so I don't miss my opportunity to take action if necessary.

Make sense? This type of thing serves you very well IF you actually take the time and effort to put it in your tradeplan as a rule. Then you never need to think about it again. It is a way to reduce what might be considered the 10% art part of trading, to a hard and fast mechanical rule, which is great for trade psychology and remaining consistent with your trade approach.

What about the trailing stop? Here's where you can really do some cool stuff, once you get a feel for the SST and its trigger line. The trailing stop printed at 1.60717 but it was on a bar that closed below the Trailing Indicator (pink line) so I stayed with the one prior, .60701. I always trail the trigger line or the other Trailing Indicators (the pink line) by two pips below the last bar's line reading that closed above that line (for longs). If a bar closes below the trigger line for example, I keep my stop where the last bar that closed above the line was.

Using the same technique, I would move the stop down to .6070. But I never want my stop on a '1' or '0.' So then I adjust it down to .6069 to try to hide it behind the '0.' I put a yellow line to show you where the adjusted stop level ended up. Again, you might think that I'm sacrificing a couple pips, needlessly, but you will find that sometimes, that one small insurance premium will keep you in for an extended move, and more pips.

For a Closer Look at the Trailing Stop, See the Image Below.

Here's a twist to the theme that some of you will really like. With forex, we can easily tune our position size, with the creative use of minis and even micros. Make sure you choose a broker that gives you this flexibility! When your adjusted stop is so close to the trigger line, like in this trailing stop example, you can also leave a portion of your trailing position ON, and adjust the stop a little further, around the trigger line for the remaining position. This technique can keep you in the trade for an even bigger move. The trigger line, when it is close to the price action, is a great trailing stop tool. If you learn to use it during opportune moments, you can increase your performance on some trades. The risk:reward ratio can be huge, too. You only risk a few pips but can stay in a trade that might go for a long time.

In this example, the last price on the chart, the closing bar, had a trigger line at .60768 (the yellow dotted line is the trigger line). I would adjust that number down to .6076. Then I would place my stop 2 pips below that at .6074. That final bar actually stabbed down to .60747 and didn't stop out. So, the remaining portion could either be exited at the close, OR, kept on as a swing trade for the hopes of a larger move up once the market opens. Of course, this is a risky play but I wanted to illustrate the example so that you can think about it and incorporate it into you every day trade tactics. Many times this will happen in the middle of the session and you don't need to worry about the close, for example.

I like the extra confirmation. I would rather give up a pip or two of insurance if it helps me avoid SOME much larger losses or if it gives me a chance for a larger gain -- somtimes, MUCH larger. Remember, nothing is ever perfect in 'rock n roll' or 'trading.' As an old rock n roll drummer, I learned at an early age to accept and be at peace with the realities of imperfection. We don't need perfection to profit from trading. Only an edge that puts the odds in our favor. Using the extra digit found in forex quotes as a 'confirmation tool' will help give you a sharper edge and a way to handle tough trade decisions without any sweating for fretting. That's what we want!
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