My 80/20 rule - how to trade FX, stocks and indices

20%

80%

Putting it all together, what does this mean for you, the trader?

How to trade the 20%

During trading sessions world financial markets move constantly. Markets exists to allow traders to search for value. My observation is that markets will find value 20% of the time due to fundamental information.

This can be key comments from a policy maker referring to changes in growth or interest rates, new economic data released from government agencies such as the Bureau of Labour Statistics monthly employment summary, the ‘Non-farm payroll’. Or major world events, such as a terror attack.

Changes in these types of information will cause traders with existing positions to potentially re-evaluate. New speculative traders may also choose to also enter the market. The impact of the new information will be at the discretion of every trader who interprets it. This reaction is what causes added volatility to the markets.

Technical trading is based on information from charts. I attribute 80% of all markets movement to this. Using candlesticks, bars and line charts to identify pervious trends. Predicting past movement can lead to potential trades being repeated in the future. You can enhance your technical charts with indicators and oscillators such as.

• RSI• Bollinger bands• Fibonacci

Technical trading is based on rules and logic. The majority of black boxes, algorithmic trading (algos) and computer trading systems are created from this. They generally do not take into account news. I attribute 80% of market movement to this.

To be able to trade consistently and for any extended period of time you have to have a balanced approach. You have to know and respect the current sentiment within the market and any new information. You have to know and understand where the trend, support and resistance will play a part in the trading activity.

I highly recommend using a good economic calendar, my preferences is FXStreet. You can plan all key news events for your trading day, week or month here: www.fxstreet.com/economic-calendar The key to trading fundamental information is to know if the markets are looking for:

• Growth figures• Inflation figures

The reason for this is the actual figures you choose to trade will have a different impact on the market depending on the economic cycle.

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

My 80/20 rule - how to trade FX, stocks and indices

Example: If we are in a GROWTH cycle and are trading the CPI (consumer price index) which is a key measure of inflation. It is unlikely if this figure is good or bad the markets will move, as in low growth cycles inflation and low interest rates are to be expected. This means traders’ expectations and the market’s reaction will be priced in.

The more likely figures that reflect strong or weak growth, which traders will focus on are GDP, Retail sales and employment data.

Once we know what figures to focus on we then have to understand how to interpret the figure. Generally speaking positive numbers are taken well by the markets, negative the opposite.

How this translates into real world trading is that good data will send the indices (FTSE, S&P 500) up and safe haven life gold and bonds (Gilt, Bund) down.

Figures will have a range. There will be a market expectation.

If we take the RETAIL SALES data in this example; October 2014 we are still in a ‘growth cycle’. Interest rates are low, inflation if under control and to keep the economy growing rates are still expected to be low. This mean we are focusing on any figure that will stimulate the economy.

Retail sales are a reflection of that: Expected -0.1% - Actual -0.3%

Remember people and traders move markets, so if you don’t trade what the ‘market participants’ are trading you will not get

the movement, volatility or opportunity to profit.

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

iView ChartsNews is covered in iView charts. You have the latest newsevents scrolled and placed directly into your charts.

Fully customisable to allow figures of:

• High impact • Medium impact • Low impact

Never miss an economic data event again.

This is a large drop. The previous month on month figure was 0.6%, we then had a drop to -0.1% as the market consensus, but the actual figure was -0.3% nearly 1% drop in a few months.

This is a hugely negative indicator for the economy.

The S&P 500

Market move 20% due to fundamentals but still adhere to technical levels 80% of the time. When you put the two together this means when trading new news the markets will experience volatility and trade the technical frame work quicker and more aggressively.

The S&P 500 targets the W1 point of interest 1850.70 and then aims for the next logical support which is the D1 1819.50, searching for downside value. This is BEARISH fundamental news moving in a technical manner.

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

BUY IT NOW - www.iviewcharts.com

As this is a large topic I suggest splitting your trading strategies to cover smaller individual components before putting them all together.

• Time frames • Identifying the trend• Indicators• Oscillators• Risk profile

Time Frames

As you can imagine that is not a popular answer. Unfortunately you have to use ALL time frames when trading. Without being too basic a minute chart makes up a 5 minute chart, that makes up a 15 minute chart that makes up and hourly chart. This means that when you get to a month chart and individual monthly candle you have a significant amount of data.

What I like about monthly candles, highs and lows, open and closes is that they are absolute. They are there for everyone to see, they cannot be changed. This means that drawing a trend line, Fibonacci retracement or any technical study from them means so can anyone can else . They are set in time.

• For day traders the focus is generally on the smallest of data minute charts even tick, why?• They are trying to predict from the past what will happen in the future.

I prefer to build a frame work around what I know, the higher time frame approach. M1, W1 and D1. What has happened in the past is set in stone, self-fulfilling, what was major support will become major resistance as vice versa. From these guide lines you can build up a picture of what the market is trying to achieve and use this to trade in the short term.

Question: Steve, what time frames do you use to trade?

Steve: I use all of them

My view on trading is that the majority of retail day traders trade on a spread betting platform. You can never get the price you

actually want. You can’t trade at ‘market’ you trade subject to a fixed spread. So how important is one individual tick?

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

How to trade the 80%

GBP/CHF

My 80/20 rule - how to trade FX, stocks and indices

By taking calculations from the M1, W1 and D1 charts we can see where the markets have found significant points of support and resistance. Markets have a memory so what was support in the past will act as support or resistance in the future.

Seeing this in action on a H1 chart means that you can predict in an intra-day manner where the higher time frames points of attraction will be. This is a logical, self-fulfilling technical frame work.

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

STARTER PACKAGE:$79 p/m

PROFESSIONAL PACKAGE:$129 p/m

COMPLETE PACKAGE:$199 p/m

BUY iVIEW CHARTS NOW

www.ivewcharts.com

Identifying the trend

GBP/USD

There are 10 templates for every time frameMT4 offers. This allows you to see the higher time frame points of attraction on any combination of chart.

The trend is quite easy to determine. This again has to be taken from the correct time frame. So when I say that I use all time frames to trade, I really do. My standard set up is to look at the same product on the D1, H1 and 15m time frame.

From this view I can identify that the overall D1 trend is down BEARISH. This can mean my BIAS for the day is to sell high. From here I use the H1 and 15 minutes charts for my intraday trade ideas. The H1 signals and frame work from the M1, W1 and D1 are my key point of attraction.

I can then use the 15 min chart for the optimal entry, remember 4 15 minute closes makes an hourly signal. I can pick out the hourly trend by using the Bollinger bands and Fibonacci. Unlike the daily trend the H1 is up BULLISH. This means two things.

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

BUY iVIEW CHARTS NOWwww.ivewcharts.com

iView Charts

Indicators/Oscillators

Indicators/Oscillators

Risk Profile

• Counter the trend and buy• Wait for the absolute extreme of the highs before getting short

In the middle chart the H1 I can see from the red horizontal lines the Fibonacci expansion levels we are reaching the overbought territory. The 15 minute chart tells me have broken the D1 levels of interest but failed to extended gains above it.

The Fibonacci retracement only work consistently is they are plotter consistently. You have to know when a significant movement has taken place.

You can back up this view by using technical indicators or oscillators, I recommend:

• RSI• DeM• Bollinger bands• Fibonacci• Volume• ATR

People can get confused with the terminology of technical analysis. Oscillators are indicators.

The difference:

• Oscillators uses a scale between 0-1 or 0-100 this is RSI, DeM ATR• Indicators are technical tool that have no scale, like Bollinger bands.

This is how the bias would help explain a top in the 15m chart (RED = potential sell): (see below)

There is a unique iView bias that combines my own experience with the self-fulfilling nature of the well-known indicators and oscillators.

If you Google ‘trading risk’ you will get the same answer time and time again. Risk 1% to 2% of your total capital per each trade.

The markets are at their most efficient when instilling fear in traders. The reason why markets seem to behave irrationally is that they know all the ‘rules’ of the game. If the average retail trader sticks to a 1% or 2% risk strategy and the market moves in excess of this in a short period of time it knows the average trader will have hit their stop, in the short term, stop during this volatility.

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

This means you have to be flexible with your risk. You can make better use of your capital and margin by trading smaller lot sizes and averaging a position over a number of prices. This is taking a number of prices over a period of time to build one bigger position in the market. This means you have more chance a dealing with added short term volatility and getting out for a scratch or profit in most trades. The signature of both parties shall evidence acceptance of these terms.

The average risk reward is 2:1. Risking £10 to make £20. If you use AND STICK to this formula you do 10 trades and only win 50%, you will still be ahead.

By using an ‘edge’ and knowing the likely outcome of a trade you can greatly increase your chances of success. Having the confidence to buy, sell or stay out will help you in the long run.

iView charts ‘trade view’ window allows you to see the edge in every market you may want to trade, on every time frame.

My 80/20 rule - how to trade FX, stocks and indices

Trades

Result

123456789

10

Trades

2:12:12:12:12:12:12:12:12:12:1

Risk Reward

-£100

-£100

-£100

-£100-£100

-£500

Lose Amount

£200£200

£200

£200

£200

£1000 £500

Win Amount

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

BUY IT NOWwww.iviewcharts.com

STARTER PACKAGE:$79 p/m

PROFESSIONAL PACKAGE:$129 p/m

COMPLETE PACKAGE:$199 p/m

Key points to remember about this data and the MARKET SENTIMENT

If we take the fundamental data example above and examine the markets from a technical perspective after the event. Here are the charts 4 hours after the data was released.

We are still in the growth economic cycle so RETAIL sales matter:

Fundamentally

1. The expectation was low -0.1% 2. The actual figure was even lower -0.3%3. There is already uncertainty with Ebola, Russia and the state of the global economy – all negative4. The short term and long term trend of markets.

The result of this BEARISH was to send safe haven products like gold and non USD currency up, the main indices down. Gold is a good indicator of how this bad fundamental data will draw short term traders and speculators into the gold market and push the price higher.

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

How to trade fundamental data technically

Technically

The data is release at 1:30 BST the market and the market reacts.

As the information filter through the markets to the traders, we start to see short term traders push the price up, based on the new information of bad data in RETAIL sales.

We hold above a MN technical levels at 1226.33 and find SUPPORT.

The next logical level of resistance is the next MN, W1 or D1 higher time frame point of attraction. We know how to get these levels from the previous chapter. This means that the W1 level of 1240.30 and W1 1251.40 point of interest will be the next logical upside target.

Summary

Trading is a very personal endeavour. No two people interpret the data they see or hear in exactly the same way. With so many products to trade and so much information out there it is important to know with trading less is more.

My 80/20 rule is to give you both a starting point and a frame work of how you should approach your trading day, week and month. It’s all about the long game. Compounding a series of calculated gains with a reasonable risk profile is how to make money in the long term trading.

Quality charting, technical studies and also fundamental information sources are always better than sheer quantity. When you see pictures of people’s trading set ups with 8 screens and charts everywhere, this is not how the professional traders do it.

As human being we can assimilate a lot of information, but only so much. Too much information means we miss the quality and therefore miss the money marking opportunities.

I advise you to invest in yourself first. Spend time and take advantage of all the free education out there. Use a demo account to learn how to actually put trades on, but remember you can only really learn the emotions of trading using real money, so move on to a live account as soon as you can.

In my experience nothing separates the men from the boys, or indeed women from the girls, by testing your strategy and your character other than real money trades.

My 80/20 rule - how to trade FX, stocks and indices

My 80/20 rule - how to trade FX, stocks and indiceswww.iviewcharts.com

I hope this helps you and remember trading is a marathon not a sprint!

For more information visit www.iviewcharts.com