Understanding the Losing Trades

As a trader, you cannot always win — it’s that simple.  Trading is about winning and losing, which is why you should never trade with money you cannot afford to lose.  Overnight was a good example of this on the binary signals.

Understanding the Losing Trades

Below is a chart of all the trade signals for overnight.  There were only 4 winners and either 13 losers or, if filtered with the higher timeframe stochastics, 9 losers.  So why did the signals perform really good and then not so good. Remember to click on the image to expand it.

Binary Signals losing tradesBecause as I have wrote on Wednesday on the Nadex Market News, the majors were pulling back to daily ATRs (good trades on the lower timeframes) but then they reached the daily ATR on Thursday.  Here are the daily charts:







Notice that the EURUSD managed to flip the ATR but should come back to test the ATR (downward movement).  The USDJPY is not at an ATR but notice it’s oversold indicating a retracement up to the ATR is likely which means it will transition from down to up on the lower timeframes.

Now take a look at the forex scanner in Multicharts for the 240 minute and daily:

Forex Scanner in Multicharts

Notice all the MPk on the 240 minute timeframes (indicating a retracement to the ATR).  If the column before the MPk column is blue then it will go down to the ATR and if red then it will go up.  This is also confirmed by the volume divergence and, previously the column after the divergence column also was registering overbought on several of the currencies.

Putting all this together using the multiple timeframe approach for filtering losing trades (which is very hard for new traders as they tend to get confused and frustrated, I know I did when I first started):

  • If there is a long signal but the ADX magenta peak (MPk) is coming in on the higher timeframe (in this case they were coming in on the 240 minute chart), then I would not take the trade because the 15 minute is going to reverse.  This signals a counter-trend trade not a trend trade.
  • If the higher timeframe is overbought or oversold in the direction of my trade, I don’t take it.
  • If I notice extreme values on the ADX (above 70) then I am more cautious and will likely take profits earlier, if needed, or not trade until I can distinguish where the market is likely to go because I anticipate the MPk coming in which will either reverse the direction or allow price to stall (aka time decay).

Since the USDJPY had the most losing trades, let’s examine that chart with the ATR Support and Resistance, following the rules of the Trade Flow Analysis for the five trades that were called overnight to see how it filtered the trades.  Here are the simplified rules:

  • Price at an ATR
  • Minimum 2 ATRs in the same direction
  • Stochastics confirmation

I have marked each trade with either the green checkmark or red “X” to identify where the trades were called.

First trade — price at ATR, 3 ATRs in your direction, and stochastics had hidden divergence.

Second trade – price at ATR, 3 ATRs in your direction but no stochastics confirmation.

Third trade – not trade zone because you do not have a minimum of 2 ATRs in your favor.

Fourth trade – no confirmation on stochastics.

Fifth trade – no trade zone because you do not have a minimum of 2 ATRs in your favor.

USDJPY ATR Support Resistance chart

As explained above, there were multiply ways to identify the market move and potential losing trades.  However, by far the easiest way was using the ATR Support and Resistance indicator because it gives a cleaner snapshot of when the ATRs are splitting (which either identifies a no trading zone or for more advanced traders a counter-trend trade).

About Gail Mercer

Gail Mercer, Founder of TradersHelpDesk, is a highly respected trader, trainer, author, and speaker residing in North Carolina. She has over 15 years of experience in trading and in the development of custom indicators.

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