Click on the chart to enlarge it.
Now that we've dialed down through three sequentially lower time frames and found an Ocean setup and entry on each, focusing in on the optimum entry point, let's ask: What did we gain?
First, using the Ocean-based rules for entry and initial stop placement (explained in the Ocean workshop), we managed to reduce the risk to assume the trade from almost $3,000 to less than $1,500, roughly a 50% improvement. A risk of $1,500 may still be little rich for many traders, in which case an even lower time frame analysis will allow more reduction in the initial risk requirements.
We stopped the analysis here at the weekly level, perhaps too high a time frame with too large a required risk for many traders. However, when evaluating risk structures two other elements need to be factored into the analysis—the probability of win and the expected profit potential. We'll deal with these below.
Secondly, we also managed to find an entry that was more than $1,400 more favorable to us, and therefore the trade had that much more profit potential built into it immediately upon the entry. The important point here is to know that multiple timeframe analysis has let us reduce risk substantially (the most crucial goal) and helped us get a better entry price.
I've stopped this example at the weekly level because bar charts of currency prices often appear erratic with lots of gaps at lower time frames. This is because currencies trade around the clock, but the US market is only open about 6 to 7 hours. Therefore, prices are moving elsewhere in the world for the other 17 to 18 hours and we have to play catch up via gap openings.
I've seen detailed studies that indicate that as much as 70% of the day-to-day price movement in domestically traded currencies is the result of gaps. That's why I prefer Forex to the domestic currency markets and Ocean-based Forex trading is like slaying the dragon—but that's a story for another time.
(This is the end of Part 6. Go to Part 7.)
|
