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Subscribers' Contribution
Name: JL      Date: 28 Mar, 05

I think its a very bad idea when you recommend using mental stops.Its much better to have a rule you always use - 20 or 30 pips depending on your trading style and how long-term you trade - and place this stop when you enter your trade. Otherwise you always have a reason - hope or stress - to delay taking your loss, and most of the time the loss wil get bigger and bigger. Taking a loss is the most difficult part in trading, and its best to have a rule, which you never change, about how many pips you want to lose per trade.

Treasury Risk Management

The Colour of Money - Series on Forex Hedging

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Use a Forecast for Budgeting
28th May, 2012

Our Reply

Thank you very much, Sir, for your contribution. Your observation is absolutely correct and invaluable for an intra-day or even intra-week trader. For such trading, it is imperative to have pre-set Stops in place, which should not be changed unless it is to move them up to protect running profits. That is the way we recommend trades on our "FX Thoughts for the Day" service at http://www.fxthoughts.com

Not to argue with you, but, for very long-term positional traders (who are assumedly disciplined), mental stops might be better because it might prevent them from getting stopped out of good positions by market noise.

We shall be glad to include your contribution on our website and request you to consider more of your insights, if you wish. We can also feature you on our e-zine "The Colour of Money". You can access the Archives at http://www.kshitij.com/com/archives.shtml

Once again, thank you for your contribution, which is truly valued. We shall include it and inform you, and hope to hear again from you in the future.

Name: XMLT      Date: 04 Sep, 04

Thank you for sending me "The Colour of Money", I find this reading very instructive.

As I was browsing the 08-Mar-2004 edition, I was a bit confused by your example of a bull pennant. Looking at it, I would have identified it as a descending triangle (because of the horizontal line at the bottom). As you say, pennants are continuation patterns (whether in an uptrend or in a downtrend). However, descending triangles would be continuation patterns in downtrends only.

So I don't know how I would have interpreted a descending triangle in an uptrend...

Please correct me if I am completely wrong. Here are my sources however: http://www.chartpatterns.com/descendingtriangles.htm
http://www.chartpatterns.com/flagsandpennants.htm

Our Reply

Bon Jour, XMLT, its good to hear from you! Hope your trades are doing well. I'm glad you are reading "The Colour of Money" and liking it. Please pass it on to your friends if you think its worth it.

I'll try and answer your query the best I can.

An essential difference between a Pennant and a Triangle is that Pennants are of much shorter time duration than Triangles, which play out over a long time. Similarly, Flags are also usually of short time durations. Meaning, whichever chart you are looking at (hourly, 4-hourly, daily, weekly etc), there will be fewer bars/ candles in Pennants and Flags than in a Triangle.

This is the main reason I've identified the pattern in question as a Pennant rather than a Triangle.

To my mind, whether one of the sides of a Triangle is horizontal or not is not of great significance. In other words, I do not make a strong distinction between Symmetrical and Ascending/ Descending Triangles.

Further, my experience is that Triangles (whether symmetrical, ascending/ descending or whether found in uptrends or downtrends) can resolve on either side. As such, it is difficult to classify Triangles as either Continuation or Reversal patterns. One thing is certain, trading becomes very difficult while the market is trapped within a triangle and that is why volumes fall. And of course volumes pick up when the triangle eventually resolves itself and direction becomes known.

The uncertainty is the highest (and opinions are sharply divided) as the market nears the apex of a triangle. The best trading instrument at such times would be an Option which allows you to benefit from the eventual move, in whichever direction it might occur. The cost of such an option could be high though. You would know better, of course, since you are an Options man.

I hope this helps you somewhat, although I must caution you that I speak only from my experience, for whatever its worth. I have not read the charting bibles such as Martin and Pring and I could well be wrong. So, please take my words with appropriate amounts of salt.

If you need to discuss this further, I'd be glad to.


XMLT

So, if I have well understood, the difference between a triangle and a pennant is not absolute, but relative to the chart considered (which means a triangle in the 4-hourlies may last several days, and a pennant in the weeklies may last several weeks... the absolute duration of the pennant being greater than the one of the triangle) ? My upcoming question is now: how to precisely differentiate a pennant from a triangle, or, put another way, what is the maximum number of bars/candles a pennant may hold (whichever the chart) ? I guess there is no dogmatic answer...

And yes, prior to a triangle breakout, the option strategy would be to buy a straddle (call + put with same strike) or even, in case a huge move is expected, a strangle (call + put, both out of the money) so named because the time value erodes very fast.

Our Reply

Clarification
-----------------
  1. The difference between ascending/ descending/ symmetrical triangles is not absolute
  2. The Pennant is quite different from the Triangle in that the pennant is resolved quickly (is of a short duration) as compared to the triangle, which can play out over a very long time.

A way to identify a Pennant (or a Flag) is that it is always preceded by a long "Pole", a swift and sizeable movement that has taken place earlier. The pennant/ flag is the market catching its breath for just a few sessions before sprinting again.

In a triangle, there is, usually, a long period of indecision, in which both bulls and bears can get badly hurt.

Of course, there's no fixed number of bars in either a pennant or a triangle, but we can say that while there are several bars in a triangle, there are far fewer bars in a pennant.



Name: Mr Mike Dunsmore,United Kingdom     Date: 13 Jan, 03
(in reply to Mr Aleksander Shimuk):

1) Leverage is good as it allows you to position more than you have but you should always work out how much you are prepared to loose on a transaction and immediately cover with a stop. I use spread betting (Deal4Free) which is very good at offering various ways of managing your exposure.
2) Rule of 10. Never expose more than one tenth of your available capital on one transaction and always use a stop loss as markets can spike quickly. I use max loss of 4%).
3) In a market where you are going against the major trend I would suggest you run at half your normal position e.g. I bet 20 a point on cable but if going against the main trend will reduce to 10 a point.
4) Never over trade, set a desired exit point on a trade and move the stop loss so you will still achieve desired profit but stay in the hunt for a larger gain. Trailing stop lose position is almost more difficult than the original trade. Cut your losses and run your gains.
5) If in doubt sit it out. The hardest thing is to not trade. I want to jump on board with every one of Vicars positions but in reality I am much happier with one or two max.
6) Agree Fridays can be a problem as many accounting/trade positions have to be settled forcing transactions regardless of rates.
7) Finally 'Plan your trade and trade your plan' that way you know what you will be doing whatever happens in the market and before it happens. You will never get a bad trades or quit a position at the wrong time. (This does not mean every trade will be profitable - you must expect some to lose money on some trades though if all trades serious managed overall profitability is a reality)

Our Reply

Our thanks to Mr Dunsmore. Trading being much more difficult than Forecasting, all inputs on Trading and Risk Management Tactics are VERY useful. If others would also like to share such thoughts, please do so. Everyone will benefit. And, we shall make a compilation of all inputs so that they can serve all of us on a regular/ constant basis.



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