Forex; 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.

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.

A Closer Look at the Trailing Stop

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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