Transcription
I'm gonna show you my hedging strategy that is right 80% of the time. I'm also gonna show you how to handle the 20% you're wrong by hedging your way out of it. They say, whoever they are, that it takes over three years to become a profitable Trader. My goal is to try and get you to skip past those three years and become profitable a lot sooner. Trading is made up of two parts: you've got the offense and you got the defense. The offense is the part of the trade where you decide to get in the market, to shoot the shot, to go long or short. You like the spot, and you're ready to get in. Defense is how you manage trades that don't work out the way you expected. The real money is made on the defense. It's easy to put a trade in, have it close out in 10 or 15 minutes, and walk away. You never even think about that trade again. It's the ones that don't work out that haunt you, that stay with you: the losses and how to manage those. With the strategy I'm going to show you, 80% of the trades you take will work out. They'll be clean; you won't ever have to even think about them again. In fact, you probably won't. It'll just be money you put in your pocket, and you walk away. But 20% of the trades you take will not go the direction you want. I'm going to show you a hedging defense that allows you to manage your margin, mitigate your risk, and eventually go flat.
Let's start with the offense first. The chart you're looking at is a 5 minute chart on the usdcad, or the cad. That's probably the pair I trade the most, and if you've watched any of my videos, you will have seen the cad in Action a lot. But there's a few things that I'm changing up just a little bit from previous videos. One of them is this blue box right here. This is the New York session; this is the session I trade. It probably doesn't matter what session you trade, as long as you trade one of the sessions where there's a lot of volume. The strategy I'm about to show you really works best when you have volume because there's follow through. So, this blue box right here represents the New York session, except for I have it starting at 8:45 and we're ending at 11:45. That's a threeh hour trading window. If the trade comes about in those 3 hours, we take it. If it comes out earlier or later, we don't take it.
We're going to add an indicator. So, if you've never done that before, you would click on your indicator box and type in "relative strength index." Every charting system should have this; it's like one of the ones that's been around forever, which is probably why I decided to use it, because, well, everyone else does too. The more eyes you have on a strategy, the more probability that's going to work out. So, we're going to add the relative strength to our index, but now what we're going to do is we're going to tweak that thing. So, you'll go into settings, and you'll pop up a window. Whatever your charting system is, you'll have a window. The first thing we're going to do is change the relative strength index length to nine. You want to make sure your time frame is set to chart or 5 minutes, and this only works on a 5 minute chart. The next thing you want to do is go into style, and I'm going to take off the RSI based Ma. I don't want the other line; it doesn't matter, and I don't use it. I'm going to change the color of the line to gray because I don't really like purple. Feel free to customize the look of it as much as you want. One thing you do need to do is change the upper band to 80 and the lower band to 20. That's really, really critical. So, just to recap, the things you need to change in order for this to work is the RSI length needs to go to nine, and under style, you need to change the upper band to 80 and the lower band to 20.
I'm going to show you a trade I took on December 3rd, 2024. Today is December 4th, so this was yesterday's trade, and I'm going to replay this starting at the beginning of the New York session. The thing that we're looking for is for this RSI to close above the 80 or close below the 20. It has to close there; it can't go up there and Bob, and then come back down and not close there. We're looking for a close, a definitive overbought or a definitive oversold market, and then we're going to either buy or sell on the opening of the candle after it closed. Let's start advancing our chart. It's climbing, it's getting there, starting to feel like maybe it's close. Now, on this candle, it closed at 79.3 n. It did not close above the 80. That is not the trade. Looks like a good trade, but it is not the trade. We're going to go one more candle. Okay, that one closed above the 80, so now we have a signal to sell. Okay, so I entered a position, and it was a sell position, so I'm going to put that right here. And my fill price was 1.46 605. Now, my take profit on that position would have been 10 Pips below that. So, um, we're going to put a line right here: 1.4 505. That would have been my take profit. That's what I was looking for. That's the setup for offense. We're looking for oversold, overbought.
The defense: this is where you really Hunker down and protect your trading account. I'm going to put a back stop 50 Pips above. The 50 Pips is important; this is where the 80% win rate, uh, comes into play. So, at 1.4 11105, I'm going to put a buy stop order. So, there's our setup. My position went in right here at 1.4... what was that? 1.40 605. My take profit is 1.40 505, and my back stop is 1.41 5. This 50 Pips is the breathing room to allow this position to take place. Let's see how it goes. Let's hit play on this and have this thing start working. So, it goes up, goes out of the money, in the money. We're now out of the session, so we're not taking any new trades. And boom, right there it hit! Did you see that? Took out the position right at 1:00, and my clothes, my fill rate on the clothes, was 1. 14054. Now, that does not mean that this did not go out of the money. It floated out of the money almost, what was that, 15 20 Pips? And so, this 50 pip breathing room that you're giving it allows you to be early on the trade, let it cycle, and come back in. In 80% of the time, it does that. So, the other 20% of the time, this would would continue on its way before it came down and hit the takeprofit and picked up this buy stop order. So now, what you would do is take the take profit off of this position, and you would have a 50 pip hedge. That's what you have allowed the risk to be: 50 Pips. Now, the question is, how do you play defense and get yourself out of that trade?
All right, to illustrate that, I'm going to show you a trade that took place back on October 24th. Uh, same rules, same RSI, everything is set up the same. We're just now in FX replay, which is the back testing software I use. There's a link down below if you don't have any back testing software; I would highly recommend checking him out because the best way to play offense is to shoot a lot of shots, but the best way to play defense is to know exactly what you're going to do when stuff goes wrong. That way, emotions don't take over, and you don't make a bunch of poor decisions, over trade, Revenge trade, all of the problems that keep people from being profitable Traders. You just know exactly what you're going to do when things go wrong. We have now broken above the 80, and we're going to take a sell position. We're going to sell one lot right there, and we're going to put on that lot a 10 pip take profit. Okay, but in order to to protect that position, we're going to place an order of a buy stop for the same one lot, and we're going to put that at 1. 38889, and we're going to save that. So, this is our risk, these 50 Pips right here, and this is our take profit of 10 Pips. And now what we're going to do is just wait, play it forward, and see what happens. All right, so that is not looking good. It's up out of it, but we're still well inside our 50 pip range, and the idea is to have this cycle back in and hit our take profit. So, we're now one day into this. It got back to break even and Spike back out. One thing to point out is we did not take this trade or this trade, even though it was inside the New York session, inside our window. We were already sitting on a trade, so don't stack trades. So now we're on October 25th, and we are looking very much like we're going to be hitting our back stop, which is just a bummer, right? Nobody wants to do that. Uh, o, that was close! That was close, didn't hit it, at least not there. And now, so now we're in a hedge, so we've got to come over here, and we're Gna take this Tak profit off. Okay, so that's our position. Now, the main thing we're looking for now is for one side or the other to get enough in the money that we can trim The Other Side by a minimum of 75%. So, we want to take a huge whack. So, we just wait. All right, so now we're 1559 out of the money, and we've got $1,200 to put towards it. That's now a 7 7% trim. Now we get to trim that off. So, we hedged to manage our risk at 50 Pips. Now we're going to mitigate and take some of the pressure off of this slow moving train. So, how you do that is you're going to go in, and we're going to close this position by 100%, and we're going to pocket that cash. So then, we're going to go into this position, and we're going to trim it by 77%. We're going to hit save. So now we have 23 Lots left on that. We've really reduced our risk, but more importantly, this position now is naked; it's unprotected. We've reduced it now to a manageable position that we can just let it go. Okay, so now that we've reduced it, put your take profit back on it. Um, maybe it's 10 Pips, maybe you want to go for a little bit more just to offset how long your sitting on that position. That's totally up to you; you can make the choice, and you're just back to trading.
Just a recap: the strategy that's 80% accurate is trading the overbought and oversold markets based off the RSI. If it's above 80, you're going to sell for a 10 pit profit. If it's below 20, buy for a 10 pit profit. But both of those have to be protected with a buy stop or a sell stop order. Once you're hedged, you're going to allow that hedge to go until you can trim it by a minimum of 75%. More is better, but at least 75%. Then you're going to get 75% of your Lots back that you can go back to trading somewhere else on the market, and you're going to let that position just ride. Now, you can continue to trim it with additional profits, or you could just let it Coast, turn it into a swing trade, if you will, put a take profit on it, and just get back to trading the RSI. If you end up with one or two of those along the way, maybe you average the price of those together so you they don't have to travel quite as far out of the money to close out. There's a lot of ways you can manage those positions that you left behind, the breadcrumb, if you will. But the main point is to reduce that risk and get back to trading.
Just some final thoughts: to manage this position, you have to have some Capital. Do not think that you're going to be be able to trade this program, or this system, or this strategy with very little Capital. Make sure you choose whatever position size you have to allow for that 50 Pips of breathing room, plus a bunch more after you leave it un hedged, 'cuz if you don't, it'll come back and buy you. Now, you're probably questioning whether this is actually 80% or more accurate. Here's my challenge to you before you jump in the comments and say, "There's no way this doesn't work," and you become a stalworth keyboard Warrior. Jump on FX replay, set up the RSI exactly how I've shown you, and go to January 1, 2024, and trade this year forward. I don't really have to try and prove that it works; prove it to yourself. Get in the system and trade and practice, and what you'll find out is you're going to be right 80% of the time, and you're going to be wrong 20% of the time. And being right's easy. Being wrong, that's where you'll make your money as a Trader. You got to really Hunker in and trim those Hedges, and then allow those positions to cycle back in, or the profits you're making by trading along the way, you can continue to trim it off and get flat and have the position go away. Neither of them are right or wrong. I really hope this helps out, and I really hope that you do go back test it in some back testing software like FX replay, because if you do, I think you've got a greater chance of becoming a profitable Trader, and you might be able to skip here's one, two, and three and just move right in to being profitable.