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Review: Trade Invalidation Management

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

Last updated 11/17/2009 7:37 PM EST (GMT -5) 7 Comments

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Bradley W. Gareiss

Technical Analyst, GFT

Whenever I post a trade, I usually include a list of conditions that could invalidate the trade.  These conditions invalidate the trade because they each would suggest that the reason for the trade is no longer present.  This short list of conditions that would invalidate the trade isn't a substitute for experience, and they aren't always perfect.  However, this list is the best way for us to quickly and easily explain what invalidates a trade.

I have heard from some customers that they have had trouble determining when a trade is invalidated, or they occasionally enter a trade that was clearly invalidated.  Today, we will go over some simple steps to take that will decrease the odds of entering a clearly invalidated trade.  The best way to accomplish this is by setting price alarms at key levels before the trade's entry.  GFT's Dealbook software can send alarms to your email or your cell phone, so you do not need to be near your computer to be aware of an alarm being hit. 

The first alarm set helps reduce the odds of entering a trade that has long bars.  I typically put an alarm two-thirds of the way from point C to point D.  I usually do not enter the trade into the platform until that alarm goes off.  Usually if the trade makes it to that alarm without long bars, there will not be long bars in the trade.  I put this alarm on right after I initially draw the pattern.

The second alarm should be set just before the entry.  We often write something to the effect of "If the pair comes within 8 pips of reaching our entry, does not enter, and reaches T1 before entering ,the trade is invalid."  In this case, we would put the alarm 8 pips before the trade entry.  If the second alarm is hit, we then place an alarm at T1.  That way, if T1 is hit before the trade enters, we know the trade is invalidated and we can cancel the order. 

The third alarm is also set right after we initially draw the pattern.  We typically warn something like "The trade is invalid if it falls below 0.8554 before reaching our entry".  We simply put an alarm at that level, so we know the trade is dead if that alarm goes off.

Once placing alarms becomes a habit, it takes less than a minute to place all three of the initial alarms, and it makes it much easier to track which trades become invalidated.  While using these invalidation rules isn't 100% perfect, they usually get the job done and will greatly increase the odds of success when followed.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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Comments (7)

dmaybee

November 18, 2009 at 12:23 AM ET

Great writeup on the powerful use of alarms to screen out invalidated trades. I never thought to use them like that. Thanks for the education.

bgareiss

November 19, 2009 at 06:29 PM ET

You're welcome. Brad

FXDragon

November 18, 2009 at 01:22 AM ET

After yesterdays expected usdjpy invalidation, eurusd and usdcad seem they will bust today also.

FXDragon

November 18, 2009 at 03:16 AM ET

That usdjpy deserves being drawn again very soon though.

bgareiss

November 19, 2009 at 06:29 PM ET

A lot of patterns get invalidated, which isn't necessarily a bad thing. It is just the way it works. The USD/JPY could work still, but it moved up to 38.2% of CD when the pair came close to entering. Right now I feel more comfortable not having that posted, although it could go either way. Brad

Semaj

November 18, 2009 at 07:40 AM ET

B, how about indicator alarms to notify you of your trade direction just incase you miss the entry by 8 pips & before it runs to T1? Stochastic Osc. or a MA cross on a 15 min? Just have to have the program running for the alerts.

bgareiss

November 19, 2009 at 06:27 PM ET

You could do that as well, but I usually keep it simple with the standard alarms. Brad

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