Forex Trading System- Plotting Points and figure charts in real time

OVERVIEWTraders who analyze stock market securities are under no severe time pressure to up-date their charts immediately. The stock market has fixed opening and closing timesand traders can update their charts anytime outside market hours at their leisure.Many traders perform this task in the morning with the arrival of the early edition ofthe newspaper.
This relaxed atmosphere becomes slightly less leisurely when plotting P&F chartsof spot currencies in real time, although it is entirely doable. Attention to detail andstaying focused are the basic mental requisites.
TOOLS OF THE TRADEThe only equipment necessary to plot P&F charts in real time is a cup of hot coffee,graph paper, a pencil, and an eraser (all the mistakes are there just waiting to be made,but easily correctible). The choice of supplies is very subjective and is determined bywhatever you are comfortable with. We prefer a French blend, 11-by-81/2-inch graph pa-
per with 1/4-inch squares, a No. 2 pencil, and a rubber graphite eraser.
TRADING PLATFORMMost trading platforms display raw moving tick data as a pip chart that displays pricesand the transaction cost. Nearly all platforms allow traders to adjust the time interval
within the charting window, typically 5 seconds, 10 seconds, 30 seconds, 1 minute, 5minutes, 10 minutes, 30 minutes, and so on.
TRADING GOALSFor the time being, we define the investors’ trading goals as the number of pips they in-tend to capture during that trading session. Higher goals and thus greater profits usuallyinfer that traders should employ greater box sizes and/or reversal amounts. Manytraders prefer to use the standard three-box reversal amount as a constant and thenvary the box size based on the anticipated magnitude of the price objective.
STARTING THE PROCESSLabel the top of the graph paper with the name of the currency pair, the time interval se-lected, the box size, the reversal amount, the date, and the time of day when your chart-ing session begins. It is a good idea to save the sheets and review them after a week orso to ascertain how significantly your online graphing skills have improved.
Next, check the most recent price displayed in the platform chart window and makethis price the median price on the left side of the graph paper. Then fill in the price in-crements above and below the median price, remembering to add or subtract the boxsize for each number in the vertical price scale.
When you end the trading/charting session, note the time of day and the number ofpips earned or lost.
REAL-TIME EXAMPLEWe begin by labeling the top of the graph paper with the following:
Currency pair:
EURUSD
Date:
Monday, January 31, 2005
Start time
00:05 A.M. MST
End time:Box size:
2 pips ($0.0002)
Reversal Amount:2 boxes

In the chart in Figure 20.1 we can see a distinct downward trend as defined bythe diagonal line above the Xs and Os. At 1:50 A.M.we initiated a short trade as a
market order at 1.3010 USD, the first low below all the previous lows. At the sametime we placed a stop-loss limit order at 1.3024, the highest X in the previous two Xcolumns.
After a brief period of unavoidable lateral movement, the trend again continueddownward. When the price hit 1.3002, we moved the stop-loss down to 1.3016 (again thehighest X level in the previous two X columns). (See Figure 20.2.)

We repeated the same method when the price hit 1.2980, and we lowered the stop to1.2998. (See Figure 20.3.) At this point we have locked in a 12-pip profit.

Another period of lateral movement then developed and no new lows were hit. (SeeFigure 20.4.) A trend reversal appeared imminent and we manually exited the market at1.2994 USD, trapping a modest 16 pips. Theoretically, we should have exited slightlysooner, but only hindsight is 20/20. We highly recommend the use of trailing stops tolimit losses and protect gains. The selection of the initial stop-loss as the highest X inthe two previous X columns was based on this particular pattern and is not a universalrule. Plus our trading objective was essentially a scalping tactic.

A simple caveat here is to not get absorbed in charting for the sake of charting it-self. Never neglect the real issue that is occurring on the screen. If violent surges breakout, stop charting and adjust your stop-loss, and then take profit limit orders accord-ingly. Charts can always be updated after the trade is liquidated.

PERFORMANCE EVALUATION

There is an innate tendency to discard the graph papers representing losses. Do not!File all the sheets regardless of the outcome (win, lose, or draw). Wait two weeks or so,then retrieve the sheets and make two piles, wins and losses (we treat draws as wins).Scrutinize the sheets in each pile looking for common ingredients and recurring pat-terns. Try to isolate which factors contributed to losses and which to profits. The cluesare all there but some detective work is required. Also, neatness and legibility counts ifyou intend to review the chart data at a future date.

Real-time P&F charting requires a modicum of discipline (and some patience),which, in turn, develops mental focus, increases familiarity with the personality of a tar-geted currency pair, and creates an air of forbidden intimacy with the market environ-ment as a whole.