The Monday Trade Explained

I had a couple questions on how the Monday trade, aka The Monday Accelerator, works so I thought I would do a post on the setup so you can test it out for yourself.

Of course, this is not trading advice and should be taken as purely informational and for testing purposes only.  It is something that I like to trade in the current market conditions, but it may not work for you or may stop working in the near future.

It is very, very risky and only you can decide if it is right for you by backtesting it with software and demo trading.  Never trade a system just because someone says it works, always test it for yourself.

So to begin, I will show you how I learned it, then I will go into how my testing and live trading has altered it into something that I am comfortable with.

This technique relies on pivot points.  If you don’t know what pivot points are, click here for a brief introduction from Wikipedia.  For the Monday Trade, you are only concerned with the central daily and weekly pivots, you can forget about the other pivot points.   I only use this technique on the GBPCHF because that is the pair it seems to work best with.

Here is a shot from my Forex Tester screen showing some backtesting in progress.   The two pivots we are interested in are the weekly central pivot (blue line) and the daily central pivot (yellow line).  I have also included the daily R3 and S3 (green lines), just for reference.

Nice setup, click above for larger image

The Setup

The double vertical lines signify the beginning of Monday.  What we are looking for is a separation between price and and the weekly pivot as soon as Monday begins.  In this case, the current price is at 2.4555 and the weekly pivot is at 2.4439 for a difference of about 116 pips.  This is enough to do the trade.  We are looking for a minimum of about 70 pips.

Position Sizing

The most important thing to remember is to always use good money management.  Even if we trade very small lot sizes, there is still a potential to make healthy gains and minimize the risk even if we are wrong.  I currently trade micro lots (1,000 units, about $0.10 per pip, 400:1 leverage) in a $500 live account.

This is a risky strategy, so you should only have a small percentage of your total risk capital in each account.  Usually good money management dictates you only risk 1-3% on one trade, so that is how much you should have in your account.  When you are profitable, you should move that profit into another account as not to endanger that money.

Be aware of the margin requirements, especially if you are trading in the US and are limited to 100:1 leverage.  Calculate your margin call point before you enter your trades.

Stop Losses

HA!  Stop losses are for Nancys.  Seriously, I don’t use hard stops with this strategy.  That being said, you have to keep a closed eye on your trade if you do choose to do it this way.  I do have a mental stop based on the price action and my current risk.  Essentially, a margin call is the stop loss if you use the guidelines in the previous section.  If you are not comfortable with this, then use hard stops.  I keep an eye on my trades on my iPhone using the new FXCM app.

Of course you should backtest this to see what you are most comfortable with.  When I first learned to trade, I thought that a hard stop loss was mandatory, but I have since learned that it is a personal preference.   If you use proper money management as outlined in the previous section, it will be less likely that you lose any significant amount of money.

Profit Target

The first thing I usually do is calculate the profit target.  Instead of actually targeting the weekly pivot itself, I want to be a little conservative and target 20 pips before the pivot.  This gives me some leeway in case the spread jumps or there is some slippage.

In this case, the weekly pivot is at 2.4439 (yes, this is backtesting data from 2001).  So I want to target 2.4460 as my target for all my positions.  I’m just using a round number to make calculations simpler.   This will be my take profit or limit.

I have also found through my own trading that if price is far enough away from the daily target to make a nice profit, and the daily target is closer to the current price than the weekly target, I like to play it safe and target 20 pips away from the daily pivot instead of the weekly pivot.  This is a personal preference and you may feel differently.

Trade Entry

Now I step backwards and start entering sell stops back down to the profit target.  The way that I originally learned it from Rob Booker was to open equal lots sizes every 10 pips.  So following these rules in this case would produce the following sell stop orders:

• 1 lot @ 2.4470 = +10 pips
• 1 lot @ 2.4480 = +20 pips
• 1 lot @ 2.4409 = +30 pips
• 1 lot @ 2.4500 = +40 pips
• 1 lot @ 2.4510 = +50 pips
• 1 lot @ 2.4520 = +60 pips

So the total potential profit would be +210 pips.  Pretty good, but we can do better…

Rob has since changed his method and I like the updated method better and that is what I have been trading.  This method involves 10 stacks, 5 pips apart.

As a personal preference, I also increase the lot sizes as I get closer to the target to maximize the move.  If the trade doesn’t work, then the large orders will not get executed, minimizing my risk.  So in this case the entry orders would look like this:

• 4 lots @ 2.4465 = +5 pips x 4 lots = +20 pips
• 4 lots @ 2.4470 = +10 x 4 = +40
• 2 lots @ 2.4475 = +15 x 2 = +30
• 2 lots @ 2.4480 = +20 x2  = +40
• 2 lots @ 2.4485 = +25 x2 = +50
• 2 lots @ 2.4490 = +30 x2 = +60
• 2 lots @ 2.4500 = +35 x2 = +70
• 2 lots @ 2.4505 = +40 x2 = +80
• 1 lot @ 2.4510 = +45
• 1 lot @ 2.4515 = +50

As you can see, this is a very aggressive strategy!  Do not try this without proper adult supervision and a fire extinguisher within arms reach.  In this case, the total potential profit is +485 pips, more than double the potential of the previous method.  The good thing is that even if the first two entries get hit and the market keeps going up, because the lot sizes are small,  the loss will be minimal.

Exit

I use mental stops, but you can also test with hard stops.  I look for a level that if broken, would probably lead to the pair taking off and not hitting the target.  In addition, if 5 or 6 of my orders are filled, I keep a close eye on the trade and close it out with a smaller profit if it looks like the pair might retrace significantly.  I usually setup my trades on the hour chart, but I drop down to the 15 minute or lower to see what the price action looks like.

Again, this is a risky trade, so when in doubt, I take the profit.  This being said, if the price action looks like it will continue to the target, do not exit prematurely.  You have to have these wins pay for any losses so I let my winners run if I feel that there is a good chance of it working out.

Since this trade is based on the Weekly Pivot, I close out open positions and orders at the end of the week.

Example

Here we go, I am going to put my orders into Forex Tester and start to step forward through the data.  The long dashed green lines are the sell stops and the red line is the take profit on all of the orders.

click above for larger image

A couple of entries get triggered on the first day but the market bounces up.  The market goes up for awhile before coming to its senses and just barely hits the weekly pivot on Friday.  This is a perfect example of why you need to target 20 pips away from the weekly pivot and not the pivot itself.

click above for larger image

Final Result

In our one backtesting trade, the Monday Trade made $47.90 in a $1,000 account for a +4.7% gain in one week.   This was done trading micro lots (1,000 units) with 400:1 leverage.  Individual results will vary between traders and weeks.

So there you have it!  Fire up Forex Tester or your favorite backtesting software and try it for yourself.  When you are comfortable with the back testing results, trade it in a demo account.  If you use a broker that offers the Metatrader 4 platform, I find that program the easiest to do charting with and it is free.

If you have any questions or comments, feel free to leave a comment below.  If you have discovered a better way of trading this, I would love to hear about it.

Thanks for sticking with this long post and happy trading!

Hugh

If you enjoyed this article, you might also like:

1. This Week’s Monday Trade
2. Another Great Monday
3. 2009-12-28 GBPCHF Monday Trade
4. Why More Money is Good
5. Oanda – First Impressions