There is a phenomenon that almost every trader struggles with at some point in their career. For some, it even happens before they ever get started. For me, it was most prominent in my career when I was making the switch to FX from trading stocks and options.And that is the ever-present, but occasionally more prominent fear of failure.Fear can stupefy traders into in-action; allowing their trading accounts to sit idly while their dreams dissipate into the realities of indecision. Fear can affect us individually, and it can become a pervasive theme throughout markets, wreaking havoc across the globe; 2008 is evidence how poisonous this emotion can become. In this article, I’m going to share with you some of the best advice that I’ve ever received on the topic of fear; a short, sweet axiom that I can utter to myself whenever I have a question about whether or not I should take that trade that instantly dissolves any fear that I may have.Before we get to the quote, there is an important question that every trader needs to have the answer to at all points throughout their trading day. The answer to this question will add perspective to our fear; it will show us how insignificant this emotion can be and even more importantly – it will encourage us to battle through difficulties to get to the promise land. And that question is:Why do you trade?There isn’t one right answer to this question… The answer can be different for all of us.Some of us just want to make a little extra money so that we can spend more time with our families, while others have plans and hopes for full-on global financial domination. The answer to this question is your driver. This is what can make the tough times easy.Whatever the answer is, it needs to be important to you.This is your goal. This should be posted on the top line of your trading plan as a reminder of what you hope to get out of all your hard work. It’s of vital importance to keep this in mind, because when we are trading, there is a litany of factors to stay on top of. Our primary objective can easily become obscured, which can lead to paralysis by analysis.One Trade Won’t Make Your Career, but It Sure Can Break itThis is how the conversation came about with my friend in which I ultimately found the error of my ways. The friend, also a former stock trader, had moved into the FX market earlier than I had. He had adapted his game before FX was the prominent asset class it is today. He has since ‘retired’ and now spends his days on the sunny shores of San Diego or Hawaii, wherever his mood takes him. He still trades FX, but primarily for fun as he doesn’t really need to earn another dollar for the rest of his life.Coming from stocks and options, I was a ‘patient’ trader. I would find a stock I liked and a reason I liked it (usually a fundamental story of some kind such as a biotech company with a product up for FDA approval), and I would then watch the technicals to find a comfortable way to play it. The inclusion of options, essentially, gave me the opportunity to ‘leverage’ my ideas. Trading in gaps was a near necessity if I wanted to catch the bigger moves, and because of this I comfortably developed myself as a swing-trader.The FX Market can be intimidatingEven after trading in stocks for over nine years at the time I had moved up to FX, the speed of the Forex market was impressive. The fact that the market never closes was only partly as interesting to me as the amount of liquidity behind each of the major currency pairs. The availability of 400 times leverage (which has since been lowered to a maximum of 50 times leverage per Dodd-Frank in the United States), made these moves seem even more threatening.Just as I had done with stocks, I was patient. I waited. I looked for an opportunity, a theme with which I could look to begin to build a position.And when I finally found that theme, my first entry hit its stop.I attempted to re-enter, thinking that my analysis was strong, and I now had an opportunity to enter at a better price. That got stopped out as well.I worked through this uncomfortable, awkward period of trading a stock-traders strategy in a Forex traders market, and didn’t see results resembling anything close to what I had put up trading stocks. For the first time in a long time, I was looking at a negative profit line and I began to question whether I really wanted to adapt to the FX market, or whether I wanted to go back to trading stocks and options.A trader’s psychology is of the upmost importance, I knew that then as I know it now, and I realized that I was starting to dig myself into the pit of despair that traders will occasionally find themselves languishing within.So, I talked to my friend. And he started the conversation by asking me the very same question that I began this article with: “Why do you trade?”I gave him my answer, and he then asked me –“Do you honestly think you are going to achieve all of that with one trade?”To which I replied, ‘well, no but….’ At which point he promptly cut me off.He then went on ‘a lot of people like to trade because of the feeling of being right [which was not the reason I had provided him.] It’s not all that different than the reason people will sit in front of a slot machine throwing away their children’s inheritance one quarter at a time. They know that the odds are against them, they just want to feel that emotion of winning. It's an easy trap for human beings, who innately desire to be right, to fall into.’He continued: “with your goal, you are going to need a heck of a lot more than one trade, aren’t you?”I looked at him like the wizard that he had just become to me, and nodded in agreement.He went on to say, “while you may need a lot more than one trade to get what you want, any one of those trades can easily drain your account, and end your game pretty quickly. So James, the answer is simple: You need to learn to be wrong more often because any trade you take is going to be but one of a thousand insignificant little trades in your career.”One of a thousand insignificant, little tradesThat line hit me like a freight train carrying a ton of bricks. It showed me where my perspective had become skewed when moving from trading stocks to FX; the fact that all of this additional leverage I now had at my disposal was not necessarily something that I had to use. It merely gave me more flexibility, which – like freedom, is best in abundance so that we can choose how or how not to impact our own fate.More importantly that that – this phrase puts into perspective the fact that any one trading idea you have is, at its very best, a hypothesis. Nobody knows for certain what price will do next. There is risk in every single trade that we place, and every single idea that we have.Counter Fear with PlanningThe best way to counter fear in the FX market is planning. After the conversation with my friend, I built risk parameters into my trading plan that will not allow me to lose more than 5% in any given day, or more than 1% on any given trade idea. This is what allows me to look at every trade I place as insignificant in the grand scope of my overall trading career; because the most that it can hurt me is 1/100th of my account value.Some ideas work out, others don’t. But worse-case scenario, I come back to the game tomorrow with at least 95% of today’s account equity, and a very real chance to move one step closer to my goal.This part of my plan has truly made each trade I place but one of thousands of insignificant, little trades. There is a big reason that this is important advice. Because if we are ever to attain our goals, there is but one way to do it: By placing lots, and lots of trades. Fear is the enemy in that paradigm, and sitting on the sidelines is only wasting time. Even if it’s a surreal market condition, trade it on a demo account until you have a strategy that you feel is consistent enough to put real money to work.Because the only thing you will never have the opportunity to gain more of in this world – is time. Time is the only asset available to you in a finite amount. You can make more money, you can buy more stuff, and you can get more of anything else. But you cannot get more time.Trading gives us the opportunity to make the most of this precious time. Use it wisely.
Trading signals are the perfect solution for the traders who are new to the trading world or do not possess enough self-confidence to trade on their own. By being a subscriber to trading signals, one can assure that they are a part of the active trading process and are making profits as much as expert traders. There are many Advantages of Trading Signals for Subscriber. These include: - The trading signals can make even a new trader capable of trading like an expert. The novice trader who is new to trading will obviously not know the tips and tricks of the trading world. Thus by being able to copy the moves of a professional trader, they will be able to have a look at the efficiency of the experienced trader and also be able to trade in a similar manner. - Another advantage is that this form of trading is extremely simple and does not require an individual to even be an expert in the usage of any particular trading platform. The trading signal subscription can be completed in a few clicks. The subscriber to-be just needs to have a trading account with their desired broker. Then the trading client is to be installed and the wanted trader to be followed be selected. The software takes care of everything that needs to be done next. - The biggest advantage of trading signals for subscriber is that one is able to attain the profits of an experienced trader without devoting the time or energy to acquire that amount of knowledge. Moreover, having huge profits equivalent to an experienced trader does not come at the cost of similar risk. It is made sure that the trading is done within the price range of the subscriber by assessing the amount present in the account of the subscriber. - Since example is always better than precept, by looking and following the moves of an experienced trader, one is able to grasp the tricks and rules of trading quickly and easily. The trading pattern of a professional trader when followed is sure to give more profit in a shorter time and also teaches the subscriber to use similar methods. - Apart from the aforementioned advantages, a to-be subscriber is also given the option of following a trader for free for a certain period of time. Only when the person is completely sure with the account monitoring of the trader who is to be followed can one opt to be become a subscriber to the trading signals and avail its benefits. Thus there are a lot of advantages of trading signals for subscribers. This is a quick method for one to learn to trade well and also a good method to make sure that their account is not left idle till the point one gets the confidence or knowledge to trade on their own. Also, by looking at the trading pattern of other traders, one will be able to get a grip on the trading process and be able to trade wel on their own too.
You know that the right trend can make your month or year as a trader. Who can blame traders for wanting to hunt for trends? We do not and we certainly recommend you take advantage of clear trends like the EUR/NZD below when trends presents themself. However, as a trader, you must be familiar with how to identify a false breakout over a legitimate break out. Many traders try and force trend entries when a breakout occurs even though the market has no intention of honoring that breakout. Any trend follower is familiar with the feeling of entering into a bad trade when they prematurely entered into a trade. It feels like a trap. It’s time that you come to grips and learn how to tell if a breakout is real or if you should fade the breakout and take advantage of the great risk: reward ratios that are available when you notice a false breakout.This article will help you to take advantage of false breakouts that experienced traders love to trade and that trap new traders.Here are the tools we’ll use to protect ourselves against getting trapped into a false breakout.1_ Average True Range (14 periods)2_ Support & Resistance3_ Candlestick AnalysisHere’s what it will look like on your screen: Average True Range (ATR)The average true range indicator allows you to see the volatility behind the pair you’re trading by measuring daily moves. You can use ATR to test the validity of a breakout when price pierces support or resistance. The reason we use the ATR is to determine the amount of pips the range must be broken by before we enter into the trend or decide to fade the breakout. As an example, the ATR (14) for AUD/USD is 68.0 pips as of today’s reading. The ATR (14) for GBPJPY is 114.6 pips. This tells you that the GBPJPY is 2X more volatile in pip terms than AUDUSD. We would look for a breakout from a range above 68 pips and 114.6 pips respectively before we enter with the new trend. If this doesn’t occur we look to take a high probability trade back into the newly expanded range with a strong money management system.Rule One of trading false breakouts is that if price doesn’t break the range by the ATR, the breakout is false and we should fade the overextended move. If the pair pushes through by more than the ATR then we are looking at a legitimate trend to follow that should now be on our watch list.Support & ResistanceAs time goes by, traders focus more on support and resistance for one reason. The market focuses on support and resistance. You should too when determining a new trend or an expanded range. Support is seen as the floor that price rests on before shooting back up. Resistance is the ceiling that price reaches before revising back to the price range. If a new trend breaks out to the upside, then what was resistance now becomes support.Support and resistance do not require an indicator but an eye to look at the chart and see when buyers stop buying in an uptrend or sellers stop selling in a down trend. We also recommend you treat them like a flexible fence as opposed to a glass floor or ceiling that will be shattered if pierced. How this applies to false breakout trade: If you recognize a false breakout below support, you can enter a buy entry near support (range low) and you can adjust trade size so that should the market reverse and move back below support to hit your stop, no more than 2-5% is risked on the trade. Finding respected levels of support and resistance is very helpful in finding high-probability trades.Many professional traders feel that trading ranges is a higher probability set up and that because following trends is tempting but has a low probability play out, they’re better off sticking to ranges.Candlestick Analysis Few methods are as valid and time tested as Candlestick analysis. Candlesticks allow you to see real-time market sentiment so that you can identify tipping points as they’re developing. Sentiment is important for you to know so you can see when buyers are heading for the exits when a supposed upside breakout occurs. Similarly, you can look at candles around support to see if sellers have lost confidence and are not willing to hold on to their trade. This allows you to take advantage of the false breakouts in real-time.The two signals we see here are the Bullish & Bearish Engulfing signals which are two very strong reversal signals at very important points on the chart. As a side note, candlestick patterns take on a critical importance around support and resistance or against major pivot levels or moving average levels because this is where sentiment of traders are key.Knowledge of false breakouts and how to trade them appropriately with ATR, Support and resistance, and Candlestick analysis can add a lot to your trading. Remember to always be patient and when you see price alerting you to a new trend or a false breakout, you will now how to approach it with confidence.Happy Trading.
The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. Are the markets really so enigmatic that few can profit or are there a series of common mistakes that befall many traders? The answer is the latter.The good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid risk management techniques.Today, we will discuss 2 key aspects of risk management.1_ Risk a little to make a lot – use at least a 1:2 risk to reward ratio2_ Risk a small portion of your account – risk less than 5% of your account on all open tradesUse at least a 1:2 Risk to Reward RatioLast fall, DailyFX published their Traits of Successful Traders. We went through extensive research on the behaviors why most traders lose. Most traders lose money simply because they do not understand or adhere to good money management practices. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money (see chart above).To resolve this paradox, establish your risk and reward parameters ahead of time. Insist on taking trades that offer at least a 1:2 risk to reward ratio. This means that for every pip of risk you are taking in the trade, seek out at least 2 pips of potential reward. By doing so, you are relieving the pressure from yourself to have to be right in the trade.As James Stanley eloquently points out in his trading plan, you can be right only 50% of the time when using a 1:2 risk to reward ratio to give yourself a shot at consistent returns. Risk no more than 5%However, there is another element to consistent risk management. How much of your account are you risking?Too often, I hear from clients via twitter or during our live webinars that they are risking a small amount, just 20 pips on the trade. However, the true risk on the trade is how much of your account balance are you exposing?Is it possible that Trader A can have a stop loss set at 10 pips and risk more than Trader B with a 50 pip stop loss? Yes! As you can see from the above example, the trade size (and resulting cost per pip) multiplied by your stop distance determines your risk on the trade.In our courses, we suggest risking no more than 5% of your account balance on all open trades. That way, if you are wrong (and we established from the first key point that it is ok to be wrong 50% of the time), then you still have over 95% of your account balance available to trade tomorrow.The formula to calculate risk on the trade is: Cost per pip X pip’s risked = Account Balance Risked For example, if I’m trading the AUDJPY with a current pip cost of $1.25 per 10k position, then a trade with 50 pips of risk is $62.50 risked in my account. [ $1.25 X 50 pips = $62.50 ]
The first time I ever looked at a price chart, it was intimidating. There were boxes, lines, zigs and zags and I had no idea how to begin deciphering the information displayed in front of me. But once I got a grasp of the basics, charts slowly grew to become an integral step in my analysis process. Charts tell us a story about how price has moved in the past with the hope that we can use it as guidance for the future. My focus in this article will be unmasking popular chart types, explaining how time frames work, and the difference between bid vs. ask prices.Chart TypesThere are 3 types of price charts that you are likely to experience in your trading career: Candlestick, Bar, and Line charts. They are all created using the same price data, but display that data in different ways. To explain, the image below displays all 3 types of charts using the same set of price data.Learn Forex: Three Most Popular Chart Types Candlestick ChartsThis chart type displays the opening, high, low, and closing (OHLC) prices for each period of time designated for the candle. The “body” of each candlestick represents the opening and closing prices while the candle “wicks” display the high and low prices for each period. The color of each candle depends on the applied settings. But in the image above, every candle that is blue means the price closed higher than where it opened (often called a bullish candle), and every candle that is red means the price closed lower than where it opened (often called a bearish candle). This is by far the most popular chart for trading forex.Bar ChartsThis chart type displays the opening, high, low, and closing (OHLC) prices for each period of time designated for the bar. The vertical line is created by the high and low price for the bar. The dash to the left of the bar was the opening price and the dash to the right was the closing price. You can see the similarities between this chart type and a candlestick chart when they are sitting side by side.Line ChartsThis chart type usually only displays closing prices and nothing else. You will see this type of chart used on television, newspapers and many web articles because it is simple and easy to digest. It gives you the less information than candlestick or bar charts, but is much easier on the eyes with a quick glance.Time FramesA chart's time frame describes the amount of time it takes to complete a single candle. If you select a 1-hour chart, that means a new candle is created every hour on the hour. If you create a daily chart, that means a new candle is created each day (at 5pm ET). If you select a 1-minute chart, that means a new candle is created every minute. Etc.Forex traders looking to decide what time frame to use can read about How Chart Time Frames Affect Forex Analysis.Bid vs. AskThe last piece of our Forex chart is decided by whether we want to look at Bid prices or Ask prices. The side we choose will depend on whether we are wanting to place a sell order or a buy order. Remember, there are two prices for every Forex pair.The bid price is where we can open a short(sell) position or close out a long(buy) position.The ask price is where we can open a long(buy) position or close out a short(sell) position.To be clear, we are free to place any type of order that we want no matter what chart we are looking at, but if it appears like our trade opened at a strange price or we were stopped out early on a trade when referencing the price chart, this is most likely due to us looking at the wrong side of the price.Are you ready to access real-time Forex charts on a fully loaded trading platform for free? Try out a FREE Demo account.Good trading!
There is a common trading expression “The trend is your friend.” Phrases such as this have stood the test of time because they are critically important to any trading plan. This article will show you how to identify trends using price charts and technical analysis.Before we get started, it is important to first explain why trend trading is a popular strategy used by many new and experienced traders. Experienced traders know when they find a strong trend and trade in the trend’s direction, it can make trading easy. Therefore, experienced traders seek out more strong trends to repeatedly take advantage of them.For example, if the market is moving up in a strong trend, it isn’t as important what the strategy is used to time entries, you simply need to be buying. When you trade in the direction of the trend, the rest of your trading approach can fall right into place. This doesn't mean that all your trades will be winners. It does mean that you don't have to be exact in your entries and exits once you find a strong trend to trade.Secondly, there tend to be more pips to be made in the direction of the trend than against the trend. In the chart above, notice how more pips are available to the downside than the upside. By aligning with the direction of the trend, you align your strategy to the momentum of the market.Determine the TrendTo determine the trend, pull a price chart on a currency pair of your choice with between 100-200 candles. Then answer the question of which direction prices are generally moving?If the trend is up, then confirm the direction by looking for a series of higher highs and higher lows on the chart. A valid up trend would look similar to the above chart. Eventually, all trends will end. So this uptrend changes to a downtrend when a series of lower highs and lower lows are established as noted below. If the trend is down, confirm the downtrend by looking for a series of lower highs and lower lows on the chart. Below is a chart of a valid downtrend. This downtrend changes to an uptrend when a series of higher highs and higher lows begin to form as noted below. It is important to note that there are no specific rules for identifying high and lows to use for trend analysis. The idea is to pick the most obvious examples of an uptrend or a downtrend to trade.Insist on finding pair in such an obvious trend that a 10 year old child can identify the trend direction from across the room. If you are not sure of the trend direction, then move to the next pair which the identification is obvious.Take advantage of the fact that there are many pairs to trade. This is one of the advantages of trading the FX markets.SummaryThere are several advantages to trading strong trends which is why many experienced and well known traders follow that strategy.Look for the most obvious trending moves. There are over 30 different currency pairs to choose and look for the strongest trend of those pairs.Filter your trading signals in the direction of the trend. Take only entry signals in the trend direction and ignore those entry signals that are counter trend.
Trading signals are an effective way for a novice trader to be able to gain profits like a professional. As soon as you subscribe to trading signals, all deals are copied onto your account. To subscribe to trading signals, one need not go far; the option for it is right in the trading terminal. The steps are as follows: - You need to update your trading platform. - An MQL5 account needs to be created and the user needs to be registered. - This account which was created should then be linked with the trading platform of Metatrader4/ Metatrader5. To do this, you simply need to go to the tools button and then choose ‘Options’ to click on the Community tab. This will ask for your username and password to make sure that the linking is being done by the correct person. - Next is the most important step – choosing the signal provider you are interested in. The entire benefit of trading signals depends on the signal provider and so it is important to do thorough research before choosing the signal provider. - To subscribe to the selected signal provider, you need to agree to the terms and conditions and also select the option of real-time signal subscription. This will enable the signal to be copied into your account in real time that is without any delay. One should also check the subscription settings to make sure they are set as one requires them to be. - When all the above steps have been completed successfully, the system will perfectly synchronize both the accounts so that you can enjoy the benefit of trading signals. All the operations of the trading provider will be there to be viewed directly from your trading account. To be able to subscribe to trading signals, the above steps are required. The best part of subscribing to trading signals is that there is no need to fax or sign any hard copy of papers and wait for the confirmation. All one needs to do is to link both the accounts following the instructions given above and the subscription to trading signals is complete. Moreover, one need not even be on the same server as the signal provider to be able to receive the trading signals. There is also another way to subscribe to the trading signals and that is directly by the MQL5 website. You simply need to go through the list of signal providers and to select the one desired, click on the Subscribe button next to it. The other details like the start day of the subscription, the duration, the name of the broker and your username needs to be entered into the database and the procedure for subscription will be complete. The name of the broker can be selected from the drop down menu in the option and so finding the signal provider is also easy. Thus subscribing to trading signals is easy and one should avail the benefits of the easy to subscribe and advantageous trading signals.
Talking Points:Where To Buy Is A Small Part Of the PuzzleLearn How To Take Small Losses Early Is KeyFocus On Good Decisions More So Than Right / Wrong“Accepting losses is the most important single investment devise to insure safety of capital”It’s natural for you to look profitable FX traders to see what type of trading methodology you should take on. Because, you figure, if James Stanley is making money on the Finger Trap strategy, then that’s obviously the way to go right? But if he’s doing well with such a short-term methodology, why is Jeremy Wagner knocking out big moves with Elliott Wave & Donchian Channels? The answer to this question is that the truth about trading lies less is where to buy and more in deciding where you’re wrong and should get out of the trade.Where to Buy Is a Small Part of the PuzzleOf course, you should have an idea where is a good time to enter into a trade. I consider this an edge, when your entry has a better chance or probability of profit than a random entry. The most common of edges that you’ll hear us address at DailyFX is trading with the trend and when reasonable fading the crowd bias with our Sentiment Index. More importantly, it’s best to write down the key things that build your edge so that before you can objectify your edge and not be swayed by emotions before jumping in a trade.Learn Forex: My Checklist for Entering a Trade With my objective edge checklist displayed on the AUDUSD chart above it’s important that you understand that it doesn’t hold the path to riches but it is important. The importance lies in that you’re not being pulled by the latest news headline or largest candle on the chart which could just be a few large orders going through that doesn’t break the overall trend. In fact, a great investor of the 20th century, Sir John Templeton, used to keep a list of investments he’d make if a price got to a certain price and give it to an associate to enter orders so that he would not be dismayed by the news around that time and in effect keeping his buying objective when it was easier to be subjective.The Bottom Line: You need to have an objective way of identifying the edge but getting into the trade isn’t nearly as important as getting out of the trade at appropriate points.Learn How to Take Small Losses Early Is KeyIf you decided to set out and learn the investing secrets of the top traders in the world, you’d likely end up more confused than when you started. The reason for the confusion is that you may read the great Paul Tudor Jones, who stated, “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms."That could easily get you excited about learning how to read market turns but just as quickly, you may read Bernard Baruch stating, “Don't try to buy at the bottom and sell at the top. It can't be done except by liars.” or “I made my money by selling too soon,” which was in context of catching the meat of a move.Learn Forex: Decide Where Your Trade Is Wrong before Deciding Where You’re Right You’ll notice in the chart above that I don’t know if EURUSD will go to 1.3200, 1.2400, or lower but I know if EURUSD breaks above 1.3900 which is the trendline resistance that I do not belong in a short trade. Deciding and honoring your exit point is a very tough but critical point in trading and why two traders can be very successful but have completely different ways of entering into a trade. In other words, if one guy is doing great picking tops and bottoms and another is doing great catching the meat of the move then the common denominator of these professional traders is their ability to decide when they are wrong on the trade as per their analysis for getting in in the first place.The Bottom Line: There are many roads that lead to trading well but there is only one highway to trading poorly and that is letting the market trade past your conviction point for getting into a trade. Make sure you know at what price you should no longer have your capital at risk or else you’re just gambling.Focus on Good Decisions More Than If You’re Right / WrongIt’s easy to close a profitable trade and think that you were right on your call or close out a losing trade and say you were wrong on the trade but that can be a harmful way of thinking. The harm comes from the fact that when you entered the trade, you may have an objective edge as we discussed earlier but you obviously didn’t know whether you’re trade would close at a profit or loss (or else, you’d never enter a losing trade again). What’s a more appropriate way to look at any trade is making sure that it’s based on good and methodical decisions because a decision is based on collecting the present data and putting the best foot (buy, sell, flat) forward, which is a fair definition of trading.As you can imagine, in all of life, we’re always making decisions. When you’ve made a bad decision, in trading as in most of life, you’re best served in recognizing when the decision did not turn out as you hoped and changing your course of action as soon as possible. What can be harmful, is when you tied every decision you make to your ego so that you wait for the circumstances to hopefully turn so that you’re hopefully proven right and your ego is protected. This hope has cost many traders their career and I hope this article prevents anyone from repeating this mental error in 2014.Closing ThoughtsAdjust your thinking on trading so that you see loss control and objective decision making that protects your capital as the cornerstone of your trading while see an entry price in less esteem as you may have earlier in your career. That is the truth of trading.
If you lived in the United States before the year 2000, the thought of yellow and orange-jacketed traders screaming at the top of their lungs across a rainbow of other-colored jackets, slips of paper flying everywhere, is probably something you associate with markets and exchanges. These stressful environments were synonymous with the notion of markets. Emotions ran high, and depending on the exchange – one may even be risking their own personal safety by entering ‘the floor.’Times have changed quite a bit; many exchanges exist only in cyberspace, no longer seeing the need for physical manifestations of their trading activity. Even the New York Stock Exchange; have you seen it lately? If not, just turn on CNBC, it's not like it used to be (quite a bit more quiet these days).But one thing that hasn’t changed is the fact that people love fast markets. Only now they mostly exist through the Internet, and now they are available to anyone willing to risk their money – not only the select few that could afford or draw on family connections for a ‘seat on the floor.’ When a big news event happens; or even perhaps a news event driven by an economic catalyst, like the 2008 Financial Collapse, markets can attempt to price in the newest data so fast that prices move at breakneck speeds. For the poor investors that are in long positions in mutual funds, the hope of stemming the bleeding before market close doesn't exist. They have to wait and watch the devastation until the end of the trading day so that they redeem out of their mutual funds.But to the trader that can take a short position just as quickly as ‘hitting the bid,’ these ‘panic’ periods present quite a bit of opportunity. Prices are moving fast and pips can stack up quickly – if you are on the right side of the trade. The big question is if this is something that fits in your trading plan?What type of trader are you?By many accounts – fundamentals and news events create price changes, thereby – fundamentals dictate what prices will do. Technical analysis on the other hand, analyzes past price movements, showing us what prices have done. And sometimes, what price has done in the past can help us build a game plan for the future; looking to those fundamental catalysts to create big price movements (the hybrid fundamental-technical trader).The alternative approach is the trader that analyzes those same past events, looking to avoid those fundamental catalysts, hoping that the technical levels from the past hold true (the technical-range trader).That’s really all there is. A pure fundamentals trader wouldn’t be looking at charts at all, and a ‘technical-breakout/trend’ trader would really be, in many ways, looking to fundamentals to continue substantiation of those trending/breakout conditions, so they wouldn’t really be a ‘pure technical’ trader.Considering the fact that ‘panic’ markets can create rapid price movements in a short period of time, which can just as easily work against the trader as it can for them, it behooves one to know as much about their risk profile before wagering their hard-earned capital.So, if you consider yourself a ‘pure technical’ trader, and have no interest whatsoever in following or keeping up with the news – I advise you to attempt to avoid panic markets. This can often be done by setting stops at major levels of support (or resistance in the case of short positions) so that when we do get those big breakouts – they don’t work against you too heavily.For all those that dare to tread in fast markets – read on; and we will share with you some ways that experienced traders approach these volatile scenarios.How to Trade Fast MarketsThe same question was broached in the article ‘How to Trade Forex Majors Like the Euro during Active Hours,’ and the recommendation to trade breakout strategies could not be more on point.As David shows in the article, increased activity often means larger and potentially more erratic price movements. And because these movements can be more erratic, it can greatly affect the trader’s ability to forecast price changes. The chart below, taken from the aforementioned article, shows how widely price swings can magnify on EURUSD during the London and the London/US overlap session (often considered the most ‘active’ period in the FX market). Now if we consider that panic markets often have an external stimuli; whether it be a natural disaster like what was seen in Japan in 2011, or a man-made disaster like what was seen at Bear Sterns and Lehman Brothers in 2008 – we have to know the market movements can be even more exaggerated, meaning price movements can become even more magnified, and forecasting can become even more difficult.Why trade breakouts to address panic?Because price movements can become greatly magnified while also becoming more erratic is the reason why trading breakouts is the best prescription for handling volatility. If we happen to be on the right side of the movement, price can trend for a continued period of time, giving us far greater potential profit targets if we are right. If we’re on the wrong side of the movement (which will probably happen more than half of the time), then we can cut our losses early before the pair continues against us in a move that could potentially drain our accounts.A critical aspect of trading breakouts is the necessity of strong risk-reward ratios, such as the trader risking 20 pips, but looking for 100 pips if correct. This could be expressed as a 1-to-5 risk-to-reward ratio (20 pips to the stop-loss order – 100 pips to the profit target = 1:5 risk-to-reward).This is what can allow rampant volatility to actually work in your favor.With a risk-reward ratio so aggressively on the trader’s side, one would need to be right only 2 out of 5 times to gleam a net profit. If a trader was right 40% of the time with a 1-to-5 risk-to-reward ratio, they could be looking at a handsome profit (2 winning trades at 100 pips each = 200 pips won, 3 losing trades at 20 pips each = 60 pips lost, net profit of 140 pips (200-60) not including commissions, slippage, etc).But what if the trader above was only right on one out of five trades? Well, they are still looking at a net profit (once again, not including spreads, slippage, etc). One winning trade at 100 pips only gives up 80 to 4 losers at 20 pips each, leaving a net profit of 20 pips; and that is with a winning ratio of 20%.How to Trade BreakoutsAn easy way of looking at breakout strategies is to simply think of ranges – and then reverse it.While range-traders look to buy support and sell resistance, breakout traders await breaks of resistance to buy (in anticipation of price continuing to rise now that resistance is broken) and looking to sell when support is breached (once again, looking for price to continue heading lower).There are numerous ways of identifying support and resistance levels to be used for breakout strategies. Some traders don’t even use indicators, electing, instead, to simply analyze and build their strategies off of price, and price action. Some traders rather use strategies based on indicators like Price Channels to point out these support and resistance levels. Many of the various Pivot Point offerings or Fibonacci studies can help in this same regard as well.Whatever the mechanism, it is important to realize that complete elimination of false breakouts is totally impossible. What often makes or breaks a breakout strategy is money, risk, and trade management.This is a hazard sport, as it can be a regular occurrence for price to break support (or resistance) briefly enough to trigger our, only to pop back into its prior range. This can be frustrating for breakout traders, and has even earned the title of the ‘false breakout.’This topic was explored in greater detail by Walker England in the article ‘Can False Breakouts be Prevented?’Not to spoil the article, which you should absolutely read, but the answer to the question is ‘No.’ False breakouts, unfortunately, cannot be prevented.To the trader looking to be more conservative, additional ‘wiggle room’ can be given to the entry in an effort to attempt to decrease the chances of caught by a false breakout.But preventing false breakouts is impossible due to the simple fact that no trader in the world knows what will happen next. So when trading panic markets, protect your trade, protect your account, and trade your plan.
There is a saying in the trading world that if you are trading without a stop loss and without having a proper risk/reward ratio you are doomed to failure. From my point of view this holds true only to a certain extent as it depends very much of the type of trader one is: scalper (meaning going for short term profits, taking quick bites out of the market and having as many entries as possible during the trading day) or a medium term investor (there are traders that do trade currencies based on the higher time frames charts, from the daily up to the monthly charts). So the statement above would most likely address the second category of traders mentioned here, as scalping can be very successful without having to employ stop loss and risk reward strategies. On the other hand, a medium term investor is the one that resembles the professional trader, in the sense that his/her analyses are based on analyzing the market from both the technical and fundamental point of view. While the scalper will mainly look at fundamentals only to the extent of the moment of time the economic data/indicator is released, the investor looks to understand why a specific economic data came in the way it did, what it means for the currency, and how to trade that into his/her advantage. Identifying a possible new trend does not mean the medium term investor will jump and take the trade just like that, but will look most likely for the setups that provide the most attractive risk/reward ratio. A risk/reward ratio should be defined as the ratio between how much you are willing to risk for a specific outcome. For example, if a trader decides to go long eurusd at the 1.30 level and uses a stop loss of fifty pips, or 1.2950, and a take profit of 100 pips, or 1.31, the risk/reward ratio is 1:2, meaning for every pip risked, there are two pips of potential profit. The higher the ratio, the better, and traders strive to identify the proper setup to have this ratio as big as possible. A good risk/reward ratio (also called rr ratio) is considered to be the 1:3 ratio, and there are traders who are effectively refusing to take some trades if the rr ratio they are basing their trading is not there and such rules are part of the money management system each and every trader should have. The medium term investor will always look for those setup that provide the rr ratio they are looking for and because of that they already have a competitive advantage in front of scalpers as one successful trade with a 1:3 rr ratio should cover for three potential bad trades. And this is why the rr ratio should be incorporated in any money management system a trader uses. However, there are some negative points related to trading with a specific rr ratio as markets spend most of the time in consolidation and having a big rr ratio implies one should trade only when markets are trending/moving. This depends very much on the risk taking, as the same rr ratio can be traded even when markets are not moving that much, so taking a lower risk will definitely be a way to go. But currency markets are characterized by extreme volatility levels and frequent spikes and that makes it difficult, if not virtual impossible, to find entry levels that assure a nice rr ratio starting with the smallest risk possible. All in all, trading with rr ratio helps traders be more disciplined and trading is one area where discipline is needed if one wants to be successful.
Summary: Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.Big US Dollar moves against the Euro and other currencies have made forex trading more popular than ever, but the influx of new traders has been matched by an outflow of existing traders.Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through amalgamated trading data on thousands of live accounts from a major FX broker. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately.What Does the Average Forex Trader Do Wrong?Many forex traders have significant experience trading in other markets, and their technical and fundamental analysis is often quite good. In fact, in almost all of the most popular currency pairs that clients traded at this major FX broker, traders are correct more than 50% of the time: The above chart shows the results of a data set of over 12 million real trades conducted by clients from a major FX broker worldwide in 2009 and 2010. It shows the 15 most popular currency pairs that clients trade. The blue bar shows the percentage of trades that ended with a profit for the client. Red shows the percentage of trades that ended in loss. For example, in EUR/USD, the most popular currency pair, clients a major FX broker in the sample were profitable on 59% of their trades, and lost on 41% of their trades.So if traders tend to be right more than half the time, what are they doing wrong? The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite bring right more than half the time. They lose more money on their losing trades than they make on their winning trades.Let’s use EUR/USD as an example. We know that EUR/USD trades were profitable 59% of the time, but trader losses on EUR/USD were an average of 127 pips while profits were only an average of 65 pips. While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall.The track record for the volatile GBP/JPY pair was even worse. Traders were right an impressive 66% of the time in GBP/JPY – that’s twice as many successful trades as unsuccessful ones. However, traders overall lost money in GBP/JPY because they made an average of only 52 pips on winning trades, while losing more than twice that – an average 122 pips – on losing trades.Cut Your Losses Early, Let Your Profits RunCountless trading books advise traders to do this. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. Conversely, when a trade is going well, do not be afraid to let it continue working. You may be able to gain more profits.This may sound simple – “do more of what is working and less of what is not” – but it runs contrary to human nature. We want to be right. We naturally want to hold on to losses, hoping that “things will turn around” and that our trade “will be right”. Meanwhile, we want to take our profitable trades off the table early, because we become afraid of losing the profits that we’ve already made. This is how you lose money trading. When trading, it is more important to be profitable than to be right. So take your losses early, and let your profits run.How to Do It: Follow One Simple RuleAvoiding the loss-making problem described above is pretty simple. When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “risk/reward ratio”. If you risk losing the same number of pips as you hope to gain, then your risk/reward ratio is 1-to-1 (sometimes written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 1:2 risk/reward ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.What ratio should you use? It depends on the type of trade you are making. You should always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Generally, with high probability trading strategies, such as range trading strategies, you will want to use a lower ratio, perhaps between 1:1 and 1:2. For lower probability trades, such as trend trading strategies, a higher risk/reward ratio is recommended, such as 1:2, 1:3, or even 1:4. Remember, the higher the risk/reward ratio you choose, the less often you need to correctly predict market direction in order to make money trading.Stick to Your Plan: Use Stops and LimitsOnce you have a trading plan that uses a proper risk/reward ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper risk/reward ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.Does This Rule Really Work?Absolutely. There is a reason why so many traders advocate it. You can readily see the difference in the chart below. The 2 lines in the chart above show the hypothetical returns from a basic RSI trading strategy on USD/CHF using a 60 minute chart. This system was developed to mimic the strategy followed by a very large number of live clients, who tend to be range traders. The blue line shows the “raw” returns, if we run the system without any stops or limits. The red line shows the results if we use stops and limits. The improved results are plain to see.Our “raw” system follows traders in another way – it has a high win percentage, but still loses more money on losing trades than it gains on winning ones. The “raw” system’s trades are profitable an impressive 65% of the time during the test period, but it lost an average $200 on losing trades, while only making an average $121 on winning trades.For our Stop and Limit settings in this model, we set the stop to a constant 115 pips, and the limit to 120 pips, giving us a risk/reward ratio of slightly higher than 1:1. Since this is an RSI Range Trading Strategy, a lower risk/reward ratio gave us better results, because it is a high-probability strategy. 56% of trades in the system were profitable.In comparing these two results, you can see that not only are the overall results better with the stops and limits, but positive results are more consistent. Drawdowns tend to be smaller, and the equity curve a bit smoother.Also, in general, a risk/reward of 1-to-1 or higher was more profitable than one that was lower. The next chart shows a simulation for setting a stop to 110 pips on every trade. The system had the best overall profit at around the 1-to-1 and 1-to-1.5 risk/reward level. In the chart below, the left axis shows you the overall return generated over time by the system. The bottom axis shows the risk/reward ratios. You can see the steep rise right at the 1:1 level. At higher risk/rewards levels, the results are broadly similar to the 1:1 level. Again, we note that our model strategy in this case is a high probability range trading strategy, so a low risk/reward ratio is likely to work well. With a trending strategy, we would expect better results at a higher risk/reward, as trends can continue in your favor for far longer than a range-bound price move.Game Plan: What Strategy Should I Use?Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higherWhenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for 1:2 or more when trend trading. Then you can choose the market direction correctly only half the time and still make money in your account.The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same risk/reward ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away.Model Strategy:For our models in this article, we simulated a “typical trader” using one of the most common and simple intraday range trading strategies there is, following RSI on a 15 minute chart.Entry Rule: When the 14-period RSI crosses above 30, buy at market on the open of the next bar. When RSI crosses below 70, sell at market on the open of the next bar.Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.When adding in the stops and limits, the strategy can close out a trade before a stop or limit is hit, if the RSI indicates that a position should be closed or flipped. When a Stop or Limit order is triggered, the position is closed and the system waits to open its next position according to the Entry Rule.
Most newer traders tend to concentrate almost exclusively on ways to enter a trade and place virtually all of their focus on that aspect of trading. While entries are important, experienced traders will agree that managing and exiting a trade will have a greater impact on the level of success a trader may achieve.One of the most effective methods for exiting a trade is simply to employ a Risk Reward Ratio on the trade. By doing so, there is no question of when to exit. If the limit is hit, you are profitably out of the trade. If the stop is hit, you are out of the trade with a small, manageable loss. This plan is very straight forward and it eliminates the chance of your emotions taking control…as long as you stick with the trading plan.Let’s look at the 4 hour chart of the NZDCAD below… In this example, if a trader were to employ a 1:2 Risk Reward Ratio on a trade (and that is the minimum that we would recommend), and a 46 pip stop were set, then a 92 pip limit would be set. With that done, just let the trade run until you are either stopped out or limited out on the trade.Here is another strategy that could be employed if a trader were trading multiple lots. Using the above scenario, a trader would open, let's say, two lots on a trade. At a predetermined level of profitability, in this case when the trade has moved the amount between the stop and the entry, 46 pips, one of the lots would be closed. At that point 46 pips of profit would be locked in.On the remaining lot, the stop would be moved to breakeven...the point at which the trade was entered. When that is done, the trader would have removed risk of loss on that position.Then, should that lot continue to move in the favor of the trader, the stop could be trailed at a respectable distance (perhaps 20-50 pips) to continue to lock in profit. The worst that could happen on the second lot would be if the trade would do an about face and retrace before the stop could be advanced. In that case, the trader would be stopped out on that lot at breakeven with no gain but no loss either.Lastly, a trader could simply observe levels of support and resistance. On the example chart above, as the trade is approaching a level of significant support, the trader has several options open to them.They could choose to close all positions and protect the roughly 40 pips per lot of profit that they gained as the trade moved down from their entry. Another option would be to close only a portion of the trade…half the positions for example.If they believe that the price will move through support, they could choose to keep all positions open but perhaps tighten their stop to protect more of their profit should the pair indeed retrace.By not closing all positions, the trader leaves themselves open to additional gain should price move through support (as we see it did in this case) and continue down.Try utilizing each of the above numerous times in a demo account to gain a level of understanding before employing them in your live account.
My friend and a great trader Ziggy wrote an amazing article in the member’s section, and he was kind enough to agree to publish his work here for you. This article deals with a slightly more advanced technique of securing your position, by moving your SL with dynamic trade management. This type of trade management adapts more efficiently to the behavior of the market.Ziggy, as always, he uses his meticulously accurate data that he has been putting together since September 2016. His research is based on the intraday levels I have been publishing for members every day. Still, you don’t need to apply his position management rules only for my trading levels. You can also use this approach for your own levels. I am sure you will find this article most interesting and helpful.Trading with Dynamic Stops – by ZiggySome time ago I put together a spreadsheet which entailed moving stops after a trade had moved in our favor and satisfied certain criteria. This has since become known as Ziggys Alternative Trade Management. As I mentioned at the time, I do not trade that way, but it was an approach which reduced risk on most trades.I have been back through the charts and for my own benefit put together something very similar. It is not a strict rules-based approach, but one of using what you can see on the chart to move the stop loss to a location that reduces risk while still giving the opportunity to profit. It will always entail positioning the stop at a reaction point once the trade has been entered. I will say right up front that this will reduce the win/loss ratio, and some will find it frustrating to be stopped out of a trade only to then see it turn and reach a profit target. The benefit is that you protect your position sooner which can increase the actual reward to risk ratios of closed trades.I will give a few examples below, of how I have moved the stop loss. Some are obvious while others are not as much.Entering Positions – Initial Trade ManagementI always use a 5-minute chart to make these decisions. In my case, I will always open a trade with a 20 pip stop and then look to move it when price action gives me a reason to do so which we will detail throughout this articleI will not take tested levels. For this analysis, I used what I could see on the chart to determine whether or not the level was already tested. If the price got to within 2-3 pips and ran the opposite direction by 10 or more pips, then I considered it tested. If it got to within 5 pips and then moved away 20, then I also viewed that as a tested level. If it got reasonably close and pulled away 50-100 pips, it’s also considered tested. Finally, if it gets pretty close on several occasions but doesn’t touch – that is also tested as there is a high probability that when it does touch, it will blast right thru.In my opinion, ‘tested levels’ cannot be defined by hard rules! Learn to select the correct levels requires you to consider the context of the chart at the time.IMPORTANT: Over the last year, I can confirm that trading tested levels (in an effort to further simplify an already simple strategy) IS PROFITABLE. With that being said, they are not as productive as untested levels. Therefore, when you are first starting out, you may consider not worry about whether a level has been tested or not. After you are profitable with that, you can then move forward with learning to determine whether or not a level has been tested.Trade Examples – How to Move Your Stop Loss* The first example is a short trade from August 17th, 2017 on the USD/JPY. As soon as that pin bar closed, I moved my stop above it and took a smaller loss than I otherwise would have. * The second example is a EUR/USD short setup, taken on August 17th, 2017. Once the 2nd pin bar closed, this confirmed that at least temporarily, there was some selling pressure. I then moved my stop loss, and ended up with a full take profit trade. * In this EUR/USD long setup from August 17th, 2017 we have a less obvious trigger to move stops, as the bullish bars never actually broke out above the candle that triggered the trade. There was obvious selling pressure though, and so I moved my stop to protect myself from taking a full loss.IMPORTANT: If there is not a relatively quick response to the level, then it has to be questioned whether or not Smart Money is still protecting this level. When you hover around the entry point, it is always a good signal to move the stop below/above the high/low since taking the entry. * In this example, I would have moved my stop as soon as the engulfing bullish bar closed, even though the trade was never in profit. In this case, I was pretty close to taking a full loss anyway – but it shows the principle of how I have chosen to reduce risk by stop moves. When I open the trade with a 20 pip stop, I feel I am giving it room to breathe. Giving it a little extra room also enables enough time to see a reaction to the level to tighten up my stop loss.After taking the time to trawl through each of the last 11 months worth of trades, I have decided that is the trade management style I will be using moving forward. To be clear I believe all approaches are profitable, but my focus is on capital preservation. I feel I have confirmed to myself that this approach will give me the best all-around performance, given my risk aversion.I will also attach my spreadsheet to this posting so that anyone who is interested can carry out some “what if” calculations for themselves. Also, be sure to look at past examples where I have moved my stop, and hopefully will be able to see why I have done so.Anyone who has seen my past spreadsheet will know they can become highly convoluted if you add too many things to analyze. In this spreadsheet, I have stripped out all unnecessary “stuff” which leaves you with something I hope you can follow. It will open at a criteria tab, on which you will be able to make any changes you wish for the spread, maximum stop loss, take profit, trading account size, and the amount you risk per trade. You will then see the result in figures, including each months result. You will also see a pip growth chart, in addition to a chart which shows any drawdowns through that same period.This is what the spreadsheet looks like and where you make your changes. The one thing you need to do is input your own spreads.You will see an input for Max Distance Traveled (MDT). I made MDT an input in case you want to restrict the distance price has moved away from the level before considering it invalid. I initially set this up because I was concerned that some levels were “too close” to be valid. With that being said, I have found that the age of a level makes very little difference to the results. I am very well aware that without fixed rules there will be variations in results. I’m not suggesting you change how you trade. I’m only sharing with you how I manage my trades and giving you the past results of managing your trades this way.Obviously, different profit targets give different results, but strangely enough not in a huge way. I would encourage you to test that for yourself as well! The real difference comes from the size of the initial risk and how that risk is managed throughout the trade. By decreasing your average loss size, you will by default increase your reward to risk ratio of closed trades. The R/R ratio of CLOSED TRADES is by far the most important measure of reward to risk.On my analysis, only 6% of trades go to a full 20 pip loss using this style trade management with an initial 20 pip stop loss and 15 pip take profit. Based on those numbers, the average loss ends up being around 8 pips. If all winning trades are closed for 15 pips, and all losing trades averaged 8 pips, then you have an ACTUAL reward to risk ratio of nearly 2 to 1. That is after starting out with a reward to risk ratio of less than 1 to 1!!This is why I say ACTUAL reward to risk is far more important than INITIAL reward to risk.
Trading is part art, and part science – and nowhere is this art more prevalent than when it comes to closing positions. Many traders will close the entire position with one action, but scaling out can present some clear advantages to traders. Below, we will discuss those advantages and how traders can look to use them beneficially.As we discussed, the overall position size, and selection of when to ‘add’ to a position can be a very valuable tool to the trader’s risk management; as it affords the opportunity to increase trade size as the position moves in the trader’s favor.Scaling out of positions is another manner in which traders can take greater control of their trades, and with a ‘scale out’ approach - the trader is often looking to remove pieces of the position as the trade moves further in their favor.This article will discuss how traders scale out of positions, and when they may want to utilize this type of trade management.Why Would Traders Scale Out of Positions?The primary reason that traders would look to scale out of positions is greed; and to the trader's line - this can be a good thing.Quite frankly, we never know how long a trend might continue, or how many pips might be generated from a single position. Scaling out allows the trader to observe the market, removing parts of the position as the market moves in their favor. Traders will also commonly look to utilize break-even stops when using a scale-out approach in order to remove their initial risk.For example, let’s say that a trader is opening a trade ahead of NFP, or Non-Farm Payrolls, and is looking at entering the position with 50 pips of risk.As a priority - they know they want to avoid The Number One Mistake that FX Traders Make, so they are looking for an absolute minimum of 50 pips on the reward side of the trade.If they decide to use a 1-to-1 risk-to-reward ratio, the trader is likely looking at one of two outcomes: Either a 50 pip stop, or a 50 pip limit. But let’s look at this same situation from the vantage point of the trader that wants to scale out of their position: If the market moves in their direction 50 pips, they can look to ‘scale out’ of ¼ of the position, and then they can move their stop to break-even; so worst case scenario, of price reverses against them - they are out of the remaining ¾ of the trade at no gain, and no loss.But what if the market keeps moving in their direction? This is where things get fun for the trader using a scale out approach, as our trader can essentially close additional pieces of the position as price continues to move in their favor.If EURUSD moves up 100 pips, the trader can choose to take off another ¼ of the position, and perhaps even adjust their break-even stop deeper in the money in order to lock in additional gains. If price moves another 50 pips, they can look to scale out of another ¼ of the position. The picture below illustrates further:Scaling out allows additional return, with no additional risk if stops are adjusted The primary benefit of this type of trade management is that if the EURUSD is going to embark upon a big move, our trader can potentially capture a much larger portion of this move than if they had settled for a 50 pip limit on the trade.When to Scale-Out?Scaling out works best with trend and/or breakout market conditions.With ranges, support and resistance is often well-defined; and if price is going to test resistance (in the case of long positions), or support (in the case of short positions), then why should traders cut their potential gains short by taking profits any sooner on any parts of the lot?In trending, or breakout markets - prices are moving with a bias in one direction. This increases volatility, as the faster price moves in one direction - the higher the probability of a reversal in the opposite direction. These reversals can quickly wipe out gains, which is one of the reasons that a trailing stop can be such a beneficial tool for traders using these trade management strategies.As the market moves in the trader’s favor - they can look to close additional pieces of the position in an effort to grasp more gain than they could have initially hoped for.
People who trade in stocks and foreign exchange (forex) might have often come across the term leverage. Leverage is most prominently used in the futures and the forex trading. Basically, leverage gives an investor the opportunity of maximizing his profits. However, leverage can also magnify the losses of an investor in case of a wrong trade. Although leverage is used in a lot of trades, it is most pronounced in the forex market. In fact, it is not unusual for a broker to offer leverage in the ratios of 200:1, 100:1, and 50:1 to forex traders. This is one of the prime reasons why leveraging has come to be associated with forex trading. Mentioned below are the important advantages and disadvantages of leverage in forex trading. Potentially Larger Profits The reason why leverages exist in a financial market is because they allow a trader to increasing the scale of their profits. For example, a trader who has just $1,000 at his disposal can trade for about $50,000 with the help of leveraging. With leverage, a lot of small investors get the opportunity of maximizing their profits when they are having a good day! Potentially Catastrophic Losses Well, a lot of people believe that the option of using leverage is a double-edged sword in any market. Many believe that leverage puts a trade under a lot of risk as the magnitude of loss increases on account of leverage. Brokers offer leverage to traders after taking into account the margin that the trader is able to put up. Traders who have a higher margin get a bigger shot at making the most of out a good call. However, as every trader will tell you, the chances of registering a loss are as much as the chances of registering a profit. During the times of a bad trade, leverage works against the trader and eats up a significant part of his margin. As we mentioned before, leverage can greatly enhance the chances of achieving a higher profit, but at the same time, it can completely wipe out your margin. It is the prerogative of the trader to act prudently and decide how much leverage will work for him. It is also essential for an investor to do a thorough economic analysis of his financial state to ensure that he is not trading money he can’t afford to lose. Concluding, we hope that this article helped you in knowing the advantage and disadvantage of using leverage in forex trading.
When you are a new Forex trader, you will always try to find out a strategy for you that will work every time you trade. There is no strategy like that in Forex. There is no shortcut to money in success. But as this market is bigger than the stock market, it is normal to have a scam in every corner of the financial industry. One popular kind of scam in Forex trading is the Forex bots. Forex bots are also known as the Forex robots or Forex expert advisors. They are not run bu human beings nor is it controlled by humans. It is a software system that runs on your Forex trading platform and calculates the right strategy for you on your currency.If you consider yourself lucky because you have found the golden goose in Forex, it is not your day. There are many problems with forex bots. In this article, we will discuss the problems of the Forex bots. As new forex traders, you have lots things to learn from the professional trader. All of them are executing live orders in their forex trading account after mastering the major market analysis skills in a manual manner. They simply ignore EAs and Bots in the market.Problems with botsLimited software: The Human mind is amazing and it can do a million of things in a blink. When you are trading with your Forex bots, it is nothing but a software. This software has limitation and most of the time Forex bots are not upgraded to the existing market condition. They only calculate the market and between their limited strategies, they are trying to categories the market within that strategy. If your market has a new movement and that does not fall in your forex bot’s category, it can give you wrong strategy. There are many traders who have lost their entire deposit in their forex trading account due to the use of these bots in the market. So make sure that you don’t look for any automated software in the market rather try to do your own technical analysis in the market by using a robust trading platform offered by professional broker.Can also be a scam: The forex market is very much popular nowadays and many scams have been created centering this industry. One popular scam is this Forex bot. Before you think to take the advantage of your expert advisors and make millions of dollars in the market, think if it is really an Advisor or a scam trying to take your money. They also show you wrong signal to make you trade on the market. If you fall for this bots, you can lose your money. These Forex bots are always a scam to make money out of the Forex traders. If you think that you will make millions of dollar by using forex bots in your forex trading account then you completely wrong. Rather you can lose millions of dollars in the market by using the scam service in this industry. So make sure that you trade in a manual system with proper risk management factors.Conclusion: Do not trade with a Forex bot. If your web browser is asking to install a Forex application that will give you best strategy of the market, do not install it. It can be forex bot which is a scam to take your money. Try to learn the art of forex trading and develop your own trading strategy in the market and this will make you a profitable trader.
To be a better forex trader, or just to be a better person in general, you have to learn a lot of things. Learning a lot of things means you have to try out stuff you haven’t done before, which of course comes with the risk of making mistakes. Not only you’ll learn by making mistakes of your own, but you can also study the mistakes made by other people who are trying out the same things as you are. Here are the common mistakes forex traders do. Don’t over trade. Over trading takes place when the trader insists that there are better opportunities at the moment, but the truth is, there isn’t any. This mistake happens mostly to new traders, who just can’t help but trade and trade. What happens is they end up in a trade that’s poorly executed leading to an eventual loss. Over trading can also start from making a lot of trades at a time, and by using more margin than you should. Don’t use too much leverage. Leveraging and trading on margin are two of the best and biggest advantages in forex trading. How can leveraging be wrong? It’s when the traders use too much leverage. Like what people always say, too much of everything is bad, and that also applies to forex trading. What does it mean to ‘use too much leverage’? It’s when the balance in your account is small, but you make a huge trade. If the forex market moves against your current position even by just a small amount, then it can lead you to have large losses which might be harder to recover from. Don’t predict without proper basis. This usually happens to new traders: they try to pinpoint pairs that they think will turn around and will move to a different direction. This is very difficult to surpass; even professional traders are having a hard time having predictions, so new and amateur traders should think twice before making such an attempt. Don’t be fooled by ‘foolproof’ broker or system claims. Traders tend to use up much of their valuable time searching for that ‘perfect system’. The problem is, there isn’t any. Eventually, you’ll encounter systems that will have loopholes and setbacks. You’ll just have to live with the limitations that will teach you a thing or two as well. The systems they advertise online are usually just means for them to rack more money. What you need to do is use one that works the best for you, and simply take it from there. If it does most of the things that you require, then it could be just what you need. Again, mistakes are just normal. What you need to do is to learn from them to avoid committing the same mistake. Remember, you’re risking your hard-earned money here. Make sure that you won’t lose it just because of a could-have-been-avoided blunder.
You record everything you feel and do before the trade, during the trade, and after the trade has been completed.Trading is a performance skill, regardless of your trading style or method.Your outcome is determined by how well you analyze the market environment, your ability to create a plan or trading method, how well you execute that plan, and luck.There are many variables that lead to success, so you have to write down everything to determine your weak and strong points. For traders, that means recording: - Who you are and your motivations for forex trading. To find the right trading method for you, you have to know who you are, your lifestyle considerations, and why you do the things you do. - Market views and philosophy. This is how you understand and frame the markets, and how you make the decisions to act and manage the risk to your account. - Observations of the market. Each day is different in the market, but that doesn’t mean there are certain “tendencies” or “behaviors” that you can take advantage of. With careful and consistent observation, you can find these “tendencies” and create or adjust your strategies to them. Also, if the environment changes, you’ll be on top of the situation and change with it! - Trading mistakes and missed opportunities. Mistakes and missed opportunities are just as detrimental to your success as the market going against your trade. Closing trades too early, not taking legit setups, entering the wrong entry levels or positions sizes, etc. should be recorded in your journal so that you avoid the same mistakes in the future. - Performance statistics. Many aspects of your forex trading performance can be quantified into hard data. This gives you a realistic, no BS picture of how you’re doing. Like Shakira’s hips, the numbers don’t lie. And sometimes a shot of reality can give you the kick in the butt you need to kick up your game! Truth be told, this sounds like a lot. So to make it easier for you to get started, here are what we feel are the bare minimum. Our “must-have” elements of a trading journal.Before we reveal our list, we just want to point that this is what we believe should be included in a trading plan.We simply provide this list so you can have a better idea of what to include in your own plan, but you don’t necessarily have to follow it exactly.All right, here are our 5 “must-have” elements of a forex trading journal: - Potential trading area - Entry trigger - Position size - Trade management rules - Trade retrospective Again, It’s up to you.It’s your trading journal.Just like your custom World of Warcraft character, you should customize your trading journal as you see fit.Remember, you are the one who’s going to benefit from writing a forex trading journal. So write down what you think you would benefit the most from!
It’s a great question since many traders, especially newer traders, literally become fixated on the indicator at the expense of everything else. When the indicator gives a buy signal they buy and when it gives a sell signal they sell…regardless of what is happening on the price chart.Always remember that price action, the direction that the pair is moving, is our primary indicator…Indicator #1.So, first and foremost, we need to determine the trend on the pair, the direction that the market is moving the pair.Take a look at the Daily chart of the CADCHF below… We can see that the pair is in a downtrend on the chart so we know that we ONLY want to find reasons to sell the pair. Knowing that and using the Slow Stochastics indicator on the chart, we will only take selling signals and ignore the signals which tell us to buy the pair. Each of the signals in the black circles would be the selling signals and a short position could have been taken successfully on each one.The buy signals in the red boxes are to be ignored in a downtrend.Keep in mind that a trader can still have a losing trade even when taking a higher probability entry. However, your likelihood of having a successful trade will be enhanced (not guaranteed) by entering trades in the direction of the trend.Remember, the indicator has no concept of trend, it only reflects momentum. As traders, it is up to us to determine the trend and then use our indicator of choice to only take trades in that direction.
With this write-up, I will describe to you tips on how you can design a custom trading strategies that fits you. This procedure can help you discover the exact areas that need to be checked if you are developing a plan or you are currently working on one. There are a lot of trading policies in existence, although purchasing books and taking courses will save you time, but trading is all about doing it yourself. In order to sort for a great trading strategy, many traders spend thousands of dollars. Discovering policies or strategies can be interesting, stress-free and amazingly fast. For forex trading to do well, it is advised to determine the factors that should be considered in developing a trading strategy and how to set realistic, measurable and reasonable goals to accomplish your objectives. A good trading strategy explains what you want to achieve and the reason behind it. It is the outcome of a thoughtful analysis of one’s skills, abilities, expectations and resources. This strategy or policy serves as a compass, guiding you on how to develop your own trading pattern. Just like how a baseball fits in a catcher’s glove fit comfortably, so should your trading strategy fit your trading plan. There is a big difference between a trading plan and a trading strategy. A trading plan explains the ‘how’ of trading while a trading strategy explains the ‘what’ and ‘why’ that drives your trading. It states the guidelines you should follow when executing, managing and evaluating your personal trades. It is encouraged that you audit the trading strategy path and think about how it relates to you. Do you have a strategy? Do you understand why you want to trade or why you are trading? How will you define your success and how will you know you have accomplished it. With an amazing trading strategy, you will be able to know how a disciplined trade plan can guide you in ways your that you can accomplish your trading policy or strategy. Although having a trading strategy will not assure success, developing a great strategy will make you more informed of your motivations, making you better manage your trading assumptions and approach to individual trades. How can a trading strategy be developed? There are no single means to this, it is believed that all approaches should begin with a review of what you want to achieve, your initial skills and capabilities and other considerations. This is another way to develop clear, measurable and actionable goals. It is easier to focus on your own trading plan by developing a strategy that works mainly because you are the one that developed it. Things to note when building a trading strategy Here are a few tips to take note of as you decide on what you want to trade. Motivation: there are many things that can gear or motivate one to build a trading strategy. What do you want to achieve mainly? Have you had deep thoughts on reasons you want to trade? Do you want to be disciplined about your finances? Do you plan to develop more income to supplement your living expenses? Is there a plan to fund your child or grandchild’s education? State in clear terms what you wish to achieve will help a great deal in influencing your decision to trade. Experience: What skills and talent do you bring to trading? Do you have skills and talent in trading? Do you manage the monthly budget as a small business owner? Do you have an analytical background? Are you fond of collecting and analyzing information? With vast experience, you can consider achieving your goals with your strengths. Taking Risk: Do you enjoy taking risks? How will your orientation affect your capability in accomplishing your goals? What risk level must you attain to be able to potentially earn the returns targeted? What will be the effect of risk on other areas of your life? Ensure that you have a limit as you open the trading account Max Loss per Day: What amount are you willing to part away with before you stop trading? (Maximum of 5% of your trading capital). Max Trade Loss: What amount are you okay risking on any particular trade? (1% of your total trading capital). Road Blocks: What type of challenges do you have? Limited time is the excuse often given for seeking interest and trading. Other excuses include lack of resources, lack of knowledge or competing priorities. Take some time to think about what will keep you from building and putting together your policies. If you are aware of these challenges, you will be well equipped to handle them. Additional Things to Note: By finding a strategy that works, using historical data will not assure profits in any market. This is the main reason why many traders do not back-test their policies which mean applying the policies on historical data. Alternatively, they tend to make impromptu trades, which is caused by the absence of due diligence. It is essential to note a policies success rate based on the fact that if the strategy has not worked in the past, it will start to work unexpectedly. That is the reason why it is very crucial to use visual backtesting- studying charts and applying new procedures on a selected time frame. Most policies don’t last for a lifetime. It is important to take advantage of the ones that still work because they often fall in and out of being profitable. If a particular strategy has worked over a few months or decades, that is an assurance that it will work whenever it is used again. However, if we never tried out that strategy in the past we will lack the confidence to make use of it in the market. There will be a peace of mind and boost of confidence that comes with knowing that it has worked before. Creating a valuable strategy By the time you can fully understand the reason you want to trade and also knowing the important issues that might influence your manner of trading, the next step is creating your strategy. Think carefully about it and consider all the aspect of your thinking by making sure you write your thoughts down. In addition, it serves as a guide for when you begin assessing trade opportunity to match actual results. A strategy can be created by using different methods. Ensure to make a choice that meets your needs. The SMART method is used in creating a measurable goal. This encourages the putting together of a timetable that will help meet the said goal and specifically identify intent. Significantly, it will help you to examine how practical accomplishing the goal will be. Specific – This is a basic list of opportunity, it must be clear, definite and concise. Measurable – The ability to achieve the goal must be measured in a particular manner. Here, there will be an output list whose content will be measured against the setup criteria. Actionable – Your determined goal must be acted upon. The ability to place trades based on your goals are appropriate measures. Realistic – the goal must be practical. It should fit you as a trader and your mission to trading. The number of trades classified is subject to the capital and objectives in your trading. Time-bound – there should be a said time frame to the achievement of the goal. Ensure you choose a time frame that will allow you complete your said goal. For example, a date set in view of an upcoming earning announcement makes sense as your goal is to develop income. Growths of asset and income objectives are frequent goals for traders. You may want to settle for longer-term financial goals if you belong to this category and use these to certify other goals as they should be. Work Your strategy Setting up a strategy will allow you identify possibly appropriate trades but you will have what you can use to appraise your actions. After carrying out the appraisal, you will notice that your strategy is good but your measures are not making results. Either way, you are learning and applying the experience to future actions. An Effective Trading strategy Although a trading plan can have several policies, it is advised that you stick to one. Go through the process of understanding and fine tuning one strategy before trying out another. By the time you have fully understood how the first strategy works then you will have the confidence to build up additional policies. When trading, you will never stop learning; there will always be challenges and decisions to make, your passion for trading will be your driving force. A lot of traders often forget the reason why they started trading or what they hope to accomplish. When you develop an amazing trading strategy, you will instill trading discipline and have a tool to check your behavior. Also note that we are not in search of policies that work 100%, with this we might hardly find any strategy. Ensure that you select a strategy that nets a profit at the end of your time frame, it could be weeks, months or years. When placing any trade here are a few points to clarify: - Defined Entry - Defined Stop - Defined Profit Target(s) This is an essential part of your policies. Define your entry, stop and target when placing the trade. This will make you think clearly as the trade starts and extends.