7-Forex Trading Strategies
Strategies for trading the Forex are compared here. Whether it’s a simple candlestick formation or a complex formation that forms over many periods, you need a plan. It is best to keep it simple.
Let’s start with an uptrend. As we are going up, the candles are waving up and down. To find a good entry to go up, we want to wait for the candles to go down, and start going up. After we see 3 candles of retracement, we draw a counter trendline (down) and wait for a good bullish candle to break this. We prefer a candle that is at least 75% body (25% wick).
We put our stop 10 pips below the low. We use fibs or support/resistance to determine our limit.
Or you can set a very high limit (1000 pips) and move the stop loss every time a higher low is formed. Then you can ride this wave as long as it lasts (surfing the forex)! HANG 10!
Let’s go to the downtrend next. As we are going down, the candles are waving up and down. To find a good entry to go up, we want to wait for the candles to go up, and start going down. After we see 3 candles of retracement, we draw a counter trendline (up) and wait for a good bearish candle to break this. We prefer a candle that is at least 75% body (25% wick).
We put our stop 15 pips above the high. We use fibs or support/resistance to determine our limit.
Or you can set a very high limit (1000 pips) and move the stop loss every time a lower high is formed. Then you can ride this wave as long as it lasts (surfing the forex)! HANG 10! (Can you hear the Beach Boys in the background… listen very carefully).
70% of the time the market is in consolidation; only 30% of the time it is trending.
When the candles are no longer making higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) then the candles are in consolidation.
We do not follow the fibonacci’s when we are in consolidation. We do not follow crowns either.
We draw the lines of support and resistance. If the distance between support and resistance is greater than 120 pips, it is large consolidation.
When the candles go down to support and we see a good bullish candlestick formation, we enter long. We place our stop 10 pips below the support line (or low of the candlestick formation) and we place our limit 10 pips before the line of resistance. It is a good idea to move your stop loss each time a higher low is formed.
When the candles go up to resistance and we see a good bearish candlestick formation, we enter short. We place our stop 15 pips above the resistance line (or high of the candlestick formation) and we place our limit 10 pips before the line of support. It is a good idea to move your stop loss each time a lower high is formed.
It has been especially helpful for me to watch my mentors trading large consolidation. I learned more from waching them than from reading theories all day long. My mentors are Market Traders.
Fundamental Announcements tend to move the market very fast. It is important to watch for them. They require different trading strategies when the announcement is very different from what is expected. Bankers tend to trade on fundamental announcements.
Here is the list of announcements we need to watch for.
Market Traders have an economic calendar on their website that lists the upcoming fundamental announcements and the expected announcement. During every live analysis of the market, five times a day, the mentor begins by going over the upcoming FA’s and which ones to keep an eye on (the ones that have a large impact… like Non-FarmPayroll Indicator).
Market Traders also has a checklist for trading fundamental announcements. Join MTI and get the checklist for trading. It’s more fun than a roller coaster ride! (You also need to have nerves of steel to do it).
There are many ways to determine whether the market is trending or sideways. Here are a couple ideas:
When a currency is in the middle of a consolidation range (even on small time frames), enter a trade to buy AND a trade to sell. Set your limits a little before the outer edge of the consolidation. Be sure to account for the spread and difference between a bid and ask chart when setting your limits.
Time the entrances for each direction so the pip spreads are cancelled out. Thus you have a completely zero hedge until one of them limits out.
Enter in the middle, one order selling, one order buying, set the limits for each to just inside the recent consolidation, get paid as it swings both ways.
If you enter at the edge, you may only take a loss as the market decides to leave the consolidation. If you enter in the middle, you will most certainly capture something. At most you risk only 1/2 of the consolidation range. If the market leaves the consolidation range after you enter, your loss would only be the difference between your limit for one trade and the stop loss of the other.
The simplest way to test your system is to find a charting software package where you can go back in time and move the chart forward one candle at a time. When you move your chart forward one candle at a time, you can follow your trading system rules and take your trades accordingly. Record your trading record, and BE HONEST with yourself! Record your wins, losses, average win, and average loss. If you are happy with your results then you can go on to the next stage of testing: trading live on a demo account.
You can create a spreadsheet, or table in a word processor to record your results. Since I am a programmer, I created a webpage to record mine into a database.
Trade your new system live on a demo account for at least two months. This will give you a feel for how you can trade your system when the market is moving. Trust me, it is a lot different trading live than when you’re backtesting.
After two months of trading live on a demo account, you will see if your system can truly stand its ground in the market. If you are still getting good results, then you can choose to trade your system live on a REAL account. At this point, you should feel very confident with your system and feel comfortable taking trades with no hesitation. At this point, YOU’VE MADE IT!
Another option would be to create an automated trading system using Meta Editor on a Meta Trader Platform. If you can program, or have a friend who can, this is a very powerful tool. You can use the strategy tester to then test it during different time levels and on different currencies.
Step 1: Time Frame
The first thing you need to decide when creating your system is what kind of trader you are. Are you a day trader or a swing trader? Do you like looking at charts every day, every week, every month, or even every year? How long do you want to hold on to your positions?
This will help determine which time frame you will use to trade. Even though you will still look at multiple time frames, this will be the main time frame you will use when looking for a trade signal.
Step 2: Find indicators that help identify a new trend.
Since one of our goals is to identify trends as early as possible, we should use indicators that can accomplish this. Moving averages are one of the most popular indicators that traders use to help them identify a trend. Specifically, they will use 2 moving averages (one slow and one fast) and wait until the fast one crosses over or under the slow one. This is the basis for what’s known as a “moving average crossover” system.
In its simplest form, moving average crossovers are the fastest ways to identify new trends. It is also the easiest way to spot a new trend. Another way would be to use trendlines. Of course there are many other ways traders’ spot trends, but moving averages are one of the easiest to use.
Step 3: Find indicators that help CONFIRM the trend.
Our second goal for our system is to have the ability to avoid whipsaws, meaning that we don’t want to be caught in a “false” trend. The way we do this is by making sure that when we see a signal for a new trend, we can confirm it by using other indicators.
There are many good indicators for confirming trends, but I really like MACD, Stochastics, and RSI. As you become more familiar with various indicators, you will find ones that you prefer over others, and can incorporate those into your system.
Step 4: Define Your Risk
When developing your system, it is very important that you define how much you are willing to lose on each trade. Not many people like to talk about losing, but in actuality, a good trader thinks about what they could potentially lose BEFORE thinking about how much they can win.
The amount you are willing to lose will be different than everyone else. You have to decide how much room is enough to give your trade some breathing space, but at the same time, not risk too much on one trade. You’ll learn more about money management in a later lesson. Money management plays a big role in how much you should risk in a single trade.
Step 5: Define Entries & Exits
Once you define how much you are willing to lose on a trade, your next step is to find out where you will enter and exit a trade in order to get the most profit.
Some people like to enter as soon as all of their indicators match up and give a good signal, even if the candle hasn’t closed. Others like to wait until the close of the candle.
In my experience, I have found that it is best to wait until a candle closes before entering. I have been in many situations where I will be in the middle of a candle and all my indicators match up, only to find that by the close of the candle, the trade has totally reversed on me!
It’s all really just a matter of trading style. Some people are more aggressive than others and you will eventually find out what kind of trader you are.
For exits, you have a few different options. One way is to trail your stop, meaning that if the price moves in your favor by ‘X’ amount, you move your stop by ‘X’ amount.
Another way to exit is to have a set target, and exit when the price hits that target. How you calculate your target is up to you. Some people choose support and resistance levels as their targets. Others just choose to go for the same amount of pips on every trade. However you decide to calculate your target, just make sure you stick with it. Never exit early no matter what happens. Stick to your system! After all, YOU developed it!
One more way you can exit is to have a set of criteria that, when met, would signal you to exit. For example, you could make it a rule that if your indicators happen to reverse to a certain level, you would then exit out of the trade.
Step 6: Write down your system rules and FOLLOW IT!
This is the most important step of creating your trading system. You MUST write your trading system rules down and ALWAYS follow it. Discipline is one of the most important characteristics a trader must have, so you must always remember to stick to your system! No system will ever work for you if you don’t stick to the rules, so remember to be disciplined. Oh yea, did I mention you should ALWAYS stick to your rules?
When developing your system, you want to achieve 2 very important goals:
- Your system should be able to identify trends as early as possible.
- Your system should be able to avoid you from whipsaws.
If you can accomplish those two things with your trading system, we GUARANTEE you will be successful. The hard part about those goals is that they contradict each other. If you have a system in which its sole purpose is to catch trends early, then you will probably get faked out many times.
On the other hand, if you have a system in which its sole purpose is to avoid whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.
Your task, when developing your system, is to find a compromise between the two goals. Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones.
Always remember these two goals when you create your system. They will make you a lot of money!
I found this out the hard way as I tried to program automated trading systems. I would be want to capture lots of pips, but I found myself with huge losses. Then when I was more cautious in the trading so I could avoid being stopped out, I missed most of the trades and ended up entering the trades so late I was stopped out! Finding the right balance is the key. You will ALWAYS incur some losses.
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.
This is the point that most people get on the stock, and is most driven by hysteria. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. People start coming up with ridiculous reasons to buy the stock and try to choke you when you disagree with them. This is when the stock becomes the most overpriced. Contrarians start shorting the stock which starts the ABC pattern.
Now the pattern forms a gartley and retraces before returning to it’s trend. When you see this change, look for gartleys and crowns. Remember, crowns is the same thing as Head & Shoulders (close enough).
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.
When prices hit the bottom trend line this may be used as a buying area. When prices hit the upper trend line this may be used as a selling area.