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With this article, I, believe that your Forex hunting next week will become even more profitable. Why is that so? The subject is on Money Management!
We have discussed the all the angles on and the importance of Stop Losses in the articles called “The Ultimate Guide On Stop Losses”, click here for Part 1 and click here for Part 2. If you have not read that guide, make sure to take a look!!
Of course, the Stop Loss is just a part of the entire equation in our world of Forex trading. Here,we are going to continue with this material, but we are going to look at a broader topic: Money Management (MM). MM is, of course, a vital topic, and is of equal importance as Risk Management, Trading Strategies, Trading Psychology, and Trade Management.
Money Management (MM)
Let us start with the question: what is basic Money Management? The core goal of successful money management is maximizing every winning trades and minimizing losses. A master of money management is a master Forex trader!!
Money management is a method to deal with the issue how much risk should the decision maker/trader takes in situations where uncertainty is present?
You might ask yourself, isn’t basic money management the same as risk management? Risk management, in fact, is your choice how much risk you want to place on a trade. You are always in control how much risk you place on a trade: whether that it is 1% or $100, but I would recommend using a standard % risk (not $) of your designated trading capital. Every trader’s first goal is to preserve the trading capital, which is achieved by being very disciplined in the field of risk management.
In Money Management every trader is actually looking at the reward to risk ratio, or R: R ratio in short. Money management calculates the balance between the risk and the reward of the trade. In Money Management the following definitions are vital:
1) The risk is the stop loss size (discussed in previous articles);
2) The reward is the profit potential (take profit minus entry).
How many pips a Forex trader has earned is really not of much value, unless the pips risk is mentioned as well. Anyhow, it would be better to focus on Rate of Return % and $/money earned. This is what all businesses do and all of us should treat trading as a business.
Reward to risk ratio
The ratio between the two is crucial. A trader that targets a quarter of the risk has just won one “battle” but has just lost the “war”. In trading terminology, this means that a trader might have won a trade, but ultimately the win means nothing and that Money Management has set them up for failure. Why?
For a trader to become long-term profitable with a 0.25 reward to risk ratio, the trader would need win 4 trades to compensate 1 loss. With this equation, the trader has not made any profit. Of course this R: R makes no sense: a trader needs to get above the 80% win % to achieve profit. Not an easy feat.
With a 1:1 Reward to risk the trader only needs to win 51% and more to be profitable. In practice, it would be better to have 60% wins or more. With a 2:1 R:R a trader only needs 35% win rate.
Here are all of the mathematical statistics to make sure you are a profitable Forex trader:
With a 0.5:1 R:R… You need minimum 67%+ wins
With 1:1 R:R… You need minimum 55%+ wins
With 2:1 R:R… You need minimum 35%+ wins
With 3:1 R:R… You need minimum 28%+ wins
With 4:1 R:R… You need minimum 21%+ wins
With 5:1 R:R… You need minimum 17%+ wins
With 10:1 R:R… You need minimum 11%+ wins
With 20:1 R:R… You need minimum 6%+ wins
Here is a fast way ofcalculating if you have correct and rational control over your capital which provides positive mathematical expectancy:
Fomula: Win % x Take profit size – Loss % x Stop Loss size
Win % for example 30% * take profit pips 55 – loss % for example 70% * 20p = 2.5 (positive = long-term win).
The smaller the stop loss, the better the R:R ratio when using same target OR the better the odds of win % when using same R:R.
I would like to ask you for some feedback! I think the best way to learn is by sharing the experience with each other. What kind of Reward to Risk ratio do you usually target? Please place a number and we will know it’s the ratio! For example, if you usually target a 3 reward for 1 risk, then please write down a 3. Thanks so much!!! By the way, here is a great Forex educational video where you will see how powerful the concept of a 2:1 R:R really is. Make sure to take some time to watch this great Forex training webinar –> “risk to reward ratio.”
R:R using Fibs and Elliott Wave
Minimize the risk of Fib trading and decrease the potential stop loss size by splitting your trading into multiple parts. If a Forex trader decides to put their entire risk of the trade (for example 1%) on the 382 Fib, then they have no opportunity to add a trade even if the currency would retrace deeper to the 618 or even the 786 Fib.
Splitting the trade into 2 or 3 parts allows for flexibility and psychological ease as well: a trader does not have the feeling that they will miss a trade with tying themselves down to a single entry point.
Splitting the risk into 3 positions would mean that the trader choices to split the chosen risk of 1% into 3 parts. The risk can be evenly divided among all 3 parts (3×33%) or more weighted to one Fib level (for example 20%-30%-50%).
With a 1% risk total, this means either 3 trades with 0.33% or 3 trades with 0.2%, 0.3%, and 0.5%. This is called cost averaging. Businesses used it often: it makes their inventory cheaper. For us Forex traders, it makes the average stop-loss smaller and that is great for our R:R.
Forex traders can do the same for Fib targets. By splitting the trader with different take profit targets, they can optimize the profit average of all positions and the entire trade.
The Elliott Wave can be used to decide which Fibs and with which division % the trade is taken. For example, for a wave 2 the trader can choose to put the risk on the 500, 618 and 786 Fib with the following division of the risk: 25% on 500 fib, 35% on 618 fib, and 40% on 786 Fib. For a wave 4 the division would be skewed higher: maybe 50% on the 382 Fib, 25% on the 500 fib and 25% on the breakout.
The EW can also be used for Fib targets. A trader should aim for higher targets if a wave 3 is expected and for closer targets if a wave 5 is expected.
3) The trader needs to choose an achievable and realistic take profit target –> because we already did an article on stop losses, I was thinking of doing 1 on take profits next week… but it depends if there is any interest. Would you like an article on Take Profits?
4) The R:R expectancy ratio should be provide a positive mathematical expectation.
Deposit = 5000 EUR
Risk = 1% from Deposit = 50 EUR
Currency pair = EUR/USD
SL = 30p = 300 USD on a standard lot basis
Size to open in order not to risk more than 1% = Risk/SL = 50/300 = 0.16 lots
Be careful with the leverage you use! A good rule of thumb is to use for example 5:1 leverage. That way a Forex trader is not over trading. For example, if your account balance is 5,000 USD, then your total is the capital of $5000 multiplied by your leverage of 5, which equals $25,000. A mini lot is $10,000, so that would be 2.5 minis. Use this formula to calculate how much risk you are taking: (SL times/multiplied by Leverage)/100 %. For example if the stop is 30 pips: (30 x 5) / 100 = 1,5 % of risk.
Regarding the trading capital, a trader has several options.
1) Reinvest the profits back into the trading capital. This way the trading capital gets larger and a percentage risk of the capital is realizing a higher return in USD (same percentage risk though);
2) Withdraw all profits. This way the trading capital remains the same;
3) Semi-flexible approach with some withdrawals and some reinvestment;
I think that option 3 is the best money management approach. Growing your account is a great thing, but you want to withdraw some money once in a while so that you still realize that the numbers are your account are still real and not fake! Then again, withdrawing everything will take away the advantage of compounding your profit. So option 3 is the best value.
What I approach for point 3 is a step approach. This is how it goes:
1) Use the same current trading capital for your risk management until you have a drawdown of x % or a profit of x% (the numbers are your choice);
2) Once you hit your drawdown maximum, you will use the new trading account balance as your trading capital;
3) Once you hit your profit target, you will use the new trading account balance as your trading capital;
4) If you hit your profit target, you can decide the division of withdrawal and add-on % of the profit. So you could choose to withdraw 50% of your profits and add 50% of profits to your trading capital. The new trading capital balance would be your old trading capital + 50% of the profits.
Another part of your money management strategy is that you want to make sure that you are diversified.
1) Preferably you are only investing a part of your savings into the Forex trading capital and you have a decent percentage of your savings invested in other vehicles – if possible;
2) You have multiple accounts with different goals. This is to spread the risk of having your trading capital on one account. The different accounts can also be used for different strategies and purposes: one could be for long-term trading, the other for intermediate;
3) Keep part of your trading capital on your account. Even though you want to trade with a certain amount of money, there is nothing wrong with keeping a part of it on the bank account. I do not think that a trader needs to put all 100% on the trading account, but make sure a margin call is not needed if you opened a trade with 1 mini ;).
Big favor from me. Could you please retweet this article or share it on Linked in? That would be really awesome! Its an important topic and want to make sure that everyone is on board with this topic.
For those who already share regularly, I thank you for your efforts!
Strike 3.0 consists of two complete trading strategies, including entries, targets, stop losses, sizes and trade management for each strategy. A significant element of these strategies is Support and Resistance levels for entries and exits. Support and Resistance levels are prices at which the trader can expect the price to react in some way. Most commonly they consist of moving averages, daily and weekly pivots, psychological levels, Fibonacci retracement and extension levels, key weekly and daily price levels and much more.
Support and Resistance Levels Are Self-fulfilling Prophecies
Support and Resistance levels are like self-fulfilling prophecies. A trader identifies a level at which he believes the price will react (reverse or break through.) He places orders at that level in expectation of a price reaction. Many other traders also think the price will respond a particular way at that level and they act accordingly. Pretty soon you have a preponderance of traders expecting the price to react at that level. And because this huge group of traders has acted on that belief, the price reacts the way the traders expected it to act.
The larger the group of traders that expects a support or resistance level to break or hold, the more likely the level will do exactly as expected. Not every level has the same number of traders (or perhaps I should say the same amount of capital) dedicated to the price reaction so that some price reactions may be smaller or larger than others. But you can usually judge the importance of a level by the way price has reacted to it in the past.
How Can I Identify A Significant Price Level?
You can start with the most obvious levels: those of the more common indicators. Moving averages, Fibonacci retracements, daily, weekly and monthly pivots, psychological levels, any number of other tools. Of these, we typically use Moving Averages, Fibonacci and psychological levels in our trading room. Be sure not to use too many, or you may end up with “Analysis Paralysis,” the inability to take trades because there’s always a level three pips away from your current position.
In addition to the indicators, we identify and use price action support resistance levels (for simplicity’s sake, let’s call these levels S/R .) Price action S/R is simply the price zones at which price has reversed direction. We look for these zones on Weekly and Daily charts and identify them with lines. These lines are just representations of zones that can be 10-20 pips wide. Remember a line is never just a line; it’s always a zone.
How Do I Draw the Best Support and Resistance Indicator Lines?
To identify lines on a particular pair, we start by finding the “fractals.” A fractal is a candle that protrudes above or below the two previous and two subsequent candles. You can use the Bill Williams Fractals indicator in your MT4 platform to help you find them. Draw a horizontal line at a nearby fractal. It may not be the nearest fractal to the left of the current candle, but it should be near the current price level. Then look to the left along the line and see how often price “respected” the line. In other words, this particular price level has been significant in the past. Since it’s not just a line, a price may not quite reach the line or may push through the line, and we still consider that the line was respected. The line can also be recognized when a candle body touches the line as well. There can be instances where the line was passed through, but prior and subsequent candles beside the pass-through candle may have respected the line. If your line is well respected, you’ve chosen a good line. Typically, we will initially draw a couple of weekly lines and a couple of daily lines on either side of the price. You may want to color-code your lines, so you know which are weekly (more relevant) and which are daily (less important.)
How Do I Use Support And Resistance Lines?
In the Strike 3.0 Reversal Strategy, we use S/R Lines for our “line in the sand” on reversals. Once we’ve identified a pair for reversal and we have Strike 3.0 Reversal signals, we will look for a nearby S/R line to place our order. Typically we’ll put it five pips ahead of the S/R line (5 pips above for a significant reversal, five pips below for a short reversal.) We try to pick a critical S/R line (preferably a weekly line) at which price would have a strong rejection. We will also use Fibonacci levels, Pivots or Psychological levels (levels whose price ends in zero) for use in finding targets for our reversal trades.
In the Strike 3.0 Momentum Strategy, after we get our Momentum Signal, we set a limit order ahead of the 20 periods Simple Moving Average for a pullback entry. We have an initial target but will adjust the objective ahead of an S/R line. This is a summary of how to calculate support and resistance levels.
What am I talking about? – Good question. To put it very simply, I’m talking about the value of looking at multiple trendlines in order to:
Determine the trend
Determine the strength of a trend
To identify potential trade entry or exit points by identifying strong levels of support or resistance in a market
What? You mean trendlines can help you do all that? – Yes, that’s exactly what I mean.
One of the oldest trading adages is, “Trade with the trend”, or, “The trend is your friend”.
Well, here’s the thing: Even if you’re not interested in trading with the trend, if you prefer taking contrarian trades looking for a change in market direction, it will still improve your trading success to know where the trendline levels are and to identify convergence of multiple trendlines. What’s convergence of trendlines? – Just give me about two or three paragraphs here to cover something more basic, and then I will happily explain the concept. Don’t worry, it’s an easy concept; you’ll get it with no problem.
Drawing and thereby identifying trendlines is simple enough – a basic trendline is constructed by just drawing a line connecting across either the lowest low prices (for an uptrend) or across the highest high prices (for a downtrend) over a given time period. Look, here’s one now, an uptrend trendline, in red, on a 4-hour chart of the Aud/Usd pair! You can easily see that the current price is well above the trendline, and therefore price could retrace substantially – all the way back down to around the .7100 level – without violating the basic uptrend that’s indicated.
Moving average lines can also be used as trendlines. Here’s the same chart with 10 (dark blue), 50 (light blue, thick, dashed lines), 100 (red dots) and 200 (yellow, thick) exponential moving averages (EMA) plotted on it. Notice how the 100 and 200 moving averages are close to each other and also, for the moment anyway, basically running along the trendline that we drew earlier.
THAT’s convergence of trendlines.
Convergence of Trendlines
Convergence of trendlines is simply when two or more trendlines come together. That can happen in one of two ways:
1 – Different trendlines on the same time frame, such as the trendline of a 10-period moving average and the trendline of a 50-period moving average on a 1-hour chart, can converge – draw close together or even actually meet at a certain price level
2 – Trendlines are drawn on different time frame charts, such as a 1-hour chart and a 4-hour chart, can converge around the same price level
You can easily see an example of point “1” that I already alluded to in the chart above. Now let’s see if we can find an example of point “2” by looking additionally at the 1-hour time frame chart.
Okay, let’s see what we can see. Notice that the basic trendline, as it appears on both the 4-hour and 1-hour chart, runs down around the .7080 to .7100 level. Now, how is that helpful? Well, for one thing, the multiple trendlines running along the same level represent additional trend strength at that price level. Secondly, that level might be a good point at which to place a buy order attempting to enter the market. I know, I know – you see a market turn and move significantly to the upside and you want to jump in and capitalize on it. But the fact is that both time frame trendlines show that price has run well above the trendline. The odds are that it will back off, retrace downward a bit, that price will at some point test those trendlines. And that’s another good piece of information to have: If price were to decline well below the existing trendlines, especially on a daily close basis, then one should consider the possibility that the trend will not last long-term and that the market may turn back to the downside. It might be reasonable to place a stop-loss order somewhere perhaps just below the .7020 level, about 60 pips below a .7080 entry point.
Okay, so we’ve identified multiple trendline price levels, possible buy entry points, and possible stop placement, potential market reversal indication price levels.
You can analyze other points on the charts, too. Notice that the 100 EMA on the 1-hour chart roughly coincides with the 50 EMA line on the 4—hour chart, both coming in around the .7160 level. That, too, can be seen as multiple trendline convergences, and identifies another potentially important price level that may provide support for the market.
The Significance of Converging Trendlines
Trendline convergence is important, (A) because it provides an indication of where the trend is stronger, and (B) because it provides an indication of greater overall trend strength when multiple trendline convergence occurs. Conversely, however, if there is not any trendline convergence, or if in fact different trendlines drawn on different charts and across different time frames show conflicting trend indications (like an uptrend on a 15-minute chart, but a downtrend on a 1-hour chart), that is an indication of trend weakness.
Rolling Up Trendlines
One of the best indicators of a developing long-term trend is what I refer to as “rolling up trendlines”. That phrase refers to trendlines that begin turning upward first on the lowest time frame charts – like 5-minute or 15-minute charts – and that then receive longer-term confirmation as the trendlines on ever higher time frame charts – 1-hour, 4-hour, daily and weekly – also begin to turn upward in succession, so that eventually all time frame trendlines are pointing in the same direction.
Rolling down trendlines refer to the gradual time frame succession of trendlines turning to the downside, first on the lower time charts and then on the successively higher time frame charts.
Going in either direction, increasing confirmation of trend on successively higher time frames represents very strong trend confirmation.
The Problem and the Solution
It’s somewhat problematic, however, to be continually checking back and forth across half a dozen time frames looking for multiple trendline convergence. It’s just a lot of work, one of those things that you just naturally start to wish could somehow be automatically indicated to you. Plus, it’s easy to miss something, looking at multiple indicators on several different charts.
Hope this article is helpful for you. If so, please feel free to share it around social media and help out other traders.
And keep on coming back to Winners Edge Trading, because we will keep on sharing all the helpful trading tips that we can think of. (And we can think of a LOT of them, trust me.)
Winners Edge Trading
After reading all of this valuable information about trading with trends, I have something I would like to offer you. Since you are in the market to find a great trading strategy that uses trend trading techniques, I will give you exclusive access to my trading system which I call the Strike 3.0 for an extremely low price! I have many trend trading techniques to choose from. If you want to learn more about this limited time offer click this link: https://info.winnersedgetrading.com/limited time+trend_trading_strategy+SPECIAL+OFFER
I have produced a video that gives a detailed training on how to use the Forex Power Indicator that we have created for our readers to use. I think this video will give you an idea of a great way to find trades using the indicator. Because the indicator actually is not a signal tool but rather it is a tool that is used to find high-powered trends. The reason we like the power indicator so much is that we find the strong trend and try to ride it.
There’s always a buzz around the forex world in regard to correlations between currency pairs and how you can use them to your advantage in your trading. While I haven’t personally downloaded or read any of the “secret” reports on this subject, I thought it might be useful to discuss this topic and to give some examples of how I use currency correlations in my own trading.
A “correlation” is a statistical measure of the relationship between currency pairs. It measures how much or how little a currency pair follows the direction of another currency pair. Currency pairs often move in tandem or in opposite directions to each other, which is quite understandable given the fact that the base currency may often be the same. For instance, the AUD/USD pair has a very high correlation with the EUR/USD pair. Over the past week, the two moved in the same direction 95% of the time. The correlation coefficient is expressed as a number from -1.0 to +1.0. A negative number means that the currency pairs moved in the opposite direction to each other more of the time, while a positive number means they moved in the same direction more of the time. Taking this to the extremes, a correlation coefficient of -1.0 means the two currency pairs moved in opposite directions to each other 100% of the time, while a correlation coefficient of 1.0 means the two currency pairs moved in the same direction to each other 100% of the time.
You can research and monitor the daily closing prices of currency pairs yourself, then calculate the correlations, or you can find a resource that does it for you! One such resource is : http://fxtradeinfocenter.oanda.com/charts_data/fxcorrelations.shtml . Oanda provides a visual tool which lets you quickly see the correlation between currency pairs over the last week, month, all the way up to 2 years. Taking a look at it today reveals that the AUD/USD and NZD/USD closely correlate with the EUR/USD pair (over the last week). This varies over time, but with experience these correlations will become ingrained in you and you’ll be able to make good use of them in your trading.
How do you make use of correlations? There are several ways in which I use the correlations between currency pairs. In general, correlation coefficients are calculated on end-of-day prices, so you would think they may not be very useful for intra-day traders. However, I have found that if currency pairs are closely related over the period of a week or a month, then they will often move in tandem throughout the day too. Here are some ideas for how to use correlations:
To confirm an entry signal. For example: If I have a trading system that gives me a buy signal on the AUD/USD pair but I am not completely confident, I’ll go to the EUR/USD, NZD/USD or even the GBP/USD to see if a similar setup is possible on those pairs and whether there is little resistance to price moving up. Quite often, there may be an obvious resistance level on the AUD/USD that makes me nervous about buying, but if there is little or no obvious resistance on the correlated pairs – that gives me the confidence to take the signal and enter. If the EUR/USD is able to push upwards quite nicely, then I can be confident the AUD/USD will push up too.
To avoid false breakouts. I especially like to use this during the European session when there are often false break-outs on the GBP/USD. If it looks like the GBP/USD is making a move and I’m ready to enter a trade, I’ll flick over to the AUD/USD to see if it is moving strongly in the same direction. The AUD/USD is a lot less volatile than the GBP/USD, even though they are often closely correlated. So, quite often the AUD/USD will NOT break-out when the GBP/USD breaks a support or resistance level, which gives me a clue that it is probably a false break-out and to hold off entering that particular trade.
To diversify your market exposure. If you take a long position in both the AUD/USD and the EUR/USD, then you’re effectively taking the same trade but with double the stake. Keep this in mind when you’re calculating your risk … sticking to a 2% risk level per trade is not a good enough rule, you need to ensure that you don’t risk too much over correlated pairs too. If you have multiple trade setup options, it’s best to diversify your exposure by taking say a EUR/JPY trade with a USD/CAD trade (two pairs that are NOT closely correlated).
To hedge your trades. This is, in a way, opposite to the above advice, but I have often used it to my advantage. If you have trade entry signals that seem to defy the general correlation rules, then you might actually like to take both those signals. For instance, the EUR/USD pair nearly always moves in the opposite direction to the USD/CHF pair. If my trading system gave me a buy signal on the EUR/USD pair as well as the USD/CHF pair, then I would probably take both entries with confidence. The reason I would be confident is that it’s likely that at worst, the correlation factor would be in play and one trade would win and the other would lose – with a net effect of a small or nil gain. At best, both trades would win.
Even if you only like to trade one currency pair at a time, always consider looking at the correlated currency pairs to see which way they are going and whether or not there’s upcoming support/resistance. Looking at correlated pairs can give you the extra confidence to enter a trade or even to exit a trade at the right time. Knowing the currency correlations can also help you manage your overall risk in the forex markets.
The 80/20 Principle is a very effective concept in achieving efficiency.
It allows you to focus on core revenue making activities instead of wasting resources on unimportant tasks. The principle is one of the essential concepts in modern day business and it has the same value for Forex trading.
This blog post discusses what the 80/20 Principle means, why it is so effective, and how Forex traders can benefit from it.
I highly recommend actually reading the post instead of scanning it. Information overload is rampant in our modern society and we are not used to focusing on any topic for longer than 30 seconds…
But the 80/20 Principle is an enormous time saver so if you spend 10 minutes now it will have an endless return in the future: a good example of greatreward (lifetime saving of time) to risk (5-10 min of reading).
80/20 PRINCIPLE EXPLAINED
The 80/20 Principle is often named differently such as the 80/20 Rule, The Pareto Law, the Pareto Principle, and others. The rule was discovered in 1897 by the Italian economist Vilfredo Pareto.
The pattern underlying the 80/20 Principle is that the distribution of results is predictably unbalanced. The 80/20 rule states that 20% of the input will create 80% of the results (output).
Put in different words: 20% of the resources will create 80% of the success.
Input/resources could be time, money, effort, skill, etc that a project, person or business puts into achieving goals. Output/success could be anything: profit, revenue, membership count, customer satisfaction, etc.
The main point is that the numbers are highly unbalanced. Humans tend to think that each unit of effort or resource has (almost) an equal importance in achieving success but the 80/20 Principle clearly explains that the numbers are highly skewed. Probability theory explains that it is “virtually impossible […] for the 80/20 Principle to occur randomly.” (Source: the 80/20 Principle by Richard Koch, page 13)
The 80/20 balance is not fixed and 80/20 numbers are examples. The ratios could be different: 30% of the resources generate 70% of the success. In fact, they don’t have to add up to 100 either: 5% of the profit could derive from 50% of the customers, 75% of the revenue stems from 25% of the products, or 65% of our achievements are based on 20% of our efforts.
Last but not least, what is the importance of the 80/20 Principle? The significance for businesses is absolutely stunning. The value of knowing that, for instance, 90% of your revenues and 85% of your products are generated by 22% of your customers is enormous. The owner or manager can then allocate sufficient resources, time and energy to this group. Deeper analysis, however, is always needed. For instance, there could be a future customer that has a potential of generating big business. The 80/20 Principle helps with knowing what is happening NOW and what/where a business should investigate, but deeper analysis is required before conclusions are made.
For more information, examples, usages, and argumentation of the 80/20 Principle, I highly recommend reading the book 80/20 Principle by Richard Koch, who explains why the 80/20 Rule is valuable and how it can be used for business, our personal lives and personal efficiency.
80/20 PRINCIPLE IN TRADING
Forex traders can use the 80/20 Principle too! In fact, there is almost an infinite number of ways for how Forex traders can apply the analysis from the 80/20 Principle. The 80-20 rule not only holds true for the analysis of our P & L account but for a wide range of topics.
Number 1: trading performance. Traders can analyze these relationships:
Are the majority of losing trades caused by the same mistake?
Are the majority of losses coming from a few trades?
Are the majority of losses coming from a small number of days?
The same questions can be asked for profits and winning trades as well.
Number 2: individual performance (personal effectiveness). Traders can analyze these relationships:
How much time is spent on each task and how much benefit does it bring?
What are the crucial tasks in my trading that lead to the most results?
What actions are the most beneficial for my results?
Number 3: the market. Traders can analyze these relationships:
80% of the time the market is in the middle of a move (not reversing), whereas 20% of the time the market is forming a top or bottom.
80% of the time the market is not trending and 20% of the time it is trending;
80% of the market moves are noise, 20% of the market moves are an actual signal;
80% of the time the market is in a consolidation and 20% of the time it is in an impulse.
Number 4: strategy performance. Traders can analyze these relationships:
Do the majority of the trading opportunities occur at the same points during the strategy?
Are the majority of my wins generated by a minority of the same entry type?
Do the majority of my filters have very small impact on the performance?
Do a minority of my tools and indicators have the most positive impact on the strategy?
It is important to note that the Pareto principle can help traders with understanding their own performance and the market’s movement in more depth.
The above questions and ideas are just examples. Everyone is highly encouraged to analyze and find connections that benefit you as a trader. This is not limited to the above and many more ideas can be created.
In fact, we encourage you to use your thinking cap and evaluate your trading from the 80/20 Principle. Do you notice any cause and effects? What facts did you discover about your own trading when using the 80/20? Let us know down below in the comments section!
The 80/20 Principle is a trader’s golden rule as it allows us to focus on the most important and valuable core tasks, methods and resources. And the focus is the only way anybody can enjoy their tasks, be in the ‘flow’ of things, learn and retain information, direct their attention to a specific goal, and valuable goals (read more in “Focus” by Daniel Goleman). If you are interested reading more of 80/20 Principle By Richard Koch, to learn more about the ‘doing more with less strategy’, you can find his book here.
Thanks for dropping a comment down below. I would appreciate your ideas.
I am sure that you are going to love this article. I will be revealing one of my long-term strategies, which I like to call ‘a million USD forex strategy’. I know that all Forex traders, including myself, are especially fond of trading strategies. This is a very simple yet highly effective and profitable trading strategy.
Best yet: I will be giving away all the details of this strategy for FREE of charge. That is the kind of thing we do here at Winners Edge Trading!
I do have one favor I want to ask from you…
In exchange for the free strategy, I would like to ask you if you could take the time to write a comment down below… I would really appreciate that!!
Now that you have done that, let me tell you some more details.
1) Because the strategy is classified as a long-term strategy, it was obvious that it needs to be an “end of day” strategy. So we will be using the day and weekly charts.
2) Also, we really didn’t want to create something that takes a ton of time to analyze. So another requirement is that the strategy uses very simple methods.
My mission succeeded: the strategy only requires a few minutes of your time every day and is straightforward.
Here is an example:
That is all a Forex trader needs. As you see the chart is very basic:
1 indicator (fractal indicator).
Because in a way, the only aspects Forex traders need to care about is where do I enter, where do I set my stop loss and where is my take profit? And that’s it!
This strategy answers all 3 questions quickly – without having to stare at your screens for 24 hours a day. This free Forex trading strategy meets all these criteria and more:
It only takes a few minutes a day to monitor the potential setups and any actual trades;
It requires none or very few indicators as to keep the chart simple;
The strategy is simple and straightforward;
The strategy is effective and profitable;
The day chart is used as to allow for end of day trading decisions.
The motto of our company is providing you an edge, a Winners Edge, and by reading this strategy article you just created that edge for yourself.
Before we dive into the exact details of the strategy, I need to make sure that everyone has a certain understanding of Forex trading. So I want to share with you a few links. Please read the ones that are valid and interesting for you:
It is a very powerful trading system that will be a great addition to your Forex trading arsenal.
Please read on for the details of the trading plan. In the next part, you will be able to discover the ins and outs of the setup, entry, stop placement, and trade management.
The ABC of the strategy
First of all, the strategy is feasible and usable for all major currency pairs and major crosses.
The currencies love to move in cycles, patterns, and waves from level to level. As we all know, there are many kinds of levels in the markets: examples vary from trend lines to consolidation zones.
Lows and highs are also examples of key levels. Their big advantage is that their numbers are clear and straightforward leaving little doubt and room for error. A day high will remain a day high no matter what. There is no doubt about their validity and are very easy to use for any measurement or strategy.
PLUS the big advantage is that BANKS use these levels as well. One simple word of advice from one trader to another is: avoid going long close to a daily high and going short close to a daily low. But this is not the strategy of course.
The next step in the process is… creating an edge. And not such any kind of edge…
The Winner’s Edge
That edge will be created via our filters. You might be asking yourself: why do we need a filter?
In fact, a trader could take a trading decision based on every single candle. But is it profitable?
Most likely not! That is why we are releasing this free Forex trading strategy guide book.
A filter makes sure that we only trade upon a certain set of conditions, which gives us Forex traders that edge.
The edge we are looking for in the strategy is to catch a currency when it is
a) either going to make a trend continuation or
b) either going to make a substantial trend reversal.
In other words, this strategy is aimed at finding turning or continuation spots on the day chart.
That sounds very simple… and it is.
Before we move on, make sure to read these vital articles:
So now you might be wondering, how do identify those continuation or reversal spots within our Forex strategy? We thought you’d never ask!
We can measure a pause in the market by monitoring the highs and lows of the day candles and keeping track whether and when it fails to make a new candle high or low. If the currency fails to make a new high or low, it equals a minor resistance or support level in the market.
Here is the definition:
In an uptrend a pause of one day (no new daily high) is equal to a minor resistance;
In an uptrend a pause of two days (no new daily high) is equal to a major resistance;
In a downtrend a pause of one day (new new daily low) is equal to a minor support;
In a downtrend a pause of two days (no new daily low) is equal to a major support.
These minor or major resistance and support levels are great trading opportunities because they indicate either a potential trend continuation trade or a trend reversal setup.
Now we have formulated the definition of a trend:
A trend is when the currency makes new highs or new lows;
A temporary halt of the trend is when the currency fails to make a new high or low.
At this stage I advise you to read these great articles before continuing:
You are probably wondering how do we catch the pips! Hang on for the ride traders! This is a great Forex trading strategy so you will not be disappointed.
The first thing we need to know is that; a failure to post a new candle high or low means that the power in the currency was not sufficient to push the price to new highs or lows.
Basically, this could translate into two scenarios:
The currency is pausing for continuation of original trend direction;
The currency is setting itself for a reversal.
The great thing is, Forex traders can profit from both directions!
That is the best thing about Forex trading. There is earning potential both ways. So no matter what, Forex traders can capitalize on movements on the Forex market: up or down.
As you can see in the example below, the currency kept making higher highs and higher lows and made a fantastic uptrend (indicated by the green circles). The triangles within the green circles are an indication when 2-day candles did not post a new high or new low, aiding visual ease to identify a string of highs and lows – in this case, higher highs and higher lows.
Here below is another example when the currency kept making lower lows. There were several pauses and 2-day candles could not post a new low. After a small retracement, the currency continued with its downtrend.
So far we have covered all the basics. Before we dive into all the details of the actual trade setups and trade management details, I need to make sure that everyone is clear on the following matters as well:
Many people involved in financial trading enjoy keeping an eye out for new investment opportunities and ideas. Of course, the majority of trading occurs in the ordinary stock market, which is something that most people understand on at least a very basic level. However, when it comes to alternative forms of investment, there are many people out there who could best be classified as interested, but not necessarily well-informed. For example, consider the idea of investing in gold.
Gold investment is an idea that tends to be in and out of popularity, and for people who have not undertaken this sort of investment before it can be a tempting idea. To be clear, the term “gold investment’ refers to buying actual, physical gold rather than investing in gold mining companies. This is what separates gold investment from just about any other type of financial investment, both in terms of how it works and why it is done. If this is something that interests you, here are a few words on some of the basics of gold investment.
First, before you actually go about investing, you will need to figure out how to do it. Gold is not a commodity that is traded in ordinary stock markets, but instead something that can be bought and sold on websites. Of course, any financial dealing on the Internet needs to be approached with care, so it may be worth noting thats an extremely popular and secure site that provides you with updated gold prices and safe storage of any gold you may purchase. The site allows you the flexibility and security to buy and sell gold as frequently as you may wish, and with as high a volume as you like, ultimately making it very simple to trade in gold bullion if you wish to do so. One good way to invest in gold is to look for gold stocks.
So why should you actually bother investing in gold? Typically, gold bullion is bought as something of a safeguard rather than as an attempt at financial gain. This is not to suggest that gold is always a safe investment, but rather that it involves a different set of strategies than ordinary investments. When you purchase a stock, you are hoping you make money on it. Often, people who purchase gold bullion are instead hoping to avoid the devaluation of the money they already have. When economies struggle and currencies lose value, you can effectively lose “wealth” without actually losing money, as your currency will be worth less. It is in times like these that some people turn to gold in order to protect their existing assets until currency becomes more dependable.
This is a guest post on behalf of Bullion Vault, written by freelancer Dennis Price.
-We’re going to make a million dollars (or more) through forex trading.
-We’re going to do it in 18 months (or less).
-And we’re going to start with next to nothing – $50.
I’m going to give you the basics of my trading strategy today and then I’ll share more details about it in future follow up articles.
This strategy IS designed to consistently offer excellent risk/reward opportunities, and, executed with some modest amount of intelligence (lucky for me that’s all it requires), should consistently produce winning trades that far outnumber and outpace losing trades.
MY 15 MINUTE CHART STRATEGY
HERE IT IS, the deep, dark, mysterious, intricate, secret system, worked out by an ancient Chinese Taoist sorcerer and kept closely guarded for centuries by inscrutable Zen currency traders:
Open a new chart, set the time period to 15 minutes. Load 3 EMAs (exponential moving averages) – the 5, 10, and 50 EMA. When price and the 5 and 10 EMA lines all cross above the 50 EMA line, buy (or, conversely, when they all cross the 50 EMA line, sell). I know, I know – the complexity of it is staggering, right?
You can also add the 21 and 35 moving averages – as well as the 100 and 200 SMAs (simple moving averages) just for higher time frame reference – but the 5,10, and 50 provide the basic trading strategy. I use EMAs weighted to the close – but that’s just my personal preference.
I’ve adjusted things a bit to my own personal trading style, but the credit for this outstanding strategy goes to a friend and fellow trader, Clay Ferrell, who was nice enough to share it for free at the Forex Factory forum (you can read more here at “Trading Systems”à”CHOROS System”, but fair warning, there are 500+ pages of discussion – and that’s not even the original discussion thread!). The original rule is to enter on the first retrace touch to the 10 MA (after price and both MA’s have crossed over the 50 MA). However, I often enter when the price has crossed and made a 15-minute candle close past the 50 MA. I do that because I’ve found that price itself is a better indicator than any moving average (and because patience is not one of my virtues).
The initial stop loss shouldn’t be more than 10 or 12 pips, at most, below (or above, in a sell trade) that 50 MA line, nor more than 10-12 pips away from your entry point. One of the main strengths of this strategy is its low risk. The theory behind this strategy is that once that 50 MA line is crossed by all three – price, the 5 MA, and the 10 MA – that 50 MA line should pretty much hold as support/resistance. It works best when the 5 and 10 Mas are both rising at a fairly steep angle. The 10 MA line should continue to rise (in a buy trade), and also act as initial support for the price. Eventually, the price will come back through the 5 and 10 MA lines and test either the 35 or 50 MA line. The FIRST time this happens, the 50 MA will usually hold – that is, there probably won’t be a 15 minute candle close significantly (i.e., not more than 4-5 pips) to the other side of it, and often price will just touch the 50 MA line and immediately bounce off of it. The game is often over the second time that the 50 MA is challenged – it’ll give way, and price and the shorter moving averages will all decisively cross back over it in the opposite direction.
This is a short-term trading strategy and it’s important to move your stop aggressively once you have a profit of about 10 pips – better to get stopped out with just a small profit than to let a profit turn into a loss. Many times I’ve been stopped out with a small profit and initially wished I was still in the trade and been tempted to jump right back in…but an hour later ended up thinking, “Boy, I was sure lucky to get out with a profit on that”.
Below is a screenshot of a 15-minute chart showing movement both above and below the 50 EMA line. Note how once there’s a significant move above or below the 50, the 10 EMA tends to act as support/resistance.
And here’s another – note the pin bar that precedes across up and over the 50 EMA, that could then have been ridden for a very nice profit.
I urge you to set up your own charts with the three moving averages and watch the market action for yourself.
That’s my basic 15-minute trading strategy. Of course, it’s not quite that simple in actual trading and there’s a bit more to it than that, too much for me to cover in the space of one article. I’ll provide more rules and trade filters for using the strategy in upcoming articles, so stay tuned.
Believe it or not, if we can simply average catching one good trade a day with this strategy, we will make it to our goal of a million dollars in 18 months or less.
1 – Learning. You have to become an expert in your business, and that’s certainly true if your business is currency trading. You need to put in the time and effort to always be learning how to improve your trading.
2 – Patience. Starting a business with less than $100, and making a million dollars in less than two years sounds fast. And it is. But it can seem oh so slow in the beginning. When you’re only seeing $5 or $10 profits, it doesn’t feel like you’re getting anywhere. You want to be already up there making the “big coin”. But you simply have to steel yourself to be patient, to be content with gradually increasing your equity. Just averaging small daily profits will make that million dollars a reality. You might even try reminding yourself every day you make a small gain, “I’m doing it – I’m making a million dollars.”
3 – Diligent adherence to a good, solid trading strategy. It’s amazing how many traders discard a basically sound strategy just because it has a few losing trades. They forget all the times it worked wonderfully. No trading strategy is going to work every time – nothing’s perfect. But I’ve found that a number of times when I thought, “Oh, this strategy doesn’t work”, that I’d often lost money, not because of the strategy but because I’d departed from the strategy. For example, sometimes I’ve jumped the trade too early, getting in as soon as price moved across the 50 EMA line – I looked back later and saw that there was never a 15-minute candle CLOSE across the 50 EMA – I’d violated the rules of my own strategy. The trading strategy wasn’t at fault – I was.
MUCH MORE TO COME: I’ll be back next week with more information on my basic trading strategy (and on another one I’ll be using) and how you can follow the progress of the Million Dollar Forex Journey account, seeing each trade I make. As always, I welcome comments, suggestions, prayers, and gifts of chocolate and liquor. J
“As you have freely received, freely give…” – (Matthew 10:8)
One of the most important things in trading is picking the right currency pair, combined with the right trading strategy. Choosing correctly has the potential to make a huge profit, while choosing the wrong pair will lose money. This is one of the similarities that the forex market shares with the stocks market- except rather than trading individual stocks we’re trading currency pairs.
When you trade it is important to make your money work for you, As Kevin O’Leary says:
There are three main things to consider when choosing your pair in the Forex market.
First, identify whether the pair is a trending or non-trending pair.
Second, figure out what type of strategy you will be trading.
Finally, you want to know the average true range of that pair (which means how much the pair moves on a day-to-day basis).
This article will explain in detail how to choose the perfect pair to trade for your specific trading style and strategy.
Step one: Identify the Trend
The first thing you must do when choosing which pair to trade is to identify the trend. A trend is defined as the overall direction in which the market has moved in the recent past, for example “the Aud/Usd has been in a downtrend for the past 6 months”. You can identify trends either by using trend lines or by applying moving averages (MA) to your charts. If the pair has not been trending, it will be important to take note of the sideways trend before you decide which pair to trade.
Step two: Pairing your Trend with the Trading Strategy
The next step to finding the right pair to trade is to make sure that those pairs fit the strategy you intend to trade. If you’re trading a trending strategy- your pairs must be trending pairs. If you try to trade a trending strategy on a pair that is sideways, you will have a losing strategy. If you have a trending strategy and you identify pairs that are trending, your chance of being a profitable trader goes up a great deal. Additionally, if you find a pair that has been moving sideways for a period of time it will be important that you choose a range trading or sideways market trading strategy to match up with those pairs. There are many strategies that you can apply for each different pair but it’s important that you know what the behavior of each pair is before you trade it. Many traders make the mistake of matching up the right pair to the wrong strategy.
Step Three: Noting the ATR
Average True Range (ATR) is the amount, on average, of movement in pips in a single day. ATR is important because if you don’t know how much a pair moves on average, it is much more likely that you will hit your stop loss. This is important when determining the pairs you want to trade based on your strategy and trading objectives. If you are an aggressive trader who is scalping and trying to make a high percentage gain in a short period of time, you will want to take special note of the pairs that have a high ATR because those can move a lot so you don’t want your stop loss too tight. Knowing the average true range of the currency pair and the strategy you’re planning to trade makes a huge difference in the success or failure of your trading.
Most traders overlook carefully selecting the currency pair that they’re trading and believe that they can trade any pair with any strategy. This trading strategy is one of the main reasons that rookies lose money, so don’t make the same mistake of pairing the wrong pair/strategy. You’re now armed with the information to pick the right currency pair with the right strategy to enhance your trading.