The Forex (Currency) market is a huge highly liquid market enabling traders to make consistent gains when following a sound trading strategy when combined with disciplined risk management.
Trade Risk Management
Never risk more than 1% of your trading account:-
1% (trading account size)
the number of PIP’s we could lose if the trade goes against us
The Stake Size. The Max trade per PIP we can afford to bet on the trade.
For simplicity, an example risk management calculation for a trade on a £100 account with a 20 PIP stop loss would be as follows:-
1% (trading account size) = £1
the number of PIP’s we could lose if the trade goes against us (20 PIPS)
5 pence. The Stake Size. The Max trade per PIP we can afford to bet on the trade.
Risk & Reward
We are looking for a target of at least 2:1 Reward to risk in order to place a trade. There must be the potential of a greater size of the reward compared to the size of the risk, each time we place a trade. Ideally, this will 5:1 or even higher.
Reward to Risk Ratio Calculation:-
Entry price – Target Price (Reward)
Entry price – Stop Loss Price (Risk)
So, for any trade, you take the stake size calculated during risk management and plug it into the Reward to Risk Ratio Calculation. If this is 2:1 or more then the trade can be placed.
Most strategies out there are either a ‘bounce’ strategy or a ‘break out’ strategy. We will concentrate on trading the bounce as it has been shown to have a higher probability, and has a higher risk-reward return than the breakout. Price action breaks out about 30% of the time but bounces 70%. Even a dogmatic disciplined approach to trading the bounce can on the balance of probabilities pay off better than second-guessing a breakout. So we Trade the Bounce.
We trade longer-term trades on the daily charts with consistently high reward to risk trades. This frees up time compared to intra-day traders who sit in front of a screen all day waiting for shorter-term trades.
Trade the Trend: If you identify a series of higher highs AND higher lows it is an ‘upward trend’. We look to trade the ‘bounce’ on the ‘higher lows’. In an upward trend, ‘trade the dips‘. In this upward trend, we do NOT trade the pullbacks from the trend, just the bottom of the pullbacks when they switch back to the upward trend.
A downward trend is the opposite or converse of the upward trend where we look to make sell trades on the successively lower highs of the downtrend. In a downward trend we ‘sell the rally‘. Once again we only trade with the direction of the momentum so we only look to trade the downward phase from a ‘lower high’ to the next ‘lower low’.
Identify the Trend: In an upward trend the 20 day Moving Average (MA) is above the 50 day MA which in turn is above the 200 day MA. The reverse must be true to identify a downward trend…
Pin Bar Reversal Strategy
Once you have identified the above trend on a currency pair then you are looking for the following in order to place a trade:-
In the downward trend scenario, we are looking to sell the rallys in anticipation of the rally losing momentum and continuing the downward trend, so, we are looking for AT LEAST three daily buyer bars (green bars that closed higher than they opened), i.e. a ‘rally’, followed by a ‘pin bar reversal’ i.e. a bar where the open and close price is in the lower third/half of the bar (regardless of it being a green bar or a red bar), this is s signal that buyer momentum is leaving the market and a signal of the end of the rally and return to the downward trend that can be traded with a sell trade.
Ofcourse, the converse applies to the upward trend with a bullish daily bar ‘signal’ (top third open and close prices) after at least three ‘seller bar’ days.
For additional trade setup confirmation, you can check for the bullish/bearish formation on the hourly charts. So for example, a bullish pin bar reversal can be confirmed by a ‘double bottom’ or ‘inverse head and shoulders’ on the hourly chart. This provides more confidence to place the buy trade:-
Another trade tip… a pin bar often bounces off the 20day MA and the 50 day MA. If the pin bar reversal is below these (in a downward trend) then you may opt to wait for the next pin bar reversal that is nearer to the 20/50 day MA before p[lacing the trade.
Place your trade after 10pm GMT. In an upward trend scenario then, when the conditions above are met and you see the signal bar (pin bar reversal) you place a buy trade with stop loss just below the signal bar low (signal bar low + spread + 1 pip) and the entry (limit order) just above the high of the signal bar (signal bar high+ spread + 1 pip) .
THE FIRST TARGET EXIT LEVEL SHOULD BE SET AT THE BOUNCES ‘SWING HIGH/SWING LOW’ LEVEL THAT LED TO THE TRADE SETUP. AFTER THIS, AS YOU ARE MOVING THE TRAILING STOP LOSS, MOVE THE EXIT LEVEL BASED ON THE PRICE ACTION.
IF THE TRADE HAS NOT BEEN TRIGGERED IN THE FIRST 24 HOURS, SCRAP THE TRADE
Manage the trade objectively. If the trade is triggered, Trail your stop loss as follows:-
Move the trailing stop loss on every second buyer/seller bar based on the trade being long or short.
Supply & Demand Strategy (Power Zones)
Trades on key levels of support and resistance. Lower probability of trade setup but higher reward than pin bar reversal when the trade is executed. There may be more losing trades than winning trades, but the winning trades tend to be big wins and is, therefore, a very profitable strategy….
These tend to be currency pair charts at multi-year high’s and lows and are supported by institutional bodies such as central banks and therefore reliable.
Managing the Supply/Demand trade, we trail the stop loss every 100 PIPS the trade goes in out favour:-
The First Pullback Strategy
These entry points from the longer-term horizontal support/resistance levels are strong entry points.
Choose one strategy initially and go with that. I will be using the Pin Bar Reversal strategy. Don’t think that its too simplistic. The simpler the strategy the better. It is tried and tested.