How to Enhance Your Forex Trading Wins
A quick look at your trading history can tell you some interesting things about yourself and your strategy if you're willing to look objectively. What is your win rate like? Do you realize that win rate doesn't matter if you're banking profit past your losses? Granted, some strategies require a high win rate because they focus on quantity over quality. Scalping is a good example. Scalpers often aim for as little as a 1:1.5 reward. Each trade matters greatly.
Traders that focus on longer term time frames can afford to be more selective in the hopes of getting in on that one big movement that can put a significant amount of money in their pocket. A 25% win rate isn't so bad when you pocket 3 or 4 times what you risked on the trade. Big movements like that typically only come by catching a trend as it is just starting with an A+ set up.
There are big benefits in narrowing your focus when picking trading set ups. You don't need to make a dozen good trades in the span of a week to build on your account balance. All a trader really needs is one good trade per week to make meaningful gains with their account. This trading philosophy gels best for long-term traders working charts in increments of 4 hour or greater.
Build Your Success With Concrete Criteria
Traders still working to live and breathe their trading strategy often make the mistake of taking suboptimal set ups. Obvious statement is obvious, right? Not so much. We're not talking about a trade that is clearly wrong for that trader and their strategy. The type of set up we're talking about is more of the A- variety. There may be 5 items of criteria the trader is looking for; he sees 4 but still pulls the trigger on it in the hopes of profiting.
Right there we can already see two major problems. Account balances do not grow off of hopes and wishful thinking. They grow off of rigorous application and adherence to a trading strategy that puts the odds in favor of the trader rather than the black hole of the forex markets. The second problem is a lack of discipline. A trader that makes a handful of good trades can easily throw it all away on a bad one.
That is far less likely to happen when focusing on finding your A+ set ups. Regardless of what strategy you practice, there is a particular set of criteria that signifies the perfect set up for your strategy. You can be scalping, trading weeklies, or any point in between. Identify those points and set yourself up a convenient checklist.
As a Price Action trader; mine looks something like this:
- Is there a clear, distinct reversal pattern at a viable swing point? (Pin-bar or Engulfing)
- Did the pattern print on a strong horizontal line? (Very Big Round Number, Big Round Number, or Support/Resistance)
- Is the pattern in favor of the trend?
- Are there any strong points of Support or Resistance ahead of the movement?
These four simple points help a Price Action trader filter suboptimal set ups out of their trading scope. They are all relatively simple and straight to the point. They do include some language in them that quite a few people would gloss over in their quest to find set ups to trade.
Point 1 asks for a "clear, distinct" pattern at a "viable swing point". What does that mean exactly? Well, a viable swing point is one that fits the trend and is not surrounded by noise. If it has formed right next to another candlestick then it does not have as much volatility behind it as one that forms on a single candlestick. Can a dual candlestick set up provide profit? Of course- provided it meets the criteria for our patterns. An Engulfing pattern is composed of two candlesticks.
But what about "clear, distinct"?
Traders often make finding these signals much harder than it actually is. You should be able to look at the chart and say "oh, that's a pin-bar" or "oh, that's an Engulfing pattern". If you're spending more than about 5 seconds trying to figure out if the pattern itself is a good one; then it's probably not. The most successful patterns are clear and distinct. Why? If you can see it clearly, so can other market participants. The more market participants piling in to that "clear, distinct" pattern- the better chance for a profitable trade.
Take the time to identify what makes an A+ set up for your strategy. Spell it out in a checklist like I've done above. If a set up can't meet each point- then it's not A+ and should be passed. Remember, the hardest part of forex is knowing when NOT to trade.
Cut Your Losses Early And Let Profits Run
"Cut our losses early and let profits run"- a phrase that is plastered all over the internet and forex education materials. The reason for that is the fact that it is great advice. The problem with the advice is that it does not offer much in the way of insight to go about doing that. How is a trader supposed to know when to cut their losses or how to maximize their profits? Is pyramiding a good idea? Should you add to a position? Should you reduce a position?
There are as many answers as there are traders. Everyone seems to have their own thoughts on it and I am no different in that regard. Let's take a look at a couple of common ideas on the subject.
The concept of pyramiding requires the trader to put more into a position as it reaches profitable goals. The most common way to go about it is to contribute a bit more to the position each time that price reaches a favorable swing point in a trend. So in an uptrend, the trader would add to the position when a new higher-low was set regardless of clarity of the pattern. The idea is to put more into the position as it bounces and proves that it still has strength.
The problem with this methodology is it can easily violate the risk to reward limitations we impose on our trades to limit losses. The first set up you enter on will be strong and viable. Pyramiding in on bounces assumes that the bounce will go in favor of the trend and not lose any volatility towards profit. It may be worthwhile to open another position if another A+ set up presents itself- but the chances of that happening immediately are slim to none.
It is generally a bad idea to increase your potential risk on a currency performing in one direction. You may as well just open a bigger one off of the A+ set up from the start.
2. Banking partial profits
Another school of thought involves taking part of your money out of the trade as your position meets certain goals. This approach seems to stoke a certain type of trading psychology in the participant. It may be for you, it may not be. The idea is to take part of your money off the table to add to your balance so you can reap the psychological benefits of watching your account grow.
On the other hand; if you're practicing good risk management then why are you taking your money off the table? It seems a bit silly to "let your profits" run by taking a chunk of your money away to no longer be generating profit for you. Frankly, that seems like the opposite of letting your profits run.
But again, it seems to scratch the itch of a certain type of trading psychology. Who's to argue if it works for you and keeps you in the game?
Find the right approach for you and don't let intangible ideas in your trading strategy derail your progress.
3. Cutting Your Losses
Every trader needs to understand how to limit and control their losses so they do not blow out their trading accounts. It's really not that complicated. The trader should always be aiming for at least a 1:1 risk to reward ratio on their trades. A 1:2 is much better because the trader needs to only be right half the time on their speculation. Quite a few traders look at these as guidelines. They tell themselves "I can gain a few pips here and there". Yes you can; and it will mean nothing if you lose dozens right after that.
These are the traditional points on risk:
- ALWAYS trade with a Stop. You simply never know what can happen.
- Only move your Stop to lock in profit, never move it further away.
- Know exactly what you are risking before you place your order.
- Double check your order screen before executing to ensure there are no mistakes.
I find it useful to advance my stop to Break Even when I gain the number of pips to my Stop. It essentially guarantees that I will not lose money on the trade and leaves room for price action to play out. Placing a trade at a well defined reversal point typically creates enough volatility to send the price in the appropriate direction to carve out that comfort zone.
So if my Stop is 100 pips; I will move my Stop up once I have gained 100 pips.
There are many ways to trade forex but several principles bind us together. No matter what approach you take, maximizing your profits and minimizing your losses is at the core of long-term success. Find the right approach for you and don't let intangible ideas in your trading strategy derail your progress.
his post was written by Dennis Heil, a forex trader and blogger from Ventura CA. Read more posts by Dennis here.
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