Many traders lack the patience to watch their trade turn into a profit after a few hours or more. What they want is a forex strategy that turns into a profit within minutes of entering into the trade. These type of traders can’t see their trade going against them. They immediately abandon such a trade without waiting for a few hours for it to turn profitable.
Whether you are new and a seasoned forex trader, one cannot escape the fact that every trade requires the knowledge to recognize the right conditions to enter a trade, where to place your stop loss, determine your target profit, move your target profit, when to take profits, when to maximize profits and when to cut losses if the market goes against your trade.
Armed with this knowledge, one has to go through a three phased regimen in making a trade and it is important to understand these three phases when one trades:
1. eXamine
In this first step, you will be navigating through multiple charts of different time-frames and currency pairs. Once the pair has been identified, one will need to study the charts and employ multiple indicators and analyze the price momentum or trend. As a disciplined trader, you will device your trading plan for that particular currency pair and wait for the market to give you the right signal or alert.
Waiting for the right set up is like setting an ambush, requiring several hours or days of waiting. When the conditions are not right, it is best to stay on the sidelines.
At times, there are false signals or false alerts. Failure to filter out false signals and alerts can result in negative consequences as one can imagine.
Recognizing the right setup can be extremely complex and time-consuming employing many technical indicators and trend analysis. At times, there can be an over analysis leading to trading paralysis and missing out the major market moves.
2. eXecute
Now that you have identified the currency pair that you want to trade, at this stage you should have a trading plan.
Your trade plan should have the following information:
• Immediate and subsequent support levels (if you are short or selling)
• Immediate and subsequent resistance levels (if you long or buying)
• Timing of economic data release for that day
• Stock Indices performance at time of execution if you are trading JPY pairs
• Risk: Reward Ratio
With regards to the size of contracts or mini-contracts, the rule of thumb is not to expose more than 1% of your trading capital.
Once the setup is right, you need to monitor the chart for the price entry point and always conscious of any immediate support or resistance levels. Ensure that the entry price is at sufficiently away from any immediate support or resistance levels and meet your Risk : Reward Ratio.
The trade can be executed manually or automatically based on a Buy or Sell Stop Order. For manual execution, you will need to place Stop Loss and Target Profit. The Stop Loss and Target Profit would have been entered when setting up your Buy/Sell Stop Order.
3. eXit
When a trade is in session, monitoring of the charts can get more intense depending on whether you are a scalper, a day trader or a swing trader.
As you have set up your Stop Loss, if the market moves against you, you have capped your losses. It is very important to always set up your Stop Loss.
If the market is going in your favor, you will let the market price move to a certain level before you adjust your Stop Loss to your Entry Price. In this way, if the market moves again you, you are at break even.
If the market continues to move in your favor and is near your Target Profit, you may want to adjust your Target Profit further and move your Stop Loss to a Profit Stop(locked in profits). If the market moves against you, it will hit your Profit Stop or if the market is in your favor, it will hit your Target Profit.
Let’s say the market is still moving in a strong trend to your favor and you cannot monitor the charts, you can either decide to take some profits by closing half or one-third of your contracts. For the remaining contracts, you can push up your Target Profit and set a Trailing Stop.
Conclusion:
Forex trading is extremely rewarding given the right training, discipline and money management. It also requires one to know how to analyze charts and monitor the charts closely depending on your trading style. Each style demands a certain amount of time commitment per day from an individual.
It is not advisable to trade every day.
All trading criteria are rule-based and there are software available to allow one to begin trading immediately.
I will advise one to trade on a demo account until he or she is consistently profitable before going live.
For those who just want to get on with it and make money without learning the ropes of forex trading, one can look at receiving automated alerts and use software trading robots that will enter and exit a trade on your behalf.
