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Six Killer Forex Trading Strategies

There are several forex trading strategies that can bring you profits. However, what works in a trending market may not work in a sideways market (and vice versa).

Here are six general strategies for placing trades in different forex trading situations. You may have seen some of these ideas in previous blog posts, but this will be a nice summary of forex trading rules to print and keep by your forex trading desk.

Remember to combine the general information listed here with the more detailed, case-specific information you’ve learned throughout this blog.

Strategy #1: This forex trading strategy works well in both sideways markets and trending markets. To trade the first trading strategy, follow these steps:

1. Enter with one lot.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).
3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.
4. Go for small profits, don’t get greedy.
5. Exit just before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

Strategy #2: This forex trading strategy works better in sideways markets, but also works fine in trending markets. To trade the second forex trading strategy, follow these steps:

1. Enter with several lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the risk-reward ratio. Keep your potential losses small.

4. Go for small profits (20-30 pips). You should be in and out of the trade quickly.

5. Exit just before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

Strategy 3: This forex trading strategy works well in trending markets and poorly in sideways markets. To trade the third forex trading strategy, follow these steps:

1. Enter with one lot.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Cancel and replace your original stop loss order (to seal in profits). Only cancel and replace the previous stop loss order after the market has made a new high (low).

5. Don’t set a profit limit order. Stay in the market until you are automatically exited when the market hits your stop loss order price (when you are stopped out).

Strategy #4: This forex trading strategy works well in trending markets and modestly in sideways markets. To trade the fourth forex trading strategy, follow these steps:

1. Enter with two lots.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Exit with one lot for a small profit before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

5. Exit with the second lot just before the market hits to Fibonacci extension bounce point (you will be going for a larger profit with this lot).

Strategy #5: This forex trading strategy works well in trending markets and poorly in sideways markets. To trade the fifth forex trading strategy, follow these steps:

1. Enter with multiple lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Place limit exit orders for each lot at different pip increments (e.g. place your first exit order to exit one lot at 40 pips away from entry; place your second exit order to exit one lot at 60 pips away from entry; place your third exit order to exit one lot at 100 pips away from entry; place your fourth exit order to exit one lot at 150 pips away from entry; place your fifth exit order to exit one lot at 200 pips away from entry).

5. Once the market has started to trend and has moved 100 pips or more away from entry, cancel and replace the stop loss orders for your remaining lots to eliminate your risk. In this case, cancel your original stop orders for the fourth and fifth lots, replacing those stop orders at the breakeven point (the market price 100 pips away from entry).

Strategy #6: This forex trading strategy also works well in trending markets and poorly in sideways markets. To trade the sixth forex trading strategy, follow these steps:

1. Enter with multiple lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Place limit exit orders for each lot at different pip increments, just as you would in the fifth trading strategy, except this time don’t set a limit exit for the last lot (the fifth lot, in this case). Instead, allow your trade to take advantage of potentially huge moves.

5. Once the market has started to trend and has moved 100 pips or more away from entry, cancel and replace the stop loss orders for your remaining lots to eliminate your risk. In this case, cancel your original stop orders for the fourth and fifth lots, replacing those stop orders at the breakeven point (the market price 100 pips away from entry). As you follow the market with your fifth lot, continue canceling previous stop loss orders and replacing them at new highs or lows, to lock in your profit.

Now you have 6 different forex trading strategies for different market situations. Mastering a few of these could become your bread and butter as a forex trader. The rapid forex blog will continue to teach you more forex trading strategies, but knowing these will add valuable tools to your forex trading toolbox!

Posted in Money Management

Rules for Trading Trendlines

It’s Saturday morning and I just poured a cup of coffee. Even though I prefer trading days, I do like the forced break of having no forex trading with weekends off!

Today I’m going to give some quick tips about trading trendlines, then I’m off to the beach to surf some non-forex waves

When looking at trends, remember the following:

1. Draw your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
2. Locate the price at which you anticipate the market will bounce (at the trendline).
3. Find the last level of support or resistance to determine where to place your stop loss order.
4. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
5. Create a trading plan. Trade the plan.

Follow these rules and you’ll prevent yourself from lots of dumb mistakes. If you find that you can’t follow a rule, it’s telling you not to trade. If you can’t draw trendlines, anticipate a market bounce, find support or resistance levels, trade within proper equity management guidelines, or create a trading plan….

JUST DON’T TRADE!!!

The time will come when you can follow these rules and the forex will still be there.

Posted in Technical Analysis

Basic Forex Money Management

Recently I’ve been discussing market orders for placing trades. Earlier today I explained some key equity management tips and how to use stops and limits when placing forex trades (the opposite of basic forex money management is the destructive forex gambling mentality).

Related to these concepts is one important money management concept that I want to share before moving on to more sophisticated trading tips.

How do you decide where to set your stop loss order?

There are several factors to consider:

1. Always set your stop loss order at the last level of support if you are buying and the last level of resistance if you are selling*

* small exception:  because there is a spread between the bid price and the ask price (usually 3-10 pips), you may want to set your stop loss order 3-10 pips higher or lower than the last high or low if the stop loss order is tight (that is, if the stop loss is close to the entry point).  Otherwise, you may be stopped out prematurely.

2. Don’t risk more than 2-5% of your margin account on any given trade.  If the number of pips between your entry point and your stop loss price is more than 2-5% of your account (remember that 1 pip is about $10) then you should pass on the trade because the risk is too great.

If you risk more than 5% of your margin account on any given trade, you will be overtrading your account. This basic money mangement rule helps you stay in the forex game long enough to trade another day (so you don’t wipe out your account with a few bad trades).

In the blog posts that will follow this, you’ll learn about where to set your protective stop loss orders for each specific trade you are making.  Nevertheless, the two rules listed above are applicable across the board no matter what indicators you are using to place your market order.

In addition to a stop loss order, you will need to set a profit limit order.

How do you decide where to set your profit limit order?

Your risk-reward ratio should be 1:1.5 for each trade you make.  That is, for every $1 you risk you should seek $1.50 in reward. This is a good rule of thumb when getting started. As you gain experience, you’ll learn how to adjust this risk-reward ratio.

Setting your stop loss defines the risk you will take on that trade.  Setting your profit limit defines your potential reward.

For now, make sure the number of pips between your entry and your profit limit is at least 1.5 times greater than the number of pips between your entry and your stop loss. Apply these basic money management principles to become a forex winner!

In my next post, I’ll be talking about understanding forex charts. This is where forex trading starts to get really exciting!!!

Posted in Forex Basics