Before I start this article, I want to share an answer to my question, that’s if you want to be profitable, how frequently you would be needed to be right? I got answer with 55% & 50% ratio.
This is absolutely wrong, because in trading, you could be right just 30%. In my article I am going to show you how.
Whenever banks get orders from customers to exchange US $ 1,000,000 for Yen, British Pounds and Euros, they as a result transact their business, so this extra supply and demand would bring changes in the price. In case, if surprised announcement comes from Fed Chief the prices will start changing very swiftly to incorporate, what latest news may be getting with the environment.
These factors affect the future price, but unfortunately, we have no source to know that these things will happen unless after they happen. Present price only shows you a roadmap of past happening. The market is ever right, and upcoming price changes would usually be determined by future events, which you can’t forecast. You cannot predict future price movement without the help of risk management.
There is a chance of to be wrong on the trade ever; because there is no assurance that the price would go up or down.
Do you know when prices will go up or down?
You should consider this question, when you plan risk management. We have found that retail trader is more right than wrong in a commonly traded pair.
The Mistake Forex Trader Make
If you see the traders were profitable more than half on many observed currency pairs. So, you might think these traders were doing well with winning percentages. But it is not correct, though traders have been profitable in 71% trades, but overall they lost money. Why?
Here it is:
The average win positions are in blue, whereas, the average loss positions are in red, every pair show traders had large losses when they have been wrong comparatively they have been right.
This is a common drawback for the Forex market traders. This can be overcome by utilizing risk management.
Risk Management Usage
If you want to use risk management into your strategies, you should utilize stops and limits, for enforcing risk reward ratio, that’s 1:1 . The reasons for setting up the risk – reward are a lot, like future prices could be difficult to predict. But whenever you are onto a right side of a trade, this kind of risk-reward could maximize your profit and limit your losses in the case of you were wrong.
Actually, the traders are not right 50%, suppose a trader only wins 40% of his trades by using 1:2 risk reward ratio, he can still get a net profit.
I take the risk management discussion a step further. Research has shown that the trader with small balance in his account carried higher leverage than the larger balance account holder. The trader with less leverage gained better result than the more leverage trader. The effective leverage is 10 – 1 or less.
Before you build a strategy, you first need to know this inevitable fact that the trading strategy doesn’t work same all the time. The market exhibits distinct conditions at different times on the base of technical, fundamentals and other factors, like future news events.
These different conditions determine whether your strategies would be successful or not. In the trending market if you trade a range strategy, it might be disastrous and very costly .In volatile market often breakout-related strategy is traded.
When you build your strategies, you must keep in mind an important thing, that as a human being you could not help but struggle for perfection. Unhappily, as a trader it might be a grave mistake, because perfection is not possible, its pursuit could cause costly repercussions.
How can you pick a Condition?
Market condition can be divided into three groups: Range, Breakout, and trend.
The range is highlighted with a ‘channel’ of price. In a range-bound market price would touch the support and resistance boundaries. In this condition it is suitable for you adopt ‘buy low and sell high’ strategy. The range could be common in a calm market. Unfortunately, the range doesn’t continue always. Latest news comes into the market and trader moves to bid. Such fast markets could be highly volatile and unpredictable. So, when range breakouts, the environment of the market gets a reaction that drives price beyond the priory defined support and resistance boundaries.
Whenever support or resistances level breaks, then price could continue to move for a long period. Wait to start trading in hope of this breakout of support & resistance level is called ‘trading breakout’, and entry orders are the preferred way of trading breakouts.
Whenever you plan breakout, you should keep in your mind that no one has information, when or how support and resistance would break. Therefore it is very important to know how breakouts can take place prior to its happening. An important question, when support and resistance level break how can one know that prices are going to continue pushing in that direction?
It’s uncertainty but, fortunately, there are some factors for adjusting this uncertainty. Good news for you, if you are successful in a trading of the breakout, the price may usually move for a long period of time. This brackout allows you to collect a large number of pips. But be careful, because you may be wrong more than right.
The trend may be your best friend. It provides you ‘bias’ by that you could trade in a currency pair. Trend traders usually wait until major support and resistance levels break, and adopt the same strategy of’ buy low’ and ‘sell high’. It’s only trend trader who applies the ‘biases of the trend.
A trend could be quantified by many ways. Some traders adopt the method of indicators like, ‘Moving Averages’ to help with discovering these trends. Some traders can select forego indicators instead focusing on a’ price action’. In the market traders want to purchase up-trends and sell down-trends.
When you are making a strategic to trade breakouts, trends and ranges, it is very beneficial for you , if you have an idea to grade , that’s how ‘ strong ‘ trends may be. The traders who want to trade breakouts and ranges, they usually look for trends. If a currency pair is making fresh highs and lows, that trader will definitely be late to trade a breakout.
The range will not be operative, if price has been set fresh levels of support or resistance. The traders, who want to employ trend strategies, usually prefer to buy up trend at low price and sell downtrends at a high price.
For Trend Grading in the Analysis Use the ‘Long’ Time Frames
In the ‘Time Frame Trading’ traders usually use multiple time frame In their analysis .By this way they get the ‘bigger picture’ of the market , in which they are trading. The 2 time longer frame’s functions is same, it also present ‘big picture’ of the market. So, when you use shorter time frames to place your trade, you come to know what the common market environment is doing.
In the ‘Time Frame Trading’ you should employ the longer time frames for grading trends. If you use hourly charts to enter trades, then, four hour chart can offer trend’s analysis, if you use four hour chart to plot trade, the daily chart would offer the same kind of information.
There are few methods to grade trends, ‘Simple Moving Average’ 200 periods is very popular indicator, by which you can grade trends. It is known as a common technical indicator, in today’s usage. If price moves above the 200, you may say the trend is ‘up’ and if the price moves below the 200, then you may say the trend is ‘down’.
But this kind of analysis might mislead. ‘Simple Moving Average’ 200 periods, doesn’t tender valid trend analysis always. The same thing could be said for other moving averages also, because anyone will be lagging the markets. Because most of the indicators are covering the markets, many of you have then tried to grade trends simply as possible.
The method is ‘Price Action’, by which you may grade trend without any indicator. During an uptrend, the price would usually make consecutive ‘higher high’ and also ‘higher lows’ and during downtrend price will commonly make ‘lower lows’ & lower highs.
Approach as Per Environment
It looks simple but practically it’s more difficult. If you are seeing consecutive higher highs & higher lows; or continuous lower lows & lower highs on the long term chart, it means you are witnessing a trend. This kind of trend develops because of many reasons, but the trader employs an old strategy of ‘buying low’ & ‘ selling high’, during these environments.
Since the market might move from the trending environment into a ranging environment, in this situation money management could be used to mitigate the losses, which may occur.