how to trade safely

The Best and Worst Forex Trading Strategies

The Best and Worst Forex Trading Strategies

Strategies in Forex market operations are a fundamental part of being able to achieve success, since without one, you will find yourself adrift and simply gambling with your money.

 

Having a strategy provides security and discipline. Finding the perfect strategy is not easy, it requires tests and time to be invested. Of course, just having a strategy does not mean that you are assured of success; on the contrary, using a not-so-good strategy can make you lose a lot of money. Next, we will explore various strategists who, after being tested and analysed, can be classified as bad or good strategies.

Please note that this is only a very brief overview, to see in-depth analysis and education, you will need to find our writings where we discuss specific trading techniques.

Table of Contents

Normally when discussing the different strategies available in the Forex market, they focus on a specific trading method that unfortunately is nothing more than a facet of a complete trading plan and does not represent the entire negotiation process itself.

This leads us to wonder: How do I know how good a Forex strategy is? Well, the answer lies in the fact that if the strategy is advantageous and consistent then it is good.

 However, you must have in mind other aspects of the strategies so that you’ll make sure that you are following the right path.

– Position’s size

– Risk Management

– Ways to exit a trade

A good strategy will depend massively on the type of trader that executes it, since the trader has the responsibility to understand his personality as a trader obtaining from this self-study the right amount of  knowledge to find the best Forex strategy that can adapt to its needs.

 

Therefore, we will focus on simple, basic and generic strategies that adapt to any type of trader. Here at The Doji Trader, we believe that psychology and personality play a huge role in the success of any trader, if you would like to find out more information on this, please click here.

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By using this strategy, you gain an advantage in the 60-minute time frame when you enter the market. The currency pairs that are usually traded using this technique are EUR / USD, GBP / USD, USD / JPY and the AUD / USD.  

 

To make good use of this technique, you must make use of an impulse indicator of 100 pips, as well as indicator arrows; tools you can find in MetaTrader 4.

Buying with this Strategy

The pips indicator will give you the signal when it is the right time to use it, it will be when the Momentum 100 pips indicator activates a buy signal and the blue line is ready to cross the red line from below. Once that is ready, the stop loss should be placed just below the red line of the indicator. Once these steps have been followed, the trade can be closed after 30 pips.

Now, if you want to sell, then you will have to enter a short position just at the moment when the 100 pips Momentum indicator activates a sale signal when its blue line crosses the red line from above and the Indicator arrows proceed to give a red arrow sign.

 

Finally, you must place the stop loss on the red indicator line and once this is finished, you must proceed to close the operation at the moment when the indicator arrows give a green arrow signal.

The purpose of this strategy is to capitalize on some unique opportunities to be obtained through the additional volatility obtained when London opens. Despite being a very specific technique, it is also very good. It can be used at any time, especially when the price drops sharply in one direction, it also allows you to return from a very strong support / resistance area.

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Although most currency traders prefer to do their intraday trades, since market volatility generally offers more positive opportunities in narrower terms, usually the weekly currency trading strategies can provide more flexibility and stability.

For example, a weekly candlestick can provide you with a lot of market information. This contains five daily candles and changes that give visibility to trader on the real market trends. Then, all weekly strategies are generally based on lower position sizes thus avoiding excessive risks. 

 

 In order to use this strategy, the use of the exponential moving average indicator is used. Then, the last daily candle of the previous week must be closed at an objectively higher level than the exponential moving average value. Once this happens, you should look for the moment at which the maximum level of the previous week is broken, then proceed to place a purchase order in the closed H4 candlestick, considering that it must be at the level price level broken.

These types of strategies are useful as most of the breakdowns do not usually become long-term trends. Therefore, a trader who uses this type of strategy has the objective of obtaining an advantage of the tendency of prices to recover both in the maximums and in the minimums that were previously established.

 

These are considered the best Forex trading strategies, because they generate a lot of confidence among traders because of their high success rate.  

In all types of markets, we will many techniques that are not as feasible or advantageous as others. It is important to keep in mind that if we find offers from people online, or many trading ‘miracles’ that sound too good to be true, there is a high probability that it is actually too good to be true…

 

Below you can find some strategies that we do not recommend when trading.

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This strategy is very popular among beginner traders. It is a scam and only used by inexperienced traders and charlatans, it is unfortunate that so many will blow their whole trading accounts by following this. The plot of this technique is based on chasing your losses by subsequently adding larger operations to your already losing position in an excessive way.

It is well known that the sensation when using scalping is very good, you are the boss and trade expert. 2 pips here, 3 pips over there and you feel so excited that adrenaline can be savoured. But as on many trading accounts, you will find yourself at a disadvantage due to the spread. To be more specific, let’s see it this way: when a winner of 4 pips is hit, the market is in the duty to immediately move 5 pips and thus cover the cost of its margin / commission. This means that the spread is consuming 20% of its profits and is also amplifying its loss just before the price has moved.

 

For this same reason, it would need to beat the market by a very wide margin in order to counteract the spread that corresponds to each operation. Although it doesn’t seem like a significant loss, it will cause this minimal statistical disadvantage to deactivate your account.

However, it must be noted that we believe scalping to be one of the most effective and useful trading strategies, and it is so popular among both professional and retail traders. It is not an easy task, but if you feel up to the challenge, you can begin your path to being a great scalper right here. If you wish to scalp for profits regularly, but feel that the high spread of your account just renders your time unworthy, then why not look on our broker reviews to find out which broker is the most cost-effective?

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Knowing that not all currency pairs behave in the same way is to be a mature and responsible trader, however, not everyone manages to be that way. Each currency has its own peculiarities, so each one will move differently, and the inhabitants of each nation will sell and buy their coins depending on their territorially political and economic situation. Therefore, decisions are made every day that will affect the movement of a particular currency in one way or another. So, this leads us to the conclusion that these types of practices (or strategies) should be used less times than recommended, there are many operators in the market who are dedicated to apply this strategy over and over again even if they don’t get results, either from boredom or despair and desire for quick success. It is critical and basic thinking, knowing that the idea of exchanging several pairs at once is a mistake and that it is best to concentrate on one and take care to study it properly.

 

Once you find a currency pair that really works for you and to which you can extract good profits, you can consider expanding your sales and purchases. Trading is often about finding where you have an edge on the market and zoning in on that specific area.

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Summary

It is always good advice to take to know that the fact that a strategy works for another person does not mean that it is equally successful for you. However, there are strategies that are usually much more general and that usually work for a good percentage of the population, which means that trying them is not a bad idea. On the other hand, if we are in front of a strategy that seems to be a fraud and that has several negative aspects, it would be best to stay away from such strategies, to avoid unpleasant moments and significant losses.

 

But the most important thing is that any strategy that you have not used before, you should try it for a while, without risking much of your capital, in order to draw your own conclusions and even customize it.

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This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results.

Posted by Alex in Lessons

How to Eliminate Risk in Trading

How to Eliminate Risk in Trading

 Eliminating risk in trading is a large challenge for traders of all skill as well as a major reason for the majority of failures when trading. Risk could even be blamed for the reason of the most recent global financial crisis, as many bankers were trading with such large leverage. To eliminate risk could prevent future disasters both economically, and for you personally with your account.

Many have the opinion that it is not possible to eliminate risk in trading, and this is true to some extent. What you do is to manage risk. At the basic level, trading can be summed up in two words — risk and reward. If there is no risk, there will never be a reward. So, take your mind away from the idea of trading without risk.

While it’s not possible to eliminate risk from trading, your primary job as a trader is that of a risk manager. Some traders don’t take risk management seriously, but to succeed in the game of trading, you must learn how to practice low-risk trading at all times. Risk management helps you to cut short your losses to protect your trading account from catastrophe.

There are many ways to manage and minimize risk in trading, and below we show how to eliminate risk in trading:

Table of Contents

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The importance of using an honest broker cannot be overemphasized to eliminate risk in trading. No matter how good your trading strategy is and how robust your risk management techniques are, if your broker is dishonest, you will never make one cent from your trading, and the money in your trading account is as good as lost.

As a matter of fact, check the broker’s trust rating. Is the firm authorized and regulated by any of the tier-1 financial regulators, such as the CFTC, FCA, ASIC, and IIROC? How does it handle clients’ funds and are there measures to protect against negative account balance?

The worst thing that can happen to you as a trader is to have a dealing desk broker who takes the other side of your trades — there will definitely be a conflict of interest. Be sure that the broker offers ECN accounts and that your account is ECN. If you would like to find the right broker for you, why not check out our broker reviews, where we fairly weigh up the pros and cons of over 30 brokers.

Trading is a very tough and emotionally draining task, and there are no guaranteed returns for all the hard work. Returns are highly unpredictable — you will never make profits from month to month. It is better you know all these now and be realistic with your expectations.

The right way to go is to understand the nature of trading and set the right goals. In the words of Mark Douglas: anything can happen, every moment in the market is unique, and there is a random distribution between wins and losses

So, your goals should not be outcome-oriented. Instead, set execution-oriented goals. That is, to properly execute your trade anytime your trade setup appears in the market, without fear, hesitation, or pressure. To ensure low-risk trading, you must have a trading plan and follow it to the letter.

You must predefine the risk of every trade. What this means is that you have to know what you are willing to risk before placing a trade in the market. And make sure you don’t go beyond your risk tolerance. This will make it easier for you to accept a loss if it occurs.

There are different ways to define your risk exposure. One way is to know the number of pips your trade setup requires. But the ultimate thing is your account risk. How much of your account capital do you risk in a trade? It is advisable not to risk more than 1% of trading capital in each trade. You can figure out your lot size once your account risk and the number of pips to risk.

By adhering to this, it becomes easier to take a loss without losing your emotional capital, and your account will be safe from blowing up.

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After defining your risk, the easiest way to make sure that you maintain that predefined risk when you place a trade is by using a hard stop loss, instead of a mental stop loss, in every trade. It saves you the emotional battle of thinking that price may reverse after you close the trade.

A hard stop loss is automatically executed once the price reaches the level where it is. It doesn’t require you to do anything else once it has been placed, unlike the mental stop loss which requires you to manually exit the trade.

Using a hard profit target is good too. Even though it doesn’t directly help you to manage risk, it helps you to maintain a reasonable risk/reward ratio and protects you from greed and hope — two dangerous emotions for traders. We believe that emotions and psychology play a vital role in trading, to learn more, click here.

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It is very important that you do not use excessive leverage so that you don’t blow your trading account. Trading is a game of odds, and there’s no guarantee that the next trade or even the next three trades will be a winner.

So, why use excessive leverage that will burn your account fast if you have a streak of losses? The first rule in this game is to preserve your capital and the second rule is not to forget the first rule. If you have your trading capital, you will get the opportunity to win in the future

Controlling your leverage comes down to the size of your positions. How many lots do you trade at a time? How does it affect your account risk? Using bigger leverage and maintaining a 1% account risk means using a tighter stop loss, which would increase your chances of losing.

It is very important to guard against overtrading because you may get overconfident and make a costly mistake that can lead to a catastrophic loss.

When you have a series of wins, take a break from trading and go do something else to clear your head. This will help you avoid getting overconfident and taking trades that don’t meet your criteria. If you trade out of excitement or boredom, you are very likely to give back all your profit plus more to the market.

Controlling your emotions is one of the toughest tasks in trading, but you have to do it if you desire to get the most out of your trading — remember, you don’t trade for the fun of it but to make money.

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While volatility is good and helps you profit from huge price movements, it can also decimate your trading account if things go wrong. If you are new to trading, it is best to avoid extremely volatile conditions such as during high impact news.

Prices can spike wildly during these conditions that using a hard stop loss may not be helpful in some cases because of huge slippages and the possibility of price gaps, which can render the hard stop loss useless.

It is best to take a short break when some of the high impact news are being released. The U.S. Nonfarm Payroll report and central bank interest rate reports are some of the high-impact events you should avoid. 

We have created a very helpful article in trading one of the most volatile market times; the FOMC Meetings. If you would like to learn how to trade at the time of these meetings, please click here.

It is not enough to set a limit on the amount to risk on each trade if you trade different currency pairs at the same time. If you use the 1% rule for each trade but have three trades at the same time, your risk exposure is at that point is 3%.

While trading different currency pairs at the same time is not bad, make sure the pairs are not correlated. Some currency pairs (EUR/USD and GBP/USD, for example) can correlate by as much as 80%, so trading them at the same time will only multiply your risk.

Trading currency pairs that are not correlated may be a form of diversification and can help you to lower risk. Some traders even use negatively nerve-wracking pairs to hedge their position.

Trading is a tough job — emotions can run high when things are moving our way, let alone when things are not moving as we want. A series of losses can make you abandon your trading plan and start trading haphazardly, which will even lead to more losses.

So, to maintain low-risk trading, you must have a maximum number and dollar amount of daily (if you are a day trader or scalper), weekly, and monthly losses beyond which you suspend trading for that day, week, or month.

 

After a series of losses or a huge single loss, it is advisable to avoid trading and do something that will help you clear your mind and regain your emotional capital. When you are coming back to the market, start with demo-trading to build your confidence.

Many of the best traders will walk away from the screen once they have lost or achieved a certain amount of points in one trading day. This is a very disciplined practice and can keep your account at a very safe, stable growth-rate. 

Following on from the final point above, trading is a serious business that requires personal discipline. You need to create a trading plan and stick to it. Define what gives you an edge in the market and make a checklist for the criteria a trade setup must meet before you place a trade. Do the same for your exit strategy.

Don’t ever think of changing your trading plan until you have reached a sample size of at least 20 trades. Then, review the plan to see if it’s doing fine or needs some adjustments.

Being a disciplined trader helps you avoid bad trading habits, such as over-trading, revenge trading, and emotional trading. 

Final Words

It is not possible to completely eliminate risk from trading since there can be no reward without risk, but applying the tips discussed here will help you maintain low-risk trading. Without proper risk management, it’s impossible to succeed as a trader.

This does not constitute investment advice or personal recommendations as your specific financial circumstances have not been considered. No warranty is given in regards to the accuracy and completeness of information. Past performance is not an indicator of future results

Posted by Alex in Lessons