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Want To Trade Forex Like An Expert? Control Your Risk

Want to step above the crowd? Knowing when to cut your losses and being consistent and disciplined about doing so can help you truly elevate your trading game.

Why Controlling Risk Is Key To Developing As A Trader

At first glance, this sounds rather obvious, doesn’t it? It may surprise you, but far too many traders lose more money than they can afford by sticking with bad trades in the hope that things will turn around for them. In reality, this rarely happens.

Smart traders, in contrast, set firm stopping points with their broker before ever opening their trades. If their losses drop below the level set, they understand that the best thing they can do is to walk away.  While this sounds easy enough to do, actually doing it consistently in real life can be quite hard. It’s basic human psychology to try to hold on to what we perceive as ours and to recoup losses. Fighting through that urge and learning to walk away will put you head and shoulders above many traders, however.

Top Tip: Planning Is Key

Have a plan about how and when to cut your losses and be disciplined and consistent about sticking to it. For example, determine what percentage of your equity can you afford to lose before making a trade and set a stop-loss order to ensure you don’t go beyond it.

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How To Develop Your First Forex Trading Plan

The ability to create and follow a forex trading plan is one of the most important things a forex trader must learn. Many new forex traders fall into the trap of either not creating a plan or failing to stick to the ones they do create. Doing either is a big mistake and leads to irrational, hasty, and emotional decision-making (very bad things when it comes to forex).

The process of creating a forex trading plan will help you understand your trading strategy thoroughly and serve as a blueprint for making trading decisions. If you design your trading plan correctly, the unexpected should not be an issue  – you should have already thought out and have a course of action for just about anything that might occur.

So how do you create a plan? In this post, we’ll take you through it from start to finish.

Oh, one thing to note before we go any further:  

Having a trading plan alone is not enough. You should also be keeping a detailed trading journal to help you keep track of how consistently you are following your trading plan. In the following article, we’ll take you through the steps of creating your first plan.

1. Determine What Kind Of Trader You Are – And How Many Trades You Should Make

The first step to creating a forex trading plan is to determine what kind of trader you are based on the frequency of your trades and the duration over which your trades run. If you are a day trader whose trading style revolves around scalping, then you should plot your trading plan with a 24-hour timeframe. On the other hand, if you are a swing trader whose trades usually span several days, you should use a week as your planning horizon. To determine the number of trades that you should make within your trading horizon, you should add up all your winning trades  over your chosen time period and then multiply them by 1.2. For example, if you make 15 trades a week and only five are winning trades, you should not make more than six or seven trades each week. The idea is to increase your win rate and your chances of being an effective forex trader.

2. Maximize Your Opportunities

By limiting the number of trades that you make on a daily basis you limit your opportunities in the markets. This is not a bad thing. Limiting the number of trades you make on a daily basis should allow you to focus on finding the best trade setups that match your trading plan. By making fewer trades, you will be able to focus more on analyzing your trades and on making trades that have a beneficial risk/reward ratio.

 

3. Eliminate Emotional Trading

As a beginner forex trader, you should strive to avoid making trades based on your emotions by always sticking to your predetermined trading parameters. By limiting the number of trades you make each day, you can more easily avoid making ‘revenge’ trades. This can happen after you make a bad trade when you make further trades in an attempt to make up your losses. Many new traders succumb to the urge to make emotional rebalancing trades in order to make up for their losing trades. Most emotional trades usually carry higher risk because their main objective is to recoup the losses on a previous trade, which might be significant.

4. Set Entry Rules

Most beginner traders start out being very excited about the movements of the currency pairs they want to trade and will typically open new trades based on an instinct alone. This is not the best way to trade as, in many cases, traders end up with open positions that they have not fully thought through or researched. Your trading plan should clearly describe the signals that you will look for before opening a trade. You should include the different parameters that the indicators you are using must meet in order for you to enter into a trade. The more detailed your plan is, the better your results will be. Having a clearly defined entry rules will ensure that you remain disciplined in all your trading activities.

 

5. Set Exit Rules

Having exit rules is just as important as having entry rules because having predetermined exit signals helps you maximize the potential gains on your trades while limiting your losses. Your exit rules should be aligned with the maximum risk you are willing to take on each trade as well as the profit potential of each trade. For example, a trader with a 1:3 risk/reward ratio would be willing to risk USD 50 dollars for a profit of USD 150 on each trade. This means that the trader should exit a losing trade once their losses reach USD 50 and should look to exit a profitable trade with a  USD 150 profit.

6. Set Stop-Loss And Take-Profit Levels

 

Now that you know the importance of setting entry and exit rules, stop-loss and take-profit levels are  next. It is crucial that you set a stop-loss level on every trade that you make in order to limit your potential losses one every trade. You should think this through ahead of time and should tie your stop loss to the percentage of your trading account that you are willing to risk.

 

Conclusion

Now that you have a good understanding of how to create your trading plan, you should get to work creating one using a free Demo trading account The Demo account will allow you to test and refine your current trading plan on either our MT4 of MT5 platforms and will enable you to pinpoint weaknesses in your plan. Once you are satisfied that your plan works in you Demo account, you can consider using it in you live account. 

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Trading Strategy: Forget Price, Try Trading Volume

Are you ignoring the volume bars at the bottom of your price chart? It’s not unusual. Loads of traders prefer to track prices or

f

s when choosing a currency pair. At first glance, volume doesn’t seem to be the most powerful indicator, but there’s more to trading volume than meets the eye.

 

The volume section of your trading platform shows the total lots of the selected currency pair being bought or sold. For example, whenever heavyweight investors start opening huge trading contracts, trading volume quickly rises. Moreover, if the world’s media channels suddenly popularize a particular currency pair, trading volume tends to rise shortly after as thousands of traders open orders. In other words, trading volume is—among other things—a popularity meter. But how is that useful to you?

Volume and leverage

Before we even think about placing an order, we should first consider how volume relates to leverage. “Why leverage?” you may ask. What could volume and leverage have in common? Leverage is an important choice when you first go through the signup process. With Exness, you can open and manage multiple trading accounts from one convenient Personal Area. Each account can have a different leverage setting, which is very useful if you wish to trade both high volatility and low volatility pairs. The rule of leverage is simple and will give your trading strategy a solid foundation. low trading volume = low liquidity = high volatility = lower leverage

high trading volume = high liquidity = low volatility = higher leverage

A highly volatile currency pair could create huge profits when combined with high leverage, but such fragile orders tend to ‘Stop Out’ underfunded trading accounts in minutes when massive price fluctuations occur. Not recommended! Instead, try comparing the trading volumes of your favorite pairs with the major and minor currencies. If your pair is experiencing lower volume, then you might want to use a trading account with a lower leverage setting. Checking the volume of your preferred currency pairs could save you a lot of disappointment.

Strong price vs high price

Volume can be used to measure the ‘strength’ of a price shift, which answers a common question every trader asks themselves on a daily basis. “Is this price shift a coming reversal or just another bump in the road?”

Let’s consider a currency in a long-term downtrend. One day, the price begins to rise. Is this a breakout in the making, or just another fluctuation? A change in trend depends on many factors, but the first place to start checking is the trading volume. If the trading volume is low at the time of a price increase, then the market move is probably just a hiccup and the downtrend will return with a vengeance.

On the other hand, if the volume has been higher than usual, then you might be seeing the early stages of a price reversal. In a nutshell, low volume direction changes don’t stick. There are always exceptions to every trading strategy, but spotting a weak reversal is a very strong indicator.

How to test the trading strategy

Try opening up your trading platform and targeting a currency pair on the Market Watch list. Look back over the last few weeks until you find a significant fall in the trading volume, then check what happened to the price shortly after. Match your leverage to the average volume, then wait for the next possible breakout. If the price is reversing and the volume is rising, then the pair could be an attractive trading opportunity that deserves investigation or investment.

 

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3 More Economic Indicators You Need To Know

Forex indicators are crucial tools that can be used by all traders in order to improve to become more effective at what they do.

1. Bollinger Bands/Envelopes

Bollinger bands, also known as envelopes, were developed in the 1980s by John Bollinger to measure whether prices were high or low in relation to market volatility. Most traders use Bollinger bands to determine whether trend reversals are about to occur based on market volatility. Bollinger bands are made up of three bands with the middle band being the 20-period simple moving average of the currency pair. The values of the upper and lower bands are derived from the middle band (the upper band is calculated by adding two standard deviations from the middle while the lower band is calculated by subtracting two deviations from the middle). As a trader, you should stick to using the default values of the Bollinger bands as this is what most traders are using. Remember the price of a currency pair rarely strays far out of the Bollinger bands, which is why they are known as envelopes.

One of the most effective Bollinger bands trading strategies is the snapback to the middle band strategy, which is based on the fact that prices typically snap back to the middle band before heading in a specific direction.

2. The MACD Indicator

The term MACD indicator is an acronym for Moving Average Convergence Divergence indicator, which is a trend-following indicator used to measure momentum. Most traders use the MACD indicator to identify trend direction and to determine momentum and potential trend reversals The MACD indicator consists of the MACD line, the signal line and the MACD histogram. The MACD line and signal line move together although the MACD line is slightly faster than the signal line. As a trader, you can use the MACD indicator to generate trade signals, or to confirm trade signals generated by other trading strategies.

3. The ADX Indicator

The average directional index (ADX) indicator is used by most traders to identify whether a currency pair is trending or not. The ADX indicator was developed and introduced into the markets by J. Welles Wilder in 1978. The ADX indicator is used by forex traders to measure the strength of a trend, to identify trends and ranges, and as a filter for different trading strategies.

The ADX indicator is made up of the ADX line, the positive directional indicator (+DI) line and the negative directional indicator (-DI) line. The ADX indicator is calibrated from 0 to 100 with values above 25 indicating a strong trend while values below 25 identify ranging markets. You can also use the ADX indicator to confirm trades from other strategies as well as its own trade signals.

Conclusion

Tools like the Bollinger bands, MACD, and ADX can help you become a more effective trader and to make better trading decisions. While it is important to note that no indicator works all the time and to always apply proper risk management, learning about these three indicators is worth any new trader’s time.

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How To Use The Parabolic SAR In Forex Trading

Have you ever wished you could tell when a trend in the forex market was likely to stop and reverse?   The parabolic stop and reverse (SAR) is an indicator designed to do just that. In this post, we’ll explore the parabolic SAR and teach you how to use it.

How The Parabolic SAR Works

The parabolic SAR typically plots dots or points on a currency pair’s chart that indicate potential areas when the price action might reverse.

When a forex chart is on an uptrend, the dots plotted by the parabolic SAR are typically below the candles. When the currency pair is in a downtrend, the reverse is true. The parabolic SAR dots usually appear close together whenever the trend is consolidating, while they are typically further apart in a strong uptrend or downtrend.

EUR/USD Chart With Parabolic SAR Indicator

It should be noted that the parabolic SAR only works in trending markets and you should not use it in choppy markets where the currency pair is trading sideways. These conditions typically generate a lot of false signals.

How To Enter And Exit Trades Using The Parabolic SAR

You can use the parabolic SAR to time your entries and exits to when a trend is about to reverse. For example, when a major uptrend is about to reverse, the parabolic SAR will typically form at least three dots above the candles to indicate that a downtrend may be about to begin. In such a case, you should exit your long trade, and enter into a short trade.

In cases where the prevailing trend is a downtrend, the parabolic SAR will typically form at least three dots below the trend to indicate that an uptrend may be about to begin. In such a case, you should exit your short trade and enter into a long trade once the parabolic SAR forms 3 dots below the candles.

Using The Parabolic SAR As A Trailing Stop

Some traders prefer to place their trailing stop loss orders at the level where a SAR dot appears within an established trend. In most cases, such a trader will rarely be stopped out of the position in a market with a strong uptrend or downtrend but will provide protection if the trend unexpectedly reverses. This can be a particularly useful feature for new traders who aren’t familiar with setting trailing stop losses in other ways.

It should be noted once again, however, that this does not work in ranging markets where the SAR typically whipsaws between positions.

Adjusting The Step

The sensitivity of the parabolic SAR is determined by the Acceleration Factor (AF), which is also known as the Step. The step is basically a multiplier that affects the rate of change or acceleration of the SAR. The default acceleration factor on the SAR is 0.02, but most charting programs allow traders to adjust this figure depending on their needs. The step has a minimum value of .01 and a maximum value of .20.

You can reduce the sensitivity of the SAR by decreasing the value of the AF, while you can increasing the parabolic SAR’s sensitivity by raising the value of the Step. When you lower the step, you move the SAR further from the price and reduce the chances of a reversal happening. By increasing the step, you move the SAR closer to the price, which increases the likelihood of a reversal.

When adding the parabolic SAR to a chart, there are two values that are required. One is the step, and the other is the maximum step. The value of the maximum step has a slight impact on the reversals identified by the SAR, but the step value carries more weight when compared to the maximum step.

Conclusion

The creator of the parabolic SAR designed it to analyse trends that last for about two to three weeks. However, this does not mean that it cannot be used on trends that last for a shorter or longer periods. We recommend you experiment with it and  test different values for the step and maximum step with a free Demo account to identify the values that allow you to ride a trend for the longest period.

 

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