Strategy Type: All Strategies

Previously, we published the first part of the risk management series. There we explained some of the common sense risk management techniques, such as trade exposure, risk/reward ratio, keeping up-to-date with the market news, managing leverage and the trading journal. In this part, we will explain the techniques that have been developed by traders, economists and analysts, which can be a bit more complicated, but are essential to understand and make part of your trading in order to minimize the risk. Here we go!

lower the risk, the better chance of success

Increase your odds of winning (by using fundamental and technical Analyses) – Unless you are a central banker or the head of a large investment fund, you cannot do anything to affect the market; all you can do is be on the right side at the right time. It isn’t as easy as it seems though, which is why you have to use both fundamental and technical analyses to increase your winning odds and minimize the risk of losing as much as possible. Many of these strategies have been developed over the course of many years, so there are plenty of options to choose from. You can find some of the best strategies here at fxleaders.com in the strategies section. Some of the best strategies, in my opinion, are: “Support and Resistance Levels”, “The Candlestick Strategy”, “Trading the News”, “Moving Averages” and “Trading the Market Sentiment”. 

Once you have tested different strategies and decided which one works best for you, build a trading plan and stick to it as long as it brings you positive results. You can carry out periodic checks to see if you have stuck to the plan and judge its success by keeping a trading journal. A trading journal is just like a diary of your trades, as we explained in the first part.

For more about keeping a trading journal: Keeping a Trading Journal – Forex Trading Strategies

Hedging protects you from unexpected events

Hedging – Most of the big investment firms and hedge funds use hedging to protect against market fluctuations and to minimize the risks, hence the name. Hedging is a trading strategy where you buy and sell two positively correlated pairs simultaneously. There are times when your technical analysis shows that you should buy the US Dollar because it is oversold, but the fundamental analysis leaves you uncertain. In this case, you should choose two positively correlated currencies like the Australian and the New Zealand Dollars. You can sell AUD/USD because the Australian economy is not doing as well as the New Zealand economy and buy NZD/USD. 

If the fundamentals from the USD come out positive, your profit from the AUD/USD short position will be bigger than the loss from the NZD/USD long position, since the AUD is weaker. If the opposite occurred, then your profit from the NZD/USD long position will be larger than the loss from the AUD/USD short. This way you minimize the risk and most of the time end up in profit, even though it might not be as great as when you only trade one pair.

To read the full hedging article: Hedging – Forex Trading Strategies

Applying the anti-Martingale method – Position sizing is a very important factor of risk management. The forex trader should adjust the size of the trade according to market behavior and the winning odds of every trade. It is only logical to allocate more funds to the trades with a high winning probability and cut a number of the funds for the trades with lower winning probability. This is the basis for the Martingale method. This method was developed as a betting strategy but it has been used in forex as well, only in the opposite direction. 

The martingale method consists of doubling your betting position (trading position in our case) after every loss. This way you are insured on every single trade, even if you lose five trades in a row. The problem with the method is when you are trading forex you only have seven consecutive opportunities to get back what you lost, even if you start with a very reasonable risk, such as 2% of the account. With the extreme volatility that we have seen recently, it´s not uncommon to have seven consecutive losing trades. So, many traders use the Martingale method in reverse. That way they cut the position size in half after every loss, meaning you can basically lose infinitely and still not run out of funds. Then, when the losing chain is over, they start doubling the position size until they get another loss. To me, this is a very reasonable risk management method.

Risk distribution – The distribution of risk is the main line of defense that the banks and investment/pension funds use against loss. The banks spread the risk by diversifying their loan and mortgage portfolios, while the investment funds diversify their investments by spreading them onto many financial instruments. The same logic applies to forex: you spread your trade size into two, three or more correlated pairs. This way you diversify your open position portfolio and distribute the risk to more than one currency. However, this might be affected by economic, political or domestic events that could occur in the country to which the currency belongs. 

Let´s take an example to make this easier to understand. By the end of August, the US Dollar had suffered heavy losses and it was oversold on the daily chart compared to most major currencies. This happened because a technical retrace was long overdue after the year-long uptrend and the Chinese stock market had added some extra momentum. Fundamentally, nothing had changed – the US economy was one of the two best performing economies among the developed nations.

We saw this situation as a very good opportunity to buy the USD against the AUD since the Australian economy is tied to the Chinese economy, which was not doing well at the moment. But instead of putting all our money on a short AUD/USD trade, we distributed the funds in three different pairs, all of which were USD longs. We sold AUD/USD, EUR/USD and bought USD/JPY, just in case a positive event for the Aussie occurred which would send the pair in the opposite direction (even though we were right about the USD). Several days later, after the Chinese stock market stabilized AUD/USD finished about 50 pips higher, we also took a small loss on that position. But the profit we had from the other two positions were far larger since the Yen and the Euro declined about 900 pips combined. So if you think that a currency (i.e. USD) will go up in the future, instead of opening one lot on EUR/USD, you open a 0.3 lot sell position in that pair, 0.3 lot sell position in GBP/USD, and another 0.3 lot buy position in USD/JPY.

The distribution of risk minimizes loss and increases the rewards

Risk management is one of the most important aspects of trading. You can only end up in profit at the end of the month if you minimize the number of losing trades and the amount of loss, which is why it´s crucial to implement these risk and money management techniques. After all, the banks, insurance companies, investment/hedge funds and successful traders rely mainly on risk management in order to succeed in the long run. This article ends our risk management series, which we hope will give our followers that extra edge needed to be successful in this business.

At the beginning of 2016, the FED had just begun a tightening cycle after increasing the interest rates in 2015. The FOMC statement and Yellen’s speech implied several rate hikes for 2016, although the global economic conditions were not ideal, while the US economy was going through a harsh winter period.

In Europe on the other hand, the ECB had promised more monetary easing measures since the current ones weren’t having enough impact on the Eurozone’s economy. The Brexit referendum was also scheduled for 2016, so that was another risk factor for the Euro and especially for the pound, although no one believed the UK would vote to leave the EU.

In Japan, the BOJ was fighting the market at that time because the risk elements in the global economy were increasing rapidly. So, the slowdown of the US and Chinese economies were the biggest worries for Yen buyers.

With the global economic slowdown during late 2015 and early 2016, commodity prices were tumbling and commodity currencies were also suffering. The Canadian Dollar was the weakest of them all, but the world was expecting an OPEC deal which would save the Loonie.

How will the currencies perform in 2016?

FED tightening cycle

After postponing several times, the FED finally increased the interest rates from 0-0.25% to 0.25-0.50% in December, marking the first rate hike in more than eight years and officially entering a monetary policy tightening cycle. While the other large central banks are easing, (except the Bank of England (BOE)), the FED is tightening which means that the US Dollar should be in an uptrend. But is it? Well, not exactly.

As we have explained in other forex trading strategies, which you can find in the strategy section here, the market moves more based on expectations than on reality – and most of the tightening cycle expectations have already been priced in so we will not see the dollar follow a consistent uptrend. The FED has planned 3-4 rate hikes this year, one every 3-4 months. The market already knows this so the risks remain small. If the FED doesn´t deliver on one of them then the market is going to go guns blazing’ against the US Dollar. We had a taste of this last week when some soft US economic data was published.

The US Dollar lost about four cents, and even a great employment report on Friday couldn´t make up for it. On top of that, the US economy is showing signs of weakness; the manufacturing sector has been in contraction over the last two months and the non-manufacturing sector is starting to lose steam. Therefore, a March rate hike looks virtually impossible right now unless things improve.

So, it won´t be a smooth road for the US Dollar. If the US economy improves, the dollar will definitely be in an uptrend, taking into account that the other big central banks are planning to ease further. But we have to see it pick up the pace soon because the market is losing patience.

ECB further easing

The ECB started the Quantitative Easing (QE) program last year. The Euro had declined for about eight months since the announcement of the QE program in May 2014. When the program started, the post-QE decline was only about one-third of the pre-QE. But the European economy still hasn´t shown much life. So, the ECB announced that it would continue for another six months.

There were further interest rate cuts in December. The market was expecting more so the Euro rallied instead of declining. We´ll need to keep in mind this year that if the ECB is not as dovish as the market expects, the Euro is going to go up, even though they are in an accommodative monetary policy. In January this year, they also promised more action in March but didn´t specify what actions exactly.

We´ll see if they meet market expectations; if they do, then there might be a period of weakness for the Euro, though I don´t expect it to last more than a couple of months. Another thing to watch this year is the risk sentiment. The Euro has turned slightly into a safe haven, so if there is trouble in China, or anywhere else in the world, the Euro will be well bid.

The decline post-QE was 1/3 the size of the move pre-QE

BOJ is easing further

The Bank of Japan has been sending the Yen 50 cents downward over the last four years, either with their rhetoric or with their actions. In only two weeks they cut the interest rates further, and even made them negative, for deposits above a certain amount. They also increased the number of Yen they are injecting into their markets by a few trillion.

The Yen declined about 200 pips. However, last week, when the market was dominated by fear, the Yen gained more than 300 pips. So, we´ll have to watch the risk sentiment regarding the Yen, since it is the primarily safe haven currency. The risk aversion sentiment has dominated the first 5-6 weeks of this year so the Yen has benefited. If this sentiment continues the Yen will be the primary beneficiary. It seems that by spring, the US economy will start to pick up the pace, and the risk sentiment will wear off, but we will still have to watch China.

Will BOE start hiking the rates?

For years there have been rumors in the market that the Bank of England would start raising the interest rates. At the beginning of last year, many thought that they would start somewhere in the Q3 of 2015. Then, expectations were pushed back to Q4 and further to Q2 of 2016. Now, even that looks to be off the table. The only member of the BOE who was in favor of rate hikes bailed out just last week.

The UK economy is probably the best performing of the developed economies, but the global worries exposure to the economy of the EU has forced the BOE to be cautious. No wonder the GBP has been declining relentlessly over the last two months, up until a couple of weeks ago. In the last two weeks, it made a 600 pip retrace against the USD but on Friday it gave back 150 pips. Against the other currencies, it still remains very weak.

This is no surprise with the Brexit referendum coming up later this year. There´s no light at the end of the tunnel for the GBP, at least until mid-year. Only when the referendum is over and we think that there won´t be a Brexit, we might see some strength in the GBP. The rumors are that it will be held sometime in summer. Perhaps the global economy will be in a better shape by that time and the BOE will likely be more in favor of rate hikes.

The commodity block

The global slowdown has put pressure on the commodity and raw materials prices, so the commodity dollars of Australia, New Zealand, and Canada have been suffering. The Canadian Dollar, in particular, has been hit hard because of the decline in petrol prices. Right now, the global economy doesn´t show signs of picking up so the pressure still remains on the commodity block of currencies.

Even the petrol prices are nearing lows and the OPEC and non-OPEC do not seem to agree on anything, seeing as they all are fighting for their market share. So until the global economy starts to improve, which in my opinion can´t happen before mid-year, the commodity currencies will be under pressure. Only after the global economy picks up, will the commodity dollars begin to improve to feel some love.

As we said in the opening paragraph, this is our forex analysis for the major economies and their forex currencies. This is an opinion based on the current global economic outlook and on the evidence we have at this moment to go over the main technical and fundamental forex strategies and create a work plan for 2016.

The outlook might change over time and we will adapt our forex strategy for 2016 accordingly. In general, the global economy and the recovery has softened and even the US and the UK economies, which have been pretty robust in recent years, are showing signs of weakness.

If things get worse, it´s likely that the safe haven currencies will gain against the others, especially against the commodity currencies. But we think that the increasing QE programs by the ECB and the BOJ will start to have a positive effect on their respective economies and the global economy by mid-year. So, if the global economy improves, then the commodity currencies, together with the US Dollar and GBP, will benefit.

At the end of 2016, the biggest forex events turned out to be not financial or economic events at all. Brexit happened as we now know, and Article 50 has already been triggered by the UK government. The Pound lost about a quarter because of that.

Another important event was the election of Donald Trump as President of the US. We didn’t analyze this or Brexit either, because well, no one knew they were going to happen. At the beginning of 2016, the odds of these two landscape shifting events were inconsiderable. But now, this is what´s moving the financial markets.

In the first part of this series, we explained the two extremes of trader personality. In part two we will discuss the trading strategies that fit each type of trader personality. When people start trading forex, they learn how the market works and what makes it oscillate. After trading for some time, traders develop their trading skills and become more confident, in fact, they become too confident and that´s when their personality kicks in. Sooner or later your personality will affect your trading. Impulsive traders start opening too many trades and closing them short while conservative traders wait too long and miss many good opportunities.

Although the vast majority of traders are not only impulsive or reserved, we do tend to lean towards one side of the personality type spectrum. This is why it is better to discover your personality, accept it and find a trading method that suits your personality from the very beginning, rather than doing it halfway after you have gone through a painful losing streak. When forex traders apply a trading method that matches their personality, they are much more likely to succeed. So, what trading methods and strategies are best for each personality type?

In order to be successful, you must match your trading strategy to your personality

Strategies for the impulsive personality type

The impulsive type should find a trading method that gives results quickly and won’t require the traders to stay in the market too long. Impulsive traders want to get in and out of the market within a short period of time since they lack the patience to hold positions for too long. So, the best strategies for them are scalping, short-term trading, news trading and breakout trading.

• Scalping is a trading strategy for very active traders. Those that itch to trade and want to get every pip. Scalpers usually use 1-minute to 5-minute charts. They spot opportunities when the price is overbought or oversold in these timeframe charts and enter the market, hold positions for a few second or minutes and exit with a few pips profit.
  

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  For the full scalping article: Scalping – Forex Trading Strategies

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• Short-term trading consists of trades that last a little longer than the scalping trades. They usually last from 10-15 minutes up to one or two hours, although during quiet times the trades might last longer. These trades usually target 20-30 pips. The timeframe charts for short-term trades are 15-minutes or up to one-hour charts. Our short-term signals can be considered short-term trading.
  

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  For more about short-term trading: Long – Short Hedging Strategy – Forex Trading Strategies

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• News trading is a forex strategy that suits impulsive traders as well. The news traders enter right before the economic data release, attempting to anticipate the outcome at or before the time the data is released. During news releases, the volatility is high so the trades close pretty quickly. If you want to apply the news trading strategy you must find a broker that executes trades quickly with minimal slippage. You must also learn how to read and interpret the economic data because it can often be tricky.
  

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  To learn more about trading the news: Trading the News – Forex Trading Strategies

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• The breakout strategy is another forex strategy for impulsive traders. As you can see in the chart below, the price has slumped about 50 pips in a matter of minutes after breaking the 1.53 resistance level in GBP/USD. When you apply the breakout trading strategy, you enter after the price breaks the resistance and close the trade a few minutes later with a nice profit.

The price jumps 50 pips after the breakout occurs

Strategies for the patient personality types

If you are a conservative trader, then the bigger timeframe charts are the best way to trade. Some trading strategies for the conservative trader types are: trend-following, moving average strategy and hedging trading strategy.

• When you apply the trend-following trading strategy, you identify trends. For example, you follow an uptrend or a downtrend in the one-hour, four-hour or daily chart, draw a trend line which touches the tops or the bottoms of the retraces, then wait until the price comes back to the trend line. It is better to wait for a confirmation, when the price retraces to the trend line, so you get better odds for the trade going your way. The confirmation might be a doji, a pin or a hammer candle in the hourly or four-hour chart.
  

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  For the full trend-trading article: Trend Trading – Forex Trading Strategies

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• The hedging trading strategy is a bit more complex than the trend-following trading strategy. For the hedging trading strategy, you buy and sell two correlated currencies, such as NZD and AUD, against another currency. It is a fundamental trading strategy but you can use the charts as well to get better entries and exits. You evaluate which of the two countries (Australia and New Zealand) is doing better economically and buy that currency against the USD, the Yen or the Euro and sell the other. Let´s say you buy NZD/USD, which the Kiwi is linked to, beis going up and you sell AUD/USD because the Chinese economy, which the Aussie is linked to, is having troubles. If the USD declines it means that both pairs will go up, but NZD/USD (which you bought) will gain more than AUD/USD (which you sold) because of the specifics regarding Kiwi and Aussie. So, your profit from the NZD/USD buy trade will be bigger than the losses from your AUD/USD sell trade.
  

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  To learn all about the hedging strategy: Hedging – Forex Trading Strategies

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• Another trading strategy for patient traders is the moving average forex trading strategy. It is similar to the trend trading strategy. However, instead of the trend line you use moving averages. Many people use moving averages on their charts, therefore they have higher odds of acting as support/resistance since many traders open a position when the price reaches a certain moving average. Below is the four-hour EUR/USD chart. As you can see, during the downtrend the price makes a retrace up the 50 MA in yellow and then resumes the downtrend again. This has happened four times during the past five weeks, which means that the sellers pile up when the price reaches the 20 MA. The patient type traders can use a trading strategy which consists of selling this pair when the price gets close to the 50 MA and close about a week later with hundreds pips of profit. Another trading strategy is to sell EUR/USD when the price and the 50 MA meet for the first time, and then add to that position on every other encounter, keeping all the trades open as the price moves down.
  

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  For more about the moving average strategy: Trading Moving Averages – Forex Trading Strategies

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The price has reversed each time after reaching the 50 MA

There are many trading strategies, so whatever personality type you have and whatever type of trader you are, there are sure to be many strategies which can fit your profile. You can check out the strategies that we have on our forex strategies section on our FXML site for more strategy ideas.

StrWhen you decide to trade in the financial markets, the one thing you should never forget is that there is always the risk of losing some or all of your funds. But fortunately for traders, one of the few aspects of trading which we can control is the risks. We can´t move the market, we don´t have insight on the intentions of the central bank, we cannot predict the economic news or other fundamentals that create market movements – so we have to do our best to control the risk. There are many strategies and techniques to do so, which together are called “Risk Management” or “Money Management”.

Risk management means fitting all the small parts together

Many new traders enter this business with little risk or money management knowledge. That means that they are nearly gamblers, because they are reducing the tools they have at their disposition for trading, and consequently reducing the odds of winning. Risk management will not ensure a win every trade, but it will reduce the loss when you lose and will increase the profit when you win. It gives you that extra edge, which is all that is required to make you a winner in the long run. But what are these techniques that make trading safer? Some of them are just common sense techniques while others have been developed by statisticians and mathematicians and are a bit more complex. In this part of our two-part series, we will cover the common sense tactics. Let´s get started.

Exposure per trade – Probably the most important factor of risk management is to decide how much you are willing to actually risk per trade. Different traders risk different amounts of their accounts but professionals only risk a small percentage of the account, usually between 0.5% and 3%. The risk is calculated as a percentage of the total amount of the account. For example, if you have a $10,000 account and according to your analysis the stop loss must be 50 pips, then you shouldn´t trade more than 4 mini lots if you for a 2% exposure. 2% of a $10,000 account equals $200, so $4/pip x 50 pips = $200. That´s for the pairs where 1 pip costs $1 per mini lot: in other pairs like EUR/GBP, where 1 pip costs $1.5 per mini-lot, then you shouldn´t trade more than 2.5 mini lots according to the calculations.

Risk/reward ratio– Another important point of risk management is to define the risk/reward ratio. If you start a new business, it would be illogical to risk more than the reward potential of that business. The same idea goes for trading; when you pick a trade you´d want the potential profit to be bigger than the potential loss. The short-term trades usually have a higher risk/reward ratio, but when you are planning to open long-term positions, a good ratio is 1:3 to 1:5. This means that when the price is trading in the 100 pip range you won’t take sides in the middle of the ran , because the risk/reward ratio will be 1:1, or even worse, sell at the bottom and buy at the top. You wait for the price to reach the top of the range and sell the pair with a 30 pip stop loss above the resistance, targeting 70-80 pips just above the support/bottom of the range. As per the chart below, you´d have a much better risk/reward ratio if you sold the arrows and bought at the black marks instead of entering a trade somewhere in the middle.

Keep up-to-date with market conditions – You cannot make reasonable trading decisions if you don´t know what´s going on in the market. It´s the same as opening a new business in an industry where you don´t have any experience and aren’t sure how things work. Being unaware of the business environment is a wasted investment. In our case, we always have to know what´s going on in the forex market; we have to check the economic calendar and be up-to-date with all the economic and political news which might affect the main currencies we´re planning to trade. Fortunately, there are plenty of sites out there that offer the economic calendar and even offer explanation and analysis if you cannot interpret the news by yourself. On our site, we have daily market updates that offer prior explanations of what might happen during the day in relation to the upcoming events.

For more about using market movement to your advantage:

Trading the News – Forex Trading Strategies

Trading the Market Sentiment – Forex Trading Strategies

Leverage – All the brokers offer up to 400-500 times leverage, although since the Swiss Central Bank intervention in January, this might be reduced to 1:100. That seems very lucrative for traders because it means that you can make big profits with fewer funds. But high leverage can lead to big losses as well, which is why it is called a double-edged sword. If you use 100 times leverage on a $10,000 account and you lose 2 trades with a 40 pip stop loss on each, it means that you have lost $8,000 in just two trades. That´s nearly the entire account. If you want to last in this business you have to be very careful with the leverage. Most professionals don’t use more than 6-7 times leverage. Personally, since I don´t like to risk more than 2% of the account, I only use up to 5 times leverage.

Leverage is as useful as it is dangerous

Keeping a journal – Keeping a trading journal, is essentially like keeping a diary of your trades. Forex trading is very dynamic, which makes it difficult to see the mistakes you make in real time, thus increasing the risk of repeating them again and again. But if you look at the trading history at the end of the week/month you can easily identify your weak and strong points. There you can see which pairs have been the most profitable for you and avoid the losing ones. You can identify in which trading region (Asia, Europe, America) you have been most successful, and also see how successful you´ve been with trading during news releases, in order to realize if you have the capacity to read and interpret the news correctly. So, after identifying your weaknesses based on your trading journal, you will obviously avoid making the same mistakes, such as trading during certain times of the day or trading certain pairs. This will help you reduce the risk of trading under unfavorable conditions in the future.

For all the details about Keeping a Trading Journal – Forex Trading Strategies

When you enter the business of forex trading, you should identify the aspects that characterize you as a trader. Many new traders try to mimic the Wall Street stereotypes they have seen in the movies, but that´s the biggest mistake that can be made. New forex traders overtrade and are overleveraged because they want to reach their first million as soon as possible, and this mindset eventually leads to failure.

Top traders identify the strong and weak points of their personality and plan trades according to their personality type. They also invest an appropriate amount of funds that they feel comfortable with, and which doesn´t break their account in the case of loss. On top of that, you should plan your trading according to the time you have available. In this article, we will talk about how to adjust trading to your personality.

Your trading personality can make all the difference between winning and losing

Personality types

We are not robots, every person is different and every trader is different, therefore, everyone has a different opinion about the market. If you ask traders and economists about where the price will be the next day, everyone will give a different answer. After all, that´s what makes a market; there wouldn´t be one if everyone had the same mindset. Besides for different opinions about the market direction, people also have different personalities. Some of us are more impulsive types, and more active in the market whereas more patient types tend to open new trades less often. Let´s see the upsides and downsides of both types of traders.

Impulsive: The forex market is very fickle and you must act fast; you should open a position if you see a good opportunity and get out quickly if the wind changes. The impulsive traders are good at that. But being impulsive has some downsides in regards to forex trading – they are restless and enter the market (buy or sell) too early which often results in misjudged trades. These types of traders usually try to chase the price instead of waiting for the price to come to them. When I analyze the market, I set levels where I feel comfortable opening a trade and then wait for the price to come to those levels. These levels might be prior support/resistance, trendlines, or levels where moving averages are found, etc. If you sell EUR/USD too early, then you will have to stretch the stop loss so that it is above the resistance or the downtrend line. Your take profit target will also be smaller; therefore, the risk/reward ratio increases.

The other downside of this type of personality is that these traders tend to close their trades too early, limiting the winning potential. If you have analyzed the market and made a plan about a forex pair, you should stick to it. I know that the market changes continuously and sometimes we have to alter the trades along the way or close them early, but in general we must stick to our plan. Cutting trades short for 20 pips, or letting them run the full course for 200 pips, makes a huge difference at the end of the month when you calculate your profit/loss.

Nonetheless, there are many impulsive traders who make a lot of profit from being impulsive. If you are this kind of trader, we will offer some trading strategies to match your personality in the second part of this article. You just have to discover and accept your personality. How impulsive are you in real life? Are you patient or are you a person who wants to get things done as soon as possible? Do you get an itch to close a trade once the trade is in profit or do you let them run their full course? So, figure out your personality and read Part 2 of this article to find out which strategy works with your personality.

Conservative: Being patient is necessary for this game; when trading you have to be calm and cautious. As we mentioned above, you don´t want to trade too early or exit too early. But, at the same time, forex is a very dynamic market and sometimes you´ll have to make decisions quickly. If the price comes near the level you planned on, you must pull the trigger. After all, you are in the market to make money.

The price doesn´t always come exactly to the pip that you planned on based on your chart analysis. So if the price is a few pips away, you should take the risk and open the position (at least that´s what I do). Traders who are too cautious tend to lose many good opportunities, which reduces the profit a lot and may end up with a loss at the end of the month.

Overly patient traders also fail to adapt the open trades to the shifts in the market sentiment. If the market sentiment turns around you must close the trade as soon as possible with whatever profit you have. When you trade forex, a winning trade can end up in a huge loss if you don´t adapt to the market quickly.

Same as the impulsive trader type, patient traders can make money trading forex as well, they just have to know and accept that they are conservator traders, before choosing a forex trading strategy. So, ask yourself the question: ‘am I a conservative person in real life who doesn´t like to take too much risk?’ Besides that, you should know how patient you are because the trading strategies for conservative traders require patience. They are based on keeping trades open for many hours or days. If you are not very patient, work on this trait, because it can be vital in order to make some good pips.

Trading forex is a human activity; and is often a very stressful job, especially if you are outside your comfort zone. You cannot move or change the market and you cannot change your personality but you can change your trading method. You must apply a trading strategy that matches your personality in order to be within your comfort zone and succeed in this business. But first, you have to discover your personality type and accept it. Once you have done so, it is easy to find the trading strategy that is right for you. In the second part of this article, we will highlight some trading strategies for each type of trader.

It is common knowledge that new Forex trader’s fail 80% of the time. This is because many beginners start trading without a clear plan. A premeditated plan is crucial when you trade. Trading without a plan is like going to war without an attack and a defense plan. Before you go into a battle you assess your capability, your strengths, and your weaknesses. The same logic applies to Forex – you prepare a plan that helps you base your trading on your strongest features and avoid the weak ones.

Your available funds

In the past, we have published part 1 and part 2 of trader psychology. The first article was about identifying what type of trader you may be. We wrote that you might want to take a personality test to see where you stand in the continuum from impulsive to conservative. In the second article, we presented the readers with some forex trading strategies explaining which was most suitable for each type of forex trader psychology.

It´s not important how many trades you win, but how much you profit when you do

In this article, we will take a look at the next logical step in creating you forex trading plan – applying your trading strategy. This is a very important part of forex trading, if not the most important. One of the most famous quotes from trader George Soros is “It´s not whether you´re right or wrong that´s important, but how much money you make when you’re right and how much you lose when you`re wrong”. These are wise words from a successful forex trader/speculator. He’s a household name in forex.

These words came to my mind as he decided to sell the Australian Dollar against the U.S. Dollar about three years ago when this pair was trading around 1.05. His strategy was fundamental; he predicted a decline in commodity prices and a tightening of monetary policy by the FED. Two years later, AUD/USD found itself about 35 cents lower and rumors were that he made more than a billion USD on that one trade.

As we know, forex strategy is important and it is alright to be wrong sometimes but the most important thing when trading is the implementation of your strategy. If you apply correctly, your wins will be larger and your losses smaller. But, how can you implement your forex strategy in the best way possible? Here are a few tips:

First Step is the Biggest – One of the biggest reasons for losing in forex is hesitating to pull the trigger when your forex strategy indicates that you should open a forex position. If you look at the EUR/USD weekly chart below, the 100 moving average (MA) in green clearly rejects the price at the black arrow. Both the stochastic and the relative strength index (RSI) are overbought and that week´s candle closed as an upside-down hammer, meaning a possible trend reversal was likely to follow.

All of these indicators show that EUR/USD would fall back down. Besides that, the area between 1.15-1.17 provided resistance many times in a one-year period. As you can see, over the next three weeks, the price has moved down about 500 pips. Now that´s a 500 pip loss, and your forex account would have been 500 pips larger if you had taken that trade. On top of that, forex traders tend to chase the price and enter in late when they have missed a good opportunity because they get frustrated, so they end up selling near the bottom or buying near the top. This would obviously result in a loss. So, if you see a perfect setup according to your forex strategy, don´t hesitate too long.

All the indicators were pointing down four weeks ago

Build a risk-free trade – Risk-free?! How can trading forex be risk-free? Well, a forex trade can´t be risk-free when you open it but it can evolve into a risk-free experience. If we take the EUR/USD example again, imagine you opened a sell forex position at the 100 MA around 1.1610 with a stop above 1.1730 (the high in August the previous year). Now, when the week ended, the price was at 1.14, 200 pips lower and the weekly candle closed as a reverse hammer.

At this time, you´re pretty sure the price will continue lower in the following weeks. You can now move the stop loss at breakeven or even at 1.1510. This means that you would win 100 pips even if the trend reversal scenario didn´t materialize. So, building a risk-free forex position is an important part of your forex strategy. But you should apply it cautiously, you can´t move your stop loss to breakeven once the position is 5-10 pips in profit. You must be patient and wait until the price moves at least 50 pips away from the entry point. Then you can move the stop loss to break even and turn your forex trade into a risk-free position.

Placing Winners – Sometimes, the direction is very clear. Take, for example, the EUR/USD pair. It was pretty clear that the price wouldn´t stretch much further above the 100 MA in green. So, let´s assume you opened a sell forex trade at 1.16. Then, by the end of the day, the price ducked again back below 1.15. At this point, the odds the price will keep moving down are about 80%.

So, what do you do? You open another sell position the same size as the first one. As we can see from the daily chart below, the price moved down in the following days and closed the week at 1.14. By this time, the odds the price will move further down in the coming weeks, increases even more. As we mentioned above, the weekly chart closed as an upside-down hammer and the indicators were overbought. So again, you open another sell position and move the stop loss for every position to breakeven – then you can lock in some profit as the price moves down. As George Soros said, “it is how much you make when the trade goes in your favor garners profit”, so on such occasions when the direction is clear, you make the most of it. Don´t hesitate… just apply this method.

It was clear that the price would move south when the daily candle formed an upside-down hammer

Losing Out – We know that your forex strategy won’t always point in the right direction. Even when all the indicators are pointing in one direction, something might happen in the forex market which changes everything – and your perfect setup turns into a failure. The trick is to recognize the failure and accept the loss.

When you first plan your trade, you pick the take profit levels according to your strategy. When I opened the sell forex trade in EUR/USD near 1.16, I placed the stop loss at 1.1650, about 30 pips above the 100 MA. I did this because the indicator I chose for my strategy was based in this MA. I saw the 100 MA as the line in the sand; once it would let go there would be no other resistance nearby to stop the uptrend. Fortunately, the price went in my direction but if it hadn´t I would accept the 50 pip loss. Some traders keep moving the stop loss further and further away and end up losing their entire account. You can´t hope for miracles to happen in forex and turn a trade in your favor. If your strategy showed a decent stop loss level then stick to it, we can´t win every single trade!

A forex strategy is very important, you can´t trade forex without a strategy just like you can´t go to war without a plan. But often, implementing your strategy is more important than the strategy itself. In fact, more often than not the strategies work just fine, it´s the forex traders that implement them in the wrong way. So, if you want to be successful in forex you must apply your strategy correctly, respect the stop losses, add to the winning trades, build risk-free positions when possible and, of course, step in when your strategy tells you to do so.

One of the first rules you learn when you start trading forex is that you should minimize your losses as much as possible to protect your capital. According to many forex textbooks, in order to do this, you must set tighter stop losses so when a trade goes bad your loss is minimal. This is a good strategy for many occasions, but the forex market is so diverse that we cannot stick to one trading style for everything. Even on the same day, the price action is different from one hour to the next – so our trades and targets should be different as well. Sometimes the volatility is low and it´s fine to have tight stops during these periods. Yet, sometimes the volatility increases and we must increase our stops as well. In this article, we will explain why it is sometimes wise to have a wider stop.

For more advice on trading in a volatile market:

How to Trade Profitably in Volatile Markets – Forex Trading Strategies

How To Turn Volatility In Your Favor – Forex Trading Strategies

Are your targets wide enough to avoid whipsaws?

Give your trade some breathing room

Just like your average Joe, your trade needs some breathing room. There might be some clear visuals, and/or very strong resistance or support levels which define the risk for our trades. However, we know that the price never respects these levels to the pip, even though we are 99% sure that the level will hold and the price will eventually reverse. That´s why this business is tough.

1.1420-30 has been a very strong resistance for EUR/USD, and the ECB gets nervous when the price reaches this level. The ECB members pop up in a coordinated way everywhere in the media with bearish comments, trying to push the Euro down. So, you know that they will do whatever it takes to reverse the price down (and it inevitably will). But you cannot sell it at 1.1440 and place your stop at 1.1460 just to feel safe, particularly when you trade the daily or weekly charts.

As you can see in the chart below, the price has always reversed when it has reached this resistance area, but on three occasions the price has managed to pierce above, reaching 1.1530, 1.1714, during the Chinese stock market crash in August 2015 and 1.1495. So if you had placed a stop at 60-70 pips, you´d have had three losing trades worth around 200 pips – but that´s not the worst part! The biggest loss would have been the many other hundred pips you would have won if you widened your stop loss.

Forex is not an exact science, there are a number of factors to consider when you place your stop loss, such as market psychology or stop hunting. How many times have we seen the big names in the industry often pop the price above or below a resistance/support level just to shake up the weak stops?

Adapt to volatile times

Sometimes the market gets extremely volatile. We´ve witnessed a handful of such occasions over the last few months. In December 2015, the ECB took more measures regarding the monetary easing program, but it was less than what the market expected, so the Euro rallied for 500 pips.

In March of this year, the ECB extended the monetary easing program again. However, this time, the measures were extreme and they exceeded the market expectations, yet the Euro surged by 400 pips! In February, the Yen gained more than 10 cents in just a few trading days. But one of the most volatile days we have seen over the last several years was August 24th, 2015 when the Chinese stock market crashed, sending a shock wave to the forex market. NZD/JPY lost nearly 11 cents in just one day.

These are just a few examples of the many volatile times that we have witnessed in only a period of a year. If you had placed a 100 pip stop loss, many of these moves would have whipsawed your trades quite easily. When you trade long-term and target 400-500 pips, your stop losses must be a few hundred pips as well, because you never know when or where the volatility might arise.

We all know how volatile the forex market can get and when we enter this business we are aware of the danger of the game. Therefore, we must adapt our trading style and targets when the market gets volatile. I´m not saying to go crazy and place 1,000 pip stops because even that might not be enough sometimes.

Over the last seven months, USD/CAD has been a great example of how volatile the market can be in both directions. But times have changed, so we must adapt. About three years ago, the daily range in most pairs was only 30-40 pips, while now the average daily range is more than 100 pips. So we must widen our targets, which inevitably means that we must cut the trade size. If we traded three lots with a 40 pips stop, now we must trade one lot with a 120 pip stop.

The volatility has been low and the daily range was narrow for most forex pairs over the last several years (from 2010 to 2014) and many new traders gained a false sense of security. But, the volatility has picked up over the last two years so we must adapt to this and change the forex strategy. The elevated volatility is not a new thing to us. From 2008 to 2010 the volatility was pretty high as well, so we know that the forex market is continuously changing and we must change with it, placing wider stop loss and take profit targets. On our forex signals page, we have widened the targets for the short and long-term signals since the beginning of last year and so far it has proved to be successful. You must widen your targets also in order to be successful.

Last month, we published an article where we looked at the seasonal factors and patterns that impacted several currencies in March. We reviewed all previous petrol prices from March months in previous years, and the comparison to March 2016 was similar. We also took a look at USD/JPY and discussed the decline of the Japanese Yen in March 2016 against the US Dollar. This March turned out to be quite flat for USD/JPY. For this month, we will take a look at the petrol prices, as well as the commodity currencies, aka the Euro and the British Pound.

The Petrol Price

The price of petrol has been in a downtrend for about two years now, due to global economic slowdown and oversupply. However, April has been a good month for the prices. As we can see from the table below, the petrol price increased seven out of ten times during April over the last ten years. Even last year, which was the worst year for petrol in the last 15 years, the price surged by a whopping 25%. So, the odds are that the petrol prices will go up this month as well.

The price of petrol surged to around $42/barrel by mid-March but retraced back down to close that month at around $36/barrel. It’s the first few days of April and the price is already heading up again. We are at $37/barrel, with the fundamentals supporting the bullish scenario. The petrol-producing countries have planned a meeting this month to discuss production and export, and possibly a production freeze. If that happens, the price will surge and we know which currency will be the main beneficiary. The Canadian Dollar will fly if producers decide to limit production but I wouldn´t advise buying the CAD against the USD because the USD has already reached rock bottom. The best scenario would be to sell EUR/CAD.

In the long term, April is a positive month for Petrol

The Commodity Currencies

The commodities and the commodity currencies already seem more positive in April. Maybe it is because the future looks a little brighter in spring and the appetite for risk increases? The Australian, Canadian and the New Zealand dollars all benefit from this positive market sentiment and try to make the most of it while they can, particularly against the US Dollar. So, the best forex strategy is to look for buying opportunities during dips.

The table below shows that USD/CAD has declined in 11 out of 15 occasions during the month of April. The last seven April months have been negative for this pair, meaning that the Canadian Dollar tends to get stronger during April. So, besides the strengthening petrol prices, this is another reason to buy this currency this month.

In the last 16 years, April has been the best month for CAD

The British Pound

Of all the currencies and other instruments in the financial world, April is particularly generous to the British Pound. As the table below suggests, GBP has appreciated against the USD in 13 out of the last 15 years. The average monthly gain for the last 15 years is 1.18% and for the last 30 years is 1.06%. The Pound has appreciated against the Buck in the last 11 April months but has only declined on two occasions.

This pair is at historical extreme lows, as you can see in the monthly chart below, and both the stochastic and RSI indicators are oversold and heading up, so the technical analysis points up as well. But, this is not a normal year for the Pound; the British referendum on leaving the EU will be held in June. The market is afraid of a “Yes” vote, as this may ruin the 11-month winning streak.

The GBP is the best performing currency for April months

Stochastic and RSI are oversold and heading up

The Euro

The Euro has performed pretty well in most April months over the past 15 years. EUR/USD was in a steep downtrend last year because the ECB had started the QE program, but even then the Euro managed to gain 4.59% against the Dollar. It is not the best performing month, but on average EUR/USD has gone up by 0.6% in April since its inception 16 years ago.

That said, the ECB doesn´t want the Euro much higher and they don´t feel comfortable even at these levels. Only today an ECB member popped up saying that the ECB might cut the interest rates again and that they have many more tools to use if needed. The technical analysis doesn´t want to support the idea of further appreciation either. EUR/USD is below a strong resistance level and, judging from the price action, we can say that it will fail to break it once again. When something can´t go up it will obviously go down.

April is the 3rd best month for the EUR/USD pair

The 1.1450 resistance level seems to be holding for now

Looking at the seasonal factors for these currencies, petrol prices, and their tendency to put up a positive performance against the USD, it´s not difficult to see that the U.S. Dollar is usually the victim during April. In fact, April has been the worst month during the last 16 years for the Buck, so this great performance is partly due to USD weakness.

However, the technical analysis tells us that the USD is already oversold. This might change the bullish April pattern for the commodity currencies, petrol prices, and both the Euro and the Pound. The UK Brexit referendum is also an added risk for the GBP – while a failure to reach an agreement by the petrol-producing countries is a risk factor for the CAD. And, as usual, the ECB is always a risk for the Euro. So, it´s worth looking at the long-term patterns as an added exercise, but take them with a grain of salt.

We all know that the first and most basic rule to make it in the long run in the forex world is to protect your account. Most forex traders have lost one or more accounts after first starting the job. Rendering your account inoperable with low funds is a big scare, particularly for fresh traders. But, that´s the risk we are willing to take in order to reap the benefits of forex trading. It would be much easier if it was a risk-free game, but you can´t make a profit without risking the booty. We cannot eliminate risk from forex, or from life for that matter, the best thing we can do is minimize the risk. Here we have several strategies and articles about how to minimize risk and building your own forex trading strategy:

• Money management tactics in forex trading
• 3 Advanced risk management tactics
• Forex trader personality discovering guide
• Traders personality, Pt. 2: Find the best trading strategy for you

If there are charts appearing in your dreams, then you probably need some guidance!

This article will address how you can fight the urge to trade obsessively in forex, and refocus your trading strategy. Once newbies start to understand the forex world and see the first positive results, they become obsessed and want to trade non-stop. They overtrade even during uncertain times and inevitably end up losing their entire forex account. I have been in this business for more than ten years now and sometimes I step back and just watch the market during uncertain times or watch the price action in the market when it becomes irrational.

The problem with new traders is that after they have been profitable for a few weeks they think they got it all figured out. They become overconfident, overtrading and opening multiple positions which they cannot manage. The forex market changes its nature continuously; it may be peaceful for a few weeks or months, only to suddenly turn into a monster in the blink of an eye.

We just had few of these occasions: during December last year and January this year the forex market was pretty quiet, with an average daily range of 30-40 pips in most pairs. Then, in the beginning of February, suddenly, someone pushed the panic button and everything went mad with daily movements worth several hundred of pips. That´s the reason that we, as forex traders, must keep our heads cool and not trade obsessively. 

Ask Yourself: Are You Obsessed With Forex Trading?

If a forex trader becomes obsessive, it starts turning into gambling. We have to fight it and try to see forex as a job, that obviously stretches over a period of several decades. First of all, it is important to figure out whether we are obsessive forex traders and accept it. But, how can we know if we are obsessive? It´s not that difficult really, you just have to ask yourself a few questions:

• Do you feel the need to trade forex nonstop even when there´s no action in the market?
• Do you trade nonstop, even when the charts aren´t telling you anything?
• Do you keep increasing your trade position in relation to your forex account?
• Do you open too many (depends on the trader and his ability) positions that you are unable to manage?
• Have you ruined or jeopardized a job, a relationship, or any other important aspect of your life due to forex trading? 
• Do you think about trading forex even when you are away from your platform or during the weekend, holiday etc.?  
• Have you tried to hold back, control or cut down the number of trades and failed? 
• Do you continuously cut the trades short? 

How To Deal With Bad Trading Personality Types

If you think you suffer from one or more of these symptoms then you may be an obsessive trader. We all show one of these symptoms from time to time but the problem is when you do these mistakes over a long term period. But, there always a cure for a disease:

Stick To Your Forex Strategy

Of course, as you may have read elsewhere, sticking to your forex strategy is important. We might alter the strategy if the market outlook changes, but we can´t change our mind every time the market makes a retrace or the price moves a few pips against your trade. Unless something really major happens, like the European Central Bank (ECB) starting to tighten their monetary policy, stay in your long-term EUR/USD sell forex trade even though this pair might go up a couple hundred of pips. This prevents you from opening and closing many trades and the psychological effect will take its toll on you. Apart from that, the cost of the spread obviously accumulates, so you will end up paying more. 

Try To Do Nothing

Following the logic of the previous argument, sometimes it is best to do nothing. You´re not trading just for the sake of it, your goal is to make money. So, if the reward is very small, it is best to do nothing. That goes both ways, either when you are in a trade or out of the market.

Let´s take a real long-term example. If you bought USD/CAD about two years ago, when the FED started to tighten their monetary policy and the price of oil started to collapse, and then you let the trade run the full course until the beginning of this year when the oil price bottomed out – you would have made 40 cents (4,000 pips). So, doing nothing and letting the trade do the entire job for you often pays off. The same logic applies when you are out of the market; if you don´t see a clear opportunity or the price action is numb don’t trade because you feel like it. Doing nothing is the best thing to do at these times, because often when the picture is not clear and you are still trading forex, that´s when you are more likely to lose. Do yourself a favor and do nothing or go get some fresh air! 

Look at this graph: If you bought USD/CAD in 7/2014 and did nothing until 1/2016, you’d be a lucky trader!

Trade the same size for a month 

If you have the urge to increase the size of your position with every trade then you really are an obsessive trader. You could increase the position size to the point that trading will just become a gamble. We know we can´t win ´em all, and increasing your trade size continuously only increases your risk.

One of the best forex strategies for this type of trader is to keep the same trade size for a month, despite the growth of your account. Picking a risk to account equity ratio, I would suggest 1-2% maximum, which may be one lot, and just trade one lot the entire month. Then, at the end of the month, if your account has grown by 20%, you increase the trade size by 10% next month. It doesn’t look like much at the first glance, but trust me, the geometric progression will take care of the profits. By the end of the year, your account will have grown nearly tenfold.   

See the bigger picture

When you see an obsessive forex trader, the best advice you can give them is to show them some big timeframe charts. There´s a lot of noise on the smaller timeframe charts and both the support and resistance levels are not that strong. Obsessive forex traders usually use one and five minute charts and concentrate on each and every tick. We know that the price doesn´t go in one direction in a straight line, there are always ups and downs, but we can´t trade every little move. So, looking at the bigger picture clears the chart and makes trading easier. If you concentrate on small timeframes for a long time (like 1, 5 or 15 minute charts), then you change to a 1- hour or 4-hour chart and will feel pretty silly seeing how difficult you made it for yourself before. This way, the obsessive forex trader will trade less and hold trades for longer. 

Forex Strategy Is Part Of The Solution

As you can see, there are ways to help an obsessive forex trader overcome their situation and there are forex strategies which can help them become better traders. The forex market is not a game full of action; you cannot trade forex just to gain some adrenaline. If you get too excited during trading then you are trading the wrong way. So, try looking at the bigger timeframe charts, stick to your forex strategy, take a step back and relax instead of trading forex like your life depends on the number of trades. And obviously – don´t keep increasing your trade size beyond reason. We hope that all this advice will help you become a better trader.