For retail traders who are beginning their journey in the forex market, it’s quite often the case that they’re unprepared for what obstacles are in front of them. All-too-often it’s the case that new traders will dive straight in head first, blow up their first account, and then either give up or take a step back and do a bit more research and try again, only this time, with a little more caution. After opening or funding their second live account, often a little more success is experienced, breaking even or even turning a small profit.
Today we’re going to discuss medium-term Forex trading and why it’s one of the most suitable styles when it comes to becoming a successful Forex trader.
First, let’s define the various styles of trading to help us get a better understanding of why medium term trading is perfect for those who are new or novice traders. We’ll start with short-term, or scalping.
A scalper looks to open and close a trade within a very short time-frame, often just minutes, looking to capitalise on small movements in price and trading with quite high leverage. This can appeal to many people because of the quick realisation of profits and losses and is often seen as ‘exciting’ because of its rapid-fire style. The major downside is that you need 100% focus for a long duration of time, more capital to get started and high leverage to make decent profit from smaller price movements.
Then we have medium-term traders. These traders generally look to hold a position for at least a couple of days, and often use technical setups to give them an entry, profit target and stop loss. This requires the least amount of capital to get started but does offer fewer trading opportunities than scalping, because setups can take days to eventuate.
Finally, we have long-term traders. This means a trader is looking to hold their position for months or years, and often bases their trade decision on fundamental factors. Now, this is quite a reliable way to create large profits because it’s dependant on fundamental factors, but it does also require more capital to protect traders against volatile movements that can occur.
Ok, so you can see that both the short-term and long-term styles of trading require more capital and in the case of scalpers, more leverage. And although there are many traders who use these styles and are very successful in doing so, for retail traders, a medium-term strategy is often more suited.
Let’s talk forex strategy
So, there is no shortage of viable trading strategies, and the one we’re going to discuss is just an example of one of many that a trader may use. We’re going to keep things simple and focus on one key concept which is trading with well-defined entries and sound risk management.
To get started we’re going to be using MetaTrader 4 to demonstrate this strategy, although these techniques can be applied using many other platforms. The only tool that is required is the trendline tool and the ability to place stop orders.
In this particular strategy we’re going to draw a line using the MT4 trendline tool that connects a minimum of two higher lows or higher highs. We’ll then wait for price to come and touch the trendline we’ve drawn.
After price touches the trendline, we’ll place our stop order just above the high/low (depending if it’s an upward or downward trendline) of that candle that touches the trendline, and our stops will be placed at underneath the open of that same candlestick. For our target areas we’ll use the high/low of previous swings, which should provide us with a risk:reward of more than 1:2.
The picture below demonstrates the buy setup for this proposed strategy and is simply inverted for bearish setups.
So you can see that our trendline was drawn through points 1 & 2, and a new swing high was created before price retraced to our trendline and bounced off it. At point 3, we use MetaTrader 4‘s stop orders to place our buy stop just above the open price of the candle that demonstrated the rejection of the trendline with our stop loss and take profit as shown according to our predefined rules.
Money Management and Risk
The key to success in the forex market is without a doubt, money management which is why it’s important to limit your downside risk by always placing a stop loss and trading only when a good opportunity arises.
In a trading setup like this you can see that the stop loss is well defined and the profit area is significantly greater than the potential loss amount. There are plenty of other methods one might want to employ to ensure that risk is minimised, for example a trailing stop or MA. Personally, I like to let my trade go until it either hits the original take profit or stop loss without any intervention.
The Bottom Line
It’s possible for anyone to make good money in the forex market, but this requires strict patience, discipline and a well-defined and executed strategy. By approaching the forex market with a solid medium-term strategy, you’ll avoid becoming another one of the market’s many casualties.
Source: Vantage FX Blog