It wasn’t too long ago that the majority of forex market newcomers wanted to become day traders. After all, they had visions of making a week’s worth of income in one day. It would appear that given forex’s low costs, volatility, and 24-hour nature, it was the perfect way a trader could do this.
Today’s breeders are much smarter. They see past those promos and promises of quick profits. They know where the true possibilities lie for the big trends. While you may not be getting the week’s income made within an hour, you could make a year’s worth of income in one year. That’s not bad, right?
How you can develop a big position and keep the risk small
One of the biggest novice mistakes is trading big moves and failing to make the most profits. Rather than a big win, these traders make a small profit. What’s the answer? Come up with something at the beginning of the trend. By going slow, you can construct a large position that promises to develop favorable risk/reward proportions.
There are plenty of techniques that can be used, although it’s best to use the simplest. Once a trend has been broken out, wait for this to close on a downward trend or near the upward trend. What you want is to have this done within 100 pips from the previous entry.
How many times should you scale in? Look for about three scale-in points while potentially getting up to five for a high-conviction trade. If you scale later on, you may want to keep it as a separate trade and take a quick profit, ensuring a risk-free scale-in position.
Where should your stop losses go
Most traders will place their stop loss excessively tight, hoping they can improve their risk/reward ratio. However, with a scale-in methodology, the stop loss can be kept at a safe distance from the price. Market’s money can be added to the trade. This will ensure the risk of loss is small on your initial capital.
Continue to watch your stop in the same way as the trend grows. In order to know your exits, you need to first understand the trend’s structure.
Understanding how the big move works
Trends usually follow a similar path, founded upon the market participants’ psychology. If you know what this structure is, you can effectively handle the trade through the entire trend and keep most of your earned money. For people who understand the market types, what you read next will be familiar.
- Accumulation – There are an array of skeptics and sellers who look for a range to hold. Buyers attain control, and a trend starts to emerge.
- Agreement – Once there is a clear trend, the naysayers will close their positions at any opportunity and station themselves to ride the movement.
- All Aboard – There’s always going to be a quick move where there’s nothing left to sell and latecomers get involved.
- Breakout – This occurs after some kind of fundamental catalyst, causing the range to break.
- Consolidation – At the start of the trend, you’ll get times of consolidation as people vie for positions and take profits from an earlier move.
- Exhaustion – After the quick movement up, people take their profit and volatility happens when the range has been formed.
- Major Reversal – This is when new people get involved, and people who don’t sell out at the first chance take their profit, ending the trend.
- Second Chance – People who missed their chance use the pullback as an opportunity to purchase, so the price is pushed back up.
This will allow you to structure the exits you do.
How you can get out a big move
Your outs need to attain two things:
- Let you capture the heart of the move like it plays out
- Keep as much of your profit as you can
In the accumulation phase, you’ll want to have the stop wide while your position is built. You don’t want to stop it out unnecessarily, and you may even garner a small bit of profit should the trend never develop.
In the agreement phase, when the trend is fully flowing, you want the price to have some room to move, but it’s still tight. Consider laying your stops.
In the exhaustion phase, there can be a rapid reversal. It pays to tighten the stop on everything but a small part.
Once you notice the double top, you should get out of any remaining balances – little gain and a lot to lose.
Here are a few helpful tips to better your performance:
- Don’t get out of the market. Instead, put the stop close to the present price, which lets the profits run.
- Make sure the stop is 25 pips away from the high/low.
- One-third of the trade should be in and out. Get out a part of the position on the reversal patterns of the daily charges. When you get the chance, add it back. This allows you to trade what’s right there while you maintain a core position to get the trend.
- Make sure your stops are tightened around news events. If the news event is volatile, tighten them on the section of the position and use options to hedge your risk.
- If you’re halfway through a trend, the profits that the original positions made are locked safe. During the time of consolidation, you can scale it in and treat it like something new… and this can lead to significant gains.
These subtle improvements can cause a huge difference in the ending profits, which is why you don’t want to neglect them at any point.