After observing my clients trade and observing the way certain currency pairs behave it became evident to me that it is easier to trade forex long term then it is to trade it short term. There are many reasons why it is easier to trade forex long term than short term below are just a few:
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First just look at the weekly chart for any currency pair, it looks far smoother with a lot less noise. Our research department has tested systems on daily, weekly, hourly and other smaller intraday time frequencies and it is evident that the bigger the frequency on the chart the better the performance. It is easier to trade smoother charts.
The market also tends to panic and make drastic moves. Usually after that buy programs for institutions step in and correct it and the moves end up being just noise.
Third the forex market is unregulated and usually traded off exchange for the retail trader thus the FCM’s are able to spike the market because they are taking a risk on a lot of the trades. By spiking the market they can make a lot of traders that have stops near by loose their money to the FCM. This is a tactic used by market makers. If you are trading long term you are far less likely to loose in these situation.
Another big issue is commissions. Forex has very high commissions compared to other markets. This is usually incorporated in the spread. So every time you make a trade you are paying $30 to the FCM. By trading long term you are trading less and thus not paying as much.
The Trend is Your Friend
One great property that the forex market offers is that it trends great. In this article I will particularly concentrate on the EUR/USD. This is particularly evident on a longer term time frame chart such as a weekly where all of the daily noise is eliminated. Below is an example of a Weekly chart of the EUR/USD with the Heikin-Ashi Trend Candles. Heikin-Ashi Trend Candles are a great Japanese technical tool whose proprietary formula is beneficial in determining the trend this tool is available in a software package that my company offers, if you would like to know more about the package you can join a free seminar that they conduct every Wednesday at 9pm EST by clicking this link http://www.forexyourself.com/seminar.
Look how well the market trended over this 3 year period and how well the Heikin-Ashi Trend Candles captured the trend.
Keys to Trading the Trend
Now as you probably already know I preach risk and money management and when it comes to trend trading nothing can be more important that risk and money management. In the next section I will show you a basic strategy for trading the trend. Although the drawdowns get fairly high because of the inevitable whipsaw periods when the market does not move trading the trend may be easier than you think. Now the main quality that you need to have as a trend trader is a strong stomach, you really need to be able to sit through the drawdowns and keep taking more and more trades. Many successful traders trade the trend. I am sure you know the Boston Red Sox, their owner John W. Henry made a lot of his money trend trading. Another example is the turtle traders and Richard Donkien.
Position Size Control
Now first and foremost it is critical to control your position size when trading the trend. This is by far the most important rule. The whipsaws will be vicious and will cause you to loose a great deal of your account if you are trading to big, not to mention have a drastic impact on you psychologically. A lot of my clients don’t use stops or targets or really follow any intense technical analysis. What they do is simply trade in the direction of the overall trend, try to trade in the direction of the SWAP (collect interest) and sit through the drawdowns. If they had large positions they would be easily margin called out of their trades.
Technically it is extremely difficult to keep your self out of the market during whipsaw periods. This is actually next to impossible in my opinion. As a trader you have to take every trade of the system you trade because you never know which one will be the huge break out of the period that you have been waiting for as a trend trader. Now the key from a risk management standpoint is to maximize the amount that you make on the trend and minimize the amount you loose on the whipsaw within the realm of your system.
There are a few ways to do this. Many successful floor traders used to pyramid into their trades meaning take a position and than add a smaller portion as the price moved in the direction of their trade. This is a good strategy, I personally like to scale up in these situations meaning I will keep adding the same size to my position at each trigger point. Now the important tactic in each of these strategies is to get out of the whole position as soon as you receive an exit signal based on your rules. This could be a technical signal or profit target.
The fist tactic is incredibly simple and was tested out effectively by our research department. Other filters can be added to this tactic to improve it. One of the systems that our firm trades teaches and sells is a variation of this strategy.
For the EUR/USD
Long Entry and Exit
Enter when the price crosses above the previous weeks high.
Add to the position every time the price crosses above its previous weeks high. Do not enter more than once per week (so if the price crosses below the previous week’s high and crosses back above it do not enter)
Exit the whole long position when the price crosses below the previous weeks low.
If the previous weeks high is not the highest high of the particular move do not enter the trade.
Short Entry and Exit
Enter when the price crosses below the previous week’s low.
Add to the position every time the price crosses below its previous weeks low. Do not enter more than once per week (so if the price crosses above the previous week’s high and crosses back below it do not enter)
Exit the whole short position when the price crosses below the previous weeks high.
If the previous weeks low is not the lowest low of a particular move do not enter the trade.
So essentially with this strategy you are always in a trade. This is because you are flipping the position and entering with the minimum amount should the trade cross above or below the key level.
I recommend starting this system with 1 to 1 leverage and scale up into the trade at each signal. In other words you should trade this system with 1 mini lot per $10,000 in your account.
In the example below you would enter long with 1 unit of your position every time you see the pointer and exit and flip the position when you see the thumbs down.
This strategy is extremely simple and effective as long as you manage your drawdown properly. This strategy is an example of how you can use risk management parameters to enhance the performance of your trading system. I would recommend using additional filters such as ATR, ADX, and Volatility since they help you gauge the strength of the trend. If you would like to learn our advanced version of this system or many other systems that we offer, please contact me at firstname.lastname@example.org.
Alexander Nekritin is a professional trader with
over 8 years of experience. His specialties include risk management and system
development. Alexander is the CEO of
www.forexyourself.com, which is a forex introducing broker and education
company that helps suite client’s needs in forex trading. Alexander has a degree
with a concentration in Investment Banking and derivative instruments from Babson College in Massachusetts.