How to trade Forex: The 4 fundamental questions that will show you how to trade forex
It’s easy to get lost in forex.
There are tons of technical indicators, systems, methodologies, frameworks, etc. No wonder why it is so difficult to come up with system/strategy you feel comfortable with…
Comfortable? Why do I have to feel comfortable with my system/strategy?
Your job as a trader is to be consistent right? Well, in order to be consistent you need to trade with discipline, and believe me, there is no way to trade with discipline if you don’t feel comfortable with your trading.
Ok, now to the important stuff…
As I said, there are plenty of tools we can use to trade forex, some of them are easy to use, but most of them are complicated and difficult to understand.
All these information, strategies, indicators, etc available make us forget about what our main goal is, which is to make money (not to use the last indicator/Strategy, etc).
We need to go back to the basics, and to do this you need to ask yourself these 4 fundamental questions:
- When to trade and when to stay away from the market
- What currency pairs to trade
- When to cut your losses
- When to let your profits run
The answer of each one of them will give you a fresh perspective of the market, a new and simpler way to trade forex.
So, do me a favor and just for a few minutes, forget about your strategy, your system, and everything about your methodology to trade forex.
Lets focus in the answers to these questions with no bias.
Are you with me?
When to trade and when to stay away from the market
You want to trade forex when the market is clear, when you have good opportunities, when the odds of the market going one way are higher than going the other way.
You cant just open your 5 minute chart and take your trade regardless of what other timeframes are doing.
So you need to do your analysis, and determine what is the market likely to do. Analyze different timeframes and if all they agree, then go ahead a take your trade. If you have conflicting signals, just let it go, I’ll guarantee you’ll get more opportunities.
By doing this you will get rid of the 2 most important mistakes in forex:
- Trading a currency pair that should not be traded
- Not trading a currency pairs that should be traded
You see what I mean?
Key takeaway: do your analysis and trade only when the market has a clear condition, when it has clear support and resistance levels. On the other hand, when it is not clear that the market is likely to do, just forget about it, you’ll get more opportunities, its not like the market will stop giving trade opportunities for ever.
What currency pairs to trade
A common mistake traders are likely to make (specially beginners traders) is to focus in just one currency pair.
If you focus on just one currency pair, you will force yourself to take trades when the market is not ready to be traded.
And believe me, it doesn’t matter what system you use, you could have the best system in the world, but if you trade the wrong currency pair, you are not going to make it.
I mean, when you are just starting out with your trading career, it’s all right to focus in one currency pair, so you don’t get overwhelmed with all the information.
Just make sure to add more currency pairs as you get more experienced.
Also make sure you are selective about the currency pairs, you also need to get to know the personality of each one of them, for instance: the AUD and NZD are slow currency pairs (you cannot expect big intraday movements), GBP and CAD are the ones that react the most to their fundamentals, and so on.
Key takeaway: Focus on more than one currency pair and trade the one that has clearer market conditions, clearer levels, etc.
When to cut your losses
There is a common saying: take care of your losses, your profits will take care of themselves.
I couldn’t agree more with that. You need to take care of your losses, cut them fast, and forget this way of thinking: the market will eventually turn around…
When the market doesn’t behave as you expected it to behave, the best thing to do is to cut your losses, run and focus on other opportunities.
And the million dollar question is: Where should I set my SL level?
There is no generic answer, every trade is different, every system is different, heck even trades within the same currency pair are different…
But there is a general rule you can follow: close your trade once the primary reason you entered is no longer existent.
You see what I mean?
So we need to adapt and see the nature of your trade, then decide when to get out of the market.
For a breakout trader: if you trade breakouts, you should place your SL level below/above the breakout level. If the market breaks back that level again, the primary reason you entered is no longer valid.
For retracement traders: if you like to trade retracements, focus on the retracement level, and place the SL level below for longs and above for short those levels, if the market breaks back those levels, the primary reason is no longer existent.
For MA crossover traders: if you like to trade MA crossovers, well a crossover on the opposite direction will signal to close the trade.
These are just a few examples, if you need any help with your specific strategy, please leave a comment below.
Key takeaway: set your SL levels at a level the primary reason you entered the market is no longer existent.
When to let your profits run
This the most difficult of them all and probably the second most important of them all.
Traders (I mean all human beings) have a natural tendency to close positive trades as soon as possible because we think that the amount of pips is already ours (it happens to be just the opposite when the market goes agains us, we have a tendency to believe that it is not ours and the market will eventually turn around, so we hold them).
Do you agree with me?
How many times you have closed your trades for a small gain, only to see the market continue in the same direction for many many pips?
We need to stop that. And I have a way to do it with only two simple steps:
- You need to have a clear plan – You need to have a well defined plan, and follow it! You know its the only way to get consistent results.
- See what the longer timeframes are up to– Try to spot the market swings in a longer timeframe, if you find it clear, set it based on that timeframe.
Another possibility is to trail your stop loss level, but please make sure to give your trade enough room to trade ok?
Key takeaway: Use longer timeframes to help you determine your take profit levels. Also consider trailing your stop loss level.
Which one of these fundamental questions do you think is more complicated?
Do you think are other fundamental questions I didn’t address?
What other techniques do you use to handle these four question?
Leave a comment below.