What is Forex Trading? A detailed Guide Part 3 | Forex trading strategies
First and foremost, what timescale should you use? The age-old quandary. You can trade the ones that are beneficial to you. Focus on the daily, H8, and H4 charts and use smaller leverage if you work and do not want to (for the time being) perform full-time forex trading. You can trade shorter durations if you wish to trade full-time and are willing to keep an eye on your screen all the time. I trade primarily on the H4 timeframe, using H1, H4, and the daily, but I also keep an eye on the weekly to get a sense of the "big picture." The longer the timeline, the more pauses you'll need and the less leverage you'll have. Longer durations have less "noise" in the market and are therefore less volatile.
The 1-minute and 5-minute charts have practically no sense, yet they do produce money for some people. It is all up to you. Use H1 and below if you want to enter and exit 10 trades each day. If you prefer to analyze charts, keep up with market news, and take your time, trade the H4, H8, or daily.
When you enter a trade, you should have a "goal" in mind, as well as a point at which you should withdraw if the market goes against you. These are the TP (take profit) and SL (stop loss) orders that you usually specify when you place a buy or sell order. These can be altered at any time during the process.
First and foremost, what timescale should you use? The age-old quandary. You can trade the ones that are beneficial to you. Focus on the daily, H8, H4 charts and use smaller leverage if you work and do not want to (for the time being) perform full-time forex trading. You can trade shorter durations if you wish to trade full-time and are willing to keep an eye on your screen all the time. I trade primarily on the H4 timeframe, using H1, H4, and the daily, but I also keep an eye on the weekly to get a sense of the "big picture." The longer the timeline, the more pauses you'll need and the less leverage you'll have. Longer durations have less "noise" in the market and are therefore less volatile.
The difficulty is that most retail traders, including you and me, lack the cash and mental fortitude to tolerate a strategy with a 30% success rate (and a 70% failure rate!), therefore for all intents and purposes, we'll state that as a retail trader, you should aim for a success rate of greater than 50–50, with average losses at least slightly lower than average winnings. This is referred to as your "edge" (what makes you profitable). If you are serious about one day becoming skilled and profitable at forex trading, you will need an edge, and this is what will absorb all of your time and efforts. It is not necessary for a system to be complex. DO NOT BUY A SYSTEM FROM A THIRD PARTY.
As a retail trader, you normally seek a 60 percent to 70% win rate, with losses equivalent to or slightly smaller than profits: 3 20-pip losses + 7 20-pip wins = +80 pip gain.
Some traders advocate a "profit-to-loss ratio" of 2:1 or something similar, with stop losses of 20 pips and profit goals of 40 pips. That's OK, but it implies you're putting your stop loss twice as near to the entry price as your profit target, which doesn't ensure a winning approach because it raises the odds of hitting the stop loss. Two factors influence your chances of hitting your stop loss: 1) the quality of your entries and 2) the distance between the entry price and your stop loss. The smaller your stops can be, the better your entries are (i.e. price goes "in your favor" virtually immediately upon entry most of the time), yet the compromise is always there.
Returning to the subject of probabilities...
E(profit) = p(loss) + (1-p)(profit), where "p" is the probability of hitting your SL and is the expected profit of any trade. The higher "p" is, the closer your SL is to your entering point. You can lower p by being the king of entries, but this requires time and devotion, as well as a lot of focus. Just keep in mind that setting stops isn't as simple as it appears when using the 2:1 or other win-to-loss ratios.
Assume my stop loss is set at 20 pips and my profit objective is set at 40 pips. The probability of hitting your stop loss is too high if there isn't enough "air" between your stop loss and profit objective in relation to the normal price movement throughout your holding period... EVEN IF you have a strong entrance that "tilts the odds" in your favor (i.e., increase the probability of moving AWAY from your stop loss shortly after entering). Use low leverage and tiny sums until you get incredibly proficient at entry and have "tight" entrances where the price turns in your favor nearly quickly. Stop hunting about R/S values and round numbers is a bad idea.
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