Simple Steps to Catching Big Forex Profits

Discussions about trading the Forex markets.
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TLenyk

Simple Steps to Catching Big Forex Profits

Post by TLenyk » Fri Nov 21, 2008 3:01 pm

If your goal is to catch the big profits in the forex-trading arena you will need to trend follow forex trends which are longer term. Here is a simple method. If used correctly it will help you catch major forex trends. This will lead you to a long-term currency trading success. The methods that we will be discussing are, breakouts, confirmation and stops and targets.

Most novice forex traders don’t bother trying to trend following forex longer term. They enter the market as day trading or forex scalping. These methods focus the trades on small moves and hopes of catching small profits. However as most short-term moves are random, this leads to equity wipe out.

There are other choices for trading in the forex market which are swing trading and long term forex trend following. This article is about is about long-term forex trend following. If you look at any forex chart, you will see long term trends that last for months or years. These moves can and do yield big profits. Read on for a simple method on how to catch a big profit in the forex market.

Breakouts

Trading forex breakouts is one of the more basic trading strategies, but nevertheless it can deliver excellent profits. A breakout is simply a move on a forex chart where a new high or low is made and resistance of support is broken. It is a fact that most major moves start from new highs or lows. Just because a system is easy to follow does not mean it cannot produce consistent profits. As breakout trading is a method used by some of the most successful forex traders around.
It's based around the whole premise that if a currency pair is trading in a very tight range for a sustained period of time, then eventually it will break out of that range. And more often than not it will continue moving in the direction of the breakout.

This means that to make consistent profits you need to firstly identify instances where a currency pair is trading in a narrow range, and then place buy and sell orders at or slightly outside the current range to catch the breakout when it happens.

Most traders don’t buy or sell breakouts and that’s exactly why it’s such a powerful method.

Confirmation

Of course not every breakout continues and some reverse, these are false and can cause losses. You will need to confirm each move. To achieve this you will need to put a few momentum indicators in your forex trading system to confirm your trading signal.
These indicators give an idea of the strength and velocity of price and there are many to choose from. Two of the best are stochastic and relative strength index (RSI).

Stops and Targets

Use the current trading range to determine where to place the stops so if you go long at the top of the range, then your stop loss will be at the bottom of the range. This is only really an emergency stop as most of the time the breakout will follow through and not go anywhere near this stop loss. Target prices can be the same number of points away as the stop at the very least.

You have to keep in mind that when the trend does eventually turn you are going to give some profit back. You don’t know when the trend is going to end, so don’t predict.

The best thing about this system is that it works pretty well across many different time frames, plus not only does it work well for trading forex markets but it's also an equally good system for trading other financial instruments as well.

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TrendsCatcher
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Post by TrendsCatcher » Sat Nov 22, 2008 10:57 am

Interesting article.

"This is only really an emergency stop as most of the time the breakout will follow through and not go anywhere near this stop loss." - if only it were that ideal! My experience is that most breakouts do not work, and that is exactly why most people cannot trade breakout. It is the infrequent breakouts that do work make up all whipsaws of the fakeouts, provided that you don't lose all your capital (or all your confidence) by the time the trends do occur.

What's everyone else's experience - do most breakout work and "not go anywhere near this stop loss"?

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Post by AFJ Garner » Sat Nov 22, 2008 11:37 am

You will note that an URL was deleted from the above post which may hint that the poster could have been trying to sell you something. You will also note another post of even date herewith written by TLenyk which urges us to take careful note of economic releases and other such fundamental data.

We trend followers seem to agree in general on the advisability of ignoring such data. The two posts do not fit very well together. You may have spotted an example of “advertisers’ puffâ€

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Post by sluggo » Sat Nov 22, 2008 1:41 pm

TrendsCatcher wrote: ... do most breakout work and "not go anywhere near the stop loss"?

Sometimes yes, sometimes no. It depends on the distance to the stop loss (among other things).

I ran a simple test using a system that enters on a Breakout and exits when price crosses a moving average. Nothing fancy. I programmed Blox to count up the number of trades that were exited "normally" (i.e. without hitting the protective stop), and the number of trades that were exited because the protective stop was hit.

I used Blox's Parameter Stepping capability to vary how "tight" or "loose" the stop was, from 0.05 ATR's (very tight) to 12.0 ATR's (very loose), in steps of 0.05 ATRs.

The results are unsurprising: when the stop is tight (very small number of ATRs), most trade exits are stop-outs. The red curve is well above 95%. But when the stop is loose (very large number of ATRs), very few trade exits are stop-outs. The red curve falls to 0%.
Attachments
graph.png
(% of trades that are stopped out) versus (distance to stop)
graph.png (16.48 KiB) Viewed 5797 times
param_stepping.png
the Blox run, distance to stop is stepped from very-tight to very-loose
param_stepping.png (19.89 KiB) Viewed 5797 times
Blox_Code.png
code to monitor stopout exits vs normal exits
Blox_Code.png (7.78 KiB) Viewed 5797 times

TrendsCatcher
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Post by TrendsCatcher » Sat Nov 22, 2008 2:49 pm

That's true, when the stop is loose, say >= 2ATR, the position is less likely being stopped out, but then the trader has to forget about making high impact trade (high R-muliple trades), becuase his trades' impact ratio will suffer a great deal, ie, Average Profit/Average Loss ratio. In other words, increasing trade accuracy by the means of making stops wider will compromise P/L ratio, thus may decrease expectency - there is no free lunch.

On the other hand, I find that if I use a too tight stop-loss, eg (0.5 to 1 ATR), the losing streak is significanlty longer and psychologically unbearable. I have just re-read Faith's "Way of the Turtle", there was more than 1 drop of luck that his first trade (the 1984 heating oil trade) turned out to be a big winner for him, seems that he was using a 1/2 ATR stop (the whipsaw entry).

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Re: Simple Steps to Catching Big Forex Profits

Post by RStrading » Mon Sep 28, 2015 10:53 am

I am undecisive whether I should use a stop based on 2ATR, or place a stop at the other side of the range. What are your suggestions?

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