Category Archives for "Forex Trading Strategies"

0 5 Incredible Tips That You Must Master to Be Successful in Forex Trading in Kenya

There are two type of investors in the forex market. Those who learn all there is to learn about the market, and those who approach forex trading as if it was a gamble. They do not take their time to learn. To them, investing in forex is not so much unlike spinning the roulette. They click blindly on the charts and wait for Lady Luck to bless them with profits.

Wrong approach. Traders who do not learn end up making massive losses.

If you want to separate yourself from this sad group of ‘trader’s, you should take your time to learn how the forex market operates.

Here are 12 most important things that you should take time to learn:

1. Develop Your Trading Plan

By failing to plan, you are planning to fail- Benjamin Franklin

I’ll illustrate the importance of having a trading plan with situations that I encounter almost on a daily basis.

When new traders discover an uptrend in the market, they usually ask something like, “ The EUR/USD is on an uptrend, where should I enter the market?” My reply is usually, “What amount of risk/reward ratio are you willing to place on a trade?”

This reply catches them by surprise. Most forex traders in Kenya concentrate so much on being right and forget that they could be wrong. The market could go against you or it could hit a top and turn right back.

Without a trading plan, it means that you do not know what to do not only if a trade goes against you, but also when a trade goes your way. Big profits on paper could turn into massive loses when you do not have a trading plan.

Here are a few important points that I use when developing a trading plan. Feel free to borrow from the list when you are developing your own trading plan:

• I always make sure that I know where and how to enter the market.
• I always know what amount of money I can put to risk on any particular trade
• I know when to leave if the market does not go my way
• I know how much profit I am expecting from every trade if I am right
• I always protect my profits by placing a trailing stop loss on my orders

These are just but a few of the things that go into developing a trading plan.

2. Have an Aggressive Money Management Strategy

Money management is one of the most important aspects of online forex trading. It is the one thing that will make or break your career as a forex trader. Unfortunately, a lot of traders enter into trades without taking money management into consideration.

If you are serious about trading, you have to learn how to manage your money.

Good money management starts way before you open a live trading account. It should start even before you are trading on a demo account. Good money management should start when you decide that you want to invest in online forex trading.

How, you ask?

Suppose that you had $20,000 that you have decided is a good starting capital for your online forex portfolio, would you put all the money on your forex trading account? You’d be putting yourself at an aggravated risk by doing so. What happens next if you lose all the money in the account for whichever reason? What if your forex broker goes broke bankrupt, closes the company and never pays back your money?

Or what happens if you accidentally take a 20 lots position and forget to set a stop loss?

If $20,000 is all you have to start trading, you should consider opening an account with a maximum of $1000. You can always inject more money into the account as you see necessary or when you have gained substantial trading experience.

The second most important factor to consider when managing your money is leverage. While it is possible to get accounts with leverage as high as 1:500, a huge leverage is a double-edge sword and usually a reserve of seasoned and aggressive forex traders in Kenya.

As a general rule of thumb, you should never risk more than 2% of your account in any one single trade.

Learning the art and science of money management will determine how you prosper in forex.

3. Make use of stop loss orders

With so much activity going in the forex market and so many a facets of setting up a trade, it is sometimes possible to forget the small things like setting protective stop loss orders on your trades. Apart from mitigating your losses, a stop loss order also lifts the burden of monitoring your trades from you. With proper stop loss orders, you can set up your trades and move on to other things, leaving your trade to play.

What is a stop loss order?

Trading online forex with your real hard earned cash is a serious business, and it should be taken seriously. As such, you should take time to familiarize yourself with the different trade management tools that you have at your disposal.

A stop loss order is an order that you place on your active trades to prevent further losses. The stop loss closes your position in case the market moves against you and reaches your specified level of acceptable loss.

As an example, if you decide to go long on the USD/JPY at 109.58, you could set a stop loss at 106.58. If the market goes against you and reaches this level, your trade would automatically be closed, preventing further losses.

Most importantly, a stop loss order eliminates one of the hugest barriers to trading: emotions. Many traders tend to fall in love with their trades, believing that the trades will turn around. They hold on losing positions for far too long, and pay dearly for it.

To become a successful forex trader, you have to learn not only how to place stop loss orders on your open positions, but also where to place the stop loss orders. To tight of a stop loss means that your stop loss will be hit by the slightest drawdowns or noise in the market, while spaced out stop loss orders could lead to insufferable losses on your account. The art of the stop loss is one of the main lessons we teach traders during our paid training sessions.

4. Close your profit-making trades at the right time

Closely related to the art of putting stop losses on your trades is the art of taking your profits at the right time. One of the biggest blunders among new forex traders is that they take tiny profits too soon but allow their losing trades run.

When is the right time to take your profits?

The right time to take your profits will be dictated by your trading plan. Before you enter your trade, you should have a predetermined entry and exit points. This reduces the impact of emotions on your trades.

Your trading style also determines when you should take your profits. For scalpers, taking profits as soon as possible is an excellent strategy, but if you are a swing trader, you might want to let your trades run for longer.

5. Exercise Proper Trading Discipline

A lot of forex traders in Kenya end up burning their accounts not because they were not trained properly in the forex course, but because they lack the proper trading discipline. It is hard to become a successful forex trader unless you learn how to be disciplined, how to stick you your trading plan and how to substract emotions from trading.

One of the best exercises to help you develop stellar discipline is to watch the markets the whole day without taking a trade, even when you have an excellent entry set up. Repeat this several times every month and you should be on your way to becoming the next successful forex trader in Kenya.

2 Keeping Your Emotions Out Of Your Trades

In a previous tutorial, I talked about the importance of developing a solid trading strategy and sticking to it. These two skills, developing a strategy and following it, will determine how profitable you become in forex trading.

Unfortunately, very few forex traders in Kenya are able to practice this trading discipline.

But Why?

The answer lies in emotions.

Human beings have emotions that are hardwired into them. These emotions, which include fear, greed and pride, are strong beasts. You will need to understand how they influence your forex trading decisions and what you can do about them.

How Do You Keep Emotions out of Your Trades?

The short answer to this question is that you can’t get rid of your emotions.

As long as you are breathing and your nerves are alive, you are going to experience emotions. They are hardwired into you.

In fact, your decision to learn how to trade forex is driven by emotions. There is nothing as uplifting as entering into a trade and exiting with a tidy sum of profits. It makes you feel like you are high on steroids. Just accept that as long as you alive, you will be experiencing some pretty intense emotions when you are trading.

What’s the Secret?

You can’t block out emotions. The secret is to understand them, know where they are coming from, and device a plat to deal with them. Of course this is easier said than done, but I have a few tips that should help you:

1. Put your eyes on pips, not dollars and pennies: Don’t let the exact amount of money you are making or losing on a trade distract you. The market does not know how much money you had put into a trade, but it knows where the current price lies.
2. Swallow your pride: The forex market is not about who’s right when. It is all about making money. There is only one way to measure your success in forex trading. Are you making profits or losses? Nothing else matters.
3. You are going to lose money in some trades: Take it to your head. No trader is immune to loses. Just like making profits, taking loses is part of the routine in the forex market. What you need is a solid risk-management strategy to ensure that you loses do not exceed your profits.

3 Forex Trading Strategies for Scalpers

Since scalpers open many positions in the forex market that do not last for more than 5 minutes, they love trading in high volumes. The high-volume lots traded by scalpers allow them to make maximum profits in the little time that they have positions open.

In this article, I am going to show you the two forex trading strategies that successful scalpers use:

1. Rapid fire trading
2. Piranha Trading

As a scalper your most important tools include a computer, stable internet connection, and lots of coffee to keep you wide awake late into the night.

Who is a Scalper?

A scalper is a type of forex trader who places and closes trades in the forex markets rapidly. Scalpers open hundreds of trades every day but will rarely hold open positions for more than 5 minutes. I like to think of them as guerilla traders.

Scalpers make use of technical indicators and price action charts to outline their forex trading strategies. All their trading strategies are developed on the short timeframe charts (M1 and M5). Plotting their trades on these charts allow them to enter and exit the market numerous time on any given trading day.

Although scalping can be very exciting and adrenaline-filled, the constant monitoring of the markets can lead to mental fatigue, which can make your trading erroneous. To stay on course, you need to know when to take a break. Impose simple rules on yourself and have the self-discipline to follow them through.

You may, for instance, decide that you are going to stop trading for the day after you have traded for 2 hours or after you have made say 20 pips.

Scalper Strategy #1: Rapid Fire Trading

The Rapid Fire strategy works best when the forex market is on a clearly defined trend. It is an action packed strategy that requires you to think on your feet and act as fast.

Rapid Fire Scalper Strategy relies on two main criteria in the forex market:

1. Highly liquid currency pairs
2. Lowest timeframes available

The strategy is best deployed on the EUR/USD currency pair using the MI chart window. Trading on the M1 time frame is like driving on the fast lane in the interstate. The timeframe presents close to 50 trading opportunities every day.

Rapid Fire Indicators

Because of the high frequency trades witnessed with the rapid fire strategy, scalpers do not have the luxury of using different indicators to analyze the market.

The two indicators used with the strategy are:

1. Parabolic SAR- Used with settings of Step02 and Maximum 0.2.
2. Simple Moving Average (SMA) – With a Period of 60, and applied to the close.

Both Parabolic SAR and Simple Moving Average are trend indicators, meaning that they work best when the forex market is on a clearly defined trend.

The SMA is used to identify the direction of the trend. We go long when the EUR/USD price climbs above 60, and conversely go short when the EUR/USD price falls below 60.

Parabolic SAR is used to give the exact entry point for both the short and long position. When the price rises above the Parabolic SAR, we go long on the EUR/USD. If the price falls below the Parabolic SAR, we go short on the currency pair.

Scalper Strategy #2: Piranha Strategy

If the forex market is not trending, it is moving in a range. The Piranha Strategy was invented for use when the markets is in range.

Let us dive into marine life. Marine piranhas take small repeated bites on their prey until the prey is totally vanquished. While a single bite might not inflict much harm to a prey, frequent bites are lethal and will usually lead to the death of the prey. The piranha scalping strategies works in a similar way. It gives forex scalpers plenty opportunities to bite small chunks of profit from the forex market.

The piranha strategy works best on the GBP/USD currency pair using the M5 (5-minute) timeframe. Using the strategy, a trading day presents trades with 15-20 trading opportunities.

Indicators to use with Piranha Strategy

The Piranha strategy utilizes one indicator, Bollinger Bands, with Period 12, Shift 0 and the Deviation left at default (2).

The Bollinger Bands are used to identify market entry opportunities. Ideally, you should go long when the price of the GBP/USD touches the lower band and go short when it touches the upper band.

9 There are 5 Types of Forex Traders- Which One Are You?

I have had the privilege to tutor many intermediate and beginner forex traders in Kenya. Almost all the traders I have dealt with ask one common question:

“What should I do right now, should I buy or sell?”

The question reminds me of when I first started trading online forex.

The truth is that there is no definite answer to this question. What you do at any particular time depends on what type of a trader you are.

There are 5 broad types of forex traders:

1. Day traders
2. Swing traders
3. Scalpers
4. Position Traders, and
5. Mechanical traders

Your forex trading strategy depends on which type of a trader you are. Understanding what type of a trader you are will help you refine your forex trading strategy and avoid trading from fear, greed and faith, which are the three greatest pitfalls to successful trading.

My Experiment

Before we discuss the 5 types of forex traders, I would like to share with you the results of an experiment that I conducted with two of my forex students, who I shall call John and Mary.

At the beginning of the experiment, I gave both John and Mary a simple trading strategy that they were to follow. The strategy consisted of a plan on when to go short and when to go long.

To make things easier for them, I sent both of them daily SMS alerts to remind them to watch out for trade setups.

After one month, I evaluated their trading results, which were very different. John had made net returns of 40% on his account while Mary had only managed 10%. Several factors make these results very interesting:

1. Both Mary and John started with the same amount of capital
2. Both of them carried out the same number of trades

• Both of them had excellent entry strategies

So, how could their results be so different?

After carefully analyzing their trades, I discovered where the discrepancy emanated. While both of them had good entry strategy, Mary constantly interfered with her trades. She would get anxious, abandon the strategy and exit trades before they ran their course.

On the other hand, John stuck to his entries and exits. He left his trades run their full course. He either got stopped or hit his targeted profit.

Both traders had a similar strategy, but their personalities were very different. The message from this experiment is very clear. What you need is not a forex trading strategy, but a trading strategy that marries with your personality.

There is nothing like a perfect strategy in forex trading. The best strategy is the one that suits your personality.

The 5 Types of Traders in the Forex Market

Your personality plays a very important role in determining your forex trading strategy. Are you impatient? Do you get anxious? Do you have a strong appetite for risks? These are some of the personality traits that will dictate which strategy best fits you.

Basically, the only difference between the 5 types of traders is the timeframe that a position is held open. The timeframe increases from scalpers to day traders, swing traders and finally to position traders. The exception is Mechanical traders, who do not heed to any specific time frames.

Scalpers

If forex trading was a superhighway, scalpers would be the individuals on the fast lane. I like to think of them as guerrilla traders. They enter the market multiple times a day, each position they open lasting only a few seconds or minutes. Scalpers can make up to 10 pips on every position that they open.

A scalper’s trading strategy relies on the busiest hours of the forex market, typically when there are two sessions overlapping. Scalpers spend most of their time trying to spot trend changes on the charts. Additionally, a scalper must be able to make snap decisions in order to capture more profits when a trend is changing.

If you are intending to scalp the forex markets, here are the 3 cardinal rules that you must follow:

1. Spreads: Since you will be opening and closing many positions, you need to trade on currencies with the minimal spreads. The major pairs (USD/JPY, GBP/USD and EUR/USD) usually have the best spreads for a scalper.
2. News: Scalpers avoid trading during major news announcements. Major news, such as the NFP usually stir different emotions in the forex market and cause inexplicable swings in the major currency pairs.
3. Leverage: Since they are only targeting small pips on their trades, scalpers must use high leverage to amplify their profits.

Because scalping is fast-paced, many scalpers result to using forex trading software to execute trades on their behalf. You can read about the other two most successful forex scalping strategies here.

Day Traders

A common characteristic with day traders is that they do not like to hold open positions overnight. They open a position at the start of the trading day and close it at the end of the day. Depending on the currency pair they are trading, day traders can make anywhere between 20-40 pips per trade.

Day traders rely on the M15 and M30 chart windows to analyze the forex market.

Day traders care most about closing all open positions at the end of the trading day. Most of them do not care whether the position is at a loss or profit. All that matters is that the position be closed at the end of the day.

Unlike scalpers who avoid trading the news, day traders rely on news to plan and execute their trades. Additionally, a day trader must be able to spot breakouts as they happen.

Swing Traders

Swing traders keep positions open for more than a day but never more than a week. Swing trading is most suited to persons who juggle forex trading with their daytime jobs. Swing trading can yield anywhere between 50-150 pips.

Swing traders have larger profit targets and stop loss levels. Since their profit targets are high and they place far lesser trades than scalpers and day trades, swing traders are less bothered by forex spreads. They can afford to trade currencies with higher spreads.

However, to be pretty sure, swing traders usually have to wait for a few confirmation signals before they open positions.

Position Traders

Position traders are the exact opposite of scalpers. If forex trading was athletics, they would be the marathoners. They can hold a position open for weeks to months. Position traders understand the fundamentals that drive the forex markets and are able to spot trends that can lead to long term profits early on. The profit potential on their trades is usually above 500 pips.

Position traders use the D1, WI and even MN chart windows to analyze the forex market.

Two characters distinguish position traders from the other types of forex traders. They are voracious and astute readers on the financial markets, and they have a very large trading accounts. The large accounts helps them withstand losses should trades go against them for an extended period of time.

Mechanical Traders

Mechanical traders do not care about time frames. They are usually the beginners in forex markets. They are the traders who have learned how to use specific technical indicators, back tested them, and now all their care is implementing the indicators on their preferred trading platform.

Most mechanical traders end up coding their strategies into forex trading software that does the trading on their behalf. The main disadvantage with this type of trading is the false sense of security that it creates. If interest rates change or the central banks take proactive measures to correct liquidity, mechanical traders may suffer prolonged losses if they do not take measure to adjust their forex software to reflect these changes.

Your Perfect Forex Trading Strategy

The perfect forex trading strategy is the one that fits your personality traits and your lifestyle. If you have a lot of time to analyze the charts and you love action-packed trading, you will probably end up being a scalper. If you are juggling a daytime job and forex trading, swing trading will probably fit you best.

I would like to hear from you. Heck, I would even like to help you sharpen your forex trading strategy. Leave a comment below letting me know what type of a trader you think you are, and why.