The rise of electronic currency trading as leveled the playing field and any investor with an online connection can trade in this exciting market - but electronic currency trading throws up one major problem which if you can overcome, could see you make huge profits. Let's take a look at it. . .
The real challenge is not picking currency direction, its executing your trading signals at the right time so you don't get bumped out of the trade by volatility.
This is a common scenario.
The trader picks the direction of the trend correctly and executes his trading signal. The market immediately comes back and takes him out on his stop, promptly reverses and goes back the way he thought the trend would go, piles up thousands or tens of thousands of dollars in profit and he's not in!
Electronic currency trading has increased volatility and it's the major challenge you need to overcome to win - you need to time your trading signals when the risk reward is at its best.
So how do you do this? First, pick the time period you wish to trade in.
You have a choice forex day trading, swing trading and trend following. The only one you should not consider is day trading - it doesn't work, as all volatility is short term time frames is random.
Swing trading has its advantages and they are discussed more fully in our other articles - but the most lucrative is, long term forex trend following and the way to restrict risk and maximize reward is to do the following:
1. Trade the Breakout
Look to buy breakouts to new highs or lows and go with them. It's a fact that most trends start or continue from these levels so trade the break.
2. Trade Sparingly
The really good breakouts are ones that punch through thick layers of resistance or support which have been tested numerous times.
Look for ones that are considered important by the market.
The good breakouts don't come around often, so you need to be patient. When you get a good one, its worth the wait, as the trend that emerges from it can last for weeks or months and that means a lot of profit.
3. Stop Loss
Stop losses are easy to set - behind the breakout point.
The real problem most traders have is they want to move their stops too quickly and put it inside normal volatility to lock in profit and get stopped out.
You must hold your stop back!
Wait for the trend to develop and then move it slowly and we normally use a 40 day moving average. This will keep you in the trend but keep you outside of normal volatility.
To make money long term, you have to take short term equity dips and keep your eyes on the bigger end prize. Don't worry if you got 50% of every major trend, you would be very rich!
You Need to Risk at the Right Time
Most traders are so obsessed with keeping risks small, they actually create a scenario where they will never make any money and they also equate trading a lot with success. Both views are wrong.
You need to be patient and wait to hit the best high odds trades and then have the courage and conviction to run a big profit by holding your stop outside of normal volatility. If you can do this, you can make huge profits with electronic currency trading and enjoy currency trading success.
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