Three minimum-risk Forex trading techniques that work
In the high-risk world of Forex trading, minimizing your risks is a critical factor in making money. In this article, I will show you three ways to profit from the market while still keeping your losses to a minimum.
Use stop losses correctly in combination with price patterns
I ensure that my trades have low risk and high returns by using stop losses when trading breakouts or pullbacks off of price patterns. On news-related events, it’s usually safe to assume that if there’s bad economic news, the currency pair you’re trading will move downward.
So say, for example, I’m watching EUR/USD closely and waiting for an opportunity to trade either a breakout or reversal off of a price pattern. If you are trading a breakout, I put my stop loss right below the most recent low in price. Then if the price continues to move downward after breaking out, my initial entry will remain profitable (uncovered) until it reaches my stop loss.
If you are trading a pullback off of a pattern, you set your stop loss above the highest point in the chart pattern. For example, when trading double tops or bottoms, you will use this strategy with tight stop losses so that when the price breaks through resistance or support, it’s still in profit even though there was the initial movement against me just before it reached its full potential.
Use price action for low-risk high reward trades
When predicting whether or not a currency pair will move in any particular direction, I almost always use price action to make my decision. If the chart shows strong momentum and signs of continuing movement, even if it’s against me (pullback after a breakout), you will still go through with my trade because the signal generated by the price action tells me that this pullback is nothing more than short-term noise.
There is significant money to be made if you go long off of a breakout or short on a breakdown. However, this doesn’t mean that you should place your stop loss right above resistance or below support like most people do. It makes more sense to set your stops about 30 pips away from these levels so that if the price does reverse before reaching them, they won’t get hit.
For example, suppose you observe a solid price pattern such as bearish or bullish engulfing and your stop loss is set at one pip below support/resistance. In that case, this means that if the market moves 30 pips against you before reaching its full potential, it will be stopped out even though there was big money to make if you were patient with an appropriate risk to reward ratio.
Cut your losses short with good market timing
Timing plays a crucial role in Forex trading- knowing when not to trade is just as important as knowing when to pull the trigger. It would be best only to take trades with a high probability of success. Otherwise, it’s better to wait until the next opportunity comes around. If you are trading breakouts or pullbacks off of price patterns, it’s best to take trades shortly after the pattern starts developing.
If you are trading an area where price seems to consolidate or no obvious way for price to go, wait until momentum picks up and there is a firm conviction in the direction of movement before entering your trade.
These techniques can be used with any Forex indicator you choose. Stop losses should be applied only when the risk-reward ratio is maximized (risking less than 1% of your account). Using price action signals will increase your winning percentage while decreasing drawdowns. Good market timing lets you jump on profitable opportunities which come around infrequently. By following these rules, one can make decent money at Forex trading.