For every hundred traders you come across who make their Forex trades in short time frames, you may find two who are making a profit worth mentioning. The rest are struggling trying to figure out why they can’t seem to get ahead. The reason is simple to figure out if they would slow down and think about their strategy for a moment.
Despite the fast pace of the Forex market, a trader needs to show some restraint and a lot of patience. One way to do this and increase your probability of overall profits is by looking at the bigger picture and paying attention to those longer time frames.
Trading With Time Charts
Time charts are a great tool for the trader who knows how to read them. What they do is take the rapid movements of the Forex market and average it out over a set period of time. This allows you to better see what the market is doing and which way the trends are moving.
To take the best advantage of this tool, you should be focusing on multiple time charts at the same time. Short term averages, such as four hours, will help you identify good entry points, while studying the average over longer periods of time will show you how the currency is trending and where the support and resistance lines lie. When you can identify these components you should be able to spot an opportunity to enter a long running trade as opposed to jumping in and out of shorter ones.
When looking at two different time frame charts, the prevailing one is going to be the longer one. An hourly time frame may show a trend going in one direction, but when you look at the daily chart you could see that overall, it is heading the opposite way. The longer time frame chart is going to be more accurate at showing you the direction of trends, and the one that you should be basing your long run trades on.
What you are waiting to find is a trend that is continuing in one direction for a significant amount of time. There may be small moves in the opposite direction, but overall the movement is in one direction. During an uptrend look to see if new highs are being met every day. If so, than this is a good opportunity to place a longer running trade. In a downtrend you will of course be looking at new lows.
Combine the information you glean from the time charts with a risk to reward ratio that supports letting your money ride a long term trend and you increase your potential gains exponentially.
The Importance of Risk to Reward
Even traders who are right a significant percentage of the time will lose money overall if they are not managing their risk to reward properly. What will happen is that they end up losing more money on those trades that went sour than what they gained on winning trades. To avoid this you should be trading some of your currencies for long term results.
This means that instead of the conservative 1 to 1 or even 1 to 2 risk to reward ratio, you set your limit higher and use a 1 to 3 or 1 to 4 risk to reward ratio. This is done on those trends you spot that are heading in one direction for long periods of time. The longer you stay in the trade during those long running trends, the higher your profit will be.
The Lagging Exit
Trading with lagging exits goes against the traders desire to pull out of a trade right before or just as it begins to reverse. The trouble is, it is nearly impossible to predict that exact moment or price, so traders will pull out just before they think this will happen, only to find out that the trend continued in their winning direction. This so-called winning trade is now looked at as a missed opportunity as it continued to climb after your exit, costing you the chance for a higher profit.
To use a lagging exit strategy, you actually have an open ended limit and pull out from the trade once you can confirm the reversal. You will lose some pips if the reversal happens very quickly, but that is nothing compared to what you could have lost in profits had you pulled out too soon.
This strategy will only work for those traders who can show great restraint in the market. Greed will make most new traders pull out of the trade before the reversal out of fear of losing a portion of those profits they have gained. You have to make the lagging exit strategy a part of your plan and then have the restraint to stick to it.
While the idea of cutting your losses and letting your gains ride should seem like common sense, the reality is that human nature is to do the complete opposite. Cutting your losses means admitting defeat and wounded pride. Letting your money ride goes against the gut instinct to get out while the getting is good. To combat those instinctive feelings, place your stop-losses and limits and let the market take over.
When that time finally comes where you can stop micromanaging every trade and let them run, you will find that your profits are finally beating out your losses and your Forex account is reaping the rewards.