Trading Lesson: How You Enter the Market Is Critical
11/28/2017 4:21 am EST
Minimize risk, take partial profits quickly, and stay in the trade. Wait for your objective to be reached and only then put in trailing stops….let the market take you out, writes CBOT veteran Jeff Wecker. Look for more Trading Lessons every Friday on MoneyShow.com.
Gone are the days when you could enter a currency trade with 50 or 75 pips of risk and expect to be a consistent winner. Markets have changed and you need to change with them or fall behind. That’s why backtesting is a problem; you’re backtesting against a market that doesn’t exist anymore.
So when we developed our robot Forex Forager (patent pending), instead of backtesting we just started trading it in a demo account. As soon as we could see that it was a profitable tool, we switched from the demo account to our “live” accounts and off we went. In today’s market, traders want to see demonstrable success now, and that’s how you deliver it.
So what have we learned from our robot about today’s markets? First and foremost is the importance of risk/reward. We learned that you should enter swing and long-term trades with no more than 5-15 pips of risk, and that you should enter them at “inflection points” (prices from where the market is most likely to move).
Controlling your risk in this manner allows you to be wrong 5 out of six times and still make significant returns. Why? Because the average swing trade can be 200-500 pips and the average long-term trade can be 500-1000 pips. So with a 5-15 pip risk strategy, the risk/reward is off the charts. But if you are risking 50-100 pips to get into a trade, you just have to be right too often.
The next thing we learned is the importance of taking partial profits quickly and putting break even stops on the balance.
This lets you lock in some profits quickly and then play with the market’s money. It also keeps you in the trade until the objective is reached.
Too many traders hang on to losers too long and get out of their winners way too early. So we built our robot to take any percent profit we want at any given price level. This frees you up to go on to the next trade.
No need to watch this one anymore until your objective is reached. Then, and only then, should you put in trailing stops.
Why? For one, you never want to take yourself out of the market; the market is smarter than you are and often goes much further than you think. Also on swing trades and long-term trades, you want to buy or sell and hold. You don’t want to try and trade in and out of them.
Next, we learned how to play the news. And you can too. Most forex traders are terrified of news events. After all, no human fingers can match the speed of reactions to news. And putting in preset orders is not the answer as wild swings will hit all your stops. So we made our robot flexible: the robot locks in profits on every swing and then latches on to the ultimate move. That’s how you beat them.
You also have to know which markets to trade and when. The U.S market has become largely a day traders market. Without major news, they just push it back and forth 20 ticks at a time and ultimately go nowhere.
So if you are going to enter a trade and want to see movement right away, it’s best to put on trades with Asian currencies during the Asian session and European currencies in the European session. And if you have a robot like ours, you won’t bother entering swing trades in the U.S session and just getting chopped up.
In summary, give a lot of thought as to how you enter the market; minimize risk, take partial profits quickly, and stay in the trade.
Do not take yourself out of the market. Wait for your objective to be reached and only then put in trailing stops….let the market take you out.
The Currencies, Coffee and Croissants group is open to all traders interested in currencies. Just contact Jeff Wecker here to join CCC.