Throughout the month we’re giving you a few Forex profit hacks to help increase your profit potential. There are 5 parts in all, so if this is the first one you’re reading, be sure and catch up:
Tip 1: Never Risk More than 2 – 5% of Your Account
A good piece of advice in life is to never risk more than you’re willing to lose. Whether you’re trading in the stock market, taking a mortgage out on your house or playing fantasy football, you should never put up more money than you can live without.
In case that didn’t click, let us repeat that again…
You should NEVER risk more than you’re willing to lose.
We suggest never risking more than 5% of your account.
Here’s a handy chart to show you what we mean:
Before going into the market, know that every trade you do comes with some risk. There isn’t a trader in history that has a 100% winning percentage.
You will lose at some point, but when you manage your risk successfully you could take that loss and live to fight another day!
Beginner or more risk-averse traders typically should start with risking only 2% of their current trading pool every trade. Once you become more experienced in the market, or your profits have steadily increased, you can move to 3, 4, or the full 5%.
Tip 2: Identifying and Trading Candlestick Formations
One of the more popular candlestick formations and one you may have seen before is the Head and Shoulders pattern. This happens when a bullish trending market makes a peak and begins to retract.
You can see it in action here:
Notice that the highest point is the head, and the two lows on either side of it are the shoulders. You draw a “neckline” connecting the two shoulders and begin to trade at that point.
But this isn’t a very accurate formation.
The problem is, the market will often overcorrect itself and you’ve taken a loss before you knew what hit you.
That’s why we at MTI prefer to trade a different pattern: The King’s Crown.
The King’s Crown is trading beyond the “shoulders” of the Head and Shoulders pattern. Once the market takes out a low of support, it has a tendency to bounce back up before the market finally falls.
You can see the King’s Crown formation here:
Here the highest point on this chart is labeled A. The previous high is labeled the “left tip.” The left tip is important because it tells us how high the market was previously trading, which tells us how low the market will eventually go.
Going back to the A mark, you can draw a line from the new highest high to the new lowest low, the B mark. Follow that trend to the next highest mark to get your C, and finally to the next low to get your D.
In this case, you should buy in the moment the market begins to rally after the D mark. You won’t lose your trade until the market overtakes the D as the newest low.
We can tell when this will happen because of what the previous high was before the King’s Crown started (the left tip).
In this case, you aren’t trading the neckline, you are trading the breaking point beyond the lowest low. This extra spike in the market, (turning the person in a crown) allows you to see the true indication of the markets and could lessen the chance you have of making losses in the future.
Tip 3: Learn to love the Stochastic RSI
Think of the ups and downs of the market like trends in the fashion industry.
Back in the 80s, leg warmers were very popular, but once it hit a certain point it became TOO popular and there was backlash created against it, making the trend slowly go away.
A lot of designers wished they had some kind of indicator for when the trend was going away (so they could have saved tons of money.)
There might not be something like that for the fashion industry, but there is for the markets. It’s called the Stochastic RSI, and it could be your key to trading.
The Stochastic RSI is made up of two lines that serve as a benchmark for when the market is looking to reverse. This is called the “buy zone” and the “sell zone”. If the currency is traded too high in the buy zone, it will break that line and begin to trend down. If the currency is going too low in the sell zone, it will break the bottom line and start trending back up.
You can see the buy and sell zones illustrated here on this chart:
Having a handle on the two barriers that the stochastic line makes up will give you a sense as to when you should reverse your direction and go from bull to bear, and vice versa.
For more information on how you can replace your current income by trading the Forex, click here to attend a FREE webinar.
This is the fourth in a series of posts covering Forex trading tips.
Make sure you’re on the lookout for more Forex Profit Hacking tips every Saturday!