When selecting or designing a Forex Trading Strategy, many human emotions and taints surface because of the sheer complexity involved. The problem is that no matter which strategy you decide to use, it will not provide 100% protection from losses. In a previous article, two strategies were compared for these reasons i.e. ‘trading with the trend’ and ‘picking tops and bottoms’. Both are good example of invoking undesirable human emotions.
For example, when selecting a top, traders have a tendency of snatching at any available profits. The reason for this action is that traders know that they are swimming against the tide and become fearful that the market will reverse suddenly back towards its original direction. However, this is a bad trading practice, especially over the long haul, because you would be subjecting yourself to intense risk but are not letting your profits run when they do occur.
So, in order to be successful using any Forex strategy, you must commit yourself totally to its inherent concepts. As such, you must be prepared to steel yourself and let your profits run until the channel shows signs of exhaustion. By doing this, your trading strategy would enjoy a good reward to risk ratio over the long haul which it would not do so if you continuously snatch at profits.
More specifically, the usual method used to detect tops and bottoms is to utilize a technical indicator but as the following example shows this approach is not as easy as it sounds and prone to difficulties. One popular oscillating technical indicator used to attempt to detect reversals is the RSI. This strategy recommends entering a BUY trade when the RSI crosses below its 30 line, forms a bottom, and then crosses back up through 30. Similarly, a sell entry is determined when RSI crosses above 70, forms a peak, and then crosses back down through 70. Trades are exited ideally when the next opposite BUY/SELL condition is encountered as just define. However, as you would fundamentally be trading against a trend, the following problem could happen.
The market will not realize that the RSI may be above 70 or below 30 for a particular currency pair. As a result, further large price movements can still happen after these conditions are met without the expected reversal occurring. Although these movements may only cause just a few points rise in the RSI value e.g. 72 to 77, the market could surge by another 150 pips or more. So, if you had set a new SHORT at RSI 71, a violent BULL action could quickly STOP OUT your new trade.
For example, when selecting a top, traders have a tendency of snatching at any available profits. The reason for this action is that traders know that they are swimming against the tide and become fearful that the market will reverse suddenly back towards its original direction. However, this is a bad trading practice, especially over the long haul, because you would be subjecting yourself to intense risk but are not letting your profits run when they do occur.
So, in order to be successful using any Forex strategy, you must commit yourself totally to its inherent concepts. As such, you must be prepared to steel yourself and let your profits run until the channel shows signs of exhaustion. By doing this, your trading strategy would enjoy a good reward to risk ratio over the long haul which it would not do so if you continuously snatch at profits.
More specifically, the usual method used to detect tops and bottoms is to utilize a technical indicator but as the following example shows this approach is not as easy as it sounds and prone to difficulties. One popular oscillating technical indicator used to attempt to detect reversals is the RSI. This strategy recommends entering a BUY trade when the RSI crosses below its 30 line, forms a bottom, and then crosses back up through 30. Similarly, a sell entry is determined when RSI crosses above 70, forms a peak, and then crosses back down through 70. Trades are exited ideally when the next opposite BUY/SELL condition is encountered as just define. However, as you would fundamentally be trading against a trend, the following problem could happen.
The market will not realize that the RSI may be above 70 or below 30 for a particular currency pair. As a result, further large price movements can still happen after these conditions are met without the expected reversal occurring. Although these movements may only cause just a few points rise in the RSI value e.g. 72 to 77, the market could surge by another 150 pips or more. So, if you had set a new SHORT at RSI 71, a violent BULL action could quickly STOP OUT your new trade.
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