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Step 5 – Risk reward ratio

Risk reward ratio

When trading any Forex strategy you will first need to understand the concept of risk reward ratio.  Without knowing where to put your stop loss and how much of your account to risk when trading, you will be unable to trade Forex successfully.

In the charts below you can see two examples where I have entered a trade using the false breakout style and the simple breakout style of trading.

risk reward ratio picture 1 risk reward ratio picture 2

The chart on the left shows a simple breakout trade.  The sellers have made a shallow retracement before the market has retraced upwards and passed through an area of supply.  When trading with a simple break out style we measure our stop loss at half of the retracement.

As you can see on the left chart I have marked the area where I entered the trade and where I have placed my stop loss.  Using the simple breakout style your stop loss will always be in reference to the retracement that came before it.

In the example on the right we have a deeper retracement where the sellers push the market down a lot further before the market comes back up to the original area of supply.  Using the false breakout style we use a different risk reward strategy.

When we are trading a false breakout style we always put our stop loss above where the tail reached.  As you can see in the chart above I have marked the area where we would place our stop loss when using the false breakout style of trading.

When trading the Beginners forex strategy you should be aiming for a minimum of 1:1.  This means if you risk $100 you should be targeting a $100 profit at a minimum.  So for example if you risk $100 at 20 pips you will need the market to move in your favour 20 pips to receive $100 of profit.

Everything I have taught you so far has been to give your trades the best chance of moving in your favour for as long as possible.  This is achieved by measuring the likely strength of the market based on your analysis of supply and demand.

Even after we have used all of these methods to analyse the market, there is always a chance that the market can turn around against us.  This is why I say that a 1:1 risk reward is a good place to exit your trade.  If anyone ever tells you that they do not need a stop loss because their trading method will never lose, let me assure you they are either deluded or outright scammers.

No one is ever right 100 percent of the time with their trading and it is accepting the losses you will inevitably have that will develop you into a realistic well rounded trader.  Using my strategy you will only need to be winning 55 percent of the time to be profitable.  So whenever you take a loss in Forex don’t get frustrated as it is all a part of being a successful trader.

The percentages I would recommend risking when trading range from half of a percent up to 5 percent.  This will depend on how frequently you like to trade and how this fits with your personality.

For example if you would like to trade every few weeks if not less well then you can afford to risk a higher percentage of your account.  But if you are the type of trader who likes to trade every day, you should be risking a smaller percentage of your account.

These are guidelines I would recommend and should not be set in stone.  Ultimately it is your own responsibility as a trader to risk sensible amounts that won’t cause you too bigger drawdown on your account.  (A maximum drawdown is the lowest point your account reached over a given period of time).

Appling the techniques I have presented in this article will allow you to trade with an excellent money management strategy.  As you become more familiar with risk reward you will begin to adjust the percentages you risk to what suits the time frames that suit you.

Once you have mastered risk reward ratio you will never have to worry about a trade ever again.  As you will not be risking percentages you can’t afford and you will understand that losing trades are a part of learning to trade Forex.

 

Step 4 – Retracements

Retracements

Understanding retracements is vital when trading with my Beginners Forex strategy.  Using retracements in your analysis will help you to measure the strength of an area of supply or demand.

My beginners Forex strategy is a logic based strategy that recognizes the market as having buyers and sellers.  Using common sense we can see how strong these buyers or sellers are going to be ahead of time.  One way of doing this is by measuring retracements.

retracements picture 2retracements picture 1

In the charts above you can see two trade setups.  In the first example the market has retraced a lot deeper before moving back to the area where the market started retracing from.  Making the area of supply stonger.

In the second example the retracement is a lot shallower.  Making the area of supply weaker as the sellers in the market have moved with less strength than the deeper retracement .  So what makes a deeper retracement weaker and a shallower retracement stronger?

This is where our good friend logic comes in.  The sellers in the first retracement were only able to push the market down 20 percent.  Now does this make the sellers weaker or stronger than the if it they had retraced 80%?

The second retracement pushes the market down 80 percent with more selling strength than the sellers that were able to push the market 20 percent. Once the buyers have come back to where the retracement started we now have an additional piece of information about the strength of the market.

By using simple logic we have realised that the sellers that were able to push the market 80 percent are more likely to have selling pressure left over the sellers that were only able to push the market down 20 percent.

So when the market comes back up to a potential breakout area we have a much better idea about the chances it will have of breaking through an area of supply or demand.  Analysing the depth of a retracement gives us a strong indication of the strength of the market when it pushes back after the retracement.

Now you know how to use retracements to measure the strength of an area of supply or demand you can now start combining this knowledge with the simple and false breakout strategy style of trading.  If we were to have a weak retracement that moves down 20 percent.  We know that when the buyers move back up there is an increased chance the market will break though our area of supply.

Therefore if the market is likely to break through an area of supply or demand we want to be using the simple breakout strategy.  The simple breakout strategy is used to take buys or sells when the market breaks through an area of supply or demand.

Whereas if we can see a stronger retracement that has moved down 70 percent.  When the buyers move back up to where the retracement started we know that there is less chance of our area being broken through.

Therefore if the market is less likely to break through an area of supply we want to be using the false breakout strategy, and really take advantage of this situation.  By using the simple and false breakout strategies in this way we will have edge over every other trader who is not aware how to use retracements in their analysis.

So there are a few key points to remember about trading retracements.

  1. The deeper the retracement the weaker the market will be once it has moved back to the area you are looking to take a breakout trade from.
  2. A simple breakout style trade should be used around weaker areas of the market that have more chance of being broken.
  3. A false breakout style trade should be used around stronger areas of the market that have less chance of being broken.

There you have it, everything you needed to know about how to apply retracement analysis to my Beginners forex strategy you now have.  Retracements will allow you to assess the strength of an area of supply or demand in a simple logical and extremely effective way.

Once you have mastered your understanding of retracements in Forex you will be well on your way to making profits with my Beginners Forex strategy.

 

 

Step 3 – Time frame analysis

Time frame analysis

In this post I will be introducing you to time frame analysis.  Analyzing more than one time frame when taking a trade may sound advanced, but don’t worry it’s not too difficult at all.

If you are not aware of what time frames are I will briefly explain.  Below are two charts.  The chart on the left is on the daily time frame whilst the chart on the right is on the monthly time frame.

Every candle stick that is on the daily time frame represents 1 day.  Whilst every candle stick on the monthly time frame represents 1 month.  Simple enough right?

Logically you now know that to wait for a setup with the simple break out strategy on the monthly time frame it is going to take a lot longer than waiting for a setup on the daily time frame.  Let me explain this in more detail with the charts below.

time frame analysis picture 1

The charts above show EURUSD on both the monthly time frame and the weekly time frame.  The area marked with the circle on the monthly time frame is also represented on the weekly time frame.  As you can see there are a lot more candles and therefore more setups on the weekly time frame.

On the monthly time frame we cannot see any setups for either a simple or false breakout style of trade.  Clearly if we want to trade more regularly than once a year we should not be using the monthly time frame to analyse the market.

Once you are familiar with time frame analysis you will realize that there are a lot more opportunities to trade when you move down time frames.  If you are the type of trader who likes to trade regularly you should be using the 4 hr and 1 hr time frames.

Whereas if you are the type of trader who wants to trade more passively the daily and weekly time frames would be more suited to you.  Trading the monthly time frame is not something I would recommend doing as it takes far too long for opportunities to set up.

It is vitally important when trading with any strategy you are aware of the bigger picture in Forex.  Analyzing more than one time frame when using my beginners Forex strategy will give you an edge over traders not are simply unaware of multiple time frame analysis.

time frame analysis picture 2

In the image above I have analysed a potential trade setup.  The chart on the left shows what looks like a good opportunity for a simple breakout sell.  I had identified the area of supply as a potentially weak area that looks tempting to sell.

Everything seemed good and I was ready to take the sell.  But what I had not done was give myself a bigger picture view of what was really going on in the market at this time.  This is where the second chart on the right comes in.

The second chart shows the same area marked with the circle that I was looking to sell on the 4hr time frame.  But now I am able to have a bigger picture view of the market as I am looking at a higher time frame.  After looking at the higher time frame (daily time frame) I was able to see a potentially dangerous area of supply.

This area of supply gave me an essential extra piece of information about my trade.  I now know that buying at this large area of supply would make this a high risk trade.  If I had only analysed the market using the smaller time frame I would have been unable to see the bigger picture of what was really happening in the market.

By checking the higher time frames for areas of supply or demand that contradict our original analysis it will give you the bigger picture view of the market you need to trade successfully.

Many traders see multiple time frame analysis as more advanced.  Whereas I see it as a basic yet essential part of trading that should be at the front of every traders mind when analyzing the market.

Using multiple time frames to analyse the market opens up a whole new set of possibilities for you as a trader.  The 2 most important ones I have identified in this article are as follows.

  1. Lower time frames allows for more trading opportunities.
  2. Checking higher time frames allows us to see the bigger picture.

Once you have recognized these points you will be in a much stronger position than many other traders who are simply unaware how important multiple time frame analysis is in Forex.

 

Step 2 – Breakout strategies

Breakout strategy

The Beginners Forex strategy is an advanced version of what is known as a breakout strategy.  In this article I will show you some commonly used breakout strategies, that will help you understand the Beginners Forex strategy.

A breakout is when the market (supply or demand) moves through an area of supply or demand in the market.  There are many different strategies that people use to trade break- outs.  In this article I will be showing you examples of two of the most popular breakout strategies.  The first type of breakout strategy is the most simple and is displayed in the images below.

beginners forex strategy image 6 beginners forex strategy image 14

The breakout strategy takes advantage of areas in the market where supply and demand is considered as weak or strong.  Supply or demand may be analysed as being weak or strong for many reasons.  Here are just a few.

  1.  The number of pips moved and the areas that have been passed. ( See article on supply and demand).
  2. The percentage the market has already retraced.
  3. A news event that caused a lot of buying or selling in the market. (News event can be considered significant or insignificant)

You don’t need to worry about what makes an area strong or weak for now.  These bullet points will just help to give you a little bit of context about why we trade with the breakout strategy.

In the example on the left the area of demand is considered weak by the trader.  Once the market passes through the area of demand that is determined weak the trader takes a sell.  Simple enough.

In the next example on the right we have an area of supply that the trader considers weak.

You can apply the same logical reasoning but this time it’s the opposite way around.  As we now have an area of supply that is weak we are interested in buying the market when we break through this area.

This is perhaps the most popular breakout strategy and easiest to understand.  Many breakout strategies build on this simple idea creating a more complex strategy.

An example of a strategy that builds on the simple breakout strategy I have outlined above is known as the false breakout strategy.  This is also known as the fakey breakout strategy in the Forex community.

This strategy is thought of as advanced by many traders but is in fact very simple.  The strategy attempts to use reverse psychology to take advantage of people who are perceived as amateur traders.    In the images below are two examples of how the false breakout strategy works.

beginners forex strategy image 13 beginners forex strategy image 12

In the example on the left we can see an area of supply pass through the marked area of demand before quickly reversing.  Once the market has reversed we have what is known as a false breakout (fakey).  The area of supply that has reversed is what in Forex is called a wick.

The market appears to be breaking out through an area enticing a large number of simple break out strategy traders into sells.  Traders who sold the market here will have got in at just the wrong point as the market quickly reverses, after temporarily breaking through the area of demand.

In the example on the right we can see an area of demand, pass through an area of supply before quickly reversing.  Again this quick reversal where the market breaks through an area and moves back inside is known as a false breakout (fakey).  The area of demand that has reversed sharply is what in Forex we call a tail.

This time the market seemed to be breaking through an area of supply before the market reversed tricking a lot of traders into buying at just the wrong time.

Remember a sharp reversal of supply or demand can be referred to as either a tail or a wick.  If you move down onto a smaller time frame these wicks and tails can be seen as candlesticks of supply and demand.  Understanding how to trade more than one time frame will be discussed in a later blog post.

The Beginners Forex Strategy is a type of breakout strategy, so it is important that you have a basic knowledge of what a breakout strategy is.  Once you understand the basic concepts of a breakout strategy you will be much better equipped in your journey towards success in Forex.