Monday, January 23, 2017

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FOREX TRADING STRATEGIES

Patience Isn’t Always a Virtue – Closing Signals Manually

When I started to learn how to trade forex a decade ago, I picked up many books, registered for online courses and attended many webinars. I also checked out strategies and trading plans. Almost all of these sources pointed out that we should stick to our trading plan and let the price reach the predetermined take profit. They said you shouldn´t cut winning trades short, but instead, let them run their course to maximize your profit. Well, it makes sense and that´s what I do most of the time. I let the forex signals run until the price reaches the original take profit. There are times when I close the forex signals manually, especially long-term forex signals as you might have noticed. There are times when you just have to close the forex signals at whatever profit they may reach, otherwise you will end up with a loss.

We can´t move the market, so if the tide is turning against us, we better close the forex signal. There is the odd occasion when the price keeps moving in one direction, but as we know the forex market is fickle. And sooner or later, the market will turn around - if you are a sensible trader you should book profit before the price comes back to get you. This is true especially for the day traders like myself. What if we missed 5 or 10 pips on a short-term forex signal... or 20-30 pips on a long-term forex signal?  For example, 15-20 pips and 80-90 pips (both types of our forex signals), are more than enough. After all, a successful trader is the one who doesn´t lose money and doesn’t get greedy. There will always be other opportunities for other trades and more profit, so close if your gut says to do it. But, what are the benefits of closing forex signals early?

Better to cut your profits

Sometimes it´s better to cut your profits short than end up losing

Take profit instead of taking a loss

The most important benefit is a smaller profit instead of a loss. The forex market is volatile and we have seen plenty of that recently. In January the SNB removed the EUR/CHF peg. In August when the Chinese stock market crashed, or in December of 2015 when the ECB failed to deliver according to market expectations. So, a good trade can turn into a losing trade just like that. How many times has your trade been well in profit but you have seen your profit evaporate in a few minutes when you saw the market was turning around against your position? Hoping the price will turn around again and reach your original take profit doesn´t work. One such occasion was the trade that Goldman Sachs took this year. The idea for this was to sell EUR/USD on the back of the ECB QE. They entered a good trade year, shorting EUR/USD at around 1.12 (if I can recall). Their first target was 1.10 but as the pair moved down, their targets fell again at parity with 0.95 as the second target. They opened another sell position around 1.06 and were riding the trades as the price kept moving down all the way to 1.460s. They didn´t close it and got too greedy. Then when EUR/USD failed to reach parity and moved above 1.10, the fears got hold of them and they closed all the positions above 1.10 at a complete loss. So, sometimes we have to close early because trading the left side of the chart is easy. You can see the history and read great examples on how to keep your positions until an initial target is reached. But trading the right side is a different story with volatility and emotions. Fear and greed can turn a profitable trade into a losing one in the blink of an eye.

Free your capital and exposure

We also close some of our forex signals early to free the capital. Although we suggested that the risk remains less than 3% of your balance per trade, we know that some traders who follow our forex signals use a much higher risk/balance ratio. So, when a forex signal is not going anywhere and we have more than one forex signal open, we close one by manual methods to free up some capital. We do this especially when we have a long-term forex signal open where we use a higher risk/balance ratio. When we have several forex signals open and the positions are increasing (even if the signals have a decent chance of reaching the take profit target), you may receive a margin call on small moves driven by volatility. Imagine you opened the two trades that Goldman Sachs advised, and sold EUR/USD at 1.12 and 1.06 targeting 1.00 and 0.95. And, you didn´t close them when the price reached 1.0460 in March. You would definitely get a margin call when the price went above 1.17 during the Chinese stock market crash in late August. When we open a forex signal, the set-up looks favourable. But, as time passes, the market changes and the signal remains open until we spot another opportunity in another pair. So, we can have up to 4-5 forex signals opened. Thus, we have to close one forex signal or more by hand to reduce the exposure, even if we have fewer signals open. This is because even though the odds of hitting take profit might be high, you can never be 100% sure when you trade forex.  

Concentrate on the next trade

Another important reason for closing forex signals earlier is to concentrate on new trade ideas and other trades. When you have open forex signals/trades it is difficult to conduct an emotionless and clear market analysis. You may miss some good opportunities on other forex pairs. It´s inevitable when you have open positions you can get too involved with them as you see the account balance move up and down. So, apart from evening and night time, when the market is quiet, if you see that a trade is not going anywhere you better close it and look for another opportunity. You will be relieved to analyze other pairs and spot out other more favorable chart set ups. Again, imagine if you were a Goldman Sachs customer and you ignored their parity target, closing at this year lows around 1.0460s. You would have had a nice profit, but the most profitable trade would be the next one. If you closed the two EUR/USD sell positions when the price was below 1.05, you could have another chance to sell this pair when it reached 1.17 in August. And when the pair returns to 1.0520 again in December... you would have made another 1,200 pips! But the Goldman Sachs clients couldn´t take this second opportunity as they were pretty unhappy  when the price reached 1.17 with the first two open signals. We can just hope that they came out of these two trades alive.

The bottom line of this article is that you shouldn´t marry your positions, especially for the long-term trades. We close a lot of our long-term signals before reaching take profit and open new ones when the price reaches the opening level again. If a signal is in profit and struggling to reach the take profit target we close them with manual signals, thus, we won´t regret those extra 5 pips if the price does reach there. Better to have a smaller profit than a loss. This also frees up our capital, reduces the exposure and gives us a chance to concentrate on other trades. 

 

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