If you are reading this article, it´s very likely that you are a forex trader – or at least want to be one. Traders share a common love of trading currencies and like the benefits that came with the job. Yet, sometimes we get carried away and incorrectly trade forex; we refuse to acknowledge some important aspects of forex trading that eventually take their toll. Sometimes traders end up trying to save forex accounts instead of expanding them. There isn´t a set of rules that explain the wrong or right way to trade forex for all forex traders, but there are wrong and right ways for individual traders. We must trade forex and base our forex strategy according to our own specific characteristics.
With the right strategy, every forex trader can trade profitably
Two of these specifics are: (1) the amount of funds available and (2) the amount of time that we have available to trade. Different traders have different amounts of funds in their accounts; some might have a few hundred US dollars, some have accounts worth millions. If your account is worth $1,000, you cannot trade in the same way or follow the same strategy as a trader who has a $5,000,000 forex account – and often you cannot use the same forex strategy.
The same goes for the time available to you for forex trading. It´s obvious that someone who has a full-time job in addition to forex and trades only part time must have a different strategy than a person who has the luxury of sitting in front of the PC all day and watching the charts.
Fund Restriction – So, you have to ask yourself two questions. The first question is: how much money you are willing to put into your forex account? Remember that it has to be an amount that won´t ruin your finances and an amount that you feel comfortable with trading. Otherwise, you´ll become too emotionally attached when you trade and this will affect your trading.
If you have a large account, you can use different forex strategies and trade from the long-term charts. If you have a $1,000,000 forex account then you can afford a 1,000 pip dip on a currency pair when combined with the right money management. That way, you can wait until the price reverses and increase before cashing in the trade. As the saying goes, big money has deep pockets. You can also open multiple positions.
However, when you have a small account, let´s say $1,000, you have to be very disciplined. You have to wait for the perfect trade setup in order to pull the trigger. I have tried many different account sizes during the last 10 years and I can say from my experience that the best way to trade when you have a small account is day trading. That means opening one or two trades a day. The trader scans the forex charts in the morning, ideally the 1-hour charts and sometimes the 4-hour charts, and waits for the perfect setup.
The perfect forex strategy for a forex trader with a small account is the ‘1-hour double indicator strategy’. This forex strategy is relatively simple. It is based on two indicators that signal a possible top or bottom after a retrace. I use three indicators for this but if two of them signal the end of a retrace then I pull the trigger. First, you have to identify a trend, such as a downtrend in USD/CAD. We know that trends evolve with retraces and the price doesn´t go in one direction in a straight line. So, as the price retraces up I wait until the stochastic indicator gets near the overbought area. That´s one indicator signalling that the reverse is near. Once it arrives I watch the market closely for the second indicator to signal the reverse. The second signal might either be a moving average or a pin, doji, or upside-down hammer candlestick. It´s even better if all three indicators signal the reverse.
As you can see, you have one chance a day and sometimes two chances, nevertheless, it works pretty well. This strategy almost never fails and the returns are great so you can expand your account quite quickly. If you risk 2% of your account with a 40 pip stop loss and target 80-100 pips, you would be making 4-5% profit a day with just one trade.
In less than two weeks, your account expands by 36% with a 2:4 risk/reward ratio
Time Restriction – The second question is: how much time do you have available for trading forex? Remember that you shouldn´t stretch yourself to the limit. Pushing yourself too far affects your judgement and affects your trading. You also don´t want to destroy your relationships or affect your work. If forex is your primary job, then you can use all the forex strategies you feel comfortable with. But, if your forex trading time is limited you must choose a forex strategy that suits your schedule.
One of the best forex strategies for part-time forex traders is the ‘swing forex strategy’. You obviously have to trade higher time frame charts, such as 4-hour and daily charts. With this forex strategy, you can trade during a trend or during consolidation periods when the price moves within a range. In this case, you can play it both ways, buy at the bottom of the range and sell when the price is near the top.
With swing trading, you could have had 13 winning forex trades worth nearly 200 pips each
As you can see in the chart above, EUR/USD traded in a 200 pip range between 1.08 and 1.10 in December 2015 and January 2016. If you have another job and you´re trading forex part-time, you could have placed buy pending orders near the bottom of the range and sell pending orders when the price was near the top. Most trading platforms now offer the alert option for when the price reaches certain levels, so part-time traders can use this option so they don´t miss good opportunities.
We can see two breakouts but they were false breakouts, so obviously, you have to place a reasonable stop loss. If you are trading large timeframe charts the price doesn´t always respect the support/resistance levels exactly to the pip. During trends, you can use moving averages, the stochastic indicator, pins, dojis, and trendlines.
As you can see from the daily chart below, EUR/USD has been in an uptrend in the last two months. If you can´t stay in front of the charts all the time you can place trade alerts on your platform to signal you during a retrace or you can build or buy an automated trading system. Of course, our site publishes articles on how to build your own EA which you can find here.
The platform alerts you when two of the four indicators are signalling that the retrace is over. In the chart below, we see that there have been three occasions when stochastic was oversold and the price made a doji/pin (which are buy signals). In another case, the stochastic was not oversold but the daily candle closed as a doji and the 100 MA in red was providing resistance. That makes two indicators signalling the same thing.
When you get the alert, you open a buy position and hold it for a few days until you think the trade has run its course. I use alerts for swing trading in the daily charts a lot because I usually watch the hourly charts for day trading and I don´t want to miss the daily setups.
An alert system based on two indicators would have issued 4 forex trade alerts worth more than 1,000 pips altogether
Don’t let insufficient time or resources bring you down. There are forex strategies which you can use to boost your profit. Naturally, you have to be disciplined when you´re low on funds and wait for the perfect setup. As explained in this article, if you apply the trading strategy correctly you can grow your account exponentially. There are forex strategies suitable for every trader but the results depend on you – and we are always here to offer advice!