A Forex Position Trading Strategy
Over the last year and a half, there have been some great trends, most noticeably short JPY first, and then the recent long USD trend. In these conditions, a lot of traders start to wonder why they are not making the kinds of trades where winners are left to run for weeks or even months, collecting thousands of pips in profit in the process. This kind of long-term trading is known as “position” trading. Traders that are used to shorter-term trades tend to find this style of trading a great challenge. That is a shame, because it usually the easiest and most profitable kind of trading that is available to retail Forex traders. Here I’ll outline a strategy with fairly simple rules that just uses a few indicators that you can use to try to catch and hold the strongest, longest Forex trends.
1: Choose the Currencies to Trade. You need to find which currencies have been gaining over recent months, and which have been falling. A good period to use for measurement is about 3 months, and if this is in the same direction as the longer-term trend such as 6 months, that is very good. One simple way to do this is set a 12 period RSI and scan the weekly charts of the 28 biggest currency pairs each weekend. By noting which currencies are above or below 50 in all or almost all of their pairs and crosses, you can get an idea of which pairs you should be trading during the coming week. The idea, basically, is “buy what’s already been going up, sell what’s already been going down”. It is counter-intuitive, but it works.
2: You should now have between one and four currency pairs to trade. You don’t need to try to trade too many pairs.
3: Set up charts on D1, H4, H1, M30, M15, M5 and M1 time frames. Install the 10 period RSI, the 5 period EMA and the 10 period SMA. You are looking to enter trades in the direction of the trend when these indicators line up in the same direction as that trend on ALL TIMEFRAMES during active market hours. That means the RSI being above the 50 level for longs or below that level for shorts. Regarding the moving averages, for most pairs, this would be from 8am to 5pm London time. If both currencies are North American, you could extend this to 5pm New York time. If both currencies are Asian, you might also look for trades during the Tokyo session.
4: Decide what percentage of your account you are going to risk on each trade. Usually it is best to risk less than 1%. Calculate the cash amount you will risk and divide it by the Average True Range of the last 20 days of the pair you are about to trade. This is how much you should risk per pip. Keep it consistent.
5: Enter the trade according to 3), and place a hard stop loss on 20 day Average True Range Away from your entry price. Now you should patiently watch and wait.
6: If the trade moves against you quickly by about 40 pips and shows no signs of coming back, exit manually. If this does not happen, wait a few hours, and check again at the end of the trading day. If the trade is showing a loss at this time, and is not making a positive-looking candlestick pattern in the desired direction, then exit the trade manually.
7: If the trade is in your favour at the end of the day, then watch and wait for it to retrace back to your entry point. If it does not bounce back again within a few hours of reaching your entry point, exit the trade manually.
8: This should continue until either your trade reaches a level of profit double your hard stop loss. At this point, move the stop to break even.
9: As the trade moves more and more in your favour, move the stop up under support or resistance as appropriate to the direction of your trade. Eventually you will be stopped out, but in a good trend the trade should make thousands or at least hundreds of pips.
You can customize this strategy a little according to your preferences. However, whatever you do, you will lose most of the trades, and you will go through long periods where there are no trades – which is boring – or where every trade is a loss or breaks even. There will be frustrating moments and challenging periods. Nevertheless, you are bound to make money in the long run if you follow this kind of trading strategy, because it follows the timeless principles of robust, successful trading:
- Cut your losing trades short.
- Let your winning trades run.
- Never risk too much on a single trade.
- Size your positions according to the volatility of what you are trading.
- Trade with the trend.
- Don’t worry about catching the first segment of a trend, or its last. It is the part in the middle that is both safe and profitable enough.