It is not uncommon to hear many people talk about how they lost a fortune trading Forex. That is why it is estimated that 95% of people trading in the Forex market will surely lose their hard earned money. That is quite a sad reality! But the question is: What are these 95% doing wrong that makes them lose money to the market whereas they came to earn? In this post we are going to talk about a very simple yet very effective strategy that will seat you among the remaining 5% of Forex traders who succeed in making money trading the Foreign Exchange market.
It is noteworthy that the greater percentage of traders who lose money in Forex do not have a trading strategy at all. While the remaining ones among these losers either have a strategy that is faulty or might still have a good strategy but were not following it conscientiously. This strategy I am about to reveal to you, which is based on trend following moving averages, is code named Riding the Trend Strategy
“If you know where you are going your journey will be short. If you have someone to teach you your journey will be shorter. But if you have a mentor to go with you, you are already there.”
In applying this strategy it is assumed you already have a Forex trading account with a trusted Forex broker. If you do not have one, you can register an account here and open a demo account with them so as to easily start implementing and seeing the effectiveness of this strategy. For purpose of simplicity, we are going to use a step by step approach in describing this strategy.
From your broker, download the MT4 (Metatrader 4) and open it as shown in figure above. Then as numbered above, click Insert from the menu items and select Indicators, Trend then Moving Averages. We are going to make use of two moving averages in this strategy, hence this first step is going to be repeated twice, one at a time, as seen in steps 2 and 3 below for the two moving averages.
After taking the No 1 step, the above window will appear. Here we will be inserting the 10 period moving average. Change the period to the number 10, then for MA method, change it to Exponential and apply it to Close. Change the Style to a color of your choice, say blue, as seen above then click the OK button.
Repeat the No 1 step above in inserting a moving average. Here we will be inserting the 20 period moving average. Change the period to the number 20, then for MA method, change it to Exponential as in the case of the first moving average and apply it to Open. Change the Style to a different color of your choice, say red, and adjust the thickness for easy differentiation from the 10EMA then click the OK button.
After inserting the two moving averages, the next indicator we need for the strategy is the MACD. This will be used to refine the signal better in our strategy. Follow the steps above to insert the MACD. From the menu, click Insert and select Indicators, Oscillators, then MACD. From the window that opens, do not adjust the parameters, just click the OK button as shown below and the MACD will be inserted on your chart.
Having taken the above 4 steps, your chart should look similar to the Fig. 6 below with all the indicators showing on the chart window.
How the Strategy Works
Like we said earlier, the Riding the Trend strategy is quite a simple but very effective one. It is most effectively applicable on the Major currency pairs, Commodities, Stocks, Indices, and Energy. It is also applicable to any timeframe of your choice (In our example below, we will be using the 1 hour timeframe). Nevertheless, you need to filter the timeframe (In this case 1 hour) using the timeframe (In this case Daily timeframe) 2-steps above your desired timeframe. This point will be expounded further in the strategy rules below.
Strategy Buying/Selling Rules
- If the 10 EMA curve is above the 20 EMA curve, then that signals a buy.
- If the 10 EMA curve line is below the 20 EMA line, then that will be a sell signal.
- If you are on the 1 hour timeframe, confirm the signal with the daily timeframe, which is 2-steps above H1, to ensure the moving averages point the same direction on both timeframes.
- Lastly, ensure that the MACD bars confirm the trend of the EMAs
- If the MACD bar is above the zero line, it means it is positive to buy
- If the MACD bar is below the zero line, that confirms a sell signal
As seen in the Fig. 7 above at point A, the 10 EMA blue line crosses above the red 20 EMA and that signals a buy and the trend continues up till point B, when the 10 EMA blue line crosses below and trends up till the point C when the trend reverses upward once again and continues up till point D.
But take note at point D that, unlike at the other times, the MACD below did not concur with the moving averages when the blue line crosses below the red line to signal a sell. And as expected, the fake sell signal did not last but reverses to the up trend. That is why it is very important to ensure the H1 MACD confirms the signal before you take a position.
- The first exit point is when the trend you are riding on H1 reverses on the daily timeframe.
- For the H1 example we are using, your stop loss should be 50pips or 500points from the time of entry
Statistics show that 31% of trends are long term, producing more than quadruple of returns based on the risk to reward ratios provided below:
- 1:1 risk reward ratio has a success rate of 67%
- 1:2 risk reward ratio has a success rate of 50%
- 1:3 risk reward ratio has a success rate of 35%
- 1:4 risk reward ratio has a success rate of 30%
Note: Risk Reward Ratio has to do with the ratio of stop loss point to take profit point. For example, if your risk reward ratio is 1:2, that means if your stop loss is 50pips, your take profit should then be 100pips.
Having learned the above strategy, start practicing it today on the demo account you created until you become adept in using this strategy. Do not be in a hurry to open position until all the criteria in this strategy are satisfied. Then you can be sure of placing yourself in the driver’s seat while riding the trends. And then you can be among the successful 5% of Forex traders.