FXstreet Trading Strategies

While the Forex market has been quiet, you have no doubt been aware of the World Cup 2014 in Brazil? If you’ve been looking for somewhere full of excitement and volatility then you haven’t had to look much further than the greatest show on earth! At the time of writing this article, I am anticipating a fantastic final between Germany and Argentina. By the time you read this piece, we will have our World Cup champions. It has, without a doubt being the greatest World Cup I’ve ever seen.

Of all the surprise results that we witnessed in this World Cup, the greatest was no doubt when Brazil was beaten by Germany in the semi-finals 1-7. It sent shockwaves around the world and many media outlets were quick to criticize the performance of Brazil’s football team for the poor result. However, I personally do not think enough credit has been given to the way that Germany played against Brazil. As an Englishman I’ve watched my national soccer team being beaten by Germany on countless occasions and rather than become bitter about it, my appreciation has just continued to grow out of respect for the style of football and resilience with which Germany plays over and over again. When it comes to reliability Germany holds no equal. It must be great to be a German football fan! Here is a team that has won the World Cup three times (at the time of writing this article), finalists 8 times over and runners-up 4 times (at the time of writing) and came third 4 times. Who would not want a track record like that?

The one thing that Germany does time and time again, is show consistency. They very rarely play erratically, they score goals, and they defend and play as a team. Coming back to my original point of having defeated Brazil, the thing I noticed the most about watching that game was how simple they kept it. They had a few lapses in concentration and I think that can be forgiven, as they were probably elated to be winning by such a large score line. However they kept control of the ball, they created space and took their time passing the ball to one another and waiting for the right opportunity to come along. Let’s face it; if the German football team were a FX trader, you wouldn’t be able to ask for a better set of skills. Watching their performance through this tournament and how they picked apart Brazil with simplicity and consistency, just made me see the parallels of what is required to be a consistent speculator in the currency markets as well. Time and time again I see examples in this wonderful world we live in, of people and institutions taking something which seems to be quite complex, making it very simple and then becoming very good at it. If you want to be a successful trader, you need to learn to do the same.

When teaching at Online Trading Academy, my fellow instructors and myself teach our students to tackle the world wide financial markets with the same mentality, using a simple rules based strategy which allows us to achieve consistency and effective results in the marketplace. Our core strategy, allows us to simply and objectively recognize institutional patterns of buying and selling. We know these patterns as levels of Supply and Demand. When we find a level of demand, we expect prices to rise so we’re willing buyers at that zone. Likewise, when we identify a level of supply we expect prices to fall, so this is where we are placing our orders to sell. When we have recognized our opportunities, all that is left to do is to place our order to enter, enter the stop-loss if we are wrong and our profit objective if we are right. We do this consistently and without question, knowing that if we keep it simple and objective, we will have success in the long run.

Let’s take a look at an example of a quality demand area which played out a little while ago:



The above opportunity on the GBPUSD showed us a strong imbalance around the price of 1.7100, suggesting to us that we had a low risk, high potential reward buying opportunity on our hands. With this identified, we simply buy when prices enter the zone, with our stop-loss just below the lows and our profit target situated at the most recent supply around 1.7165. We then let things play out and see what the results are:



As we can see from the above screenshot things could not have worked out any better. Prices dropped nicely into our buying zone, going nowhere near our protective stop-loss order and then rallied to our profit target in a relatively short space of time. The risk was well worth the reward we achieved on this opportunity. However, not every opportunity works out as picture perfect as this. Just like Germany managed to score 7 goals against Brazil they also had one scored against them. As traders we have to expect to take losses as well, irrespective of whether or not we like it. Here is another setup of an objectively identified institutional supply zone, which also offered a low risk and high potential reward trading opportunity:



The structure of the zone suggested a large imbalance between the willing buyers and the willing sellers, allowing us a very tight low-risk entry for a great short. There is nothing any different from this selling setup to the previous example to buy. We would approach this level exactly the same way irrespective of our thoughts or emotions. We just play out trades with consistency. Here is the result:



As you can see from the results above, the level completely failed, resulting in a small loss and nothing more. The trade matched the plan and we took it accordingly. We can afford to take the small loss because when we do win, we win at least three times what we lose. This level of efficiency is required in trading just like it’s required in anything else that you want to do successfully and consistently.

One can look back at Germany’s campaign through this World Cup and not every game they played was as spectacular as the one against Brazil. There were one or two times when they looked like they could’ve been beaten. However, they stuck to their plan, kept things simple and got the job done. Yes they had some goals scored against them but they also scored plenty themselves. These tactics are similar to what is required in the world of trading. We will always take losses and we will also take decent wins. What we need more than anything is to be consistent, simple and disciplined. Treat your trading like the Germans treat their football and maybe you’ll develop the level of consistency that you’re aspiring for.


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Traders all over the world use trend lines to project price into the future and identify potential turning points. In this video we teach you how to use trend lines and apply them to your trading.







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One of the things that many forex traders struggle with is when to close a profitable position. Often, they let emotion take hold, either closing out a position when they shouldn’t because they are scared, or holding on for more profits because of greed and losing everything in the process. It’s important to remember that you should never base a decision on anything but logic – but that can be hard to remember in the heat of the moment.

Having a huge profit on an open position is a good feeling, but your decision on what to do next shouldn’t take into account how much profit you have made already – don’t count your money and use this as the basis of your decision. Instead, ask yourself whether you really believe that your trade will continue to move in the right direction based on real market signals.

For instance, if you are in a strongly trending market, then it often makes sense to keep your position open until there is a clear signal to exit. For instance, if you see new highs being made on a daily basis in an uptrend, then the best thing to do is to keep your position open and limit your risk by using a trailing stop. Keep your stop slightly below the previous day’s low and let the trade run until the market closes your trade for you. Alternatively, simply set your stop to track the 8 day EMA – this will keep your stop at a reasonable level below the current price until the trend reverses.

However, if you do this, keep a lookout for opposing price action. A strong signal such as a large bearish pin bar in a rising market is a signal for you to take your profits. Similarly, keep a lookout for support and resistance levels – if you have already made significant profits, there is no reason to take risks. Even if you think you see a breakout signal as the level approaches, remember that many breakout signals are false. It’s often better to take your profits rather than betting that a trend will continue through a support or resistance level.

On the other hand, price action can also be a good indicator that you should stay in the market. Again, if you are riding a trend and it starts to flatten out, you may be tempted to exit – and perhaps you should. However, if you see a strong pin bar that reaffirms the trend, or any other supporting price action, then consider staying in the market. Again, make sure that you have your risk management strategy in place using trailing stops, but don’t exit the market by yourself when all of the signals are pointing in the right direction – let the market decide.

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The Importance of Exit Strategy, part 1

This is short video about exit strategies, with text and examples. This is part #1:

• exit determines more p&l more than entry
• there is no perfect exit strategy except with hindsight

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The Importance of Exit Strategy, part 2

This is short video about exit strategies, with text and examples. This is part #2:

• fix rules do not work
• you will never perfect your exit strategy
• the real damage is psychological, not financial
• your exit strategy must be designed to match your trading psychology
• a good defence is better than a good offense

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What does the turn in price look like? In the following chart, a supply zone for a short entry was highlighted with the yellow box, and the blue arrow indicates where a good short trade could have been entered. This is the expected “turn in price.”

our stop would go above the zone in which we entered. Here it would have been about 17 pips. Using our 3:1 ratio, we need to find a reasonable profit target of at least 3 times that, or 51 pips. The blue box shows a small demand zone fulfilling our 3:1 ratio, while the green box give us a target of 72 pips, giving us a potential 4:1 trade.




So the turn in price would have been in the supply zone, at the blue arrow giving us a simple 3:1 reward to risk ratio, if not better if the trade kept running. But where do most new traders look to enter? The interesting this is that many trading books teach traders to take what we call a “break-out” trade. This is where price breaks down below a support level, or above a resistance level. This is usually far, far away from the turn in price! The short blue line marked “B” is a common entry used by new traders. In this example, the trade would have worked out entering there, but where would the stop go? If done properly, the stop would still be in the same place as the trade entered at the supply zone. What happens to the reward to risk ratio when entering at the breakout price? Entering there at approximately 136.95 would have given you a 44 pip stop, and a profit target of 26 pips at the blue box and 45 at the green. Over time, this strategy will make you a very frustrated, unsuccessful trader.

Trading at or near the turn in price gives you better reward to risk ratios, and combined with proper trade management, can turn trading into a career instead of a hobby.

You do know what people who trade as a hobby are called, right? We call them “donors.”


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This article written by Dr. Stefan Friedrichowski and Christian Stern was originally published in the September 2014 issue of Traders' Magazine.

• Dr. Stefan Friedrichowski is physicist and full-time trader and manages the scientific work and the development of trading strategies and Christian Stern is full-time trader and heads the treasury and the education department at Trading Stars.

Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.



The Trading Idea There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP) or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic price movements take place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage and use it for a real profit.

An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.”

This is absolutely true. There may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.


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FOREX traders often mistakenly think that their combined actions in the CFD market are determining the way a currency pair moves. It is true that they have an impact however we are trading a derivative ( a product that tracks the price of the underlying security) and to understand what drives our CFD prices we must understand what is driving the price of the underlying security, in this case the exchange rate of currencies.The actual exchange rate is decided by the market makers who operate as foreign exchange dealers. A dealer accommodates people who want to change one currency into another, usually for the purpose of trade or investment, dealers charge buyers a higher price than they pay sellers making themselves a profit by providing this service.

To understand what drives FOREX prices we need to understand the foreign exchange dealer function, how do they decide prices and what makes them increase or decrease price.

Jack Treynor in his 1987 article "The Economics of the Dealer Function" provided the definitive view of the way money market dealers operate, he gave us the Treynor model which gives a thorough insight into the motivation and actions of dealers.



The model shown on the left shows the price of a security on the vertical axis and the exposure of the dealer on the horizontal.

Given a set position for the dealer, in the case highlighted the dealer is currently long the security. The mid point on the horizontal axis would be his flat position. The dealers bid and offer prices are shown, the spread being clear as the difference between these two.



Every time a dealer changes his net position his mean price (average of bid and offer) will change. If a customer who wants to buy a substantial amount of the security the dealer has to decide what price to offer the security at. The trade will alter the net position of the dealer, this new position will change the future price of the security, hence it must affect the current price, indeed the dealers current price must reflect what the price is expected to be in the future if it does not people will be able to make profit simply by trading with the dealer and he will consequently loose money.

As an example of this suppose a trader wishes to buy a substantial number of GBP from the dealer to pay for goods bought in the UK from an exporter. If the current dealer position in GBP is shown in red,(according to the diagram he is net long the GBP) after taking the deal, selling GBP to the customer, he will have less GBP, he may be short GBP, his new position is shown in purple.

To ensure the customer cannot make a profit by undoing the deal he must offer the price that would take effect after the deal. Which is higher than the offer price before the deal. The blue box shows what would happen if the customer sold the GBP back immediately, the dealer would make the spread on both trades and the customer would loose money.

As the size of a dealers position grows they take on more and more price risk, they are not in the business of speculation, they are merely providing a service and taking a profit for doing so. If the orders arrive in a symmetrical fashion, equal buy and sell orders, the dealer will be happy his current position will be flat and he will continue to make the spread.

Often an investor will come to the market who has a view on the asset that is not yet reflected in the price, a series of such investors would result in the dealer holding a large position and getting sand bagged along with the other investors who did not have the new insight. Investors decide if their insight is sufficient to cancel the cost of trading, if not they should not trade.

If the dealer reaches his maximum position he will turn to the dealer of last resort, the central bank, to lay off his position.
The balanced dealerIn the above discussion which is a simplified view of the dealer function but sufficient for people to get a good understanding of what happens, the dealer will be constantly exposed to price risk for the underlying security. If that were the case they would be speculative dealers making profit from the movement in currency not from providing a service.The majority of FX dealers do not expose themselves to price risk, they are not speculative dealers. To mitigate the risk the dealer will hedge each position by opening a forward exchange contract. If the value of the security drops it is offset by changes in the forward contract. The price risk has not disappeared it has been transferred to someone else by the forward contract. The forward will often be held by a speculative dealer with a naked long or short position however they may move some of the risk on with more forwards.

The dealer has replaced price risk with liquidity risk as he must now be able to role over the forward contracts as required. Hence the need for liquid markets!

Having discussed the economics of the dealer function which is the main driver of foreign exchange rates we can see that the price that the dealer quotes depends on two distinct things
The volume of buying and selling of a particular currency
The price of the forward contract needed to provide matched book.
1. Estimating the physical demand for a currencyWe can get a good estimate of this by looking at two things, the trade balance and the volume of government securities being bought by foreigners. There are other reasons to change currency but these are the two major sources of currency exchange. If a currency has a negative trade balance (importing more than it exports) this will put downward pressure on the exchange rate as people are selling the local currency to buy the currency of the exporting country to pay for goods and services.High yield on government debt will attract foreign buyers who will have to buy the local currency before they purchase the government bond, this effect is very noticeable at the moment with the euro and some of the more peripheral country bonds offering high yield. Figures of foreign ownership of debt are published by each central bank as is their timetable for issuing new
2.Estimating the forward priceWe must consider two numbers here, the expected price and the forward price, many people believe these two things should be the same(that is the UIP uncovered interest rate parity). If the two numbers were the same it would be impossible for the speculative dealer to make a profit and the balanced book dealer would not be able to hedge his position. The speculative dealer makes money when the forward price is less than the expected spot price, which is proven empirically to be true.The forward and the expected spot rate are linked closely to interest rate expectations and hence monetary policy.

Having discussed the dealer function in this way and concentrated on the matched book dealer we have a much better understanding of how changes in the prices of FOREX can be explained.

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Hi, it’s Thursday on The Traders Podcast, and this is a special crisis episode, where your host Rob Booker reports on a drastic move (depicted at right) where the Swiss franc gives up. Also: Bitcoin is collapsing, and we don’t know why yet… But Rob speculates. And Jason makes a quick prediction about the Academy Awards Best Picture nominees.



And while you still can, don’t forget to check out Rob’s early bird signup for the newest version of his trading course (releasing this upcoming Friday, January 16) — Trifecta 4.


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Earlier this week I was teaching a lesson in the ongoing Extended Learning Track program for Online Trading Academy, which is a session that revises content learned in the classroom-based environment and then applies it to live markets. As it stands, the session I taught was one of my favorite topics to talk about, namely, multiple time frame analysis.

As we all know, consistent trading in the worldwide currency markets has its challenges and we can choose to keep our analysis as simple or complex as we choose. However, my colleagues and I would always say that a trading strategy needs to be simple and rules based to make it truly worthwhile and obviously easy to execute in a regular fashion. With this in mind though, it is vital to remember that avoiding or ignoring the power of multiple timeframe analysis in trading can be a costly endeavor.

So, if we understand that using a number of different charts to get a clearer picture of a market is a necessary practice, then why don’t people do it more often? It is amazing how many people I meet that day-trade on a regular basis, yet only look at small timeframes and wonder why their results are inconsistent. They haven’t been taught to follow the trend and use small charts for precise entries so they often complain about direction and are left scratching their heads wondering why they have been following the trend, and then as soon as they enter a trade they find the trend reverses on them. If you have ever heard of the common trading phrase, “the trend is your friend,” you too may have suffered from the same frustration from time to time. I know I did! One way to avoid this pitfall is to simply avoid using small timeframe charts alone, just because you are an intraday trader. Following the trend is a key lesson in any new trader’s educational journey and a lesson which I do agree with to a certain extent. However, we must remember that any trend is something that has already happened and when we trade we are trying to determine what is actually going to happen next.

Obviously, trends do have the tendency to continue to a degree but, as we know, changing trends also occur and being aware of this and learning how to interpret it becomes a powerful skill in any trader’s arsenal. Big changes in trend direction tend to occur quite regularly in the FX markets as well, which means there are plenty of fantastic opportunities to jump on board new movements early in their development if we know what we’re looking for. This is where the power of multiple timeframe analysis comes into its own.

We also need to remember that the dynamics of the currency markets openly allows big trend changes to occur on a regular basis because, unlike stocks, there are always two instruments in every currency pair. Because one currency is constantly being valued against another, this means technically that the price is highly unlikely to ever go to zero and, due to the nature of the theory of reversion to mean, we are more likely to see swings up and swings down on a regular basis.

In the stock market on the other hand, the long term trends can last much longer with less exaggerated swings up and down.Let us take a look at some recent price action of one of the more popular major currency pairs, the GBPUSD:



Obviously, we can see that for almost a year now the cable currency pair has been in a long-term downward trend, consistently making a series of lower highs and lower lows. If one was to follow the methodology of traditional technical analysis, they would be looking for trading opportunities which would involve short selling the GBPUSD in an effort to reengage and follow the existing trend.

However, the objective and astute trader must also be aware of where a trend reversal is likely to happen as they don’t want to be the last person jumping on board the move. This can actually increase risk and decrease reward. When a trend change does occur it can often be very quick and rather unforgiving as we can see in the below example:



At the time of taking the above screenshot, the GBPUSD had reversed in price by almost 1000 pips in around just two weeks. If you had been following the trend you probably wouldn’t be feeling too confident in that strategy right now.

In my XLT session we learned in detail how to anticipate these shifts in price action ahead of time to secure ourselves an edge in the marketplace. Obviously, there is a lot more to identifying these changes in price that can be explained in the context of a short article like this, but to give you an idea of what is involved take a look at the chart below:


Does this make things a little clearer for you? By stepping out and looking at a chart on a bigger timeframe, we shouldn’t really be too surprised right now that a sharp correctional rally in the currency pair occurred. If we remain completely objective, we can see that the GBP USD actually trended down to the bottom portion of a five year range.

Until this range is broken we must assume that it will hold, which would suggest more upside potential for the Pound against the US Dollar from where it stands currently. If had only analysed the small time frames we would have completely ignored this possibility.One of the biggest lessons I learned during my trading education was to never make assumptions. Everything that we see on the news or even on a price chart is the result of something that has already happened. Our job as traders and investors is to analyse what has happened so as to give us an idea of what may happen next. The key is to open our eyes and look at the big picture as well as the small one.


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Good morning Traders Podcast listeners! Today on Episode 428 your host Rob Booker interviews Juan Colon, co-founder and CEO of Darwinex. This is a great new up and coming way for traders and investors to make connections. Contact Darwinex at: info AT darwinex DOT com if you would like to receive more information! Thanks for listening!


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Hello Traders Podcast listeners! Welcome to Episode 464. In today’s episode Rob thanks you for all of your positive feedback regarding the recent podcasts. He loves hearing from you! Many of you have asked, “Where is Jason Pyles?” Rob promises to bring Jason back on for a reunion show very soon. For the topic of today’s show Rob discusses how Jet.com and Oracle.com compare to Amazon.com. This business news is fascinating and insightful to our strategies as traders. How does Amazon stay on top? They reduce customer anxiety. It’s magic. So, how can you apply this trick to your trading? Listen in to find out!



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