How to Build and Trade Strategies

Talking Points:

• Swing trading can be attractive due to the potentially strong risk-reward ratios available.
• Swings take place in range-bound and trending markets.
• We show traders how to trade swings in both environments using two different technical indicators.

When someone first begins to learn to trade, they’ll often delve right into technical analysis. After all, if you can read a chart and get trade ideas directly from past price information, there is no need to learn any of the ‘difficult’ stuff. The things like GDP reports, or inflation readings, or central bank announcements: The Macro-Economic events that will often help to shape the way that this world will continue to grow.

This is difficult just because there is so much of it. Many very bright young people will spend their entire lives studying economics and even then, they realize that the field is a very inexact science.

The shortest distance between two points is a straight line, and for most traders that straight line draws directly from technical analysis.

And right after learning candlesticks, traders will often begin moving into indicators to assist in interpreting that chart information. Trading is difficult enough, but when first encountering a chart most traders just see a bunch of squiggly lines. The indicator can help to make sense of that madness.

The first few indicators learned are often the basics. The moving average is often the first one learned because it is so simple; and then after that traders will usually move towards slightly more advanced, yet still ‘basic’ indicators.

These traders will learn how the indicator can work, and may even place a few trades based on that indicator. This story almost always ends the same way as these new traders realize that the indicator doesn’t ‘always’ work, so they discard that one and move on to more advanced studies. This is a very unfortunate mistake.

The fact of the matter is that no tool, whether it’s an advanced indicator or something simple that you learned on your second day in markets – is going to perfectly predict the future. Holy grails don’t exist and regardless of how strong your analytical approach is – any trade you place can end up costing you money.

This accentuates the importance of risk management: The future is uncertain regardless of how great of a trader you become. The difference between a professional and an amateur is that a professional knows what to do when they’re right and when they’re wrong, and an amateur doesn’t. If you want more information on the topic, our Quantitative Strategist Mr. David Rodriguez outlines the importance and relevance of risk management in our DailyFX Traits of Successful Traders research. You can get the full guide at the link below completely free-of-charge.

So, if any trade brings along with it risk, and if the future is uncertain – what does this say about the trader’s pursuit of profit?
This should illustrate that trading is more about probabilities than it is about direct prediction; with the goal being to get the probabilities in the trader’s favor, if even by just a little bit – and this is where technical analysis comes in.

Using technical analysis can allow traders to take a look at what has happened in a market in an effort to get an idea for what may happen in that market. Notice that we didn’t say ‘predict’ or ‘will happen.’ What follows are two ways that indicators can be used to look to initiate positions in the FX market.

Relative Strength Index

RSI is probably the most discarded indicator on the planet earth. While moving averages are often the first indicator learned, RSI usually follows closely thereafter. And after careful examination, traders will often realize that RSI (like any other indicator) isn’t always right. So they’ll often discard it, and move on to investigate other indicators (which all have the same issue of not being perfectly predictable).

RSI, like any other indicator, has pluses and minuses. RSI can work fantastic in a range as an entry indicator; and traders can use this to trade swings in range-bound market conditions.

Traders can look to use RSI in the default manner, investigating short signals when the indicator crosses down and through ’70,’ under the presumption that the market may be leaving ‘overbought’ status; while investigating long signals with RSI crosses up and over 30 as the market leaves ‘oversold’ status.

Trading the Range in USDJPY (4-hour chart) with RSI



How to Trade Swings within a Trend Using MACD

As we looked at above, RSI can be a fantastic way to trade swings within a range. But the fact-of-the-matter is that most traders avoid ranges like they were infested with bubonic plague. So I would be remiss in this article if I didn’t touch on the most desired of the three market conditions: The trend.

To use an indicator to trade swings within a trending environment, we’re going to need some type of a filter to help us determine which direction to trade the trend. A common filter for this cause is the 200-day moving average; as many investment banks and hedge funds around-the-world use this indicator for the same purpose.

If prices are above the 200-day moving average, traders determine the trend to be ‘up,’ in which case they look for opportunities to buy.

In the below image, we’re taking a look at GBPUSD over the past year; in which the pair has seen a brisk up-trend take prices from the 1.5500 vicinity, all the way up towards 1.7000. The 200-day moving average has been applied, and is showing in red on this 4-hour chart below.

MACD has also been applied, using the settings of 21, 55, and 9 periods respectively, and when the MACD crosses up and over the signal line – a long position is considered. Because this is a trending strategy, the short signal from MACD (MACD crossing down and under the signal line) is used only to close the long position. No short positions are initiated here because the trend is classified as being ‘up.’

GBPUSD 4-hour chart (with 200-day Moving Average) Using MACD Trend-Side Entries



As you can see above, not every signal would have worked out perfectly. But in this year-long trend in GBPUSD, traders had numerous opportunities to jump on the long side when prices were ‘low,’ and then to close the positions out after prices have swung higher.

--- Written by James Stanley


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Talking Points:

• Building a Bias
• Finding Our Where or When You’re Wrong
• Taking What the Market Gives You

Trading well is simple but it’s not easy. Due to its simplicity, many traders attempt to jump into a trade figuring it will work out sooner or later. However, a trading plan that involves wishing leaves traders, experienced and new, exposed to a myriad of problems.

Trading Means More Than Wishing You’re Right



Building a Bias

There are many ways to build a bias in trading. A bias is often defined as being bullish, bearish or indifferent. Many traders like to look at a moving average or a recent price extreme in order to build a bias. Either way, a bias helps you to identify entries with strong risk: reward ratios so that even if your win % isn’t great, you’re still making progress.

A Bearish Bias helps you Identify Entries



Put differently, a bias is finding a direction that you prefer to trade in. This is intended to put the odds in your favor in the spirt of the law of inertia, which states, all things being equal, an object in motion stays in motion until an equivalent or net external force stops the trend.

Another reason why building a bias is helpful is that it can keep you out of low probability trades. In trading, we can never predict the future but we can see what’s moving and what’s not. If a currency pair isn’t moving, it’s likely best to wait for & confirm a breakout or look for another pair that is making trend progression. If you’re looking to trade trends, it can be costly to tie your margin up in a pair that’s not moving.

USDJPY Has Sucked Traders into Its Range



Finding Our Where or When You’re Wrong

Trading is full of a lot of helpful rules that have stood the test of time but there is one that often stands above the rest. To quote, Jim Rogers, “Your first loss is your best loss.” There is a lot to unpack from this statement but we can save that for another time. What’s important now is to consider that to manage your trade and your risk, you must decide as soon as possible when the trade is not working out whether in price or time terms.



Some traders are incredibly inpatient, but that can be a good thing. After years of trading, I’ve learned that the best trades often work from the start. Therefore, if my analysis is showing me that a currency pair has the potential to move 75 pips to the upside this week and I enter a trade I have two decisions to make:

• Is the pair trading above my stop (because it’s a Buy order)? (if yes, move to #2)
• Is this trade acting in a timely manner toward my target (if not, something may be amiss)

If I answer yes to both of these questions, then I’m OK. However, if a pair is dragging on in a state of unprofitability, then you’re exposing yourself to unnecessary risk. While we cannot know the future, we can know how much exposure we have on any given trade and that’s where you must develop your skills so as to limit your risk on any one trade.

Taking What the Market Gives You

This is where many traders unfortunately start. They don’t have a bias or method to findoutwhere or when they’re wrong. They simply enter a trade and focus on how much they could make. This type of hope is a dangerous thing.
The preference is to start with a risk point, where you’ll get out of the trade if it doesn’t work out as you want. Only then, in relation to your risk point, should you determine where you’ll get out of the trade IF the trade goes into your favor. A further word of advice, pat yourself on the back and move on if your profit target is hit. It’s too easy to watch the trade after you get out, and be upset that you missed the “big move”.

Emotionally, it’s better to leave the trade once you’ve exited for better or for worse because your risk is limited to when you’re in the trade. If you’re not in the trade, there’s no reason to worry about what could have been. This will allow you to master your approach to the market and not be emotionally subject to its next move when you have no skin in the game.

Happy Trading!
---Written by Tyler Yell, Trading Instructor

First, before you can trade a price channel, you need to identify on your graph. This process can be done relatively easily using basic technical analysis. Traders should first identify and connect a series of highs and lows on your graph. Below we can see an example of this process on a EURAUD 4Hour chart. Notice how resistance has been formed by connecting the two previous highs to form a ascending line of resistance. Since resistance is rising, this means support should be rising as well as with the creation of a series of higher lows. These lows should run parallel to the resistance line that was previously drawn completing the price channel pattern.
While the EURAUD graph used in today’s example is an ascending price channel, it should be noted that channels may also decline in a downtrend or trade sideways during ranging markets.

Learn Forex – EURCAD 4Hour




Trading the Channel

Once a price channel has been identified, we can then take a plan of action for trading it. Trading pricing channels is much like trading a range since we will pinpoint areas of support and resistance for entry order placement. In an ascending pricing channel entries can be set on or near a level of existing support. Traders will look to buy the market in an uptrend in the event price bounces from support up to a higher high. It’s important to remember that trading a pricing channel is ultimately a support and resistance strategy. That means that traders will wait for their opportunity to enter the market and not trade when prices reside between these levels.

One of the easiest ways to trade and ascending price channel is to set a buy entry at support. This way when price touches this value, orders to buy the EURAUD would be executed into the market. However, traders seeking further market confirmation can also employ the use of an oscillator such as CCI when trading pricing channels. Traders using an oscillator will wait for their indicator of choice to return from overbought territory to sell as market momentum begins to return lower in a declining channel.

Trading with oscillators may be new for some traders. For more information on CCI be sure to take advantage of DailyFX’s training course through Brainshark. The course is free and after clicking the link below sign into our ‘Guestbook’. You will be met with a series of videos including other strategies involving the CCI Indicator!

Learn Forex – USDCHF Channel Entries




Exiting Positions

Once an entry is decided, the next step in trading channels is to plan your exit. One reason traders like price channels, is because they provide clear areas for stop and limit order placement. In an upward sloping channel, stops should always be placed below the line of support. If price moves to a lower low and invalidates the channel, traders will want to exit positions to buy the EURAUD as quickly as possible.

Profit targets can also be set by using the pricing channel pictured above. Areas to take profit can be extrapolated by extending our line of price resistance. Traders will want to exit on a test of this line, as price may reverse at this point and continue trading inside of the channel.

---Written by Walker England, Trading Instructor


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Talking Points

• GBPJPY Starts Week Breaking to Highs
• R4 Resistance Sits at 171.36
• Range Resistance Begins at 171.08

EURCAD 30min Chart


The EURCAD opened today’s trading residing between clear points of support and resistance. Resistance has been tested once, and has been defined as the R3 camarilla pivot at 1.4561. After a quick test of resistance price immediately dropped back down to key values of support. Range support for the EURCAD can be seen above at the S3 pivot near 1.45333. The distance between these two points have created a 58 pip trading range for today’s session. As long as price remains supported, reversal traders may begin to watch for a bounce in price back up towards resistance.

Traders should also be aware that the current move toward support may be a part of a bigger market reversal for the EURCAD. Price dropping below the S4 pivot, would indicate the creation of a lower daily low along with a change in market conditions. At this point, traders should consider concluding any range bound positions. As long as price remains under 1.4518 traders may then select with the markets current momentum and morning trend.





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Talking Points:

• Most beginner traders focus on their win percentage
• Educated traders focus on their Risk/Reward Ratio
• Veteran traders focus on how their win percentage and Risk/Reward work together

I work with traders that have a wide variety of skill levels, from people just starting out to traders trading their own money (and sometimes others') professionally. And it’s always interested me how similar the learning process is for most traders. We all start off learning the most basic forex terminology and tools and work our way up until we have carved out our own strategy, good or bad.

Something I frequently see evolve over time is a trader's understanding of win percentage and risk/reward ratio and the important relationship that they have. Today, we analyze this crucial concept.

The Win Percentage Fallacy

What if I told you I had a strategy that has a win percentage over 90%, would you be willing to use it? If you quickly responded, “yes,” you should think a bit longer about what a 90% win rate actually means. On average, my strategy will win 9 times out of 10, but how does this translate into actual dollars and cents?

The above example is a trap I see many traders fall into. Win percentage on its own does not create a winning strategy. We also need to know how much the strategy is winning and losing on the average trade to determine if it has an edge.

In reality, it’s easy to create a strategy with a high win rate. We simply set our profit target 1 pip away from our entry, and a stop loss 50 pips away. More than 90% of the time, our strategy will close out its trades as a winner because the profit target is so close to the current price and our stop loss a long way off. It doesn’t matter where or when we enter the trade, we should have an excellent win rate regardless.

The problem with this strategy is obvious, however. Our profit per trade is tiny compared to the loss we take when we are wrong. So all those profitable trades are completely offset by the rare but large losing trades. We would actually need a win rate greater than 98% to be profitable using this strategy, something nearly impossible.

Focusing on the Risk:Reward Ratio

Once traders realize that a high win rate won’t guarantee that their strategy will be profitable, they often turn to creating a strategy using a positive risk:reward ratio. This is good, because this corrects the number one mistake Forex traders make. A positive risk:reward ratio means that we set our profit target further than we set our stop loss. So our reward is greater than or potential risk on each trade.

Most Traders Use a Negative Risk:Reward ratio



The key benefit to using a positive risk:reward ratio is that it takes pressure off of our strategy’s win rate. We know for certain that as long as we are correct at least 50% of the time, we should be profitable. In fact, our win rate doesn’t need to be that high. We can make money with a win rate much lower than 50% if our risk:reward ratio is strong enough.

Combining Win Rate and Risk:Reward Ratio

Bringing these two lessons together is what creates a profitable strategy. We need to have an edge when we take into account our win rate AND our risk:reward ratio. Neither attribute can make us profitable on their own. The chart below shows several risk:reward ratios and the win rate required to produce breakeven results. To be profitable, we need to have a win rate higher than the breakeven win rate next our preferred risk:reward ratio.

Risk: Reward Ratio and It’s Breakeven Win Rate Required




---Written by Rob Pasche


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Talking Points

• In a Downtrend, RSI Can Remain Oversold
• Use the Centerline to Determine Market Direction
• Settings Can be Adjusted for More or Less Oscillation

RSI (Relative Strength Index) is counted among trading’s most popular indicators. This is for good reason, because as a member of the oscillator family, RSI can help us determine the trend, time entries, and more. Today to help become better acquainted with the indicator, we will review three uncommon tips for trading with RSI.

GBPUSD 8 Hour




Think Beyond the Crossovers

When traders first learn about RSI and other oscillators, they tend to gravitate to overbought and oversold values. While these are intuitive points to enter in the market on retracements, this can be counterproductive in strong trending environments. RSI is considered a momentum oscillator, and this means extended trends can keep RSI overbought or oversold for long periods of time.

Above we can see a prime example using RSI on a GBPUSD 8Hour chart. Even though RSI dropped below a reading of 30, on July 27th, price continued to decline as much as 402 pips through today’s trading. This could have spelled trouble for traders looking to buy on a RSI crossover from overbought values. Instead consider the alternative and look to sell the market when RSI is oversold in a downtrend, and buying when RSI is overbought in an uptrend.

GBPUSD 8 Hour



Watch the Center Line

All oscillators have a center line and more often than not, they become a forgotten backdrop compared to the indicator itself. RSI is no different with a center line found in the middle of the range at a reading of 50. Technical traders use the centerline to show shifts in the trend. If RSI is above 50, momentum is considered up and traders can look for opportunities to buy the market. A drop below 50 would indicate the development of a new bearish market trend.

In the graph above we can again see our GBPUSD example using an 8HR chart. Notice how when price pushed upward, RSI remained above 50. Even at times, the center line acted as indicator support as RSI failed to break below this value on June 24 th prior to the creation of a higher high. However, as momentum shifted, RSI dropped below 50 indicating a bearish reversal. Knowing this, traders could conclude any existing long positions, or look for order entries with prices new direction.



Check Your Parameters

RSI like many other oscillators is defaulted to a 14 period setting. This means the indicator looks back 14 bars on whatever graph you may be viewing, to create its reading. Even though 14 is the defaulted setting that may not make it the best setting for your trading. Normally short term traders use a smaller period, such as a 7 period RSI, to create more indicator oscillator. While longer term traders may opt for a higher period, such as a 25 period RSI) for a mother indicator line.

In our final comparison, you can see a 9 period RSI line side by side with a 25 period RSI line. While there may not seem like much difference at first glance, pay close attention to the centerline along with crossovers of the 70 and 30 values. The RSI 9 at the top of the graph has considerably more oscillation compared to its RSI 25 counterpart.


---Written by Walker England, Trading Instructor


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Talking Points:

• Automation can save time
• Automation can find more trading opportunities
• Automation can reduce trade errors

Automated Trading Can Save Time

The greatest benefit of all, is the time saved when running automated strategies. Being free from sitting behind a computer screen all day looking at charts allowed me to live a more balanced life.



It's nice to not have to stress about looking for trade signals and double checking my analysis to make sure a setup was valid. Instead I could focus my time on more important things, like making sure my actual strategy was effective and looking for ways to improve it. Having the extra time allows the ability to do this, which I think makes a big difference.

Automation Can Generate More Trading Opportunities

Following the same line as the benefits explained above, automated strategies run 24 hours a day, 5 days a week. This insures that every opportunity out there is being capitalized on.

Without automation, we are bound by how much available time we have to commit to look for trades. Many have full-time or part time jobs, and all of us must sleep. So there will most assuredly be times where we miss trade setups. But when we have a program constantly scanning the market based on our set of rules, we know that each trade that could possibly be placed, will be placed. And we know the trade will be managed properly based on our preset rules. We are maximizing our strategies' potential, which should increase profits.

Automation Can Reduce Trade Errors

We might think that we are disciplined and are careful each time we place a trade, but we are all humans and we will make mistakes from time to time... whether they are intentional or not. True accidents come in a variety of forms, including: placing an incorrect trade size, setting a stop/limit at the wrong level, closing out the wrong trade, or (in my opinion, the worst mistake of all) placing a trade in the opposite direction of what we actually wanted.

Some of you might be laughing at the thought of placing a trade in the wrong direction, but I know there are many of you reading this that immediately thought back to a time when you thought you had placed a winning trade, only to find out that you had a losing trade that was placed in the opposite direction. It happens.

But even beyond those type of trade errors, almost all traders fall victim to their emotions which can cause us to deviate from our strategy. All our work to create a winning strategy means nothing if we don't follow it, so emotions can really hinder performance. When we automate our strategy it takes emotions completely out of the equation. Computers will do exactly what we tell them to do, so we know our strategy will be executed exactly like we engineered it to.

How Can We Begin Using Automation?

There are a couple different ways we can get into trading automation depending on where we are at in our Forex journey. If we have our own trading strategy that we would like to have automated. If we do not have our own strategy, we could then look towards a platform that has pre-built strategies included with it.


---Written by Rob Pasche

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Talking Points:
-The Psychology of Gaps
-When the Gap Doesn’t Fill
-Using the Gap for Future Reference

"There are no facts - only interpretation" – Nietzsche

In the Forex market, gaps are rare. A gap shows on a chart when an open prints below the prior close. This often happens to a major shift in the market’s understanding of value from the close of the prior session to the start of the current session.

The Psychology of Gaps



Technicians have loved gaps dating back to candlesticks of the Japanese Grain markets where they were called market windows. A gap or window can give you insight into a strong shift of market understanding and you can look to that gap area to see how the market reacts around that level to see if the sentiment holds. Because of the rarity of gaps in the FX market, their occurrence demands attention because like Opening Ranges, they can provide a bias for you to base future trades against.

When the Gap Doesn’t Fill



A gap that doesn’t fill is known as a runaway or continuation gap.

This is an exciting gap and can be seen in the earlier to middle parts of a trend suggesting a trend still has further room to run. If the gap immediately fills and the trend reverses, the gap is known as an exhaustion gap and can also be used to set stops against and build your bias. Either way, as they say in London, you should always mind the gap.

Using the Gap for Future Reference



A gap that develops near a common target and pushes price past that target can be a significant sign that strength is set to continue. This recently developed on EURUSD near the 100% Fibonacci extension from the May 8th top to the correction that ensued during the month of June. The 100% Extension was set around 1.3250 as shown above. When a weekend gap caused price to trade through that level and not attempt to fill, that pushed the bias to the next Fibonacci Extension level of 161.8% at 1.2905 that is near where we’re trading on this week’s open.

Closing Thoughts

A good gap is a terrible thing to waste. As traders looking for information to build a bias around, gaps provide a strong shift of sentiment that you can use. A gap communicates to you that whatever price was be bid to enter a trade is no longer valid based on the new information and if this “new” information is just the start, then the trend can and likely does continue.

---Written by Tyler Yell, Trading Instructor

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Talking Points:

• Strong support finally broken, sell setup
• AUD/USD volume continues to increase
• Fibonacci Expansion targets up to +450 pips profit

Unless the AUD/USD suddenly reverses in the next two hours, the Aussie will have its first Daily close below 0.8650. This level has acted as major support for the entire month of October, leaving me to wait a considerable period of time for it to break prior to setting up a short position. Today, we review this technical trade setup, analyze trading volume, and use Fibonacci Expansion to setup profit targets.

Major Support Broken - Bearish

One trading strategy that I use and teach others is to include basic technical charting techniques in your decision making process. One the most basic (and arguably most important) techniques is to identify support and resistance levels. Learn 3 Simple Ways to Identify Support and Resistance in Forex.

On a Daily chart, the Aussie has carved out strong support at 0.8650 by touching and bouncing off of this level several times without breaking. I mentioned in previous articles how a trade setup could occur if price were to break this key level… and the break has finally happened today.

Learn Forex: AUD/USD Daily Chart – Major Support Broken



The chart above shows the support level created by several bounces and now broken by today’s candle. Traders looking to participate in this break can place a market order after 5pm ET (Daily candle close) or can set an entry order to sell around 0.8640. A market order will guarantee that we are entered into a trade where as an entry order would give us a better entry price for a more conservative trader.

Increase in Trading Volume - Bearish

While breakouts can look great in real time, the outcome might not be what we expect. Price could retrace, create what we call a ‘false breakout,’ and take our money before we know what hit us. So a way to defend against a false breakout is by confirming it is, in fact, a real breakout. One way we can confirm a breakout is by looking at volume.

Our ideal breakout opportunity will be accompanied by an increase in volume leading up to and during the actual breakout. Increasing volume acts as confirmation for whatever trading action is occurring on our price chart. So if volume is increasing during a breakout, there is a better chance that the breakout is valid and could continue moving in the direction of the break.

Learn Forex: AUD/USD Trading Volume – Increasing volume



AUD/USD volume has been steadily rising for the past several days with today’s volume placing itself in the top 3 trading days of the entire year. This increase in volume can act as confirmation for a breakout trade.

Fibonacci Expansion Acts as Profit Targets

How far could the AUD/USD fall? That is the big question. It can be difficult to locate potential support/resistance levels when price moves to an area that the market hasn’t seen in 4 years (like the AUD/USD right now). But one tool that specializes in projecting key levels in unchartered territory is the Fibonacci Expansion.

By using the beginning and end of the primary down move followed by the subsequent retracement, Fib Expansion will draw price targets outside the most recent price action.

Learn Forex: AUD/USD Sell Breakout – Fibonacci Expansion Profit Targets



The 61.8% expansion sets up a profit target around 0.8430 and the 100% expansion, a target around 0.8140. We could set our limit at either one of these levels or evenly split them between both. But we do want to make sure we use a positive risk:reward ratio. I recommend using 1:2 ratio where our profit targets are at least twice as far as our stop losses.
Aussie Moves Down Under (Support)

It’s been a long time coming, but the Aussie has finally given traders (in my opinion) a solid reason to pull the trigger on a trade. With major support breaking and an increase in volume confirming, this breakout trade could get interesting.

---Written by Rob Pasche


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Talking Points:

• Inside Bars precede market breakouts
• Use the risk management tool to determine risk percentages

Every trader should have a variety of strategies available to apply to the markets. Having multiple strategies may seem like a complication at first, but having choices can allow traders to react quickly and be able to trade a variety of market conditions. Today we will start a new strategy series by reviewing how to trade inside bars. Let’s get started!

What is an Inside bar?

Inside bars are easily identified pricing patterns that can be found on virtually any chart. The pattern itself requires some simple technical analysis, which includes identifying a series of highs and lows on a daily chart. The idea is that the current candle on the graph will not exceed the previous candles high or low, thus leaving it “inside”.

Let’s look at an example. Below we can see an example of an Inside Bar developing on a USDCAD Daily chart. Our analysis begins by pinpointing the previous bars high and low. Currently the high for the previous daily candle resides at 1.1673 while the low sits at 1.1548. It is important to remember both numbers as today’s price action should not exceed the denoted high or decline below the previous low.

If price remains inside both values, our inside bar will be confirmed!



Execution

So now that you have identified an inside bar, the next question is when and how to trade them. First off, trading inside bars lends itself to trading breakouts. The idea is that the identified highs and lows mentioned above, will also act as support and resistancevalues. If price breaks above resistance, traders will look to buy the market. Conversely if price falls below support, traders will look to sell.



Determining Risk and Reward

As the final step, setting stops and managing risk is one of the most important components of any working strategy. When it comes to trading inside bars, this process can be simplified by setting your stop between your orders. This means if your buy entry and sell entry are spaced 125 pips apart, as per our USDCAD example, you would set your risk at 62.5 pips.
Profit targets can also be formed in the same fashion. Traders opting to use a 1:2 Risk/Reward ratio can elect to target twice the amount of profit in pips relative to their risk. This means using the example above, a 125 pip profit target would be set.

Lastly, now that your risk in pips has been determined, you can use these values to help you determine your risk in terms of your account balance. To do this, you can use the risk management application available for Marketscope 2.0. It will take your risk in pips along with your selected trade size, and show you your net risk in terms of a percentage.


---Written by Walker England, Trading Instructor


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