As the US government shutdown as well as debt ceiling debate
continues to play out without a resolution in sight, I am attending a small
investor conference for one of our projects. I am being approached by a young
associate who asked me a question which answer I think may benefit all new
traders, regardless if you trade forex or any other asset class.
The young associate, an intelligent young woman in her mid-20’s,
has started to trade in the forex market in her own and told me that is has
worked out a strategy which she is comfortable with. She asked me the following
question:
How can I increase my trading profits while I also decrease
my risk exposure at the same time?
The answer to the question is rather simple, but she asked
me if I could take an hour over lunch to explain to her how she could implement
it. She offered to take me out. I usually don’t give lessons like that, but
there is always an exception.
I will not go into detail how lunch went, but I will give a
short overview of what we discussed as we lunched away. The food was fantastic,
the ambient amazing and the company great. Overall it was an experience I would
not mind to repeat at a different setting.
The answer to her question: Stagger your entries in a
support or resistance zone.
What does this mean?
Most new traders place one single order as they enter a
trade and as you may know out of experience you usually witness a move against
your first entry. This strategy is for real traders who do not scalp; those who
scalp will find this useless.
Let’s say you want to trade 0.50 lots and EURGBP is your
currency pair you would like to take a short position in. Newbie traders who do
not understand how to trade will place one single order of 0.50 lots and set
their stop loss as well as take profit; often they are so terrified that they
keep the stop loss so tight which means a normal price move will stop them out.
Here is how you should do it, which does not only increase
your profits but at the same time reduces your risk exposure:
- Identify the resistance zone; there is always a zone and not just one single number which mark support or resistance.
- Let’s assume you identified a resistance zone which spreads 30 pips
- Split up your orders in as many as you feel comfortable with, in this example we will use 3 orders
- Enter your first order for 0.15 lots
- Enter your second order for 0.15 lots
- Enter your third order for 0.20 lots
As you see your total lot size remains at 0.50 and this
should not be confused with a martingale strategy. Uninformed traders will tell
you that the spread you will pay will eat away your profit which is not only
moronic, but false.
For starters a spread of one or two pips should never eat
your profits and you should not have a bigger spread. In case you do you may
want to consider switching to a good forex broker who offers you very tight
spread. As I am writing this short post the spread for EURGBP over at PaxForex
is 1.2 pips.
Let’s assume you plan to exit this trade for a profit of 75
pips, the spread on staggered entries will not eat away your profits as you
actually earn higher profits with this approach in comparison to one single
order of 0.50 lots.
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