Our Forex Trading Strategy

In order to trade the Forex market, you need a strategy, a set of rules that you need to follow day after day that will increase the probabilities in your favor. You’ll know that if you follow your rules, at the end, the probabilities will do their job (remember not to focus on individual trades, we cannot control them, instead, focus in a group of trades) and you will get consistent results, period after period. The strategy we use to trade the Forex market is the following:

Market Followers

We never try to guess where the market is heading. It’s dangerous to try to guess where the market is heading because most of the time we will make “buying” and “selling” decisions based on what we “think” the market could do, we might have a bias that was formed because of a subjective methodology, what we saw published somewhere else, or what a trading pal told us. More than 10 years of trading experience tell us that it is impossible to get consistent results trading like this.

How we do it. Instead of trying to guess where is the market heading, we trade based on what the market is telling us. We try to identify the market condition and trade based on this condition. If the market tells us that it has more probabilities to go up, we try to find long opportunities, if it tells us that it has more probabilities to go down, we then try to find short opportunities, if it ranges, we then adapt our strategy to such market condition.

Market Entries

Most currency traders based their trading decisions on technical indicators, but most indicators are a simple formula applied to price (close, open, high or low) for a determined amount of periods. This tells us how the market behaved during the chosen period of time, but believe me, this has nothing to do with the future direction of the market.

How we do it. We enter the market based on price action, the market itself tells us to enter the market when it has a higher probability of heading in one direction over another. It is a simple and objective methodology to trade the Forex market and get consistent results.

Risk-Reward Ratio

Most traders based their strategies in a good accuracy. The accuracy of the system refers to the number of positive trades over all trades for a chosen period of time. But there is one slight problem, we never have control over the accuracy of the system, the market decides whether it is going up or down, the accuracy of the previous 10 trades has nothing to do with the accuracy of the next 10 trades.

How we do it. Instead of trading based on a good accuracy, we trade based on a good risk reward ratio (RRR). The RRR refers to how many pips we are risking and how many pips we are willing to make on one trade in a set of trades. When we based our trades on a good RRR, we can have the same amount of winning and losing trades and still get good trading results, this way we will not depend on the accuracy of the system in order to get consistent results. Additionally this helps us trade with less stress.

Trading Plan

At the beginning of the day we end up with a short term and a long term trading plan. Every day we analyze the long term charts to determine in which currency pairs we are going to look for a trade opportunity and the short term charts to determine what the market needs to do to get us ready to trade. This helps us to have a very well structured plan and trade with more discipline.

Trade, Risk and Money Management

These are aspects of trading that many forget about, yet they are very important (I would venture to say that they are even more important than market entries). Risk management refers to the methodology we use to define how much to risk on each trade. Money Management refers to the methodology we use to determine how large our next trade should be (position sizing) and Trade management is how we manage our trade once we are already in it (partial profits, pyramid in, etc).

At the end, all these rules help us trade based on a simple yet objective methodology the Forex market, with low stress levels which help us follow the strategy to a 100% and therefore get consistent results. All we are doing here is just putting the probabilities on our favor.