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3 Easy Steps to Trade Forex (Part 3) By James Stanley It will often take traders awhile to learn a concept that may sound very simplistic, but is absolutely a point of emphasis for all traders. That concept is: Nobody knows what will happen next with price. Regardless of how strong a strategy may seem, or how sure the trader is that price will go up, or price will go down, a simple fact remains: Nobody knows exactly what will happen next on the chart. That is why the management of risk is so important to traders. If risk isn’t managed, results can be catastrophic.
Created with Marketscope/Trading Station 2.0 Let’s think of the trader that looks for ‘100 pip wins,’ on each trade that is taken without observance of potential losses. Let’s imagine that this trader has a string of successes, winning 9 trades in a row, adding 900 pips to their trading account. At this point, our trader is feeling good with 9 straight wins. And then our trader takes a trade that doesn’t do what they thought it would. And as opposed to immediately realizing the loss, our trader decides to wait and hope that the trade comes back in their favor. The next morning our trader opens their trading platform and sees that the position is now losing 1000 pips. This one trade, this single idea has just wiped away the gains of 9 winning trades, AND THEN SOME. Our trader would be looking at a net 100 pip loss, when they have won on 90% of their trades. 100 Pip Loss with 90% win ratio! While this may sound like a problem that can be easily fixed, we have to imagine the decision making process that goes through our heads when we are in a trade. We are human; we want to be right. By default, our brains associate losses with failure and many traders, new and old alike, are reticent to realize losses for fear of failure. The thing that most professional traders will realize is that losses are inevitable; because nobody knows exactly what will happen next on the chart. So the goal then becomes – not necessarily to avoid losses; but to mitigate the damage on those ‘ideas,’ that are losers, and maximize the profit potential on the ones that are winners. One of the most important steps that traders can take to address risk, trade, or money management concerns is the creation and observance of a prudent trading plan; a plan in which the trader specifies the maximum amount of risk that will be taken on, the maximum potential loss that could be seen, and perhaps most important – the amount of return a trader wants to look for given a pre-determined amount of risk (The Risk, Reward Ratio). The importance of risk management CANNOT be understated. The one thing that I, as a trader, know is that I will take losses. My goal is to make those losses hurt as little as possible while making my winners as profitable as I can. This is what we teach in the DailyFX PLUS Education Curriculum; between the On-Demand Video Course (available 24 hours a day, 7 days a week: On-Demand Video Course), and the 3-4 Live webinars that we host in the DailyFX PLUS Live Classroom (DailyFX PLUS Live Classroom). If you would like more information on Risk/Money Management: DailyFX PLUS Online Video Course Lesson 1 – Money Management Clarifying the 5% rule --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “Notification,” to Instructor@DailyFX.com. 
Created with Marketscope/Trading Station 2.0 In a market environment such as this – traders will generally want to look at BUY positions, looking for the trend to continue to the upside. Could short trades work here? Sure, there were a few areas where short trades may have been able to have been traded profitably. But the bias is discernibly to the upside, and that can be evidenced as price is continuing to go up. There are clearly more buyers than sellers over the duration of this chart, as price has continued to go up. On the other hand, markets can exhibit clearly defined movements going in the other direction. The chart below identifies a strong down-trend: 
Created with Marketscope/Trading Station 2.0 Once again, this is a situation in which there is a clear imbalance in the numbers of buyers and sellers in the market. By the very fact that price was going down, we know that there was more supply than demand; or more sellers than buyers. Many traders will look to only open SELL positions in these situations. Identifying the trend can bring many benefits to the trader. Two of the most important benefits are: Have an idea for the market sentiment exhibited for that particular asset over the time period analyzed To get a better understanding for which direction they may want to trade in that particular market Many traders will ONLY take trades on the side of the longer-term trend. This is done in an effort to ‘get the trend on your side,’ or to ‘trade in the direction of the previous bias,’ in the hope that that bias or trend continues and works in the traders favor to push price higher (or lower for SELL positions). There are many ways to identify trend, and this is something that can be customized and done in quite a few different ways so that traders can adjust their trend identification to the specific timeframe and approach they are looking to trade. In the links listed below, we cover a few of the more popular mannerisms of identifying trend. Over the next 2 articles, we will examine 2 more of the important subject areas of trading that new traders are going to want to be familiar with. If you’d like to learn more about identifying and trading with the trend, the following links will provide much more information: DailyFX PLUS Online Video Course- Trend Trading Price Action, an Introduction How to Trade with Moving Averages --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “JS Notification,” to Instructor@DailyFX.com. 
Created with Marketscope/Trading Station 2.0 As you can see in the above picture, when price approached or entered in the ‘Support Zone,’ price had shown a tendency to go up. By price going up, we can assume that there were more buyers than sellers in the market. Also, as price enters or approaches the Resistance Zone, traders have shown a tendency to sell in the past. Identifying Support and Resistance in this fashion can be classified as using Price Action to display these levels; as traders are using the price chart itself, devoid of any other indicators or studies to assist. Support and Resistance can be extremely important for traders to identify as taking a BUY position when price is approaching or in a resistance zone could be potentially costly. Or, perhaps, imagine taking a SELL position as price is in a Support Zone. If traders respect that support as they had in the past, and ensue with more buying than selling – driving price higher, once again that could be potentially costly. There are numerous ways of identifying Support and Resistance, or potential Support and Resistance price zones. This is where areas of study such as Fibonacci can come into play, as many traders will look at ‘Fibonacci levels,’ to point out potential prices that may become Support or Resistance in the future. The links below offer more information in specific regards to Fibonacci. 
Created with Marketscope/Trading Station 2.0 Pivot points are another study that traders will commonly look to in an effort of forecasting potential price levels that may function as support or resistance in the future. Pivot points are based on calculations of previous day’s price action. Once again, the links below contain more in-depth information into the study. If you would like more information Support/Resistance: Fibonacci Retracements: How to Trade Fibs in Forex Pivot Points: Floor Trader Pivots DailyFX PLUS Online Video Course Lesson 1- Support and Resistance How to Trade with Support and Resistance Part 1 How to Trade with Support and Resistance Part 2 Price Action Swings --- Written by James Stanley To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX. To be added to James’ distribution list, please send an email with the subject line “Notification,” to Instructor@DailyFX.com.