Forex Trading Romania

Menu
  • What is a pip

What is a pip

A pip refers to “point in percentage”.

But how do you know where a pip is?

Here’s how…

For pairs without JPY in it, 1 pip is on the 4th decimal place of the Forex pair:

However…

For pairs with JPY in it, 1 pip is on the 2nd decimal place of the Forex pair:

What about a pipette?

A pipette is also known as a fractional pip.

It’s a decimal place away from a pip.

For pairs without JPY in it, 1 pipette is on the 5th decimal place of the Forex pair

For pairs with JPY, 1 pipette is on the 3rd decimal place of the Forex pair

Put it all together and here’s what it looks like:

So…

If EUR/USD moves from 1.1234 to 1.1235, that’s an increase of 1 pip.

If EUR/USD moves from 1.1234 to 1.0234, that’s a decrease of 1000 pips.

If GBP/JPY moves from 123.45 to 123.55, that’s an increase of 10 pips.

If GBP/JPY moves from 123.45 to 120.45, that’s a decrease of 300 pips.

Are you getting it so far?

Next…

How to calculate the value of a pip?

The way to calculate the value of a pip is simple:

  1. Determine the value per pip of this currency pair you’re trading
  2. Determine the spot rate between your account currency and the quote currency (the “second half” of the currency pair)
  3. Convert value per pip from the quote currency to your account currency

Example 1:

Let’s say your account currency is in CAD.

You go long on 100,000 units of EUR/USD.

So…

If EUR/USD increases by 1 pip, how does it affect your P&L (in CAD)?

Step 1: Determine the value per pip of this currency pair you’re trading

Since you’re trading EUR/USD…

EUR is the base currency (the “first half” of the currency pair), and USD is the quote currency (the “second half” of the currency pair).

To determine the value per pip, let’s look at the quote currency.

If you’re long 100,000 units of EUR/USD…

The value per pip is 0.0001 x 100,000 = 10 USD per pip.

Step 2: Determine the spot rate between your account currency and the quote currency

Your trading account is in CAD.

The quote currency is in USD.

Thus, look at the spot rate of USD/CAD.

Step 3: Convert value per pip from the quote currency to your account currency

Let’s assume the spot rate of USD/CAD = 1.3000.

Thus, 1.3 x 10 = 13 CAD.

This tells you that every 1 pip of movement in EUR/USD is worth $13 CAD to you.

Example 2:

Your trading account is in SGD and you long 10,000 units of GBP/JPY.

If GBP/JPY moves by 1 pip, what’s the impact on your P&L (in SGD)?

Step 1: Determine the value per pip of this currency pair you’re trading

Now, since you’re trading GBP/JPY…

The GBP is the base currency and the JPY is the quote currency.

Look at the quote currency to determine the value per pip.

Since you’re long 10,000 units of GBP/JPY…

The value per pip is 0.01 x 10,000 = 100 JPY per pip.

Step 2: Determine the spot rate between your account currency and the quote currency

The currency of your trading account is in SGD.

The quote currency is JPY.

So, look at the spot rate of SGD/JPY.

Step 3: Convert value per pip from the quote currency to your account currency

Let’s assume the spot rate of SGD/JPY = 79.00.

Ask yourself this:

If 79 JPY is worth 1 SGD, how much SGD can you get with 100 JPY?

So…

100 ÷ 79 = 1.26 SGD.

This means that every 1 pip movement in GBP/JPY is worth $1.26 SGD to you.

Now…

Don’t worry if this is too much work for you.

You can use this FREE pip-value calculator that I’ve created this for you.

  • What is a long position

What is a long position

If you enter a long position, it means you want to buy a financial instrument.

You’re bullish about the market.

You expect the price to go up in the future.

The exact opposite of a long position is a short position.

I’ll explain…

Forex example:

Let’s say EUR/USD is 1.1234 right now.

If you’re bullish on it, you can enter a long position at 1.1234.

This means that you’re buying EUR and selling USD.

And if you sell EUR/USD at 1.1334, you’ve earned 100 pips.

Next…

Stock example:

Let’s say Apple share price is $100 at this moment.

If you’re bullish on Apple’s share price…

You’ll enter a long position and buy its shares at $100 each.

And if you sell your Apple shares at $120 each, you’ll bag a gain of $20 per share.

When do you enter a long position?

Here are two scenarios to enter a long position:

  1. Enter on a pullback to the moving average
  2. Enter on a breakout from resistance

I’ll explain…

Scenario #1: Enter on a pullback to the moving averages

If the price is above the moving average, then the market is in an uptrend.

If the market is in an uptrend, then enter a long position when price pullbacks to the moving average.

Here’s what I mean:

Scenario #2: Enter on a breakout from resistance

If the price consolidates near resistance, then chances are that the resistance will be broken.

If price breaks above resistance, then enter a long position on the breakout.

Now, here’s the thing:

There’s honestly no fixed way to enter a long position.

You’ll have to find the trading style that suits you over time.

If you want to learn more, go check out:

• Swing Trading Strategies that Work

• The Price Action Trading Strategy Guide

  • What is a short position

What is a short position

If you’re bearish about the market, you expect the price to go down in the future.

So what should you do?

You’ll enter a short position.

This means you’ll short sell a financial instrument.

And the exact opposite of a short position is a long position.

Let me explain…

Forex example:

Let’s say EUR/USD is 1.1234 right now.

If you’re bearish on it, you can enter a short position at 1.1234.

This means that you’re selling EUR and buying USD.

And if you buy EUR/USD to close your position at 1.1134, you’ve earned 100 pips.

Next…

Stock example:

Let’s say Apple share price is $100 at this moment.

If you’re bearish on Apple’s share price…

You’ll enter a short position to short sell its shares at $100 each.

And if you buy Apple shares at $80 each to close your position, you’ll bag a gain of $20 per share.

When do you enter a short position?

Here are two scenarios to enter a short position:

  1. Enter on a pullback to the moving average
  2. Enter on a breakdown from support

I’ll explain…

Scenario #1: Enter on a pullback to the moving averages

If the price is below the moving average, then the market is in a downtrend.

If the market is in a downtrend, then enter a short position when price pullbacks to the moving average.

Here’s what I mean:

Scenario #2: Enter on a breakdown from support

If the price consolidates near support, then chances are, that support will be broken.

If price breaks below support, then enter a short position on the breakdown from support.

Now, here’s the thing:

There’s honestly no fixed way to enter a short position.

You’ll have to find the trading style that suits you over time.

If you want to learn more, go check out:

• Swing Trading Strategies that Work

• The Price Action Trading Strategy Guide

  • What is a base and quote currency

What is a base and quote currency

When you look at a Forex pair for the first time, you might ask:

“How do I interpret EUR/USD?”

“Am I buying both EUR and USD?”

Not to worry…

I’ll explain.

In Forex, it takes 2 currencies to form a pair.

And there are 2 parts to the ‘equation’:

  1. Base currency – the currency in the first part
  2. Quote currency – the currency in the second part

In EUR/USD:

  • EUR is the base currency – the first part of the ‘equation’
  • USD is the quote currency – the second part of the ‘equation’

Here’s another example…

In USD/JPY:

  • USD is the base currency – the first part of the ‘equation’
  • JPY is the quote currency – the second part of the ‘equation’

So how does it work?

Let’s say EUR/USD = 1.1234…

This means €1 gets you USD 1.1234.

So, if you think EUR/USD will get higher than 1.1234 in future, you’ll go long.

Because you’re expecting:

  • Base currency EUR to strengthen
  • Quote currency USD to weaken

Does it make sense?

Great!

Then let’s move on to the next lesson…

  • What is a major currency

What is a major currency

Major Currency pairs are currencies with the most trading volume against the US Dollar.

Here’s a list of them:

Out of all forex pairs…

EUR/USD is the most heavily traded with the most trading volume.

Because it involves 2 economic powerhouses – the United States and the Eurozone.

Next…

Benefits of trading the major currency pairs

The Major Currency pairs are better to trade with.

And here’s why…

These markets are liquid, so you can enter and exit your trades with minimal slippage.

Their spreads are also tighter, so your transaction costs are lower.

How to use Major Currencies to identify strength and weakness of the US Dollar

The Major Currency pairs are all linked to the US Dollar.

And the price movements of these pairs allow you to understand the US dollar better.

Let me explain…

#1: How to identify strength of the US Dollar

US Dollar is strong if you notice these Major Currencies in a downtrend:

  • EUR/USD
  • GBP/USD
  • AUD/USD
  • NZD/USD

Why?

Because as these major currency pairs decline, you now need less USD to get 1 unit of the EUR, GBP, AUD or NZD.

Next…

#2: How to identify weakness of the US Dollar

Likewise…

The US Dollar is weak if you see these Major Currencies in an uptrend:

  • EUR/USD
  • GBP/USD
  • AUD/USD
  • NZD/USD

Because as these major currency pairs rise, you now need more USD to get 1 unit of EUR, GBP, AUD or NZD.

  • What is an exotic currency

What is an exotic currency

An Exotic Currency are currency pairs from smaller economies.

They have lower liquidity and are more volatilite (compared to major currency pairs).

Here are a list of them:

Next…

Benefits of trading the Exotic Currency pairs

You might be thinking…

“Exotic Currency pairs aren’t the cool kids in town.”

“So why should I trade them?”

Because you’ll get profitable trading opportunities from time to time.

And these trends can last for months or even years.

Here are a few examples…

USD/ZAR had an uptrend that lasted 5 years:

USD/MXN had an uptrend that lasted 4 years:

USD/CNH had a 3-year uptrend:

  • What is a cross currency

What is a cross currency

The good news is this:

You don’t have to stick to USD pairs.

There are cross currency pairs to trade – currency pairs without USD inside.

They also consist of major currencies from developed economies

Here’s what I mean…

EUR/GBP is most traded out of all these.

It involves 2 economic partners: the Eurozone and the United Kingdom.

Thus you can expect EUR/GBP to be liquid with high trading volume.

Benefits of trading the Cross Currency pairs

By trading the Cross Currency pairs, you can:

  • Find trading opportunities not found in Major Currencies.
  • Better express your opinion of the markets.

Here’s what I mean…

For example, if you’re bullish on GBP and bearish on AUD – you can long GBP/AUD.

Or if you’re bearish on EUR and bullish on JPY – you can short EUR/JPY.

GBP/AUD and EUR/JPY not available on the list of Major Currency pairs.

So if you only stick to the Major Currencies, you’ll miss out on these trading opportunities.

Moving on…

How to use Cross Currency to identify strength and weakness of the markets

Let’s say GBP/USD is in a strong uptrend.

The rally could be either due to:

  • A weak US Dollar
  • A strong Pound

You can’t tell why GBP/USD rallied just by looking at only 1 currency pair.

So what you can do is to reference it to other Cross Currency pairs.

For example:

If the GBP/AUD is strong as well, then GBP/USD’s rally is due to a strong Pound.

But if the GBP/AUD is weak, then GBP/USD’s rally is due to a weak US dollar.

You can also check against any other Pound Cross Currency pairs.

If they’re in an uptrend – Pound is likely to be strong.

If they’re in a downtrend – Pound is likely to be weak.

  • What is leverage in Forex

What is leverage in Forex

Leverage in Forex means you’re borrowing money from your broker to trade a larger position.

For example:

Let’s say your account has $1,000 capital.

If the Leverage is 10:1, you can open a position size of $10,000.

If the Leverage is 100:1, you can open a position size of $100,000.

If you want to use Leverage to open a position, you’ll need to know what Margin is…

What is a margin

It’s the capital you must have in your account to open a position using Leverage.

Let’s say Margin required is 1% of position size.

And you want to long 1 lot of EUR/USD which costs $100,000.

So the Margin required is $1,000.

This means you must have $1,000 in your account to long 1 lot of EUR/USD.

Leverage in forex is a double-edged sword, here’s why…

It amplifies both your winners and losers.

Here’s an example:

Let’s say your account size is $1,000.

You want to long 1 lot of EUR/USD worth $100,000, where 1 pip is worth $10.

Assuming Leverage is 100:1.

So you’ll need a 1% Margin which means you must have $1,000 in your account.

If the trade moves in your favour by 100 pips, you gain $1,000 – a 100% return.

If the trade moves against you by 100 pips, you lose $1,000 – your account is busted.

Now if you don’t want this to happen to you, then you must have proper risk management.

To learn more about risk management, check out Forex Risk Management and Position Sizing (The Complete Guide).

  • What is a margin call

What is a margin call

A Margin Call occurs when:

The value of your positions and remaining capital is not enough to meet your margin requirements.

So your broker alerts you to inject more capital into your trading account to keep the trades open.

You might be scratching your head and wondering:

“How could I even get myself into this situation?”

Well, it’s because your trades have gone against you too much due to leverage.

Let me explain…

Example:

Let’s say your account has $5,000.

You long EUR/USD that costs $100,000 and Margin required is $1,000.

Since you’ve opened this trade, that $1,000 becomes “locked in”.

Your Margin available is now $4,000.

Next, you also long GBP/JPY that costs $400,000 and Margin required is $4,000.

You have no Margin available now since you have “locked in” $5,000 Margin.

So if those trades go against you…

The value of your account is less than $5,000 but, your margin required is $5000 (so there’s a shortfall).

Your broker will request you to top up your account so that your account value is back to $5,000.

Alternatively…

You’ll have to close some of your open positions (most likely at a loss).

This allows you to “unlock” some Margin to support your other open trades.

So, how can you avoid a margin call?

When you get a Margin Call, there are 2 possible outcomes:

  1. Inject more capital into your account
  2. Close your open positions (most probably at a loss)

But both outcomes are crappy, isn’t it?

So…

If you don’t want to reach the threshold of getting a Margin Call, you must do these:

  • Always use a stop loss
  • Don’t use the maximum leverage that’s available
  • Risk 1% of trading capital per trade

Let’s say your account size is $10,000.

The risk you can take per trade is 1% * $10,000 = $100.

So you’ll close a trade when it goes against you by $100.

You can use a stop loss order to automatically close your losing trade.

If you want to learn more, then check these out:

• Forex Risk Management and Position Sizing (The Complete Guide)

• FREE Pip Value Calculator

• The Complete Guide to Stop Loss Order

  • What is slippage

What is slippage

A Slippage happens when your order gets filled at a different price than you expected.

Here’s an example:

Let’s say you intend to long EUR/USD at 1.12400.

But perhaps due to high volatility, your order gets filled at 1.12550.

That 15 pips difference is a negative Slippage – you buy at a slightly higher rate.

A negative Slippage sucks right?

But don’t worry…

You’ll get positive Slippage sometimes too.

Let’s say you intend to long EUR/USD at 1.12400.

But your order gets filled at 1.12350 instead…

That 5 pip is a positive slippage – you’ll buy at a slightly cheaper rate.

When does a Slippage occur

Slippage tends to occur when you use market orders to execute a trade.

Slippage can be huge when markets are volatile — especially during news events.

It occurs more frequently when markets are less liquid with low trading volume.

Is there a way to work around this?

You bet!

How to avoid slippage

If you want to avoid Slippage…

Use a limit order instead of a market order

Compared to a market order, a limit order gets filled only at a specified price.

You won’t have to trade at any level higher or lower.

Avoid trading during volatile periods

Trading any major news event is risky if you don’t know what you’re doing.

The prices can swing in both directions within seconds.

If you’re a newbie trader, you’re much better off staying out of volatile periods.

Trade when liquidity is high

For instance:

You can trade when the New York and/or London markets are open.

During those times of the day, the markets are generally more liquid.

You can also trade major currency pairs like EUR/USD, GBP/USD instead.

Since these currencies are from major economies, they are frequently traded.

When liquidity is high, you’ll experience much fewer Slippages on your trades.

  • What is a buy limit order

What is a buy limit order

A Buy Limit Order is an order placed below the current market price.

That order will only trigger if the price were to reach that level.

The exact opposite is a Sell Limit Order.

You might be wondering:

“How does a Buy Limit Order work?”

I’ll explain…

Forex Example:

Let’s say you want to go long on EUR/USD.

The exchange rate is now 1.1234.

But you think that you can get in at a lower price later.

So, what do you do?

You’ll set a Buy Limit Order at a price lower than 1.1234.

Take for example 1.1200.

The Buy Limit Order will be triggered if EUR/USD reaches 1.1200 or lower.

Stock Example:

For instance, Facebook’s share price is $1,000.

But you think it’s too expensive to buy them now.

So you’ll set a Buy Limit Order at $990 and be in the trade when share price dips a little.

Fairly simple, right?

Next…

Why you should use a buy limit order

When you use a Buy Limit Order, you make your trading easier.

Here’s why…

You’re able to buy in at a cheaper and precise price

And you’ll be guaranteed to pay for that price or less.

If market gaps below the Buy Limit Order…

You’ll buy in at an even cheaper price!

Improvement in your trading psychology

You’ll realise trading is mostly about being patient and waiting for the right setups.

Now…

What’s a better way to stay patient than to use a Buy Limit Order, right?

By letting price come to the level you want, you’ll achieve:

  • Better risk to reward
  • Prevent yourself from chasing the market
  • Makes you a more patient and less emotional trader
  • Possibly reducing the chances of busting your account

Moving on…

The downside of using a buy limit order

Let’s face it, the Buy Limit Order isn’t foolproof.

And here’s the thing…

A Buy Limit Order is not guaranteed to be filled.

The market might not pullback lower to hit your Buy Limit Order.

So what happens next?

You’ll potentially miss out on trades that bring you huge bucks.

Or you might even forget about the Buy Limit Order you’ve placed.

Next…

A simple way to use buy limit order to ride the trend

You’ll want to use the Buy Limit Order to enter on pullbacks in an uptrend.

Don’t worry…

I’ve broken it down into these few steps for you:

  1. Identify an uptrend
  2. Wait for a breakout of resistance
  3. Place the Buy Limit Order near that resistance turned support

Step 1: Identify an uptrend

You’ll want to notice the price making higher highs and higher lows.

Step 2: Wait for a breakout of resistance

Once price breaks out of resistance, you don’t want to jump straight into the trade.

You’ll end up buying at the highest price with lousy risk to reward.

Instead, you’ll want to:

Step 3: Place the Buy Limit Order near that resistance turned support

Let the market come to you instead.

You’ll be better off with a more favourable risk to reward.

Now…

This is only one of the many ways to trade the trend.

If you want to learn more, check out The Trend Trading Strategy Guide.

  • What is a buy stop order

What is a Buy Stop Order

A Buy Stop Order is an order placed above the current market price.

The order gets triggered if the price were to reach that level.

(And the opposite is a Sell Stop Order.)

So, how does a Buy Stop Order work?

Let me explain…

Forex Example:

Let’s say you want to buy EUR/USD.

Its exchange rate now is 1.12345.

Let’s assume you want to enter only when the price makes new highs.

So you’ll place a Buy Stop Order at a price higher than 1.12345.

You could place it at 1.12400 for example.

The Buy Stop Order will be triggered if EUR/USD hits 1.12400 or higher.

Stock Example:

Let’s say you want to buy Amazon shares.

But maybe you don’t want to buy now unless there are fundamental catalysts to confirm the bullish trend.

And you want to let that reflect on the share price.

What should you do?

Assume Amazon’s share price is $1,900 now.

You’ll buy only if it makes new highs.

So you could place a Buy Stop Order at $2,000 to be in the trade when its share price rallies.

Pretty straightforward, isn’t it?

Moving on…

Why you should use a buy stop order

Here are a couple of reasons why a Buy Stop Order will benefit you…

You’re trading a breakout strategy

You’re expecting the price to go much higher if it breaks the resistance level.

However…

A breakout could happen within seconds.

So even though you’re watching the chart, you could miss out on the trade.

What you can do is to place a Buy Stop Order ahead of a breakout.

That way, you can always be in the trade.

Improves your trading psychology

By using a Buy Stop Order:

  • You’re less likely to miss a trade
  • You don’t have to chase the price when it gets overstretched
  • You don’t have to glue your eyes to the chart the whole day waiting for that breakout
  • You’ll become less emotional in trading – saving your account from self-destruction

Next…

The downside of using a buy stop order

As convenient as a Buy Stop Order sounds, it doesn’t guarantee a profitable trade.

Because your Buy Stop Order might get triggered on a false breakout.

So what happens?

The price hits your Buy Stop Order.

But instead of continuing higher…

The price falls lower, and you get stopped out.

And now you start to ask:

“Why am I even buying high and looking to sell higher?”

Don’t worry.

Because in the next section…

I’ll share with you how to properly use the Buy Stop Order for your breakout strategy.

How to use buy stop order and find high probability breakout trades

Here’s how…

  • Identify a resistance level
  • Wait for a build up to form at resistance level
  • Place Buy Stop Order slightly above the resistance level

Step 1: Identify a resistance level

You’ll use the previous swing highs to identify resistance.

Step 2: Wait for a build up to form at resistance level

After resistance has been formed, don’t place a Buy Stop Order just yet.

Wait for the price to form a build up near resistance level.

Step 3: Place Buy Stop Order slightly above the resistance level

Then place your Buy Stop Order slightly above resistance instead.

Now, a Buy Stop Order is just one of the tools to help you trade the breakout.

If you want to learn more, then check out The Complete Guide to Breakout Trading.

  • What is a sell limit order

What is a sell limit order

A Sell Limit Order is an order placed above the current market price.

That order will only trigger if the price were to reach that level.

The exact opposite is a Buy Limit Order.

So you might be wondering:

“How does a Sell Limit Order work?”

I’ll explain…

Forex Example:

Let’s say you want to go short on EUR/USD.

The exchange rate is now 1.1234.

But you think that you can short at a higher price later.

So, what do you do?

You’ll set a Sell Limit Order at a price higher than 1.1234.

Take for example 1.2200.

The Sell Limit Order will be triggered if EUR/USD reaches 1.1200 or higher.

Stock Example:

For instance, Facebook’s share price is $1,000.

But you think it’s not over-valued enough to short sell it now.

So you’ll set a Sell Limit Order at $1,100 and be in the trade when the share price rises a little.

Fairly simple, right?

Next…

Why you should use a sell limit order

When you use a Sell Limit Order, you make your trading easier.

Here’s why…

You’re able to short sell at a higher and precise price

And you’ll be guaranteed to go short at that price or higher.

If market gaps above the Sell Limit Order…

You’ll short sell at an even higher price!

Improvement in your trading psychology

You’ll realise trading is mostly about being patient and waiting for the right setups.

Now…

What’s a better way to stay patient than to use a Sell Limit Order, right?

By letting price come to the level you want, you’ll achieve:

  • Better risk to reward
  • Prevent yourself from chasing the market
  • Makes you a more patient and less emotional trader
  • Possibly reducing the chances of busting your account

Moving on…

The downside of using a sell limit order

Let’s face it, the Sell Limit Order isn’t foolproof.

And here’s the thing…

A Sell Limit Order is not guaranteed to be filled.

The market might not go higher to hit your Sell Limit Order.

So what happens next?

You’ll potentially miss out on trades that bring you huge bucks.

Or you might even forget about the Sell Limit Order you’ve placed.

Next…

An easy way to use sell limit order to ride the trend

You’ll want to use the Sell Limit Order to enter on pullbacks in a downtrend.

Don’t worry…

I’ve broken it down into these few steps for you:

  1. Identify a downtrend
  2. Wait for a breakdown of support
  3. Place the Sell Limit Order near that support turned resistance

Step 1: Identify a downtrend

You’ll want to notice the price making lower highs and lower lows.

Step 2: Wait for a breakdown of support

Once price breaks down from support, you don’t want to jump straight into the trade.

You’ll end up short selling at the lowest price with lousy risk to reward.

Instead, you’ll want to:

Step 3: Place the Sell Limit Order near that support turned resistance

Let the market come to you instead.

You’ll be better off with a more favourable risk to reward.

Now…

This is only one of the many ways to trade the trend.

If you want to learn more, check out The Trend Trading Strategy Guide.

  • What is a sell stop order

What is a sell stop order

A Sell Stop Order is an order placed below the current market price.

The order gets triggered if the price were to reach that level.

(The exact opposite is a Buy Stop Order.)

Now…

I’ll explain how a Sell Stop Order works.

Forex Example:

Let’s say you want to short EUR/USD

And EUR/USD is now 1.12345

Assuming you want to enter short only when the price makes new lows.

You’ll place a Sell Stop Order at a price lower than 1.12345.

For example, at 1.12200.

The Sell Stop Order will be triggered if EUR/USD hits 1.12200 or lower.

Stock Example:

Let’s say you want to short Amazon shares.

But you’re waiting for fundamental catalysts to confirm the selling pressure.

And you’ll want that to be reflected on the share price as well.

If Amazon share price is $1,900, you’ll short only if it goes lower.

What you can do is to place a Sell Stop Order at $1,800.

So you’ll be in the trade when its share price falls to $1,800 or lower.

Next…

Why you should use a sell stop order

A Sell Stop Order is a tool to make your trading simpler.

Let me explain.

You’re trading using a breakdown strategy

You’re expecting the price to go much lower if it breaks the support level.

But here’s the thing:

A breakdown of support could happen within seconds.

And you could miss a shorting opportunity.

So by placing a Sell Stop Order ahead of a breakdown, you’ll always be in the trade.

Improves your trading psychology

By using a Sell Stop Order…

  • You’re less likely to miss a trade.
  • You don’t have to chase the price when it gets overstretched.
  • You’ll be able to plan ahead and short at a better risk to reward.
  • You don’t have to watch the chart the entire day waiting for that breakdown to happen.
  • You’ll become less emotional in trading – saving your account from going bust.

Next…

The downside of using a sell stop order

As convenient as a Sell Stop Order is, it doesn’t guarantee you a profitable trade.

Because your Sell Stop Order might get triggered on a false breakdown.

What happens next?

The price hits your Sell Stop Order.

But instead of continuing lower…

The price reverses and rallies till you get stopped out.

And now you wonder:

“Why am I even shorting at the breakdown?”

Don’t worry…

Let me share with you how to properly use the Sell Stop Order for your breakdown strategy.

How to use the sell stop order to ride the breakdown

I’ve broken the process down to 3 simple steps:

  1. Identify a support level
  2. Wait for a build up to form at support level
  3. Place Sell Stop Order slightly below the support level

Step 1: Identify a support level

You’ll use the previous swing lows as your support level.

Step 2: Wait for a build up to form at support level

After the support has been formed, don’t place a Sell Stop Order yet.

Instead, wait for the price to form a build up near support level.

Here’s what I mean:

Step 3: Place Sell Stop Order slightly below the support level

Now…

You don’t want to be placing your Sell Stop Order on the support level itself.

Because you’re likely to get stopped out from a false breakdown.

Do this instead:

Place the Sell Stop Order slightly below support.

Fairly simple, right?

If you want to find out more about high probability breakout trades, check out The Complete Guide to Breakout Trading.

  • What is a stop loss order

What is a stop loss order

A Stop Loss Order allows you to limit your losses on your trade.

Here’s how it works…

If you go long on a financial instrument:

A stop loss order is placed below entry price to close your position if the market price hits it.

If you go short on a financial instrument:

A stop loss order is placed above entry price to close your position if the market price hits it.

Simple?

Next…

Why you should use a stop loss order

When you use a Stop Loss Order, you’re essentially managing your risk.

It’s like having an insurance.

You hate to pay for it, but you’ll be glad you have it when shit hits the fan.

A Stop Loss Order:

  • Limits your losses to feel like a pinch
  • Prevents you from blowing up your trading account
  • Allows you to live and “fight” another day
  • Allows you to sleep in peace at night

Not to mention, a Stop Loss Order is FREE.

Moving on…

The downside of using a stop loss order

If your Stop Loss Order is too “tight”, you’ll keep getting stopped out of your trade.

And you’ve probably seen the price hit your Stop Loss Order…

Only for the market to go in your favour later on – a double whammy for your losing trade.

I know that stinks.

But the thing is…

A Stop Loss Order is necessary.

You’ll just need to learn how to use it the right way.

How to use a stop loss order properly

Here’s a simple guide for you to follow:

  1. Identify the market structure
  2. Set your stop loss order away from the market structure

Let me explain…

Step 1: Identify the market structure

Market structure refers to things like support and resistance, trendline, etc.

It behaves like a “barrier” that is hard for the price to get through.

This makes it difficult for the price to reach your Stop Loss Order.

Step 2: Set your stop loss order away from market structure

A Stop Loss Order is placed at where your trading setup will be invalid if price hits it.

So in order for you to not get stopped out easily, you’ve got to give it some “buffer”.

Here’s how…

  • Find the current ATR value
  • Place Stop Loss Order 1 ATR away from the market structure

If you are looking to short, you’ll place Stop Loss Order 1 ATR value above resistance.

Entry at resistance in USD/CHF Daily:

If you’re looking to long, you’ll place Stop Loss Order 1 ATR value below support.

Entry at support in AUD/CAD Daily:

Before you hit the buy order, always remember to place a Stop Loss Order first.

Now…

If you want to learn more about risk management and Stop Loss Order, then check these out:

• Forex Risk Management and Position Sizing (The Complete Guide)

• The Complete Guide to Stop Loss Order

  • What is bid vs ask

What is a bid vs ask

What does Bid and Ask mean for Forex traders like you?

In the Forex markets:

  • Ask price – the price you buy at to go long
  • Bid price – the price you sell at to go short

Here’s an example of what Bid and Ask price looks like in Forex:

So what does it mean?

When you want to go long, you’ve got to buy at the Ask price.

When you go short, you’ve got to sell at the Bid price.

Now the difference between Bid and Ask price is also known as the Spread.

For example…

Let’s say EUR/USD = 1.0010/20

  • Ask price = 1.0010
  • Bid price = 1.0020
  • Spread = 10 pips

If you go long EUR/USD, you’ll buy at 1.0020

If you go short EUR/USD, you’ll sell at 1.0010

The spread of 10 pips is part of the transaction cost of the trade you take.

How the Bid-Ask Spread impacts your trading

A huge Bid-Ask spread erodes your profits and worsens your losses.

But what’s worse is not realising that it actually happens.

So let me explain…

Bid vs Ask is large

Let’s say you buy 1 lot of EUR/USD on a 10 pip stop loss and a 10-pip target profit.

If the Spread is 3 pips, then that’s 30% of your profit potential, or 30% of your stop loss.

This means that your trade only has 7 pips to move before you get stopped out.

And if you win the trade, your profit is only 7 pips.

Bid vs Ask is small

Now…

Imagine you buy 1 lot of EUR/USD with 10 pip stop loss and 10 pip target profit.

If the Spread is 1 pip, that’s only 10% of your target profit or 10% of your stop loss.

Your trade has 9 pips to move before getting stopped out.

And your profit is now worth 9 pips (instead of 7 earlier).

So with a tighter Spread:

  • You don’t get stopped out as easily
  • You keep the bulk of your profits

How to overcome the wide bid ask Spread

You can’t avoid paying the Spread in Forex.

But you can work around the bid ask Spread.

And here are 2 ways to do it:

  1. Focus on major currency pairs
  2. Trade on a higher timeframe

I’ll explain…

1. Focus on major currency pairs

Trade the major currency pairs (those with USD in it) like EUR/USD or GBP/USD instead.

Major currency pairs have higher trading volume and liquidity.

This means that their Spread is much lower.

Avoid trading exotic currency pairs from developing countries like Mexico, Turkey, etc.

Because they have larger Spreads to compensate for the lower volume and liquidity.

2. Trade on a higher timeframe

By trading on higher timeframes, you’ll place wider stop loss and profit target.

And the thing is…

As your stop loss is wider, the bid ask Spread matters less.

Here’s how it works:

Let’s say you buy 1 lot of EUR/USD on the 5-minute timeframe.

You place 10 pips of stop loss.

The spread of 3 pips is 30% of your stop loss.

However…

Let’s say you buy 1 lot of EUR/USD on the Daily timeframe.

And you place 100 pips of stop loss.

The spread of 3 pips is only 3% of your stop loss.

So if you trade on the higher timeframe with a wider stop loss…

The percentage of transaction costs on the trade decreases.

Now, there’s other advantages to trading the higher timeframes.

If you want to find out more…

Then check out The Truth About Trading Daily Timeframe Nobody Tells You.

  • What is the meaning of Hawkish

What is the Meaning of Hawkish

When you hear the word Hawkish, it means the central bank has tightened monetary policy by increasing interest rates.

This subsequently increases the inter-bank borrowing rate, mortgage rate and fixed deposit rate.

A Hawkish monetary policy will discourage:

  • Consumers like us from spending money on goods and services
  • Companies from borrowing money from the banks for expansion

The reason? To slow down the “heated” economy.

(Note: The opposite of Hawkish is Dovish)

Next…

How does a Hawkish policy impact your trading

A Hawkish monetary policy means the interest rates will be higher.

So, investors will move their funds from other countries to earn higher interest rates here.

So when a country adopts a Hawkish stance, demand for its currency will rise and appreciate.

Also, a Hawkish monetary policy can be further classified into:

  1. Expected Hawkish policy
  2. Unexpected Hawkish policy

Let me explain…

1. Expected Hawkish policy

If a Hawkish policy is expected, then the news is priced in and you’ll unlikely see sudden spikes on the chart.

2. Unexpected Hawkish policy

If a Hawkish policy is unexpected, then you’ll likely see sudden spikes on your chart to take into account the unexpected Hawkish news release.

Moving on…

How to take advantage of a Hawkish central bank in Forex trading

Now…

A central bank’s monetary policy on interest rates is a key driver of the Forex market.

Here’s what you’ll do:

You’ll find another currency that belongs to a country with a Dovish monetary policy.

For example

Let’s say US’s Federal Reserve is Hawkish.

The US Dollar (USD) will also be pretty strong.

If Turkey’s central bank is Dovish, then Turkish Lira (TRY) will be relatively weaker than USD.

So what does this mean?

USD/TRY will likely be bullish – as you need more TRY to exchange for 1 unit of USD.

This trend will likely to continue for a good number of months before the central banks announce their next major policy decision.

Here are some ways to trade this:

  • Trade the breakout – go long when the price breaks above the previous swing high
  • Trade the pullback – go long when the price bounces off the 50 MA

For trade management, trail your stop loss with either:

  • Moving average
  • Previous resistance turned support

This way, you’ll be able to ride the trend for all that it’s worth.

Pro Tip:

Avoid getting caught with your pants down – use Forex Factory to see upcoming major economic news.

That way, you’ll know when each central bank will announce their next major policy decisions.

  • What is the meaning of Dovish

What is the Meaning of Dovish

When you hear the word Dovish, it means the central bank has loosened monetary policy by lowering interest rates.

This subsequently lowers the inter-bank borrowing rate, mortgage rate and fixed deposit rate.

A Dovish monetary policy will encourage:

  • Consumers like us to spending money on goods and services
  • Companies to borrow money from the banks for expansion

The reason? To stimulate the economy back to health.

(Note: The opposite of Dovish is Hawkish)

Next…

How does a Dovish policy impact your trading?

A Dovish monetary policy means interest rates will be lower.

So, investors will move their funds to other countries to earn higher interest rates.

So when a country adopts a Dovish stance, demand for its currency will fall and depreciate.

Also, a Dovish monetary policy can be further classified into:

  1. Expected Dovish policy
  2. Unexpected Dovish policy

Let me explain…

1. Expected Dovish policy

If a Dovish policy is expected, then the news is priced in and you’ll unlikely see sudden spikes on the chart.

2. Unexpected Dovish policy

If a Dovish policy is unexpected, then you’ll likely see sudden spikes on your chart to take into account the unexpected Dovish news release.

Moving on…

How to take advantage of a Dovish central bank in Forex trading

Now…

A central bank’s monetary policy on interest rates is a key driver of the Forex market.

Here’s what you’ll do:

You’ll find another currency that belongs to a country with a Hawkish monetary policy.

For example

Let’s say China’s central bank is Dovish.

The currency, Chinese Yuan (CNH) will be weak.

If the US’s Federal Reserve is Hawkish, the US Dollar (USD) will be relatively stronger than CNH.

So what does this mean?

USD/CNH is likely to be bullish – as you need more CNH to exchange for 1 unit of USD.

This trend will likely to continue for a good number of months before the central banks announce their next major policy decision.

Thus you’ll want to look for bullish setups to go long.

Here are some ways to trade this:

  • Trade the breakout – go long when the price breaks above the previous swing high
  • Trade the pullback – go long when the price bounces off the 50 MA

For trade management, trail your stop loss with either:

  • Moving average
  • Previous resistance turned support

This way, you’ll be able to ride the trend for all that it’s worth.

Pro Tip:

Avoid getting caught with your pants down – use Forex Factory to see upcoming major economic news.

That way, you’ll know when each central bank will announce their next major policy decisions.

Translate »