The market is always right. Not you. Not your opinion. Not someone else’s opinion. So, you have a choice: you can fight the market or you can go with it.
And how do you know where the market is going? Price action! For example, our robot “Forex Forager” always knows at what price it is right about a trade and at what price it is wrong. It doesn’t wander in cyber space with 30-100 pip stops. It knows the exact inflection point where a decision needs to be made. Therefore, it is able to get into a swing or even long term trade with as little as a five pip risk. Do you realize what kind of risk/reward possibilities that sets up for you? You can afford to lose 5,6. 7 trades in a row at five pips each, then catch a winner for 150-400 pips or more. The math is on your side and the longer you play the game, the more profits add up.
Consequently, you need to learn and then be able to find the “flash points” in each currency pair. Let me give you some examples. A head and shoulders formation has a neckline. On that neckline is a specific price, above which you want to be positioned one way and below it another way. Most people will position themselves according to the direction the head and shoulders is pointing, because that’s what they learned in a trading academy or text book. And there’s nothing wrong with that. However, when it doesn’t work out according to the rules, there’s a mad dash to the exits. And that’s where reversing comes in. When a formation fails and the stampede to get out is underway, you’ve got to reverse your position on a dime. The move can be fast and furious, and now, with you on the proper side, your profits are going to be fast and furious.
Now a head and shoulders is only one of many places where you can use a reversal strategy. There are failures every day and you only need to pay attention to take advantage of them. Another good example is a break out from a consolidation, i.e. a rectangle or triangle for example. Many people are going to go with those and you can too. But as soon as it fails and comes back into the triangle or rectangle, you should have reversed your position already and benefitted from all the stops being hit as people scramble to get out. Other inflection points can be found at prices like Fibonacci numbers, etc., anywhere where there’s a specific price where people have been taught to, and are likely to stake out a position.
After all, this is a zero-sum game and most people lose. So by definition, if you are going the opposite way (by reversing quickly), you have to make the money they are losing. You must understand that the markets always trade towards the stops. That’s how it shakes out all the weak longs and shorts before making the major move. Otherwise everyone would win and that can’t be in a zero-sum game. So, you should be attentive to that. You can see from the various chart formations which way the market is positioned, and once you know that, you can be ready to reverse when those positions go sour and the stops add fuel to the move.
Read more articles on risk and trade management
You can learn more about these techniques at the international forum – Currencies, Coffee and Croissants (CCC). It’s just a group of about 50 currency traders from 27 different countries, who meet on skype daily to discuss techniques like “reversing” as well as specific trades. Its educational and fun. You can reach me on LinkedIn or firstname.lastname@example.org.