We have learned some principles regarding technical and fundamental analysis. We also went over some various money management issues. It is now time to learn how to trade the "Forex Cash Cow" strategy, one of the finest trading strategies I have developed over the years.
Over time I have created and tested many trading ideas for different markets. In the past I was naive enough to think that the more complex and the more time and effort I put into designing a trading strategy the better it will work and the more money I will make. It took time and some loss of money in order for me to learn that it is the simplest and easiest to implement trading strategies that yield the best results. Using common sense with correct money management is the key. Understand and follow these two principles, and I guarantee you will be light years ahead of the 95% losing crowd.
I believe that a good trading strategy is one that exploits certain occurrences in the market that do not happen very often. While the losing crowd tries to trade every day and force trades on nonexistent opportunities the winners wait like hunters for those high probability low risk trades.
I refer to the Forex Cash Cow strategy as my bread and butter strategy! There are several reasons of why I like it so much. First, it is very accurate, probably the most accurate strategy I am currently using. Second, it does not occur every day, on an average I expect to see it 3-4 times per month. This means less stress for the trader and more free time to pursue other activities. Third, most of the time I know a day in advance if there is going to potentially be a signal or not. Fourth, it has the potential of providing a very nice profit for the patient trader.
The logic behind this strategy is simple, once the market has "exploded" price wise to a certain direction it will continue moving in that direction until it runs out of fuel. The Forex Cash Cow strategy aims to catch the move from the moment the market has proven to have "exploded" to the moment it runs out of fuel! The idea is simple, instead of speculating if and when a large move in price is due we just wait for the market to tell us "I started moving hard and fast, please join!".
The Forex Cash Cow strategy works very well in the currency market simply because this market possesses the characteristic of having various sharp and long price swings. I have noticed that throughout the month currencies tend to have various strong two day trends. These two day trends are what this strategy aims to exploit.
The one thing that always bothered me when trading currencies are the fake moves that occur prior to the market really deciding on a direction. This phenomenon is very common in volatile markets and can kill you if you do not know how to handle it. Don't get me wrong, volatility is very good for a trader. Without sharp moves we cannot make those handsome profits in the short term. However, you have to know how to approach this volatility.
The bigger the moves a currency pair makes the higher are the chances of success using this strategy. This is why I chose to use the GBP/USD pair; it has the largest short term moves of all currency pairs.
Many market analysts/system designers/technicians claim that for a trading strategy to be good it has to work in every single market. I strongly believe the opposite. For me, every market has its own personality. This is why I adapted this strategy to the GBP/USD pair. I think its personality is the most adequate for trading the Forex Cash Cow strategy (or any other trend following strategy).
The problem I encountered when designing this strategy was how to establish that a trend has started without it being too late to place a good risk/reward trade. I found that there are two problems with trying to identify and join a trend. First, you can easily get tricked into thinking that a trend has started only to find out some time later that this was a fake move. Second, by the time you spot a valid trend it is either to late since it is ending or if it is not ending a very good reaction is due which could easily hit your stop loss.
The first requirement that must take place is an intraday "explosion" in price. We want to see the market being extremely bullish or bearish within a relatively short period of time. For our purposes "a short period of time" means one trading day (measured on a daily bar chart). I found that if the GBP/USD pair moves 140 pips or more to one direction in one trading day an "explosion" in price has taken place and the trend will probably continue into the next trading day or two. The 140 pips is a very important number. Less than that and it is probably just a common intraday swing which does not provide any insight as to whether a good trend is possibly developing. It is not an every day occurrence that the GBP/USD moves 140 pips or more (in a single day), it probably happens an average of six or seven times a month and that is why it is so special. As a general trading rule, the less often a certain trading opportunity occurs the more profitable it can be.
Once we spot an explosion in price as described above, step two comes into play. On the next trading day we want to see the market move 70 pips in the direction of the price explosion. We enter the trade in the direction of the move at a distance of 70 pips (it will not always be exactly 70 pips as you will see later on when the 30 pip rule comes into play). Don't worry, it is all very easy to calculate as you will learn shortly.
A stop loss of 60 pips is immediately placed. The exit is either a profit target of 100 pips or a time target of 11:30 of the next day, whichever is reached first.
Let's go over several examples. All times New York time.
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