Opening and managing forex trades
In this article we look at how and when to open positions with Forex trading. We will examine the timing of opening positions and discuss the best ways to manage open positions.
When should you open a position?
It is best to open a position on a ring high during a downtrend and on a ring low during an uptrend. A ring high is the moment at which the sellers overpower the buyers again within a downtrend. A ring low when the buyers overpower the sellers again within an uptrend.
Timing your positions is crucial and if you do it right you can maximize your profits with Forex trading. But how can you actually recognize the right moments?
- Candlesticks: candlesticks are most important and should be the deciding factor.
- Horizontals & trend lines: often create a resistance or support level.
- Moving averages: often create a resistance or support level. (additional)
- Fibonacci levels: create additional resistance and support levels. (additional)
Setting your position
When you have found a good currency pair to trade it could be wise to open a position by placing an order. If a ring high is visible in a downtrend you place your order 5 pips below the current OHLC (open-high-low-close) bar. If the position has not been opened by the next day you just remove the order and check for a new opportunity.
Safely managing your positions
Always use a stop loss! That way you can limit your losses and ensure that you achieve positive results. At first, place the stop loss 5 pips above your candlestick in case of a ring high and place the stop loss 5 pips below the candlestick in case of a ring low. This way, a false outbreak can be quickly closed with a limited loss.
If the price does move in the right direction you can move the stop loss as soon as a new bar is formed in the direction of the trend. In an uptrend you increase the stop loss level the period after a bullish OHLC bar is formed and in a downtrend you lower the stop loss level the period after a bearish OHLC bar is formed. You do not change the stop loss if the next bar has moved against the predicted trend.
When the price moves in the right direction you can adjust the stop loss to 5 pips below the lowest point of the last OHLC bar in an uptrend, and 5 pips above the last OHLC bar in a downtrend. This is the best method to secure your profits without limiting them.
Successfully trading through to a system
If you want to be a successful trader you will need to trade with a system that fits you. Within that system two ratios play an important role: the reward to risk ratio and the ratio that determines the size of your position.
Reward : risk ratio
This ratio can be used to calculate the (potential) reward in relation to risk.
Calculate the reward by deducting the target value (the value at which you expect to take profit based on your technical indicators) from the price at which you entered the trade (opening price).
The risk can be calculated by subtracting the opening price from the stop loss.
The ratio between the reward and the risk can then be calculated by dividing the reward by the risk.
With this ratio a value of more than one is required (in that case you should be right more than 50% of the time) and a ratio of more than two is desired (so you have a wider margin for error without incurring losses).
Ratio to determine size of position
If you want trade consistently and relatively safe it is recommended to risk a maximum of one to two percent of your account size in one trade. That allows you some breathing room in case of a series of unprofitable trades.
To determine how much money you use to open a position you first multiply your account balance by the percentage you are willing to risk. Subsequently you divide this number by the difference between the opening price and the stop loss of your position: you now know how much money you can bet on the trade without losing more than a certain percentage of your account balance.
Keep making money?
If you want to keep making money is important to stick to your system and trade accordingly. Like business has a business plan, a trader has a trading plan. By effectively handling and managing risks you can obtain consistent profitable trading. So, do not forget:
- To check whether there is a good entry point
- To calculate your reward / risk ratio
- To calculate how much money to put on one position
Opening of a position
Within Plus 500
It’s very simple to open a position within the Plus500 software. Just find the instrument you wish to trade and click on the buy or sell button. Then you will also see the option to “only buy when rate is”. With this function you can place an order to buy or sell at a specific price.