In this article we look at how and when it’s best to open a position in Forex. We look into timing and also check out how you can manage an open position.
When to open a position
It’s best to open a position on a swing high with a downtrend and a swing low with an uptrend. A swing high is the moment that sellers take over from the buyers in a downtrend. A swing low is the moment that buyers take over from sellers in an uptrend.
By timing your position well, you can maximize your results and make a nice profit trading Forex. But how do you recognize these moments?
- Candlesticks: candlesticks are the most important and decisive factor.
- Horizontals & trend lines form a resistance or support level.
- Moving averages form a resistance or support level (extra).
- Fibonacci levels form extra resistance and support levels (extra).
Setting up your position
When you have found a nice currency pair that you want to take a position on, it’s recommended that you take this position through an order. With a swing high in a downtrend, you place the order 5 pips below the OHLC bar; if the position isn’t opened the next day, you delete the order and you check if there is a new possibility.
With a swing low in an uptrend you place an order 5 pips above the last bar so the position is filled when the upward movement is pushing through again.
Safely managing your position
Always use a stop loss! This way you can limit your losses and make sure you make a profit. Place the stop loss 5 pips above the candlestick with a swing high and place the stop loss 5 pips below the OHLC bar with a swing low. That way a false breakout can quickly be shut down with limited losses.
When the price does go in the right direction, you can move your stop loss up once a new bar has been formed in the direction of the trend. You increase your stop loss with an uptrend and if the next day a bullish OHLC bar has formed. You lower your stop loss with a downtrend and if the next day a bearish OHLC bar has formed. You don’t change your stop loss when the next bar goes against the predicted trend.
When the price goes in the right direction, you can move your stop loss to 5 pips below the lowest point of the last OHLC bar with an uptrend or 5 pips above the last OHLC bar with a downtrend. That way you secure your profit without blocking the way up.
Trade successfully using a system
If you want to trade successfully, you will have to follow a system that suits you. Within the system two ratios are very important: the reward verses risk ratio and the ratio that determines how large of a position you need to take.
Reward versus risk ratio
You can use this ratio to calculate the potential reward versus the risk.
Calculate the reward by deducting the target value (the value you expect based on the technical indicators) from the price that you opened your position at.
You can calculate the risk by deducting the opening price from the stop loss.
The ratio between risk and reward can then be calculated by dividing the reward through the risk.
This ratio a value of more than one is mandatory (you need to be right in more than 50% of the cases) and a ratio of more than two is ideal (you have a larger margin for error without losing more money than you make).
Ratio for taking a position
If you want to trade consistently and relatively safely it’s recommended that you only risk one to two percent of your entire account’s worth on a single trade. That way you have some breathing room if you walk into a few losing trades.
To determine the amount of money you can put in a single position, you first multiply the amount in your account by the percentage you want to risk. Divide this amount by the difference between the opening price and the stop loss of your position. Now you know how much money you can risk on a trade to make sure you don’t lose more than X% on a single trade.
Keep making money?
If you want to keep making money, it’s important that you keep following your system. Just as a company has a business plan, trading has a trading plan. By dealing with the risks the right way and by managing them successfully, you can profit pretty consistently. Don’t forget:
- To check if this really is a right time to step in.
- To calculate what your profit/risk ratio is.
- To calculate how much money you should stake on a position.
Opening a position
It’s simple to open a position within the software of Plus500. You do this by going to the desired financial instrument and by hitting buy or sell. Then you can click the option ‘buy when the price’ and fill out a value where you automatically buy or sell.
Within MetaTrader you can take a position on a currency pair by right-clicking the desired currency pair. Then click on the option ‘new order’ and fill out the volume. 0.01 = 1000, 0.1 = 10,000 and 1 = 100,000. Finally, choose the option pending order.
Use buy stop to buy with an order and use sell stop to sell with an order. Don’t forget to place your stop loss! Once the order is processed, you will see the lines appear on the chart automatically.