Hedging is one of the most misunderstood trading methods in the world.

So in this guide, I'll give you the facts about Forex hedging, so you understand what it's really about. I'll also dispel the common myths about hedging.

Then most importantly, I'll show you how I utilize hedging in Forex.

Alright, let's jump into it…

What is Hedging?

Hedging is a trading method where traders can potentially hold both long (buy) and short (sell short) positions at the same time. This is done to lower risk and take advantage of market conditions that may be harder to trade with one-sided positions alone.

Large multinational corporations primarily use hedging to manage their risk associated with currency rate fluctuations and changes in commodity prices.

But independent traders like us can also utilize hedging to profit from market fluctuations.

The Benefits of Forex Hedging

You can hedge in many different trading markets.

However, Forex provides some of the most favorable conditions for hedging.

First, transaction costs in Forex are relatively low.

Forex Traders usually only pay a spread, or a spread plus a small commission.

Second, Forex is the largest market in the world, so you'll usually get the price you see on the screen.

Other markets don't have that many market participants, so you may not be able to get a good price on your trades.

Next, it's equally easy to go long and short in Forex.

In other markets like stocks or crypto, it's not as easy to go both long and short. It's much easier to go long in these markets.

Finally, it's possible to trade very small lot sizes in Forex, making it possible to hedge if you have a small account.

This makes Forex hedging accessible to more people, compared to hedging in other markets.

How Does Hedging Make Money?

The next question that people ask is:

If hedgers have a long and short position at the same time, then how do they make money?

What critics of hedging miss is that you don't need to have the same sized short and long position on at the same time. 

Traders can do a partial hedge or utilize no hedge at all.

When positions are not fully hedged, that allows you to take advantage of directional moves.

However, if price does not do what you expect, then you can do a full hedge to stop further losses. At that point, you can clear your head and reassess your options.

In addition, you can potentially make money from both hedged positions, instead of taking a hard loss with a stop loss on just one position.

…and that's one of the many benefits of hedging.

How to Hedge in Forex

You should develop your own hedging methods, but this is what I do.

My hedging method is very simple, but also very powerful. 

It's a simple 5 step process:

1. Identify major support or resistance (S/R) zones
2. Place a trade as enters the zone
3. Place a take profit at the next minor S/R zone
4. If I'm wrong about the direction, I hedge the trade
5. I leave the hedge in place and look for another trading opportunity

There are several nuances that I take into account when looking to enter and exit trades, but that's the basic idea.

To learn more about how I hedge, take my course.

Examples of Hedging

Now these concepts may be a little hard to understand without some illustrations.

So let's dig into the charts so you can see some examples.

Like I mentioned above, I look for solid support and resistance levels.

This is the type of zone I look for.

In this case, I would be looking for price to bounce, so I might look for a buy somewhere inside the green zone.

As the chart moved forward, it turned out that I would have been wrong about the trade.

So when price closed below the zone, I would have hedged 100% with a short. In other words, if I had 1 standard lot long, I would hedge with 1 standard lot short.

In this example, price moved both above and below the green zone, giving me opportunities to close both the long and the short at a small profit.

Not all trades work out like this, but it's a good example of how hedging can have advantages over stop losses.

If you still have questions about how hedging works, here's a video that shows more hedging in action.

In this video, I use backtesting software to speed up the process of practicing hedging.

This is a process that I highly recommend doing before ever risking any real money.

Is Hedging Better Than a Stop Loss?

One method isn't inherently better than the other, it just depends on your trader personality profile.

Some people prefer stop losses because it gives them a hard exit and once they are out, they have a clear head and can focus on finding new trades.

That's great.

I personally use both methods.

But I use hedging as one of my trading methods because I find that it's a lot more flexible and not as stressful as using a stop loss. Instead of taking a loss right away, I can work my way out of trades where I wasn't right about the initial direction.

You can read about all of the pros and cons of each method in this article.

So if you're interested in hedging, I would suggest trying it out in a demo account or simulation software.

See if you like it and if you want to continue mastering it.

The Best Currency Pairs to Hedge

The best pairs to hedge are going to be the Forex pairs that have the lowest net swap. 

In Forex, long and short positions pay or receive separate swap rates, or the daily interest charge or credit, as a result of holding an open position.

If you're paying a lot of daily interest to hold a position, then that will obviously eat into your profits.

You calculate the net swap by adding the long swap and short swap rates.

This information is available from your broker, or you can get it in your trading platform.

In MetaTrader, right-click any market in the Market Watch window, then go to Specification.

Scroll down and you'll see the long and short swaps.

In this example:

• Long: -5.628
• Short: -1.765

Therefore, the net swap is: (-5.628) + (-1.765) = -7.393

So if you hold an equal long and short position in this pair, you won't be losing too much money.

Therefore, this is a good pair to hedge. 

As this is being written, I consider anything greater than -8 is tradable. This may change in the future.

On top of that, most brokers don't have a margin requirement if you have a fully hedged trade.

To learn more about Forex hedging swaps, and what makes a good swap, watch this video.

Get the MT4 EAs here.

Common Forex Hedging Myths

Like I mentioned in the beginning, hedging is one of the most misunderstood trading methods. There is a lot of BS floating around the internet about it.

So in this section, I'll address a few of the most common myths about Forex hedging.

You Cannot Hedge if You Live in the US

It's true that there are specific rules around hedging in the US.

However, you can still hedge in a US account, while still following the rules.

There are 2 hedging rules in the US:

1. You have to exit the oldest open trades first
2. You cannot go long and short in the same account

What many people miss is that there are exceptions:

1. You can exit older trades first, if they are of a different lot size than the newer trades. This can be easily achieved by using nano lots. You can also exit an older trade if it's in a different currency pair.
2. You can setup 2 sub accounts under your primary account. Take longs in one account and shorts in the other account.

That's all there is to it.

There is some thought and practice required, but it does work.

I've been doing it for years.

Here's a video that shows you the concepts in action.

Get a free trial to TradingView here.

You Can't Make Money with Hedging

As I demonstrated above, it's certainly possible to make money with hedging…IF you know what you're doing and have trained extensively.

Again, the key is know when to hedge and how much.

If you hedge 100% every time, then of course you won't make any money.

However, there are times when you might not hedge at all.

Or you might hedge only 50%.

That's the beauty of hedging, it's much more flexible than one-and-done stop loss strategies.

Hedging is No-Loss

Some content creators will tell you that there are certain hedging methods that have 100% winners.

This is simply not true.

There are hedging methods that have very high win percentages, but it's simply not possible to have all winners.

When you learn how to hedge effectively, you can close out a series of trades at a net profit, at a relatively high success rate.

If you want to learn more about why this is a myth, read this article.

Learn 7 More Forex Hedging Myths

Those are just 3 of the common hedging myths out there.

To learn the other 7, watch this video…

What if I'm Wrong About a Hedging Trade?

As I mentioned above, there's no way to have 100% winning trades in hedging.

But there are ways to get out of a losing trade without having to resort to a stop loss.

The first thing I do if I'm not sure about where price is going is to hedge 100%. 

Then I look for other opportunities or more clues about where price could go.

If I have a good idea of where price will go, I have a total of 8 ways to get out of a hedging trade.

I'll share one with you here.

This method might seem a little counterintuitive at first, but demo trade it on a chart and you'll start to seen when it can work.

What I share in this video is one of my most used hedging exit methods.

Can Hedging be Backtested?

Yes! I highly recommend practicing on backtesting software and a demo account before you ever risk real money.

Since hedging is so discretionary, you aren't backtesting a hard set of rules, but you're more getting a feel for what to do in different market conditions.

I suggest using backtesting software that has the “forward test only” feature. This feature doesn't allow you to move back on the chart, only forward.

When you use this feature, you cannot “cheat” and go back once you have seen what happens in the future.

This is the best way to simulate live market conditions. You will probably blow out your backtesting account the first few times.

But don't get discouraged, this is normal.

Keep at it and you'll start to get the hang of it.

This is the software I use to practice hedging.

Final Thoughts on Forex Hedging

Forex hedging can be a great way to trade because it is very flexible and can lower your stress, compared to stop loss based trading strategies.

I love it.

But just like any other trading strategy, it's not for everyone.

Learn it in a demo account and experiment with the ideas in this guide.

If you want to learn my complete hedging method that I've developed over 10+ years of live trading, click here.

The post The Heroic Guide to Forex Hedging for Beginners appeared first on Trading Heroes.

Chart patterns are valuable because they give us clues as to what the markets might do next.

In this tutorial, I'll introduce you to the Second Spike chart pattern. I'll show you how to identify it properly and what it can tell you about what the market is likely to do next.

The Second Spike chart pattern is a reversal pattern that happens after a strong move, usually in the bullish direction. It signals that the market could be reversing and may provide a trading opportunity in the opposite direction. 

How to Identify a Second Spike

There are basically 3 components of this chart pattern.

Once these characteristics are present on your chart, you may have a Second Spike.

1. Look for a Strong Move

The first criteria to look for is a strong move in the upward direction.

This pattern works best with bullish reversals, so I'm only going to look for strong upward moves. It can work for bearish reversals, but I've noticed that it's less reliable.

But test both to see what works best for the market you're trading.

Here's an example of a strong bullish move.

2. Mark off the Elbow

The elbow is a zone on a chart where price previously turned.

Mark off the bottom of the turn, until about half way to the high of the move.

You're going to be targeting this area if the market does a Second Spike.

This is what it looks like.

3. Look for a Retracement Back Into the Elbow

Now that you have the retracement zone marked off, it's time to watch your chart and wait for price to move back into that area.

Set an alert if your platform has that feature. 

This will ensure that you never miss a trade.

Once price enters the zone, it's time to take a trade.

How to Trade a Second Spike

Now as you may have guessed, the ideal entry for trading this chart pattern is to take a trade as soon as price gets into the elbow zone. 

This is called a Hard Fade entry and you can learn more about it here.

Do not wait for any confirmation. 

Entering as soon as price enters the elbow zone will give you the best chance of success and is usually the cheapest price you're going to get on this trade.

The example above shows an idea entry in the elbow zone. The trade worked out well, with price moving back down near a previous support level.

Examples of Second Spikes

Here are more examples, so you can see this concept in action. I'll show you each step of the process, so you'll have a better idea of what to look for in real-time.

Example 1

After a big bullish move, price starts to stall and forms a top.

At this point, I mark off the elbow zone, as shown in this chart.

Next, I wait for price to re-enter that zone and I take a trade in the opposite direction. Here's where I would take a short trade.

It can take a little bit of practice to enter these trades because the big bullish bar might make you nervous.

But once you get the hang of it, that's not a big deal.

The stop loss will go above the highest high of the last move.

Now that the trade is on, I'm just going to sit back and wait to see what the market does.

I would set a take profit on this trade, based on where I think price is likely to go. The horizontal lines would be my 2 potential profit targets.

In this example, I did not get stopped out. Price retested the elbow zone, but it did not hit the stop loss.

If I was able to hold the trade for this long, I would have been rewarded with a big downward move.

As you can see, it took some time for this trade to work out, so I would have had to be patient.

Not all Second Spikes are clean, some of them are messy, like in this example.

Example 2

Now I'll speed things up a bit and put all of the information on 1 chart.

There was a strong upward move in the GBPJPY and there were 2 opportunities to enter a short position on a Second Spike entry.

Example 3

This is another example where there were 2 opportunities to enter on a Second Spike.

If you took this trade, it would have worked out well, with price dropping below previous support.

What Happens When They Don't Work

If a Second Spike doesn't work, your stop loss will get hit and you're out of the trade.

It's all good, move on to the next trade.

Just like with any other profitable trading strategy, not all trades will be winners.

But if you've backtested your strategy and it has an edge, then keep calm and keep trading.

Final Thoughts on Second Spikes

Now that you know what Second Spikes look like, it's time for you to create a trading strategy.

If this chart pattern appeals to you, of course.

The first step is to create a trading plan. I have a free worksheet that will help you create a detailed trading plan.

Then backtest your trading strategy to see if it has an edge.

If your strategy doesn't perform as well as you would like, experiment with different ideas and optimizations until you develop a trading strategy that you're happy with.

Now get to work!

The post What is the Second Spike Chart Pattern in Technical Analysis? appeared first on Trading Heroes.

There are several different types of moving averages out there, but my favorite is the Exponential Moving Average (EMA).

In this beginner's guide, you'll learn what the EMA is, how it works and the results of a super simple trading strategy that uses the EMA.

The Exponential Moving Average shows the average closing price of the previous candles over a specified period of time. It gives more weight in the average to the most recent closing value, and therefore has less lag than the Simple Moving Average. 

I could start by giving you the formula for how to calculate it, but that's boring and overly complex.

If you really want to know how the formula is calculated, I'll provide that towards the end of this guide.

But let's start off with something way more practical.

What is a Moving Average?

A moving average is a graph of the average closing price of a market over the last X number of candles/bars.

Let's use a setting of 10 as an example.

So on a daily chart, the current moving average value would be the average of the closing prices of the previous 10 days.

On a hourly chart, it would be the average of the closing prices of the last 10 hours.

When you're trading, you'll often see the number of candles used in the calculation in parenthesis.

It looks like this:

MA (10)

The Difference Between an Exponential Moving Average and a Simple Moving Average

A Simple Moving Average (SMA) takes the sum all of the closes in the range and divides that number by the number of candles in the range, which is 10, in the example above.

Here's what it would look like in a spreadsheet.

The number in the bottom right corner is the average of the closes from the last 10 days.

An EMA does something similar, but it gives more weight to the closing price of the most recent candle.

Therefore, it lags less than the SMA.

Here's how that looks on a EURUSD daily chart.

As you can see, the EMA stays closer to the current price than the SMA does.

This is why I prefer to use the EMA…most of the time.

You can also use the the open, high or low, instead of the close, to calculate the EMA.

Here's what it looks like when I put the open, high, low and close EMAs on the same chart.

Interestingly, the EMA of the open and the close are almost identical.

But the most commonly used price point is the close. 

Why the EMA is Useful

The EMA smooths out the complex price movements on a chart and gives us one simple line, which we can use to develop trading strategies.

This line shows us the overall trend of the market and gives us a reference point to take trades. 

When the EMA is used as a trend indicator, pullbacks into the EMA can be great places to enter trades, or add to an existing winning trade.

Here are some examples of where you could have opened buy trades on the NEM chart.

This chart uses the 50 EMA (blue) and the 20 EMA (green).

Notice how using EMAs with different settings can help us take advantage of different phases of the trend.

When the trend is weaker, the 50 EMA gives is 3 buy points, as shown by the blue arrows.

As the trend accelerates, the 20 EMA becomes more useful and gives us one entry at the green arrow.

EMAs can also be used in conjunction with other indicators to create countertrend, or against-the-trend, trading strategies.

Here's an example of a 100 EMA on a gold chart, paired with the RSI indicator.

Notice that when RSI goes overbought or oversold, price tends to move back towards the EMA.

This is an example of a countertrend EMA strategy.

Which EMA Setting Should You Use?

The setting you use will depend on the length of the trend you want to identify.

If you want to find longer term trends, you'll include more candles in the moving average.

Something like a 200 EMA is a common setting that traders use to identify a long term trend.

Here's a 200 EMA on the BTC daily chart.

As you can see, the 200 EMA smooths out the downtrend and allows us to see that the long-term trend is down.

For a short-term trend, you'll use a lower EMA setting. A frequently used EMA setting is 20.

This is what the 20 EMA looks like on a chart.

The 20 EMA on this RIVN chart shows that the short-term trend is up.

So if you want to capture long term trends, use a higher EMA setting.

If you want to trade shorter term trend, or you want to place trades in fast moving markets, use a lower EMA setting.

Traders use variations of the settings, depending on the type of market they are looking for and what their backtesting has shown to work.

Obviously, there are many potential settings that you can use.

But let's take a look at an actual trading strategy and the settings that are commonly used with this strategy.

I'll also show you the backtesting results from using these settings.

EMA Crossover Strategy

A well-known moving average trading strategy is to trade when a faster moving average crosses over a slower moving average.

For example, the Golden Cross and Death Cross are often mentioned in the mainstream finance media.

This method usually utilizes the SMA, but the concept is exactly the same.

Here's a chart of the S&P 500, showing the Death Cross that occurred in March.

The purple line is the 50 SMA (faster) and the gray line is the 200 SMA (slower).

So when the 50 SMA closes under the 200, you sell.

When the 50 SMA closes above the 200, you buy.

If you have an existing position, you close it out and enter a trade in the opposite direction.

Obviously, there are more details that need to be added to make this a complete trading plan.

So here's a trading plan that I created and tested in NakedMarkets, using the 50 EMA and 200 EMA, instead of the SMA.

Like I said before, I like the EMA better because it tends to be more responsive to price changes.

You can use almost any platform to backtest this strategy manually, including MT5. But NakedMarkets makes it much easier.

Entry

• Go long when the 50 EMA closes above the 200 EMA. Place the stop loss below the last swing or below the 200 EMA, if there is no obvious swing.
• Go short when the 50 EMA closes below the 200 EMA. Place the stop loss above the last swing or above the 200 EMA, if there is no obvious swing.
• 2% risk per trade.
• 1 entry per signal, 1 trade at at time.

Here's an example of a short entry, with a stop loss (red line) above the swing level before the crossover.

Trade Management

Set the stop loss to breakeven, once the trade is profitable by 1R.

Exit

Wait for price to hit the stop loss, or the EMAs to cross over in the opposite direction.

EURUSD Daily Chart Results

I tested this trading strategy on the EURUSD daily chart, from 2004 to 2022.

This is a really easy strategy to backtest and can be completed in just a few minutes on the daily chart. 

Here are my results…

As you can see, this method didn't trade too often.

But it's really good at riding strong trends when it does take a trade, logging a 34.53% gain on the best trade. 

This trading strategy is super simple and a great starting point for beginners. 

The test was done with zero optimization and used the settings that are freely available on many websites and in YouTube videos.

Therefore, you can do some analysis of the strategy to see if there ways that you could improve the results.

You could experiment with different EMA settings, moving the trade to breakeven sooner, and testing this on different timeframes.

Although this strategy only averaged about 5.71% per year, imagine if you had 5 to 10 markets or timeframes that you trade this on.

That can add up to a solid yearly return. 

So get to testing and find the markets, settings and timeframes that work for you.

You might want to try the 4-hour chart next. It's also very easy to test and you can see your results quickly.

USDCAD Daily Chart Results

I also tested the USDCAD on the daily chart from 2006 to 2022.

These results weren't as good as the EURUSD results, but it was still profitable.

So there is some potential here and should be explored further. 

I noticed that I missed a couple of huge trends because the strategy exited at breakeven.

A re-entry rule could be added to catch these trends.

There's also the potential to split each trade up into 2 parts, taking some profit on the initial move, then leaving the rest to run.

I'm just giving you a starting point here.

Again, try different settings and timeframes on the USDCAD.

It's up to you to test, improve and master this strategy. 

Why is the 200 EMA Important?

The 200 EMA is often used to determine the long-term trend of a market. 

If price is below the 200 EMA, that's often seen as bearish, and if price is trading above the 200 EMA, that's bullish.

Traders who use the 200 EMA will usually only look for shorts is price is below the EMA and only look to buy if price is above the EMA.

It's often used when trading stocks, but can be applied to any market.

But remember, always test first!

The Exponential Moving Average Formula

Alright, if you've made it this far, then you must really want to know how to calculate the EMA.

So here it is…

EMA = k x C + P

k = 2 / (n + 1)

n = Number of days included in the EMA calculation, or the EMA setting

C = Current closing price – Previous EMA

P = Previous EMA

This can be a little confusing, so I'll break it down for you.

Weighting Factor Explained

The weighting factor is k. This gives more weight to the current closing price, based on the number of periods used in the settings.

So if there are more days in the EMA calculation, the current closing price will have less of an effect on the current EMA value.

If there are fewer days, the current closing price will have more of an effect.

Let's start by looking at how a 10 period EMA affects the k value, versus a 200 period EMA.

k = 2 / (10+1) = 0.18

k = 2/ (200+1) = 0.01

In the case of the 10 EMA, the current price has 18% or 0.18 more weight in the moving average than the other 9 data points.

Since there are more data points in the 200 EMA, the current closing price has a smaller effect and only has 1% or 0.01 more weight than the other 199 data points.

Putting it All Together

When the weighting factor is multiplied by the difference between the current closing price and the previous period's EMA value, you're simply giving more weight to the current EMA value.

Finally you add in the previous EMA value to get the current EMA value.

Final Thoughts on Trading with the EMA

The Exponential Moving Average is a great indicator to use to build trading strategies.

I've given you one way that you can use the EMA to trade.

But now it's up to you to test this trading strategy and make it your own.

The secret to successful trading is learning a strategy that works, then customizing it to your unique personality. 

So if you would like to move forward with this EMA crossover trading strategy, the next step is to start backtesting.

I've created this backtesting guide for beginners that will help you figure out your favorite settings and which markets/timeframes this strategy works in.

Remember that just because the strategy worked in the examples above, does not mean that it will work in all markets and with all timeframes. 

You HAVE to backtest. 

But backtesting is a process of discovery and can be a lot of fun.

Now get to work!

The post Exponential Moving Average Strategy (with Results) appeared first on Trading Heroes.

Two of the best known technical trading setups are the “crosses,” or the Golden Cross and the Death Cross.

They are used to signal the potential start and end of long-term uptrends and downtrends. This technical analysis method is usually used on the daily chart.

A Golden Cross and a Death Cross are opposite signals and occur when the shorter term moving average crosses over the longer term moving average.

The most commonly used moving averages are the 50-period Simple Moving Average (50 SMA) and the 200-period Simple Moving Average (200 SMA).

Keep reading and you'll learn the specifics of each crossover and see examples of each cross in different markets.

You'll learn how to get Golden Cross and Death Cross alerts on your computer or smartphone.

Most importantly, you'll also learn how to backtest these crosses to see if they actually work in the markets you trade (no coding needed).

Golden Cross Explained

A Golden Cross occurs when the 50 SMA crosses above the 200 SMA. 

This suggests that the market is entering a long-term uptrend.

Examples of Golden Crosses

Here's an example of a Golden Cross in Bitcoin.

After the cross, the market went on a big run.

This is another example on the AT&T chart.

It's very easy to spot a Golden Cross, once you know what to look for.

Death Cross Explained

Conversely, a Death Cross occurs when the 50 SMA crosses below the 200 SMA. 

This is a clue that the market could be entering a long-term downtrend.

Examples of Death Crosses

Here's a Death Cross in the Nasdaq, which signaled the beginning of a bear market.

Another chart showing a bearish cross on a AUDUSD chart.

Now that you know what these crosses look like, the next question is…

Do These Moving Average Crosses Really Work?

Most of the research around moving average crossovers has been done in the stock market.

This is a study that I found particularly interesting because they tracked both Golden Crosses and Death Crosses across multiple US stock sectors.

As you can see, trading these crosses worked out well during the bull market between 2009 and 2018.

They also did a longer-term study over 20 years, and the results were also profitable.

However, there's a twist to this study…

Instead of selling short on a Death Cross, they actually went long. 

They found that this method generally outperformed the Golden Crosses in a bull market because they were entering the uptrend on a pullback.

So although a moving average crossover is a super simple concept, there are many variations that you can experiment with.

Some of them might work better than the basic strategy.

When These Crosses Don't Work

Just like with everything else in trading, a Golden Cross or a Death Cross does not a guarantee a profitable trade.

There will be periods where the market goes into consolidation phases and that's when you can lose money.

Here's an example of this in the Russell 2000.

If you took every trade on this chart, you would end up with a net loss.

So be aware of the market you're trading and if price action starts to get choppy, it's best to pause and re-evaluate.

Optimize Your Entries

There are several ways that you can optimize your entries and make your trades more profitable.

Here are 2 ideas that you can experiment with…

Trade a Pullback

Instead of buying or selling exactly when the crossover happens, you can look for an area of support or resistance after the cross to enter a trade.

For example, instead of going long exactly at the Golden Cross on this gold chart, you could wait for the support level to form at the orange line.

Then you could buy below the orange line to get a better price than if you entered at the crossover.

As long as price stays above the 200 SMA, your trade has a good chance of working out. A good place to put your stop loss is at, or slightly below, the 200 SMA.

This entry method will also give you the opportunity to get in late, if you missed the original signal.

It would be the same idea in a downtrend, except you would be looking for resistance after a Death Cross.

Ride the 50 SMA

Here's a classic trend following method…

After a cross, you could also trade a retracement to the 50 SMA.

This entry will cause you to lose out on some profits, but it will also help ensure that you're in a strong trend.

For example, here are a few long entries that would have worked in the S&P500.

First make sure that the 50 SMA is above the 200 SMA.

Next, wait for price to drop below the 50 SMA, then close back above it to enter a long.

Then trail your stop loss is a way that you feel comfortable with. A great place to start would be a close below the 50 SMA.

Again, it would just be the opposite in the case of a downtrend after a Death Cross.

In order to find out if these ideas will work in the market you trade, you'll have to backtest.

Here's how to do that…

How to Backtest Golden and Death Crosses

Let's get real, most trading strategies don't work in all markets.

So you'll have to do some testing to figure out which markets work with these moving average crossovers.  

Since these moving averages are so easy to setup, you can quickly backtest them in any market and on any timeframe.

Backtesting is essential because you want to know that the strategy has worked over a long period of time, which will give you confidence to take trades. 

If you're new to backtesting, then read my backtesting guide for beginners to get started.

NakedMarkets is a great software for backtesting strategies, especially if you don't know how to code.

The first thing you should test is the basic version of the strategy. 

For a long, do the following:

• Enter a long when the 50 SMA crosses above the 200 SMA
• Exit the long when the 50 SMA crosses below the 200 SMA

For a short, do the following:

• Enter a short when the 50 SMA crosses below the 200 SMA
• Exit the short when the 50 SMA crosses above the 200 SMA

From there, test the optimization ideas listed above.

If there's a market that you want to trade with these setups, then it's time to create alerts so you don't miss any signals.

How to Get Golden Cross and Death Cross Alerts

There are a few different ways to get alerts for these setups on your laptop or mobile device.

However, the easiest way that I know of is to use TradingView.

They have a ton of markets available, so there's a very good chance that they have a chart for the market you trade.

Since your alerts are hosted on their servers, you don't have to worry about keeping your computer on all the time.

It's easy to setup alerts, which will ensure that you don't miss any signals.

First add the 2 moving averages to the chart.

Click the Indicators button, then click on Moving Average.

Now you'll see the moving average on the chart.

Double click the moving average line to pull up the settings.

Here are the settings for the 50 SMA.

Add another Moving Average and change the Length to 200.

Then right-click on the 50 SMA and select Add alert on MA.

On the settings popup, change the settings to the following:

If you want email or SMS alerts, you can select them under Alert actions.

Click the Create button to set the alert.

Final Thoughts

The best part about these setups is that they are simple and can be added to any chart, on any platform.

But just knowing about these entries is not enough.

You have to backtest the strategies to see if they have an edge in the market(s) you trade.

Then keep a good trading journal to be sure that you're executing your trades correctly.

The post Golden Cross vs Death Cross Differences Explained appeared first on Trading Heroes.

Building your own trading strategy from scratch is difficult. It's a lot easier to find a trading strategy that someone else is trading successfully and tailor it to fit your personality.

With that in mind, I always keep my eye out for new trading strategies and test them out to see if they work or not.

I found this strategy in a Kindle book and it looked like it could work, so I gave it a test. In this post, I'll show you how the strategy works, the testing plan that I created and the results of my testing.

At the end of this post, I'll show you potential upgrades to this strategy and where you can see my additional testing results with this method.

The Trading Method Explained

This trading strategy comes from the book MT4/MT5 & TradingView High Probability Forex Trading Method by Jim Brown. I don't know Jim and I wasn't paid to review this book.

This book was purchased with my own money.

I actually had this book in my Kindle library for about a year before I got around to reading it. Something about it drew me in, but the spammy title also put me off a little.

When I finally opened the book, the trading method made sense and I read the whole book in 1 sitting.

It's an easy read with decent pictures to illustrate the concepts.

Jim is the inventor of this trading strategy and he uses it to trade for a living. Since this is Jim's method, I won't go into all of the details.

You'll have to buy the book to get all of his trading methods, insider tips and download the custom indicators that come with the book. However, I'll show you enough so you can see what I did.

If you like my results, you get the book. If not, you can look for something else.

On the upside, the basics of the trading strategy are simple.

It's made up of 3 moving averages and 2 momentum indicators. The method looks for changes in momentum and marks the chart at points where you can potentially get in at turning points.

As you're looking at a sample chart, you can probably tell that you can use the signals in a couple of different ways. You can either take trending trades or countertrend trades.

I decided to take trend trades only in my test.

The Testing Plan

The great thing about this book is it shows you some excellent entry methods. On the downside, it's light on exit strategies.

In fact, there are no exit strategies.

Jim gives some suggestions on how you can potentially exit a trade, but nothing concrete.

That's one of the biggest downsides of many otherwise useful trading books. They don't give you a complete trading strategy.

There could be many reasons why the author chose not to do this. Maybe his exits are based on reading the market, instead of having set rules.

Nothing wrong with that.

But from the standpoint of someone reading the book and wanting to learn how to trade, it leaves the reader hanging.

That's why I'm sharing my results here.

However, the book does give you a great starting point to create your own strategy.

The other downside is that this book doesn't give you stats on the trading method.

Again, I get why authors do that. They don't want to create expectations or get angry emails from readers who aren't getting the exact same results due to a multitude of reasons that would take a few hours to diagnose.

Therefore, it was up to me to come up with my own exit strategy.

But where to start?

I've found that the easiest way to start testing a trading system that doesn't have set exits is to use a 1X risk profit target. So if the stop loss is 100 pips, then the take profit will also be 100 pips.

This won't work in all cases, but it's a quick and dirty way to help me see if a method has potential or not.

So here's the trading plan that I put together to do my first backtest of the concepts in this book.

• Pair: EURUSD
• Timeframe: Daily
• Risk per trade: 1%
• Entry: Trend trades only. Wait for moving averages to stack up in order. Short to long (top down) in an uptrend, long to short in a downtrend. This is very similar to other trend trading methods that use multiple moving averages. Once the moving averages are stacked in the correct order, I wait for a dot on the chart, while price bounces off one of the moving averages. Red dots are sells and green dots are buys. Open the trade as soon as the candle closes.
• Stop loss: Set the stop loss on the other side of the last swing.
• Take profit: 1X risk
• Trade management: None, set and forget.

Long Example

In this long example, I entered a trade at the green dot marked by the arrow. It was a trade that hit the profit target easily.

As you can see, this trade made much more after it hit the take profit. I'll get into more about how I was able to take advantage of these “extra” moves and increase the output of this basic strategy, later in this post.

Short Example

It's a similar idea here. Enter on the close of a red-dot candle, when the moving averages are lined up correctly and price bounces off the short, medium or long moving averages.

Testing Method

I would normally use Forex Tester for a strategy like this, but the custom indicators are only available for MT4, MT5 and TradingView.

Great.

So I fired up TradingView and a spreadsheet to start backtesting. This method takes a little longer than using Forex Tester, but it gets the job done.

The data in TradingView goes back to 2003, so it's enough to do a solid test.

Testing Results

• Pair: EURUSD (daily)
• Trades: 84
• Win rate: 75.0%
• Total return: 42%
• Max losing trades in a row: 2
• Max drawdown: -3%
• Testing period: May 7, 2003 to January 19, 2022 (~224.5 months)
• Average return: 0.18% per month

Video Version

If you want to see the concepts in action, watch this video.

Final Thoughts

I consider this a good test.

The strategy works.

A max drawdown of 3% is very good.

But this is just the starting point. There might be ways to increase the return of this strategy. 

If you want to learn all of the tips and tricks that Jim teaches, get the book here.

To get all of my future updates where I test new and potentially more profitable versions of this strategy, join my private membership group here.

The post A Simple 75%+ Win Rate Trading Strategy for Forex Trading appeared first on Trading Heroes.

Using divergence is a popular way to identify potential trading opportunities. But how does it work and when does it stop working?

RSI Divergence occurs when the Relative Strength Index indicator starts reversing before price does.

A bearish divergence consists of an overbought RSI reading, followed by lower high on RSI. At the same time, price must make a higher high on the second peak, where the RSI is lower. In a bullish divergence situation, there must be an oversold condition on the RSI, followed by a higher low on the RSI graph. Simultaneously, price must form a lower low on the second peak.

Now let's take a closer look at some examples of RSI divergence and how you can use it to identify potentially profitable trading opportunties.

What is RSI Divergence?

Another way to look at RSI divergence is that RSI can show a change in price momentum, before you see a change in price action. You can think of it as an early warning signal.

In other words, it helps traders spot potential price reversals.

RSI Divergence Examples

It can be tough to visualize divergence from words alone, so now let's take a look at few charts, so you can see divergence in action.

I'll give you examples of both bearish and bullish divergence.

Bearish Divergence

Here's an example of bearish divergence. Price finds 2 new highs, but on the RSI, there are 2 new lows.

This can give you a hint that upward momentum is slowing down and a downward move could be coming soon.

One thing to notice about this example is that there are 2 divergence signals here. You might have traded the first divergence and possibly been stopped out.

If you didn't take the second divergence, then you would have been stuck with a loss.

So it can help to re-enter a trade if your basic analysis of the trade stays the same.

Bullish Divergence

As you would expect, bullish divergence is just the opposite of bearish divergence.

First look for an oversold signal on the RSI indicator.

Next, look for a lower low in price action and a higher low in RSI.

The higher low in the RSI does not have to be in the oversold area for the signal to be valid.

Here's an example of bullish divergence on the AUDCHF.

How Do You Confirm RSI Divergence?

The first thing to understand is that you cannot “confirm” any trading signal, in a way that would guarantee a profitable outcome.

You probably understand that, but some new traders think that there's a way to always be sure of a winning trade.

That's simply not possible.

Trading is about wins and losses.

However, you should do everything you can to verify that you have a legitimate divergence trading signal…before taking a trade. 

Luckily, there are only a few variables that go into a valid divergence signal.

The first thing to look for in RSI divergence is a situation where RSI is in an overbought or oversold condition.

This shows that there is a relatively extreme move and price is likely to bounce back from that level.

Then look for a situation after that where:

• Oversold: Price forms a lower low, but RSI forms a higher low
• Overbought: Price forms a higher high, but RSI forms a lower high

Also remember that the candle has to close for it to be a true RSI divergence signal.

Do not take trades before the candle closes and you get a verified divergence.

In order to take advantage of as many divergence signals as possible, it helps to have a RSI divergence alert indicator.

It's installed on a desktop or laptop and can send an alert via: email, text message (where available) and/or push notification via the mobile app.

What are the Settings for RSI Divergence?

Just like with any other indicator based trading strategy, the specific settings for the RSI indicator will vary between traders.

However, the best place to start is with the default RSI settings:

• 14 period
• 30/70 signal levels

Where Can I Get an RSI Divergence Indicator?

It can be a little tough to get an indicator that shows divergence. 

This is because the calculation is tricky and it can be hard to get it right. 

But TradingView does have a RSI divergence indicator that works pretty well. 

That's an easy way to see divergences. 

Divergence Trading Strategy Optimization

Now that you understand what RSI divergence is, let's take a look at a few ways to optimize a divergence trading strategy.

These methods can help you increase your win rate or average profit per trade.

Use Support and Resistance

You can increase your odds of winning by looking for support and resistance levels that coincide with RSI divergence.

The key is to look for a very clear support/resistance level. 

This is what a good signal looks like.

Notice how far back you would have had to look back to identify the support level.

Trailing Exit

Another way to maximize your profits on a RSI Divergence trade is to trail your stop loss.

Like with any other trading method, changing your exit method does have trade-offs. When you start using a trailing exit, your win rate will probably go down.

On the bright side however, trailing your stop loss can increase your overall profits and you can potentially automate your exits.

As the saying goes:

Cut your profits short and let your profits run.

How do you trail your stop loss?

There are many ways to do this, but I'll give you 2 examples.

One popular method is to use the Parabolic SAR indicator. It prints dots above or below every candle.

In this example of a long trade, you could trail your stop loss at one or two PSAR levels back from the current candle.

If you don't like the rigidity of the PSAR indicator, another way to trail your stop is to move it to the next support or resistance level.

For example, here's a chart where there was a RSI divergence and the market started to trend.

By trailing your stop loss at each blue line, you would have been able to lock in profits as price moved in your favor. This move would have made much more profit, compared to simply targeting 1R or the next support level.

Fixed Profit Targets

If you don't like the uncertainty of trailing profit targets, or targeting support/resistance levels, then fixed profit targets could be right for you.

A good place to start with fixed targets is to simply set take profit orders at risk multiple levels.

For example you could start with 1X risk, or 1R, as a profit target.

So if your stop loss was at 100 pips, you could set your take profit at 100 pips.

If you want to automate your “R” trailing stop, you can get our Risk Multiple Trailing Stop EA for MetaTrader 4.

It will manage your trailing stop automatically, according to the amount of risk you took on the trade.

This method is especially helpful if you find that you are frequently right about a price move, but then price retraces against you and you either get stopped out, or price hits breakeven.

Different charting platforms have different ways that you can mark off multiples of risk.

My favorite way is to use TradingView's Risk/Reward tool.

Here's how the tool works.

Another way to do it is to use the Fibonacci tool on any charting platform.

The tool can be repurposed to show to the multiples of risk on any trade you're looking for.

Since you can add multiple levels to the Fibonacci tool, it can show you 1R, 2R…10R, etc.

This video will show you how to do it in MetaTrader.

When Does RSI Divergence Fail?

Just like any other trading methodology, divergence will not work 100% of the time. 

The most common instance when divergence fails, is in strongly trending markets. If you take too many divergence trades in a strong trend, you will lose a lot of money.

So be sure to have a solid money management plan in place. 

Here's an example:

Learn to identify when you're in a trend and have something like a 2-strikes rule, to cut your losses short.

Your win rate and percent return will also be determined by your exit strategy, the quality of your execution, and your ability to objectively analyze your results.

The most common reasons for the failure of any trading system are:

• Not enough testing
• Giving up too early
• Not journaling your trades properly
• The strategy doesn't have an edge
• Unrealistic expectations
• Not knowing your expected statistics
• Missing good trading opportunities

Those are issues primarily related to your trading psychology and trading process. Therefore, if you have a trading strategy that has an edge and you're on a losing streak, then you need to look at your process and psychology.

Don't switch systems just because you have a losing streak. It might not be an issue with your strategy.

Take an objective look at all elements of your trading. 

Conclusion

So that's how RSI divergence works.

You may also be wondering how hidden RSI divergence works.

That's a totally different animal, so I'll cover that in a future tutorial.

But for now, if RSI divergence appeals to you, then work on solidifying a real trading strategy.

Remember that although divergence may look good in a few well-chosen examples, you need to have a complete, well-tested trading strategy in order to have long-term success with RSI divergence.

This starts with creating a trading plan and backtesting your plan.

Then if your strategy passes those tests, you can move into beta testing…and if that works out, then to live trading.

Take the time to go through this process.

If you rush into live trading, you'll just end up on the Trading Silodrome.

In future updates, I'll show you more examples of RSI Divergence testing results and how you can become a better RSI trader.

Until then, be sure to look at my RSI divergence testing results on the daily chart of 27 currency pairs.

To get alerts when RSI divergence happens, use this indicator.

The post RSI Divergence Explained appeared first on Trading Heroes.

Not many websites talk about the Batman, so let's take a trip into the cave where this this mysterious chart pattern lives, and find out what it's all about.

It's called a Batman because it looks like the top of Batman's cowl. These patterns are easy to spot because of the characteristic “ears” and price consolidation between them. 

But that's not all that you should be looking for.

Let's get into a more detailed description of what to look for in a Batman and how it can be traded.

Video Demonstration

Batman Chart Pattern Definition

The “Batman” is basically a variation of the double top/bottom reversal pattern. Here's what you are looking for:

• Strong trend
• Price hits key zone
• Failed high volatility spike
• Consolidation period
• Another failed high volatility spike in the same direction

This is an example of a bearish Batman. We would expect price to drop after the second failed spike and we would look for an opportunity to go short.

The important thing to look at is where this pattern prints on the chart. Just like any other countertrend chart pattern, this one has a much higher probability of success if it prints on a key support or resistance zone.

This is an example of a bullish Batman. It's just the opposite of the the example above, but the principles are the same.

Again, we see the big spike into the support level, followed by consolidation. Then another push lower that's rejected, and price heads higher.

The Psychology Behind a Batman

Like any other chart pattern, you shouldn't look at the pattern in isolation.

Take a few minutes to understand the market backstory, psychology behind the pattern and what it's telling you about the market.

When you understand what traders are doing behind the scenes, it's easier for you to identify a high quality setup.

The first part of a Batman is a strong trend. Obviously, this isn't close to being a Batman yet, but it's an important precursor.

When the market moves swiftly like this, it's also more likely to move quickly through this area of the chart, in the opposite direction. There's no guarantee that it will move through this part of the chart again.

But if it does, it will probably move rapidly. That means quick profits.

…and that's good for a Batman trade. 

Next, price approaches a strong zone.

This is when it's time to pay attention.

Remember that this has to be a significant zone. The more times price has touched this zone and decisively rejected it, the better.

Take a minute to look at the history of the chart and see how significant this level has been. If it hasn't been that significant, then this probably isn't a good opportunity.

Now we wait to see what happens. There could be several reversal patterns that could happen here, including a Batman.

Bulls try to push the price higher, but fail the first time. You'll notice a strong rejection at this point.

That's the left ear.

The bulls gear up to make another push and this is where price consolidates. There's a lot of buying and selling here as the bulls and bears battle it out for what the next big move will be.

Finally the bulls give it another try, and fail again. This forms the right ear and is another sharp price rejection of the key zone.

That's when there's an opportunity to possibly take a trade because there's a good chance that price will start to move away from the support or resistance zone. In this case, it's a resistance zone.

Of course, it doesn't always work out as nicely as this, but here's what this opportunity ended up looking like.

Where to Enter a Trade

There are three places that you can potentially enter a Batman. Stick around because I'll show you how to test this for yourself.

1. At the right “ear” rejection
2. At a break of the “forehead”
3. On a retest of the pattern

Ear Entry

This is most aggressive entry, and potentially the most profitable…but also the most risky. It's riskier because you have less confirmation that price will reverse.

For this entry, you are going to try to enter as close to the top of the right ear as possible. The idea is to enter when you are reasonably confident that the level is going to be rejected, but not too late that you miss out on a majority of the profits.

In our example trade, this might be a good place to go short.

Forehead Entry

The next place that you can enter is when price closes below the forehead.

This is a level that's drawn at the support zone.

It also helps if there was a test of the level from the bottom, as you see to the left of this chart. When you see touches of the zone from both sides, that helps to confirm that it's an important level.

Pattern Retest

Finally, you can trade a Batman at the point where price retests the formation and rejects it. Here's where price retested the pattern twice and is now looking to head lower.

When a Batman Fails

Just like any other chart pattern, this one will not work out 100% of the time. This pattern will usually fail at the forehead or the right ear of the pattern.

Here are the points on the example chart. These are the areas on the chart that price is most likely to continue upwards, in this example. It would be the opposite for a bullish Batman.

Is There a Difference Between a Bearish Batman and a Bullish Batman Pattern?

There isn't a difference between a bearish and bullish Batman. The pattern appears at both market tops and bottoms.

So keep an eye out for this pattern on the timeframe that you currently trade.

But be sure to test the pattern before you start risking real money on it. 

Is the Batman a Type of Head and Shoulders?

No, the Batman is more like a double top.

Even though we are using Batman's head to describe a chart pattern, this is not a head and shoulders (H/S) formation.

A H/S has three pushes into a zone. The middle push is the strongest, with the other two being weaker…looking like shoulders.

The concept behind them is similar. You are looking for a failed push into a key level.

But the way that this plays out on a chart is different.

Here's an example:

Is the Batman a Type of Harmonic Pattern?

There's a type of harmonic chart formation called the bat pattern. Harmonic patterns also include the Gartley, crab and butterfly.

They use Fibonacci retracement levels to predict price movement, and are way too complex to get into in this article.

If you want to learn more about them, you can check them out here.

The bat pattern looks nothing like the Batman pattern.

I'll have more about harmonic patterns in future posts, but for the purposes of this post, it's enough to say that harmonic bat patterns are totally different from Batman patterns.

Does it Really Work?

Alright, now this is all great in theory, but does this chart pattern actually work?

Does it give you a quantifiable edge in the markets? 

That's what we will take a look at in the next Batman chart pattern blog post. I'll do some backtesting and show you the results. 

If you want to check to see when my results are posted, click here to read all posts associated with this chart pattern.

In the meantime, feel free to start testing it yourself. You can get started with this tutorial.

Remember…never, ever assume that a trading strategy you read in a blog post will work. Always test it for yourself. This includes trading strategies that you read about on this blog. 

The strategy may not have an advantage, or it may not be a good match for your personality.

Test it for yourself before risking real money. 

Stay tuned for the results…

More Indicators and Chart Patterns Explained

• The Beginner’s Guide to Trading Pin Bars
• The “Batman” Chart Pattern Explained
• Inside Bar Pattern Explained
• A Forex Price Action Trader’s Guide to Outside Bars
• RSI Indicator Explained: Calculation and Definition

The post The “Batman” Chart Pattern Explained appeared first on Trading Heroes.

…and more importantly, which ones will work for YOU? 

This is what I want to help you understand in this 3-part RSI series.

Most blog posts and YouTube videos give you one or two well-chosen examples and expect you to believe that a certain RSI trading strategy will work for everyone.

That's simply not true. 

The reality is that a strategy has to match your personality and lifestyle for you to be successful with it.

So don't trust that any strategy you find on the internet will work for you.

In this post, I'll give you 3 complete RSI trading strategies.

Test them for yourself. Here's how to get started with testing.

…and in the next post, I'll show you my testing results.

Before we get started, here are two related blog posts:

• Part 1: The RSI indicator explained
• Download the free trading plan worksheet PDF

Now that you have some basic information, let's dig into 3 popular RSI trading methods that can be found all over the internet.

Vanilla RSI Explained

Let's start with the “vanilla” RSI trading strategy. The idea behind the RSI is that it shows you times when price is “overbought” or “oversold.”

So as the theory goes, you should go long when price is oversold and go short when price is overbought, because price is likely to reverse.

This is a “reversion to the mean” type trade.

Most blog posts will tell you to enter a trade once RSI enters back into the channel. But this is where most blog posts stop.

So now let's take it one step further and formulate a complete trading plan from this idea.

Vanilla RSI Trading Plan

Based on what I have read on the internet about this RSI trading idea, here's a plan that I came up with:

• Strategy name: RSICross
• Version: 1
• Currency pair: EURUSD
• Strategy timeframe: Daily chart
• % Risk per trade: 1%
• Stop loss: Other side of last price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 70/30 levels)
• Entry rules: 
  • Look for overbought or oversold condition
  • Open trade when RSI closes back inside RSI channel
• Trade management rules: 
  • 1 position at a time, no stacking
  • Set and forget, no moving of stop

I'm using a 1R profit target because it's a quick and dirty way to see if a strategy has an advantage. It also gives us a definitive profit target.

Some exit methods, like targeting the next support/resistance level can be very arbitrary and will vary from trader to trader.

It's true that some strategies do require a larger profit target to be profitable, but since this is our first test, let's eliminate as many variables as possible.

Simple enough right?

If you don't want to wait around for my next blog post, go ahead and test this for yourself with software like Forex Tester. If you feel that I missed anything in this plan, leave a comment at the end of this post.

RSI Divergence Explained

Another common RSI trading strategy on the interwebs is to use price/RSI divergence to enter trades.

For a short trade, you wait for RSI to close outside of the channel. Then look for price to form a higher high, when RSI has formed a lower high.

…and the opposite for a long trade.

Here's what long entry signal would look like:

…at least that's the theory.

Again, the chart above is a well chosen example. The internet is full of them.

The real key to making it work is in the trading plan and the testing process.

RSI Divergence Trading Plan

• Strategy name: RSIDive
• Version: 2
• Primary timeframe: Daily
• Currency pair: EURUSD
• % Risk per trade: 1%
• Stop loss: Other side of last price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 70/30 levels)
• Entry rules:
  • Look for overbought or oversold condition
  • Look for divergence between RSI and price
  • Avoid trades in heavy trends
  • Look for good separation between the price peaks
  • Open trade when there is a strong candle in the direction of the trade and RSI “hooks.”
• Trade management rules:
  • Trade 1 position at a time, no stacking
  • Set and forget

If you like this strategy, feel free to test it for yourself. Otherwise, keep an eye out for my next blog post.

RSI 50 Crossover

The final common RSI trading strategy is the 50 level crossover.

Unlike the previous 2 strategies, we use the 50 level on the RSI as a confirmation of a trend. So when we think that a trend is in place, we take a short trade when price closes below the 50 and a long trade when it closes above.

This strategy is a bit more subjective because it can be tough to know when price is trending. I can see the potential to get whipsawed a lot.

But I'll give it a go anyway.

Here's an example of a long trade…

RSI 50 Crossover Trading Plan

• Strategy name: RSI50
• Version: 1
• Primary timeframe: Daily
• Currency pair: EURUSD
• % Risk per trade: 1%
• Stop loss: Other side of last minor price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 50 level)
• Entry rules:
  • Look for strong price trend
  • Enter trade when price closes on the other side of the 50 RSI level
• Trade management rules:
  • Trade 1 position at a time, no stacking
  • Set and forget

Conclusion

Will all of these trading strategies be profitable in backtesting?

Maybe.

…or maybe none of them will be.

That's why we test before ever risking real money with a strategy. 

Stick around for the next post, where I give you the exact stats on how these trading plans test out.

Which RSI trading methods do you think will be profitable? Leave a comment below with your guess or post your own test result.

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The post RSI Trading Strategies: 3 Complete Trading Plans appeared first on Trading Heroes.

In this post, I'll explain how the carry trade works in Forex trading, the risks and the benefits. I'll also show you how to backtest it, if this is something that you're interested in trading.

The Carry Trade Explained

A carry trade is when you borrow a currency that has a low interest rate, then use that money to buy another currency that pays a higher interest rate.

You make money on the difference between the interest rates.

In order to see the interest rates for each currency, you can look at any up-to-date list of central bank interest rates.

Here's a good one from FXStreet.

For example, if you did a carry trade where you borrowed Swiss Francs and bought US Dollars, you would be making money on the interest (also known as rollover) because the interest rate of the Federal Reserve is higher than the interest rate of the Swiss National Bank.

How much would you make, you ask?

Well, you can just jump over to a rollover calculator and figure it out. Most brokers have one.

This is an example from Oanda.

So if you went long a standard lot of 100,000 currency units of USD/CHF and held it for 24 hours, you would make $6.16 in interest.

One important thing to note is that the interest rates listed on the Oanda website are different from the actual central bank interest rates.

This is because all brokers reduce the interest rate on both sides as a transaction cost. It's like the spread on a trade.

Check with your broker to see their rates because it could be very different from the central bank rates. 

But it sounds like easy money, right? You just sit around on the beach and collect the interest…like a bank.

That's what some websites would like you to believe.

But it's not really that easy.

Here's why…

Is the Carry Trade Safe?

I cringe whenever I see websites mention that the carry trade is low-risk.

It's not.

You can actually get into a lot of trouble with the carry trade, especially if you are leveraged.

When I interviewed professional Forex trader Kim Krompass, she mentioned that her first big blowup happened when she was only doing carry trades.

The reason it's not safe is because although your interest rate is risk free, there is still position risk in your trade.

Let's say that you went long USD/CHF, like in the example above…

…then this happened.

That's about 1,800 pips in a matter of a few hours. If you were long a standard lot (100,000 units), you would have been down approximately $22,000 during that move. 

At $6.16 per day in interest, it would take you almost 10 years to make up that loss.

As you can see, the carry trade is far from risk-free. 

However, if you manage your risk properly and enter the market at a good spot, it can be possible to build up a nice interest-bearing position, while minimizing your position risk.

If you want to learn how I do this, check out my Zen8 trading method.

Now that you understand how the carry trade works, I'll answer a few commonly asked questions about this trade.

What is Positive Carry?

Positive carry means that you are making money on the interest rate differential between the two currencies you are trading. Negative carry means that you are losing interest on the trade.

Remember that positive carry should never be an excuse to stay in a losing trade.

Always consider your position profit or loss first. 

Who Should Worry About Negative Carry?

If you are a day trader or trade short-term, then you probably don't have to worry about negative carry. However, if you are a position trader and will hold your position for months or even years, then rollover needs to be considered because the interest can add up.

What is the Japanese Yen Carry Trade?

The Yen carry trade refers to a trade where you borrow Japanese Yen and buy higher interest rate currencies like the US Dollar. This trade was popular in the early 2000s. It's said that many Japanese housewives used it as a way to invest their family's money during a time of zero interest rates in Japan.

Should I Trade the Turkish Lira?

At this point, you're probably looking at the interest rates of central banks around the world and trying to figure out the biggest spread. Naturally, the Turkish Lira stands out because at the time that this blog post was first written, the Lira has an interest rate of 24%.

Well, it's high for a reason…

Countries with higher interest rates are generally less stable. Therefore, they also have larger position risk because big moves can happen suddenly, liquidity is lower and spreads are wider. 

Here are examples of countries with higher rates:

• Russia: 7.75%
• Mexico: 8.25%
• Egypt: 14.75%
• India: 6.25%

Even though it's tempting to trade these currencies, the risk isn't worth the reward. Stay with the major central banks, the carry trade is risky enough.

Final Thoughts on the Carry Trade

So that's how the carry trade works. Now that you understand the benefits and downsides I hope you can use this information in your trading.

The carry trade isn't for everyone. But if you manage the risks, it's another trading strategy that you can add to your arsenal.

As always, be sure to backtest the carry trade before ever trading it live.

If you have any questions about the carry trade, leave them in the comments below.

The post How Does the Carry Trade Work? appeared first on Trading Heroes.

If you prefer the text version, it's provided below the video.

Getting Started with Volume Profile

What's up traders, this is Hugh and in this video I'm going to show you how to put Volume Profile onto your charts and why you might want to use it.

Okay, so this is TradingView. I'm looking at the other screen, so forgive me if I'm not looking directly at you. Here is my Volume Profile indicator and this comes with TradingView. I think it's only available with the paid version, but it's a really handy tool because you can see where the most volume has occurred on a chart.

And that's important information because you want to know where you might run into some issues if you're looking at the charts, what price points you're going to run into those issues and where the buying or the selling pressure might be coming from.

Volume Profile vs Regular Volume

So let's take a look at some examples. First of all, I've put the regular volume down here at the bottom. As you can see, it can be a little tough to read this because you have to go candle by candle and you have to really dig into what each candle is telling you.

Whereas Volume Profile is just one line and you can also make it multiple lines, like some people do. So you can show Volume Profile like this and this will show you the levels at which there was the most volume.

So I haven't set it so that it shows me the volume on the candles that are only on the candles that are displayed right now. So as you can see, there's a bunch of volume here and this is the highest volume level.

There's a bunch of here. And then down here around this level is where you're going to see the most volume in this area. So this is really useful information. I only look at the highest volume level because I don't want my charts cluttered up with all this other stuff.

But it's useful to see the volume at all levels. And as you can see, this level is the second highest volume level on this chart. So there's a good chance that there's going to be a turning point.

How Do You Use Volume Profile to Trade?

I don't use it as a rule specifically per se, but I do use it as a guideline to show me where price might turn or where the profit targets might be. So for example, with this Volume Profile right now, I'm actually looking for a short here.

If I do end up taking a short, then I'm going to look for this Volume Profile level as the, as well a little bit above it. But I'm going to sit that as my limit as to how far price could go.

So I'll probably set my take profit a little bit higher than that. And if you are looking for something that's above the level or below level, let's see if I have an example here. So for example, if I move this chart backwards, it will show me the change in Volume Profile level.

Okay, so here, there's a big Volume Profile level here. So if, if you were looking for a long right here, it really helps to know that there was a lot of volume below your level. So you have some confidence to take the trade because a lot of trades have happened here, so there's a good chance that it'll push it out. Right? On the flip side, if you see a volume level really, really close to where you want to take a trade, for example, let's see if we can find one here. Let's scroll back and see, okay, here's a, I think this is a good example right here.

If the Volume Profile is exactly at your level or maybe a little bit below, then you might be in trouble. If you wanted to take a short here and if you had the highest Volume Profile level right there, then that might tell you, maybe you shouldn't be taking that trade because you're going to run into a bunch of volume and you never know what's going to happen at that point.

So if we put the profile back on there, we can see that yes, that is the highest volume level followed by this level down here. It might not be a good trade level, but again, it's just a guidelines. So it's up to you if you want to actually take the trade or not.

If I scroll back a little bit more, like I said, does it help? It helps to zoom out so you can also see the key levels around price and when you zoom in and out like this, you can get a good idea of where the big volume is and you can trade accordingly.

Conclusion

So try it out, backtest it with Bar Replay and see how it works for you. I just use it as a guideline, but maybe you can use it as a specific training program or a trading system.

All right, thanks for watching.

To learn more about TradingView's Volume Profile indicator go here.

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The post How to Setup and Trade with Volume Profile appeared first on Trading Heroes.

(Yes, you can do this in a US account, I'll show you how later in this post.)

A couple of months after I started experimenting with hedging, my friend asked me to teach him how to trade Forex.

But there was one condition…

He wanted to learn a strategy that was super conservative. Something about making it easier to explain to his wife.

Fair enough.

I saw the potential in hedging, but it still needed more forward testing.

So I told him that I have a method that could fit his criteria, but it still needs some testing.

I welcomed him to test it with me…

Even if it didn't work, he would learn the basic concepts of Forex trading, get practice executing trades and gain a better understanding of what type of strategy would suit him best.

He was game, so over the next 3 months, I went over to his house 2-3 times a week and we traded the London open. He traded a demo account and I traded a small live account.

…and guess what?

We both made money at the end of…every…single…month.

(past performance does not guarantee future results)

At that point, I was confident that it worked and my friend had a firm grasp of the concept, so we stopped meeting up.

I traded it for another 3 months and I was profitable during those months too. 

Then I stopped trading it…cold turkey. 

Later in this post, I'll share with you why I stopped.

I'll also share why I started trading it again. But before that, I'll show you the method and help you figure out if it is for you or not.

[toc]

Is Hedging For You?

But enough about me, is hedging for you?

It depends on your personality.

Unlike other traders on the internet, I will never blindly tell you that any one trading strategy is the only one you need, because that is simply not true.

The key is to figure out your Trading Personality first, then learn strategies that are a good fit for your personality.

It's like driving a Ferrari…not for everyone.

It's a small shift in where you focus your attention, but it can have a huge impact on how quickly you progress as a trader.

You can spend years spinning your wheels and chasing shiny new trading systems or you can become more aware of what you are good at in the beginning and focus only on those types of strategies.

So if hedging is something that resonates with you, then keep reading.

However, if you still think that hedging is dumb, then stop reading now and go find another strategy. I won't be offended.

Also remember that this is the way I trade it. There are many other different hedging methods out there.

So if you see a way to improve on this idea, go for it!

The Biggest Benefit and Drawback of Hedging in Forex Trading

If you are considering using my Forex hedging strategy in your trading arsenal, then you need to understand what you are getting into.

Regardless of what you have read before, there is no such thing as a “sure-fire” way to profit with hedging.

There are no free lunches in trading.

Every benefit of a trading strategy has a corresponding drawback.

Biggest benefit of hedging: Consistent returns (when done correctly).

Biggest downside of hedging: Low returns per month, so you need a fairly big account or trade for investors if you want to trade it full-time.

Alright, if you are still reading, then you are probably into this kind of thing.

…or at least you are curious.

Before I show you my hedging method, let's get a few definitions out of the way. If you already understand these concepts, then skip down to the section on The Core of My Forex Hedging Strategy.

What is Hedging a Position?

Hedging is when you hold a long and short position in the same currency pair, at the same time.

This may not make sense at first because you don't make any money if you do this. But hedging can be a great way to limit your risk, while the market figures out which direction to go.

Once the market “shows its hand” and starts trending you can start to profit from your winning trades and minimize the losses from your losing trades. Partial hedging can also be used to reduce your loss if you are wrong about a directional trade.

Why Hedge?

The bottom line is that nobody knows, with 100% accuracy, what the market will do next.

Therefore, holding long and short positions at the same time can allow you to profit from price movements in both directions.

If you use my method, you can also profit while you reduce your exposure to your losing trades.

How to Hedge in a US Account

This video is a little old, so bear with me. The concepts are exactly the same, just the platform is different.

Instead of using the Java platform, I now use TradingView.

The result is the same…you can get around the hedging and FIFO rules.

So if you live in the US, you can do this too.

The Core of My Forex Hedging Strategy

I call my Forex hedging strategy Zen8.

It is super flexible and there are a ton of nuances to this method. I will share these details with you in later blog posts.

But in this introductory post, the most important thing that you can learn is the simple concept of the Roll-Off.

This is the core of my Forex hedging strategy and this one idea alone is very powerful.

Here's how it works:

When you close a winning trade, you will Roll-Off 50% of your gain from your losing trades.

So you still take a loss from your losing trades, but you do it at a net profit.

To get the complete guide, download the PDF here:

Roll-Off Example

For example, if you closed a long trade for a +$500 profit, you will close, or Roll-Off, a -$250 loss on your short position immediately after you close your long trade.

This way, you will still have a net profit of $250, but you will also reduce the lot size of your losing position.

From there, you can put on another long position to hedge your existing short position. Since your short position is now smaller than it was originally, you have successfully reduced your risk to further adverse moves.

Then you keep working back and forth between hedging and doing Roll-Offs until you are able to close all trades.

Your goal in Zen8 is to get completely flat or have no open positions. This allows you to take a break and find a good spot to get back into the market again. 

Benefits of Zen8 Over Other Hedging Methods

Other hedging methods will take more trades (or even double down) to offset losing positions. In my opinion, that is the worst thing that you can do because you will eventually get stuck with a huge losing position on one side of your books (buy or sell side).

I've seen a couple of high-profile hedgers go down this way. 

But if you are diligent about doing your Roll-Offs and continually reduce your position sizes (even if the profits are small), you will be able to keep your risk low and your returns consistent.

How to Get an Exact 50% Roll-Off

At this point, you may be wondering how to Roll-Off exactly $127.32.

The answer is nano lots. They allow you to custom tailor your hedges and Roll-Offs, even with a tiny account.

If you start trading a large account, then you don't have to use nano lots. But until then, I would highly suggest that you use them because they give beginning traders a huge edge and makes this hedging method possible in a small account.

How to Get Started with Zen8 Forex Hedging

This trading method can be backtested. But this is one case where I believe that it's actually more beneficial to open a demo account and start beta trading it as soon as possible.

To get maximum benefit, you should do both at the same time. 

Backtesting works very well when you have a defined set of rules for entry, exit and trade management. However, given the highly discretionary nature of this trading method, I believe that it's far better to just dive into it.

How will you know when you are ready to stop trading in a demo account?

That's entirely up to you. But I believe that a good rule of thumb is if you are able to get yourself out of a bad situation at least twice, then you are probably ready to go live with a very small live account.

I would define a bad situation as having a position that is down 500 pips or more. You learn a lot about how to be a good hedging trader when you are stuck in this position.

You might even consider putting yourself into this situation on purpose, so you understand why should should avoid getting too far in the hole. 

Which Pairs to Trade?

It can be tempting to trade several pairs at the same time.

I've found that sticking with one pair is the best way to trade Zen8…at least in the beginning. This gives you enough margin to safely work your way out of trouble.

You can trade whichever pair you are most comfortable with. However, I would suggest staying away from pairs that have a large spread or are highly volatile.

Where to Enter the Market?

In reality, it doesn't matter. That's the beauty of hedging.

Seriously.

Hire a monkey to pick your entry point. Have your kids pick an entry. Use Tarot cards.

I will probably get some blowback from that statement.

But if you think I'm nuts, then you don't truly understood what I have written above.

Go back and read the Roll-Off section, then try it in a demo account.

That being said, you will make your life easier if you choose a high-probability countertrend turning point. Again, just pick one…support and resistance or RSI are good places to start.

Position Sizing

Start waaaay smaller than you think is safe. A good rule of thumb is to calculate what would happen if your position was down 1,500 pips.

This could happen, so be prepared. Again, you will need to demo trade for some time so you can learn how to get out of these situations.

That said, I believe in having a 2:1 hedge, at most. If you are unsure about the direction of the market or you want to walk away from your trades for awhile, then it's better to have a 1:1 hedge.

Again, this is a personal preference, so do what works best for you.

Start with 1:1 and go from here.

The Worst Thing That Can Happen in Zen8 Hedging

Without a doubt, the worst thing that can happen to you in Zen8 hedging is being stuck with a large position that is down 500 pips, or more, on one side of your books.

I've been there and it SUCKS.

For example, if you have a large long position that is down 500 pips and you are flat on the short side, it will take much longer to Roll-Off enough profits on the short side to close out that 500 pip deficit.

You might think that the worst thing that can happen is the market moves violently, like it did during Francogeddon. That is certainly a risk, but if you are properly hedged, that shouldn't affect you.

The losing position will be offset by the winning position.

Download the Free Zen8 Forex Hedging Strategy PDF

To get more details on my Zen8 hedging method, click the button below to download my free Forex Hedging Strategy PDF. In this PDF guide, you will learn things like:

• My favorite pair to trade with Zen8
• What to do when I picked the wrong market direction
• How to take advantage of interest rollover
• And more!

Why I Stopped Hedging (and Why I Started Up Again)

The reason that I stopped hedging, and started up again, can be summed up in one word: mindset.

Our minds are funny things.

They can cause us to do things that move us away from things that we want and towards things that bring us pain.

Someone in my mastermind group pointed out that some people have a subconscious need to solve problems. Once they solve a problem, they get bored and look for another problem to tackle.

I immediately identified with that statement and realized what I was doing.

So if you have some success with this hedging method, but you start to have some doubts, then ask yourself why you are going to quit something that's working.

Here are the reasons I told myself that I should stop trading Zen8:

It's Too Stressful

My stress was self-imposed. I was micro-managing my positions and was always anxious about them. Once I adopted more of a swing trading mindset, hedging became easier and more fun.

It's Not a “Real” Trading Strategy

No stop losses, are you crazy?

Conventional trading wisdom says that you always need a stop loss. That is true for the most part, but I've learned that there are exceptions to every rule.

This is one of those exceptions. If you are properly hedged, then stop losses actually aren't necessary.

The Gains Aren't Worth It

Another reason that I stopped trading Zen8 is because it's a low return trading strategy. I was stuck between trying to learn how to build a small account and how to build a track record to attract investors.

Depending on what day of the week it was, I would lean one way or the other. That was a poverty mindset.

Why not do both?! That's an abundance mindset.

Why I Started Up Again

Fast forward to 2017 and I went to the Truth About FX Conference in London. One of the speakers was Gonçalo Moreira, the head trader at FXStreet.

You can watch his trades in real-time here.

His shared his Coastline Trading Strategy in his presentation and it was very similar to the way that I had been hedging.

He started trading this way because he noticed that a lot traders who won online trading contests were hedgers. That's when everything clicked for me. 

Gonçalo's track record and research finally gave me the validation that I needed to continue trading my Zen8 method. It's weird…even if we see a method working, sometimes we need validation from someone else to start trading it.

Anyway, I'm grateful to Gonçalo for sharing his method. I also encourage you to keep learning new things and attend trading events.

Here are my results since I started trading it again.

Remember that with my hedging style, I'll never have a huge winning month. But I'm going for consistent profits of 0.5% to 2% per month.

Conclusion

A word of warning about this method…

It can be very easy to start seeing profits right away. This can lead to Acute Cranium Enlargement (ACE) and taking oversized positions.

If that happens, then you are in for an education in digging yourself out of a deep hole. It's possible, but it's also very painful.

Trade conservatively and Zen8 can be a lot of fun.

Get cocky and it can become a total grind and you might feel like poking your eyes out with a rusty nail.

So start small in a demo account and figure out what works best for you.

Happy Hedging!

If you want to learn more about how to hedge in Forex, join my Zen8 Forex Hedging Program.

The post My Best Forex Hedging Strategy for FX Trading appeared first on Trading Heroes.

The Three Drives Pattern is a well-known harmonic chart pattern. It is a relative of the ABCD pattern, for reasons you will learn about in a bit.

This pattern was mentioned in Robert Prechter's famous book “Elliot Wave Principle.”

In this post, I will explain how to identify it and show you how it is traded.

If you want to learn how this pattern works, this post will give you everything you need to know.

But that's not all…

I will also show you how to backtest the pattern so you can find out if it is really something that you want to pursue in your live trading. 

Here we go…

How to Identify the Three-Drive

The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.

Sometimes the reversal can be a huge move because the built-up pressure is finally released.

Not always of course, but that is what happens when it works well.

Are there time and distance requirements for the moves? Some books say yes, others say no.

So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.

Let's take a look at how it works…

Bullish Three Drives

In the bullish version of this pattern, there are three drives or pushes in the upward direction.

After each push, there is a retracement, marked A and B. The retracements are a 0.618 Fibonacci retracement of the previous drive.

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern.

When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3. 

At least that is how the textbooks teach it. So that is where you should start testing it.

Let's take a look at a real example, so you can get a better idea of how this works.

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView and Oanda data.

For those of you who want to follow along at home.

Here's what the chart looks like when we mark point zero.

The first retracement hits the 0.618 Fibo level almost exactly.

Now if you Fibo the retracement, you will see that price extended way beyond the 1.272 extension. So if you were following the rules of the Three Drives Pattern exactly, this would no longer be a valid signal.

However, just for fun, let's keep going…

The next retracement also blows through the 0.618 retracement level.

The next push hits the 1.272 Fibonacci extension exactly.

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.  In this example, that gets hit easily.

So in summary, this was not a textbook pattern, but it would have ultimately worked out. That brings up the question:

Should I follow the system exactly or should I allow the rules to be bent?

Well, that all depends on what your backtesting tells you. 

Bearish Three Drives

Then of course, the bearish pattern is the same thing, but upside down.

How to Trade this Harmonic Forex Pattern

Just like with any other trading strategy, different traders will trade this pattern in different ways. But let's take a look at the most commonly taught way to trade this setup.

It is a good starting point for you to do your own testing and optimization.

There are basically three ways that you could enter a trade:

1. Put in a pending order at the last 1.272 level, with a stop loss guess
2. Wait for the market to print a strong rejection bar, like a Pin Bar or Outside Bar, then enter the trade, with a stop loss on the other side of the bar
3. Wait for the market to break through the 1.272 level, then put in a pending order if the market drops below the 1.272 level and use the previous swing high/low as the stop loss

Most resources will tell you to wait for the level to be rejected, then put in a trade (#2). So let's go with that method for now. 

Potential Optimizations

When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI can be a good indicator to use.

As you can see from the example above, drives 2 and 3 form higher highs on the chart, but RSI forms a lower high on drive 3.

Another potential optimization is to look to see if the top of drive 3 matches up with a previous major support or resistance point. In the same example, the turning point does indeed match up with a resistance level.  

How to Backtest the Three Drives Pattern

Alright, now let's get down to business.

After most traders read about a trading strategy, they go directly into trading it in their live account.

…and big surprise, they lose money and they say that it doesn't work. There are so many things that can go wrong in between the time you learn a trading method and actually trading it with real money.

Here's a short list:

• You misread the instructions
• You are risking too much per trade and are freaking out every time your trade moves one pip
• The trading method doesn't actually work and it turns out that everything on the internet is not true
• You start trading it correctly and forget the rules because you didn't write them down
• You think you know better and keep changing the rules
• You second guess yourself and miss good trades
• And more

These are natural mistakes that all humans make. Myself included. So why risk your hard-earned money on your unproven skills? 

First, write down the exact rules of the system that you want to test.

You can download the backtesting plan worksheet for free here.

This will ensure that you don't deviate from your plan.

Next, you need to backtest your system and make sure that it has positive expectancy.

Fire up NakedMarkets and test your system.

If it does not work in backtesting, then it certainly won't work in live trading.

Once you have a system that works in backtesting, then move it into a demo account. Do not risk real money at this point. 

Only when you are comfortable in a demo account, should you even consider trading live. 

Other Resources

Here are some other resources that you can use to learn more about this chart pattern.

It's always a good idea to look at how others are trading a chart pattern, to get ideas on how you can improve your strategy.

You don't have to follow them exactly and you will probably throw out a lot of the ideas. But it only takes one good idea to dramatically improve your results. 

• TradingView Three Drives tag – These are charts that community members have posted on the TradingView website.
• YouTube videos – Here are the search results for videos related to this chart pattern.

A Close Cousin: The ABCD Pattern

One pattern that you will hear associated with the Three Drives is the ABCD Pattern. This could also be called the Two Drives pattern…I guess.

If I had to choose, I would personally start testing the Three Drives first because there is a greater chance that price will reverse after three moves, than two.

Price simply has to travel a longer distance and therefore will be more “tired.”

Conclusion

So that is how you identify the Three Drives technical chart pattern.

Remember that just because you see other traders using this pattern, does not mean that it will work for you.

You need to backtest it for yourself and figure out if it matches your trading personality.

Never take anyone's word that a trading system works.

Not even me

Do you own homework and you will progress much faster as a trader.

The post Three Drives Pattern Explained appeared first on Trading Heroes.