One of the “golden rules” of Forex trading is to always use a stop loss. But is a stop loss always necessary? Certainly not.

Forex can be traded without a stop loss, while still using proper risk management, through the use of hedging. By not using a stop loss, traders can avoid getting stopped out by rollover and volatile market conditions. 

See hedging in action in this video. Don't get me wrong, stop losses are an excellent way to limit risk.

But there's a more creative way to limit risk and make money on both sides of the market.

Can You Still Limit Risk Without a Stop Loss?

Of course.

But like with anything else in life, there are trade offs.

The solution to trading without stops, while maintaining proper risk management, is to use hedging.

When you hedge, you hold long and short positions at the same time.

A hedge effectively acts like a stop loss, but also allows you to potentially profit on both the long and short sides, as price moves up and down.

Yes, You can do this in a US Forex Account

Before you write this off because you're in the US, this can be done in a US account. You just have to know a couple of tricks, which are perfectly legal. 

The first trick is that you have to separate your longs and shorts into different accounts. Many brokers make it easy by allowing customers to open multiple accounts or sub accounts.

Another thing that you have to do in order to hedge in a US account is to enter position sizes that are different. Using nano lots makes this easy, without taking on necessary risk.

When you do these 2 things, it's easy to hedge, even if you're in the US. To learn more about how to hedge in a US account, read this tutorial.

Why You Might Not Want to Use a Stop Loss

Stop losses work well for most traders. but there are a couple of reasons why you might not want to use a stop loss. Let's go over them here.

Rollover Can Stop You Out

When the New York session closes, the spread increases significantly for about 30 minutes. Here's and example of how this works. The red and blue horizontal lines are the bid and ask lines.

After New York closes, the lines are close together. The box on the the right side is an indicator that shows end of the New York session.

But during rollover, which lasts for about 15-30 minutes after the NY close, the distance between the lines expands significantly.

You can see how many pips the spread typically is during these times, by looking at a historical spread tracker like this one. The spikes show the rollover times.

Ask your broker if they provide this data.

When price is really close your stop loss and rollover kicks in, you could get stopped out. If you have a pending order open, your order could also get executed.

So you need to understand when this happens and how wide the spread can get on the pairs that you're trading.

Greater Flexibility

If you don't like the feeling of losing money when you get stopped out, hedging provides an excellent way to flow with the market.

You can scale in and out of your positions, without having to use a hard stop loss.

Of course, this is assuming that you manage your positions correctly. 

Trade Forex Without a Stop Loss by Using Hedging (get the guide)

You can limit your risk without a stop loss by using Forex hedging. This type of hedging works best in Forex.

I don't know of any other market where it's so easy to incrementally close and add to your trading positions.

To get started with hedging, get our free Forex hedging PDF guide.

Final Thoughts on Trading Without a Stop Loss

So as you can see, it's possible to trade without a stop loss, while still managing your risk.

For most traders, the best way to manage risk is to use a stop loss. But some traders like the flexibility that hedging can provide.

The herd (most people) will tell you that you always need a stop loss. As I've shown here, that's not always the case. Learn to be an independent thinker, and you'll spot opportunities that others are missing. 

If you want to learn more details on how to hedge, keep an eye out for our new Zen8 Forex Hedging course that will be coming out soon.

The post How to Trade Forex Without a Stop Loss 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.

If your trading personality is a good match for trend trading, then this post will show you how to get started.

There are several different methods for determining a trend.

The most important thing to remember is that you should find the one that works best for YOU.

The trend direction in Forex trading can be determined by using a trend following indicator or by analyzing price action. Frequently used trend following indicators are moving averages, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Trends can also be identified through price action analysis by drawing trendlines or observing progressively higher lows, in an uptrend, or lower highs, in a downtrend. 

In this post, I'll get into more details on how to use these tools to determine a trend the currency markets. I'll also show you a couple of popular trend trading systems.

Test each of these methods out in demo or backtesting and get a feel for what you are most comfortable with, and gives you the best results.

The 2 Schools of Thought in Trend Trading

There are 2 ways of looking at trend trading.

Each one has its advantages and disadvantages.

Some strategies try to get into the move as soon as possible. When you trade this way, your winning percentage is usually low.

However, the upside is that you also have very large winning trades when you are right.

Another way to approach trend trading is to try to get most of the middle of a trend.

This method requires a little patience because you have to wait for a trend to develop.

In addition, you have smaller winners because you're only getting the middle of the trend.

The potential benefits of this method are that you generally have a higher win rate than the previous method and you might have a little more confidence entering a trade because the trend is more defined.

Now with those concepts in mind, let's get into the methods that you can use for trend trading…

Price Action Analysis

The method that I prefer to identify a trend is pure price action.

This involves looking at the Energy Flow of price, and is the purest form of technical analysis.

So the first thing to look at is:

• Higher lows in an uptrend
• Lower highs in a downtrend

But it's a little more complex than that.

First, let's take a look at a chart.

The circled areas are places where price formed higher lows and you could have potentially entered trend trades.

Next, we need to understand what the market typically does before a trend.

Many times, there's a consolidation period before the trend, as price “gears up” to make a big move.

You might have a chart that is showing higher lows or lower highs, but it might not be the start of a trend because price didn't consolidate before it started trending.

Trendline Analysis

You can also use a simple trendline to define a trend.

Here's the same trend, identified by a trendline.

In this example, we can simply draw a line to connect the points that we circled above.

Some traders will stay in a trade until price breaks the trendline.

Of course, some currency pairs are more volatile than others.

So you should test your trendline strategy extensively before trading real money.

This method might not work in very volatile markets.

Again, there's no right or wrong answer here.

Use whatever makes the most sense to you.

Trend Indicators

You can also use indicators to determine a trend.

Some traders find this more comforting because they have definitive number or line that they can use to define a trend.

Here are some examples…

Moving Averages

One simple way to identify a trend is to use one or more moving averages.

It can act as a dynamic support and resistance level in a trend.

Single Moving Average

For example, the 20 exponential moving average (EMA) is a popular moving average to use to identify trends.

The great thing about this method is that it's very simple and since it's dynamic, it can adjust to market volatility.

Moving Average Crossover

Another way to use moving averages to determine a trend is by using a moving average crossover strategy.

You can use the simple 50 and 200 moving averages, which are commonly used settings.

I did a test on this system with multiple backtesting software products, and the tests turned out positive.

See the results in this video.

Relative Strength Index (RSI)

Another indicator that can be used to identify and ride trends is the RSI.

You can track the 50 level on the RSI and use that as a way to identify pullbacks that can be used to enter an existing trend.

I did a test with this strategy and it turned out profitable.

More testing would have to be done, but you can see the results here.

Moving Average Convergence Divergence (MACD)

The final popular indicator that can be used to trade trends is the MACD.

You are looking for a crossover in the MACD signal line to take a trade.

Here's one example of a long trade. You could have entered at the left arrow and exited at the arrow on the right.

As you can see, this trade would have been profitable, but the exit was not ideal. So you would have to do some testing to figure out a good exit strategy.

Maybe exiting at the next crossover is a good idea.

…or maybe that should just be a signal to start trailing your stop loss.

Only testing will show you the best way to exit. 

Like other trend indicators, you cannot take every signal because that will give you too many signals and eventually blow out your account.

Therefore, you would need to have some sort of filter that will allow you to only trade the higher probability crossovers.

Trend Trading Systems

Now let's take a look at more complex trend trading strategies. They contain some of the elements listed above, but also add in other rules for money management and scaling in/out.

Bill Williams Trading System

This trading strategy is not widely known, but it's one of the most aggressive trading strategies that I've ever seen.

It uses a set of proprietary indicators. Luckily they are available for free on most trading platforms.

If you like huge winners and don't mind a low win rate, then this strategy is for you.

The Bill Williams method looks for consolidation periods and enters the market when price breaks out. Then it aggressively adds positions as the market continues to move in your favor.

I've tested this strategy it can lead to some gigantic winners. The only downside is that it takes a lot of time to manage, so you can really only trade a few markets at a time.

Here's an example of what the indicators look like.

They are available for free on TradingView.

Get the complete trading system in Bill's book here.

The Turtle Trading System

This trading system is well known.

It was featured in the Market Wizards book and many of the traders that learned this system went on to run very successful hedge funds.

After the non-disclosure period was over, “Turtles” like Curtis Faith shared the trading strategy that they were taught.

The system is based on the Donchian Channel breakout strategy.

But it adds in some position sizing rules and other risk management rules that help the trader maximize trending environments and minimize losses in whipsaw environments.

I've found that for some people, this method of trading makes complete sense. This guy is one example.

For others, it's too complex.

…and that's fine too.

You should use whatever trading method works for you.

Here's an example of Donchian Channels applied to a chart on TradingView.

Conclusion

So those are the most frequently used ways to identify and trade a trend.

Of course, the tricky thing about trends is that you never know when they are going to end.

Therefore, you either have to try to get in early to capture most of the move, or look for an established trend and take a piece out of it.

But when you have the right tools on your side, and you practice using them, you can spot trends and profit from them.

Regardless of which method you use, be sure to test your trading strategy thoroughly before you risk real money. 

If you're new to trading, start by taking our free beginner's course.

Once you understand the basics, then it's time to create a trading plan and start backtesting.

Stay tuned for future backtesting blog posts where I test these trading ideas and show you the results. 

The post How to Determine Forex Trend Direction appeared first on Trading Heroes.

A rule-based trading system has strictly defined rules for all components of a trade. A trader is not allowed to deviate from the rules. The basic rules cover: entry criteria, lot sizing, maximum trade risk, trade management, maximum portfolio risk and exit criteria. 

There are basically three types of rule-based systems:

1. 100% automated strategies
2. Manual trade management strategies
3. A mixture of both automated and manual elements (Incremental Automation)

Regardless of which one you choose to use, this guide will show you how to create a system that works for you. 

Step 1: Understand What Works With Your Personality

This is a really important step, so don't overlook it.

Many new traders think that they don't have to worry about system/personality fit because they just have to follow the rules of a system and they will make money.

Nothing could be further from the truth.

Even if you have black and white rules, you still have to consider how you will react to the results.

You could have a very profitable system, but if you cannot tolerate certain aspects of the system, you will give up on it.

Let's take a look at the primary elements that you should be aware of.

What Are Your Goals?

The first thing you should consider are your goals for the trading system. 

Do you want to multiply a small account? Or do you want to make a steady income on a larger account?

These are very important questions to ask yourself when you are getting started. 

Your answer to this question will determine the type of system you will create.

It helps to write down a yearly goal that you will be shooting for.

Some traders want to make 10,000% in a year (yes, they are serious). But in reality, 30% a year, with a decent sized account would be more than enough to meet their desires…with a lot less stress.

So take a realistic look at what you really want to get out of your trading system. 

Write down your goals in your trading plan. 

Drawdown

A lot of traders want to make the big bucks. But big profits usually also means big drawdowns.  

Can you handle that?

Some traders can.

However, in my experience, most traders can't.

So pay attention to your drawdown numbers. A 40% drawdown might not be a big deal when you are demo trading. But the psychology can change dramatically when real money is on the line.

If you have a hard time feeling the emotional impact of a drawdown in a demo account, open a small real money account and use nano lots.

You may find that you are willing to tolerate a higher or lower drawdown than you expected. That's why it's important to test different types of trading systems to find out what works best for you.

Trading Frequency

Next, it's important to understand how frequently your strategy trades and how you feel about that frequency. 

For example, let's say that your strategy only executes a few trades a month. But when it does trade, there's a high probability of success and you usually have a few big winners because you trail your stop loss.

That sounds great right?

Well, that actually sounds terrible to some traders. These traders get bored easily and want to be trading more frequently.

The opposite can also be true.

If a system executes too many trades, some traders get stressed out about having to trade all the time, or having too many trades open at once.

So take some time to consider your optimal trading frequency. 

It's not the same for everyone. 

Winning Percentage

Are you the type of trader who likes to see a high win rate? Or do you prefer to win less often, but have higher risk multiple returns per trade?

One trader I know of likes to go for 100R trades. But he only wins about 20% of the time. Could you handle 8 losing trades in a row (or more), before you get a winner?

Or would you rather only make 1R, but win 75% of the time?

Both methods are profitable.

There are no right or wrong answers here.

It's all about what you are most comfortable with.

Again, experiment with both to see what you prefer.

Fully Automated, Manual or Both?

The mechanics of how you enter and exit trades can make a big difference in your trading results.

For example, if your trading system has to be automated in order to be profitable, but you don't know how to program an automated trading strategy, then that strategy won't work for you.

But you can always learn. Take our Beginning MT4 Programming Course by master developer Adam Hartley.

Of course, you can also look for programmer to code it for you. Here's a list of programmers and a guide on how to find the right one.

On the other hand, maybe you don't trust an automated system and would prefer to manage trades yourself. If that's the case, then be sure that you will be able to trade at the times when your trades usually set up.

If your system usually has its best trades at 3:00 am local time, then that probably won't work as a manual system.

This is why backtesting and beta testing are so important. You want to figure out the blind spots in your system so you can compensate accordingly.

Step 2: Create a Written Trading Plan

The next step is to write down your trading rules.

This ensures that you have a solid reference point from which to make all of your trading decisions.

Use any recording method that works for you, but I've found that good ol' pen and paper works best for me. It's just easier to take notes and change things during the development process.

After I'm done making changes to a system, then I'll put it into Evernote.

If you want a template for your trading plan, you can download a free PDF worksheet here. I find it very useful to print out a bunch of these and leave them near my desk.

When I get an idea, I jot it down so I don't forget. Then I can come back to it later to develop the idea.

A good trading plan should have the following elements:

• Trading system name
• Version number
• Indicators used, with settings
• Entry criteria
• Trade management rules
• Risk rules
• Re-entry rules
• Rules for portfolio risk
• Will this be traded manual, fully automated, or a little of both?

There may be other elements that you want to add later, but that list is a good start.

You can get a trading plan from many sources on the internet. There's no shortage of them, you can get them from courses, forums and blog posts.

See the strategies that we've shared here.

I would also recommend checking out the MQL5 Codebase and TradingView trading strategy communities. They are a big mish-mosh of strategies, with varying levels of quality, but they can give you some good ideas.

You can also look at the code and copy/paste ideas you like. If you find a strategy that actually works, that can be a great starting point for your strategy.

But how do you know if a trading strategy will give you an advantage in the markets?

That's what backtesting is for…

Step 3: Backtest Your Trading Plan Rules

Next, it's time to test your plan so you are confident that it will work in real-world trading. If you are new to backtesting, read our free guide here.

There are different ways to backtest and the best method for you will depend on the type of strategy you have.

For example, if you have a fully automated strategy, you may consider testing in something like Forex Tester or MetaTrader 5. These are good platforms to backtest automated Forex strategies on.

If you have a manually executed strategy, Forex Tester, MetaTrader 5 or TradingView are all good platforms to test on.

Your backtesting will give you some key pieces of information:

• Drawdown
• Win rate
• Longest win streak
• Longest losing streak
• Best/worst days to trade
• Best/worst times to trade
• And more!

If a backtesting platform doesn't give you some of this data, you can always export it to a spreadsheet to figure it out.

Don't expect to hit the jackpot on the first try. A successful backtesting result is almost always the result of many, many experiments.

Successful traders make small tweaks to a strategy and test the results. Remember to only change one thing at a time and test that change.

Otherwise, you won't know which changes worked and which ones didn't.

Once you have a strategy that hits your goals, you are ready to move on.

Step 4: Beta Test Your Rules

After you have tested your strategies and are confident in the results, don't jump into live trading just yet. There's one more step to do before you start risking real moola.

This is called beta testing or forward testing.

You don't want to jump directly into live trading because there are still a few things that you may need to work out.

For example, if you have a fully automated trading strategy that runs on MT5, you should definitely test it in a demo account with the broker that you intend to trade live with.

The broker's spread or server lag may affect how your strategy trades in live conditions. Sometimes the results can be significantly different.

So run this beta test for a few months to be sure that there aren't any other hidden issues with your trading system. Once you are confident it will work as you expect, now it's time to go live!

Step 5: Go Live

Now it's time to put your system into action. I would recommend starting out with a small account or using a smaller amount of risk in the beginning.

There may still be a few unforeseen differences between your broker's live server and the demo server. 

But if it's all good, then let your strategy loose!

Remember to track your trades in a trading journal, so you can review the results every week.

Don't change anything about the system until you have at least 100 trades in the books. It can be tempting to start to mess with the system if it isn't winning right away.

Resist the urge because you may just be in a normal drawdown. You need to give the system time to apply your edge.

Final Thoughts on Rule-Based Trading Systems

A rule-based trading strategy will not take all of the emotion out of trading. For some traders, a very strict trading system can actually lead to more losses because they are not free to take all opportunities that come along.

But for traders who can be indecisive about trading decisions, or prefer to minimize the effect of their emotions, strict rules can be a great way to trade.

The added benefit of a rule based strategy is you can change specific elements of the strategy and see exactly how those changes affect the results.

The post 5 Steps to a Rule-Based Trading System That Works 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.

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

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.

(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.

Most of the time, the trader is trading an Idea, not a Strategy. If you aren't familiar with the difference, then this post will show you how to tell.

There are actually two stages that come before you have a proven trading Strategy. You need to go through all three stages, in order to have a trading method that works and that you are confident in.

If you choose to ignore these steps, you can end up spinning your wheels for years. I would like to help you avoid that fate.

Here's how…

Stage 1: Idea

An Idea is a very general concept. It could be something like:

• “I notice that the Asian Drift usually goes in the opposite direction of the actual trend for the day.”
• “Looking for a strong trend on the daily chart, then waiting for a pullback on the one hour chart looks like it would be profitable.”
• “Price tends to reverse at daily pivot points.”

However, some traders mistake these generalizations for a trading Strategy and start trading it in their live account.

That obviously never ends well.

Don't get me wrong, the overall concept behind a lot of trading Ideas are sound. But if you don't test and apply them in a uniformed manner, you have zero chance of becoming consistently profitable.

These simple Ideas could be traded in so many ways.

That's why you need a Sketch…

Stage 2: Sketch

Here's where things get interesting.

An Idea is a general hypothesis on how to profitably enter the market. But a sketch takes it one step further and defines specific trade entry, management, exit parameters and more.

Also consider:

• Will you scale in to the trade or only have one entry?
• Will you scale out of the trade?
• Will you add to a winning trade (pyramid)?
• Are there certain days that you should not be trading?
• How do you know if you should bail early?
• And more!

To create a complete sketch from any trading idea, download this free worksheet. It will give you all the parameters you need to create your own Sketch.

But you still are not ready to trade live yet…

Stage 3: Strategy

Once the Sketch has been proven in backtesting and forward testing, then it is time to take it into live trading, with real money. If the Sketch holds up under live conditions, only then is it considered a proven Strategy.

Anything else is just an Idea, opinion, rumor or untested Sketch.

Final Thoughts on Developing a Profitable Trading Strategy

So if you are losing consistently, ask yourself if you really have a Strategy, or if you are actually trading an Idea or a Sketch. 

There is a huge difference between the three of them.

Once you understand where you are in the process, it's easy to move forward to the next step.

But what if your Sketch doesn't test well? Keep testing different things or find a course that can give you proven strategies.

Just be sure that they match your trading personality.

The post 3 Stages of a Profitable Trading Strategy appeared first on Trading Heroes.

You have watched a ton of YouTube videos, read what seems like a million blog posts, and learned countless trading strategies.

That's great, but now what? 

This is where many traders get tripped up.

They learn a plethora of different trading systems, then they try each one out for a few days. Of course, they can't seem to get one to work, so they give up and move on to the next one.

Big mistake.

You just bought yourself a ticket on the Trading Silodrome.

That's when you go around in circles for years, jumping from system to system and never really getting anywhere.

Learning to trade a technical trading strategy successfully, is a 7-step process:

1. Create a trading plan
2. Backtest it
3. Work on your trading psychology
4. Forward Test it in demo
5. Work on your trading psychology more
6. Trade in your live account with confidence
7. Work on your trading psychology even more

Anyone who tells you that you can just grab the PDF in #1 and jump straight to #6 is either just trying to sell a course, or they forgot what it is like to actually go through the entire process.

If you really want to make it in trading, then you need to follow those steps.

But it's easy to write a blog post or make a YouTube video about the steps. There is plenty of advice out there on the internets.

How about actually going through the entire process?

Yes, let's do more of that.

In this blog post, I'll give you the exact parameters of a trading system, then in later blog posts, I'll show you the testing results.

Feel free to follow along at home

Trending Outside Bar Trading Strategy – Version 1 (Codename: Aardvark)

Alright, first we need to define a few things for this Outside Bar trading strategy. It is based on the Big Shadow strategy that I learned from Walter.

To make a custom plan of your own, you can download this worksheet.

The Tools

In this test I'm going to use the following:

• Forex Tester
• The TH Outside Bar indicator for Forex Tester (optional, but speeds up backtesting)
• The 10 and 20 EMA (optional, but it makes it easier to see the strength of a trend)
• Candlestick chart

The Strategy Parameters

• 1% risk on each trade
• 1R profit target
• Daily chart only

Definition of an Outside Bar

The generic definition of an Outside Bar is a bar (or candle) where the high and the low of the current candle is both higher and lower than the high and low of the previous candle.

Here's an example:

But it could also look like this…

This is the preferred type of candle, at least for this strategy. In this trading strategy, we are going to look for Outside Bars that have the following characteristics:

• The candle closes near the top for a long, near the bottom for a short.
• The two previous candles (marked as 1 and 2 above) have lower highs for a short and higher lows for a long.
• Candle 1 should have a lower high than candle 2, for a short. Candle 1 should have a higher low than candle 2 for a long.
• The body of the Outside Bar should engulf the body of the previous bar.

Here's and example of a long Outside Bar:

There is going to be some skill and practice necessary, when it comes to identifying a good Outside Bar, so don't feel bad if you aren't good at identifying them right now. Your goal at this point should just be to get through one round of backtesting on one currency pair, on the daily chart.

How to Determine a Trending Market

In this strategy, we are going to only look for Outside Bars in trending markets.

This is where the EMAs help.

They are totally optional, but when there is good separation between the EMAs, that is a good sign that you are in a trending market.

Again, it will take some practice to learn what a strongly trending market looks like, but the EMAs give us a good reference point.

It also helps to learn how to read price action.

Here's what good separation with an Outside Bar, in a trending market, would look like.

Entry

Enter on a pending order, when the price of the next candle breaks the high of the Outside Bar (plus 5 pips) for a long, or the low of the Outside Bar (plus 5 pips), for a short. There also needs to be a support zone for a long and and resistance zone for a short. Outside Bars in between zones will not be considered.

Stop Loss

SL goes on the other side of the Outside Bar, plus 5 pips.

Profit Target

Equal to the stop loss, plus 5 pips. Only looking for a 1R target in this version of the strategy.

Exit

I will only exit when the stop or take profit are hit. No closing out early.

Example

Here's the same chart, with all of the levels shown.

Pairs to Test This On

I will test as many pairs as I can get data for. Stay tuned to future blog posts for the results of the Aardvark.

If you want to see an Outside Bar chart analysis on the EURUSD weekly chart while you wait, read this.

Conclusion

Remember, backtesting does have limitations. But it is the key first step in determining if a trading system could be viable or not. If you have zero data about a system, you are flying blind.

Also keep in mind that your backtesting results may be very different from mine. That is because people see the markets differently and can interpret the same set of rules in very different ways.

That is why it is so important for you to backtest a strategy for yourself and not listen to anyone on the internet! 

I will post the results from this Outside Bar trading system soon.

To learn all 7 steps in the Forex Trading Strategy Development process, sign up for our FTSD program.

If you have any questions, leave them in the comments below…

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post Trending Outside Bar: Forex Trading Strategy Plan (Version 1) appeared first on Trading Heroes.

If you have been trying to figure out where to get some good Forex trading systems, this blog post will point you in the right direction. I don't recommend any system in particular, because what works for me, probably won't work for you.

…and vice versa.

So whenever you are selecting a trading system to test, remember the Trading Heroes Trifecta:

• Does it match your timeframe personality?
• Does it match your technical/fundamental bias?
• Can it be traded according to your risk personality?

When a trading strategy can meet those three criteria, you have a significantly higher probability of being able to be consistently profitable with that method. Of course, there are no guarantees in trading.

But if a trading strategy doesn't meet those criteria, then you have zero chance of making it work.

With that in mind, here are nine great resources to find Forex trading strategies. There are many others out there, but in my experience, these are a great place to start.

1. Trading Heroes Forex Trading Systems Blog Posts

From time-to-time, I find interesting Forex trading systems and I write about them. I don't necessarily trade them, but I have it on good authority that they are making money for at least one trader.

So if you are looking for a few trading system ideas, this is a great place to start. You can find those trading strategies here.

I can't promise a lot of volume but they will be real systems or contain real testing results.

2. Naked Forex Now Community

The thing that I really like about the Naked Forex Now Community is that Walter not only teaches and develops trading systems, but he shows you how he trades them in real time.

This allows you follow his thought process and is one of the best teaching methods, in my opinion.

Another benefit of this community is that Walter features other successful traders in the community, and how they are trading.

The goal of most trading courses is to trade like the instructor trades.

…and that's great. You should learn from someone who is doing it successfully.

But when you can also learn from other traders who are doing well, that just increases the number of trading methods that you are exposed to and could work for you.

Join the NFN Community here.

3. 2nd Skies Forex Price Action Community

Chris Capre also provides a great variety of trading strategies that can work on multiple timeframes and in different market conditions.

Some of his trading methods are aggressive and others are more laid back, so I believe that most traders can find something that fits their personality, in this community.

He also does a great job of outlining a framework that helps you understand the foundation of his trading method.

I believe that this is very important to making a trading strategy work for you.

Join the community here.

4. Baby Pips

Just because a trading system is free, doesn't mean that it can't work. It actually doesn't matter where you learn a trading system. All that matters is that it fits your Trifecta and you test it properly, before ever risking real money.

So with that in mind, quantity can sometimes be better than quality, when you are just trying to brainstorm some trading methods. One great place to see a wide range of trading systems is the Baby Pips forum.

They have a section dedicated to free trading systems and it can give you a lot of great ideas.

5. Forex Factory

Another firehose of Forex trading systems is Forex Factory. Again, you will have to dig through a ton of posts to find something that could be useful. But even if you can't find a good system, it can be helpful to look through these trading systems for ideas.

There is a TON of stuff here, accumulated over many years, so the best place to start is probably the systems that have the most comments. Some traders are good at stirring up controversy, getting a lot of comments, then bailing out when the system doesn't work.

As you go through the posts, you will learn to spot these threads. But this forum can be another great source of trading systems.

6. Turtle Trading

If you haven't heard of the Turtles, they were an experimental group of traders trained by legendary traders Richard Dennis and William Eckhardt.

During the training program, they were taught a very simple trend trading method.

The best traders in the group were given real money to trade and several traders went on to become legendary hedge fund managers in their own right.

Everyone in the group had to sign a non-disclosure agreement, that was valid for a certain period of time.

As soon as the time limit was up, a couple of the traders came forward and disclosed the system.

You can find the complete system for free here, or you can read more about it from one of the most successful Turtles, in this book.

7. Forex Patterns and Probabilities Book

Now let's take a look at a few books that can help you discover a great trading system.

The first one is Forex Patterns and Probabilities by Ed Ponsi.

With a name like that, he as to be honest.

Seriously though, there is a reason why this is one of my favorite Forex trading books. All of the trading strategies are laid out in an easy to follow manner and do not require fancy entry and exit rules.

8. Beat the Odds in Forex Trading Book

Another book that does a great job of teaching specific trading methods is Beat the Odds in Forex Trading by Igor Toshchakov.

This is a fairly thin book, but it is packed with tons of trading tips and strategies.

I'm confident that you can pick up at least two great trading tips in this book.

9. Naked Forex Book

Finally, if you want to get the strategies that Walter trades, but don't want to join the community, then his book: Naked Forex is the way to go.

It provides very simple Forex trading strategies that anyone can follow.

I've personally seen many traders use his strategies and do well. If you follow his videos in the community, you will also see that he practices what he teaches.

Conclusion

So if you have been wondering where to find Forex trading systems that you can try out, these nine resources will keep you busy for awhile.

You might be tired of me saying this, but a trading system is only going to be as good as your ability to execute it.

Therefore, don't look for the most profitable trading method. Find the one that you are most comfortable trading.

The post 9 of the Best Resources for Forex Trading Systems appeared first on Trading Heroes.

Coastline Trading is probably nothing like you have ever seen before. It breaks all the “rules” of trading and it still makes money.

You could call it the “bad boy” of trading systems. 

If there is anything that I've learned since starting this site in 2007, it's that there are some trading methods that do not fit neatly into the trading rules that you read about online or in books. Granted, a smaller number of people are successful with these methods because they are so different.

Nonetheless, for certain personality types, this can work.

So what makes Coastline different? 

Well, on the negative side:

• It has no stop losses
• It has permanent drawdown

But there are some big upsides:

• You don't need to time the market. In fact, a random entry can still make money.
• When traded correctly, it can be very consistently profitable.

…wait, rewind…

No stop losses? Isn't that why most traders blow out?

Usually.

But I'll get into how that can be avoided in this method.

So if you are tired of trying to time the market exactly, then this might be a trading style that you want to explore. Like with any other trading method, there are risks associated with this method too.

Remember, there are no free lunches in trading.

However, if this still interests you, then keep reading…

Before we get started, my goal in writing about these different types of trading systems is to expose you to different trading ideas. It is your sole responsibility to figure out if this system fits your personality or not. I'm NOT saying that this is the best trading method in the world. But for the right personality type, it could be a great fit. 

Coastline Trading is…

Simply put, Coastline is a hedging strategy.

But those never work, right?

Depends on who you talk to. 

I have seen it work in a few instances. If you look up FX Viper, he is another high-profile hedger that manages money (check his YouTube videos).

Back in 2011, me and a friend also came up with a flavor of hedging that works too.

So I know that this can work.

Coastline Trading is the brainchild of Gonçalo Moreira, currently THE trader at FX Street. He trades the company's money with this method and teaches it on the website.

Since it is a hedging strategy, you don't really need stop losses. You just need to understand net exposure and stay well within margin limits.

How did he come up with this method?

Gonçalo did his own study of the past winners of trading contests and he found that many of them traded a very similar system. So he reverse engineered the method and came up with what he calls Coastline Trading. He also added some safeguards and monitoring methods that help you understand your risk at all times.

Now, you are probably thinking…

But what about traders in the US? They can't hedge right?

Not so.

This tutorial will show you how to do it.

Since this is Gonçalo's proprietary trading strategy, I can't give too much away here. But if you are interested in learning more about it, you can listen to his conference presentation or head on over to his homepage on FX Street.

There is a lot of information on the website for free, including some webinars that he did.

Backtesting the Coastline Trading Strategy

Yes, this strategy can be backtested. I confirmed this with Gonçalo in person. 

He did a lot of backtesting before ever trading real money.

…and if you are interested in this strategy, this is a must.

Since this method doesn't have set entry and exit rules, backtesting is more for practicing how to get out of bad situations. You should push the limits of the system in backtesting. Then you will understand where to set your risk boundaries in live trading.

Conclusion

I hope that this trading method gives you some ideas. It may not be a trading method for you, but I can see where it could be a great compliment to other trading methods.

There is much more to it than I have explained here, so be sure to head on over to Gonçalo's page to learn more.

Happy trading!

P.S. – If you want to learn my style of hedging, get it here.

The post The Coastline Trading Strategy: The Bad Boy of Forex Trading Systems appeared first on Trading Heroes.