FOREX TRADING 101 - CONT'D

The purpose of stop loss is simply to protect my trades from a totally unexpected, unusual, logic defying movement in price. For almost a year, my stop loss has never been hit for once. That doesn't mean, I don't have losing trades. I simply close losing trades if the loss will not affect either my monthly, weekly or daily targets. From my research I have realised that it is tight stop loss that creates panic which is major factor that kills most traders. For illustrative purpose, let us look at the implication 200 stop loss based on my recommended lot sizes for 3 hypothetical traders:

Account size Min. Lot size 200 pips stop loss @$1/PIP
$100 0.01 $20
$1,000 0.10 $200
$10,000 1.00 $2,000

The above examples are extreme cases, but the 3 traders above will survive the turbulence and live to trade again and again. Let me emphasise that where your trade is guided by informed planning, it is extreme rare for price to move 200 pips against you. This trading technique removes fear from your trading and develop your ability to develop the patience to pick between 50-100 and more per trade. Once you have the confidence, you will realise how easy it is to increase the lot size and and go for the kill. I will show why it is rare from the explanation below on how I entered my trades.

I am less concerned about all these fanciful indicators flying in this forum. In fact I don't have time to waste on studying them. Believe me, the facts are always very obvious on the charts once you have the sky-view of the landscape. For my short-term trade, H4 is my principal guide. I use H1 to determine the current direction of the market and M15 to determine my point of entry my trades. I use RSI 14 days period to determine the strength of any current price movement. Once the RSI is around 70 on the H4, in 95% of such situations, the trend is about to change. I will then move to H1 to actually confirm reversal of the trend and M15 to determine entrance. Thereafter I will check, where the price is situated at that time within the trend and support/resistance line to re-confirm the genuiness of the new trend. The next thing is simply to wait for the confirmation of the trend and enjoy the free ride. Nothing could be more simpler than this!

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