This article
advances the procedures
commenced in Hub 28.

To access other
Hubs, please click
on the link to
‘Your Forex Library’
above.

I want to now
investigate the
subject of ‘Entry and Exit’ strategies in more detail and
specifically focus on techniques that you will need to employ
to ensure as much success as possible.

I have already discussed Entry and Exit strategies in Hubs 16, 17
and 18 but only in a general sense. On their own, no such strategy
is capable of guaranteeing success and this Hub will show, that
in order to do so, they must be integrated into a trading package
consisting of other Forex concepts.

As there are countless number of Forex Trading strategies, I will
focus on just one to illustrate to you the main concepts that you
require to achieve success.

These ideas are relevant to all other Forex trading strategies.

I have based my Forex Trading system on the Stochastic(5,5,3)
oscillator but, as I have already said, stick to your own if you
already have a favorite. The concepts that I am now about to show
you applied to almost all.

As explained within Hub 18 the entry and exit rules for the
Stochastic are as follows:

Entry rules: Enter a new trade when the faster moving Stochastic
line crosses above or below the slower moving one. A buy is
preferably entered when the Stochastic is below 20 and a Sell
when the Stochastic is above 80.

Exit rules: Exit the trade when the opposite crossovers occurs.
The Stochastic provides well defined entry and exit points
and is easy to use.

However, the Stochastic is a lagging indicator and, as such,
it can create false signals. For instance, the Stochastic could be
registering a new sell crossover at 85, but the market may
experience a sudden bull surge resulting in a rise of hundreds
of pips.

The Stochastic reading, on the over hand, may only rise by a few
points to 89 for example.

This is a serious problem and happens frequently and forces Forex
traders to monitor and even change Stochastic settings
constantly in order to adapt to the ever-evolving Market conditions.

As you can see, the Stochastic is a good indicator, in general,
that can be used to predict the probability of a market reversal
but on its own it is not totally reliable.

In fact, all the technical analytical tools such as candle patterns
and the RSI etc suffer from the same problems and are limited it
their role of reversal detectors just by themselves.

So, how do you improve the probability of making predictions using
one of these indicators as a central concept of your Forex Trading
Strategy.

First of all, you must grasp the fact it is almost impossible to
predict the next Forex movement. In fact, the best you can hope for
is gaining an accurate handle on the probabilities of the next move.

To achieve this, you need to back-test your Forex Trading System using
historical data for the currency pair of interest. Back-testing is
a major concept and will be discussed shortly in-depth within future
Hubs.

Select the first entry configuration of your trading system i.e. you
intend to enter a trade immediately within the same timeframe that
a crossover occurs.

Then back-test this condition against historical data that should be
long enough to provide at least 30 of these entry occurrences.

Back-testing can be done manually but, if you do this, you must
attempt at all costs to record your results accurately and not let your
emotions influence this process in any way. As such, using an automated
back-testing system can overcomes this problem.

Once you have recorded at least 30 results, you then need to determine
the expectancy of this configuration of your Forex Trading System.

This subject is covered in hubs 7 and 23. More specific examples will
be explained in future Hubs.Do not forget you are searching for a
reliable expectancy value which has as high a positive value as possible.

You will then need to select other configurations of your Forex Trading
system e.g. entering trades during the timeframe after the crossover
or entering  when the trade is a certain number of pips in advance of
the crossover etc. Be as imaginative as possible.

Calculate and compare your expectancy results of all your configurations.

If none of your trials produce a satisfactory positive expectancy value
then you will need to experiment with other trading indicators.

Once you have finally obtained a Forex Trading System, you will then
need to deploy the principles of Money Management in conjunction with
your system’s expectancy value in order to determine how much you should
risk per trade.

Money Management is discussed in Hubs 8, 26 and 27 and further more
detailed examples will be outlined in future hubs.

Make no mistake, this processes outlined above will take you months to
complete properly but surely this is better and safer then mindlessly
gambling on a subject that is as complex as the Forex.

Good Luck with your Forex Trading.

If you have any queries, please leave a comment and
I will do my best to answer it.

Regards,

Terry Allen
 

Please be advised that Foreign Currency trading involves
substantial risk of monetary loss.

All information contained on this website is provided as general
commentary and must not be constituted as investment advice.

I will not accept liability for any loss or damage, including
without limitation to, any loss of profit, which may arise directly
or indirectly from use of or reliance on this information.