weekly trading lesson

Student’s Question:

I placed a Buy trade on the NZD/USD, entering at .5825. Looking at the two day low, I set the Stop Loss at .5740. The limit was placed at .6030. With a risk of 85 PIPs compared to a potential gain of 205, the reward to risk ratio is 2.4.

FX Power Course Instructor’s Response:

Congratulations on the Money Management aspect of your trade. Being aware of the proper Risk Reward Ratio will be critical to your success as a trader...well done.

I would however, encourage you to make two adjustments: do not use minute charts for your trades and trade only in the direction of the trend on the Daily chart.

The longer the time frame a chart encompasses, the more accurate the feedback will be. Minute charts will not have as many data points, for example, as an hourly chart and therefore will be that much less accurate. We recommend using nothing less than a 1 hour chart for purpose of analysis and executing trades.

The overall trend on this NZDUSD pair is to the downside...see the chart below. As such, the higher probability trade will be in that direction...to the downside...and we would only be looking for opportunities to sell the pair.

Our trading strategy is first to check the Daily 1 Year charts on the currency pairs to find the one(s) with the strongest trend in either direction. Once that is determined, check out the Hourly charts (4 Hour 40 Day and 1 Hour 10 Day) on the same pair to fine tune an entry into the trade in the direction of the trend.

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