Trade Forex Fundamentally

All right, last time I showed you how to make the so called “Short Gamma” trades, which take quick, small profits in ranging environments so that you can make money even if the market’s not moving much. In this forex trading tutorial I want to show you how to capitalize on HUGE movements in the market using a few forex trading secrets.

Similar to the previous case, we’re looking for a massive imbalance to develop in the market. Think of the market as a rubber band. If things are stretched too much and something happens such that one end gets loose, the rubber band corrects itself and moves back to equilibrium. The market is the same way.

How do we capitalize on this imbalance and get in before everyone else does?

Once you’ve done your analysis and determined that an imbalance is present and decided which way it will correct to start the next massive 2,000 pip+ trend, you are ready to consider an entry. But how? Using a technique I call, “Long gamma” trading.

Long gamma trading means you are only taking small losses but are gaining relatively large winners. The disadvantage compared with short gamma trading is that your win/loss ratio will be somewhat lower (just based on statistics), but the good news is that when you win, you win big. So how do we actually trade this? Let’s continue…

Attention signal (Is there an opportunity?)

With long gamma trades we want to first identify an opportunity. The indication of an opportunity is that we are either breaking out of a ranging environment or that a previous trend has become exhausted and is turning around sharply. Remember when we talked about market cycles? We want to make sure conditions are right for entry. Market cycles tell us that price action tends to move from ranging to trending and back to ranging ad nauseum. That means when you see a sideways-ranging period, the longer it exists, the likelier price is to break out in a strong move. Similarly, markets don’t trend forever in one direction, so if we see a large reversal combined with an imbalance we should be prepared for a large move to occur in the opposite direction. When either of these two types of attention signals show themselves, we start looking for triggers to enter.

The trigger for entry

 When an opportunity comes along with these types of strategies, it doesn’t matter precisely what price level you enter at because things are so random. Rather, it’s more important to be aligned with the immediate driving force of the market—sentiment.  Think of it this way—sentiment is like the wind in a boat’s sails: if you have some difficulty starting out it doesn’t matter so long as the wind is blowing. Your trigger is to enter after price has proved that sentiment is in the direction of the unwinding of the imbalance and is starting to form a new trend for you to ride. Here’s how:

1. If price has been ranging on a weekly chart, your trigger for entry is when price breaks out of the range in your direction and closes outside the range. If price has been trending but the trend has reached exhaustion and has turned around on a weekly chart, your entry trigger is when price has moved in your direction for at least two consecutive weeks with larger than average volatility. If you see big candles in the direction opposite of the latest trend, you’re on the right track.
2. Enter the first position at market price.
3. Set your stop loss at 2 * the 14 day average true range (ATR) value to allow plenty of room for randomness- (i.e. for price to “breathe”) so you don’t get stopped out easily by the randomness of the market. If the ATR is 100 pips for today, then your stop should be set at 200 pips.
4. Risk no more than 5% of your account equity. If you have a $20,000 account and your stop loss is 200 pips, you would buy with a max position size of 50,000 or 5 mini lots.
5. Enter a second position after at least 2 days have passed and price has moved a bit away from your first entry (this is to allow the market time and space to move around so that you don’t overleverage yourself)
6. Hold no more than 2 positions at a time
7. Take profits at 3 times the size of your stop loss (e.g. if your stop loss is 200 pips, then you take profits after 3*200 = 600 pips have been reached). This is to maximize the share of the total trend that you capture. Alternatively you could set a trailing stop so that you can follow the trend for as far as it goes.
8. Do not enter if price moves against your direction violently. This means that something is surprising the market and volatility is increasing (which doesn’t suit this strategy). Objectively this means, for example, if you see a big downward candle on the chart when you’re going long that is at least 1.5-2*ATR. When this happens, wait for price to stabilize and start moving back toward the middle of the range while going in your direction. Patience pays off here.

There you have it- how to make money trading forex in high volatility environments. It’s important to combine this strategy with other strategies in your arsenal so that you capture big trends in fast moving markets, and you capture quick forex profits in slow, sideways markets.