Four Important Forex Entry Principles for Low Risk Entries

  • By Harrison Cole

  • February 12, 2017
  • 3:21 pm BST

What You Should Know Before You Jump Into a Forex Trade

There are four things to consider when developing your Forex entry techniques and they are: analysis, position sizing, low-risk entry & scaling in. These are not specific techniques, but principles that must be followed when creating your own Forex trading strategies. All good traders use a form of these 4 important Forex entry principles and you’d be well advised to study them and work out a plan to incorporate them into your own trading.

1. Analysing the Forex markets

Technical analysis dominates when building your Forex trading strategies, though fundamental analysis can be used to determine dominant themes or trends in the market. Support and resistance levels, trend lines and candlestick patterns can all be used to make decisions on your Forex entry points. Every time you view a chart you should take into account common support and resistance levels and apply your trend lines to identify where the strength and weaknesses are in the market.

Globally it is important to take into account the economic outlook for different countries and consider critical numbers such as the whether the country is lowering or increasing the reserve bank rate, how difficult it is for countries to borrow funds and what the employment data is indicating at that point in time. These are all extremely important in determining the bigger trends in the market.

2. Position sizing in the Forex markets

Sound position sizing methods are critical to your Forex trading success and will allow your account to either flourish or flounder. Before you enter a trade following your Forex entry signal it is essential to size your positions to control losses. No matter how good your analysis is, YOU WILL BE WRONG and there is no time like the present to leave your ego at the door and accept this fact.

Your very own survival in the markets may depend on this one point. If you have placed too large a position on the trade then you can blow up in spectacular fashion as the result of a strong move against your position. Psychologically it is always harder to get out of losing positions when you have a relatively large amount riding on the trade. Cutting your losses early will allow you to stay in the game longer and still have capital available when the great opportunities present themselves.

3. Low-Risk Entry – selling strength and buying weakness in the Forex markets

Low-risk entry points improve your chance of success when Forex trading. A low-risk Forex entry point means you will lose very little if the trade does not go as planned and by keeping your losses small this can improve your risk reward ratio and your overall profitability. Low-risk Forex entry points not only make trading easier, they are more profitable overall because when a trade does not work out your loss is as small as it can reasonably be.

One trading principle along these lines is to buy weakness and sell strength. Often when a market is stretched in one direction, say it is oversold, you can gauge a long entry price with a tight stop and it is often at these times the greatest reward to risk opportunity presents itself. You have to be nimble and trade light around these points and when they present themselves you have the opportunity to scale in as the trade moves in your favour, which leads us to the next point.

4. Scaling In – Knowing how to add to winning positions when trading Forex

Have you ever entered a trade and realised almost immediately that you did the wrong thing? Most people have when trading the Forex market (or any market for that matter). By entering a part position, you can test the waters and if the trade moves as you expect then you can add to the position. This is known as scaling in. While most Forex traders enter a position in one full parcel and exit the same way, you could also add to a winning position to maximise your returns from a trade. Scaling in is one of the most under used Forex entry techniques.

Spend as much time developing your position sizing model as you spend on looking for good entry techniques. An example of scaling in would be to buy on a false break of support and then when the market bounces back above support and continues up to resistance, you can add to that original false break position. This takes both nerve and discipline but the rewards can be great.

Conclusion

Ensure you adhere to these principles when developing your Forex entry strategies. If you do then should greatly assist in providing a solid platform with which to build into a successful Forex trading career.