Low Risk, High Return = Forex Risk Trade
Every forex trader wants a low risk, high return trade. This is not a dream. In this article, I will share how we placed such risk trade in The Alien Room. I will also share few tips on how to look for these low risk, high return trades.
Forex Trading is a game of managing risk.
What is risk?
Risk is the potential amount of money that you might lose in trading. When we measure whether a trade is good or not, we determine the risk and reward in a particular trade. E.g. for every $1 that you risk, what is your reward? If reward is not worth the risk, then this trade is a no-go. Read more about profit and loss calculation in forex trading.
For example, in a USDJPY trade, if you are risk 20 pips for a reward of 21 pips, then this reward to risk ratio is not good at all, even if it means you earn 1 pip more than what you might loss.
As a norm, a reward to risk ratio of 1.5 is sustainable in the long run. That means, a 50% more reward than risk. For every $1 of risk, your reward is $1.50.
[cs_alert type=”note” icon=”fa-key” border_color=”#5cb85c”]In The Alien Room, I always want to make sure my minimum reward to risk is 1.8 and above. I like to screen and take trades that meet a 2:1 reward to risk ratio.[/cs_alert]
Today, I will share with you a trade that was executed in The Alien Room that has a low risk entry.
AUDCAD Trade posted on 25 Aug 2016 and executed on 26 Aug 2016. We sold exactly at the highest point and then price plunged.
Wrote a private post to my members in the Alien Room highlighting that AUDCAD is approaching a resistance.
[cs_alert type=”info” icon=”fa-gratipay” animation=”fadeInLeft”]As a busy professional yet desiring a financial free lifestyle (also make more money), you can use my trade ideas so not to miss out any chance to make money. Or use it to supercharge your analysis too![/cs_alert]
As a forex trader, you can do a few things:
- Learn Forex and Understand
- Take less than 3 minutes to input these levels into your trading platform. You can use your mobile or tablet to trade too. Get a free trading platform here.
- Define your risk and reward. Prepare yourself psychologically how much you will lose.
- Either collect money or lose money.
In forex trading, there is no 100% win method. It’s about losing less and making more each time. However, today I am going to share some tips where you could always enter into a low risk forex trade. Below is something that I wrote in G+ private group, where I share my rationale of placing a risk trade.
How to place a low risk high return forex trade?
Tip1: Avoid counter trend. Trade with the trend
Most traders whom I helped previously (whom previously was not profitable) could not understand trend properly. They do not know about multiple timeframe analysis, neither are they able to differentiate whether they are doing a counter trend or with the trend trade.
How to identify trend:
Example of a downtrend with lower high lower low.
Trade in the direction of trend. If it is an uptrend in H4 or day chart, look for buy setup or pattern. If it is a downtrend in H4 or day chart, look for sell setup or pattern.
In the case of AUDCAD Case Study, it is a downtrend in H4 where we can see lower highs and lower low. Therefore, it is good to choose to sell.
Tip 2: Once trend identified, use a momentum indicator to time your entry
Indicator can be beneficial if you use it correctly. If you do not know trend, there is a high chance that you could buy when it is a steep downtrend or sell when it is a steep uptrend (therefore trading a counter trend).
Let me share a very powerful way to use indicator to time for forex trade entry that works perfectly well with trend. I taught this often to my students too. The indicator that I use is MACD.
Insert MACD into your chart. Download our version of MACD here.
In a downtrend, look for sell opportunity. Look for bearish divergence from MACD for entry.
In an uptrend, look for buy opportunity. Look for bullish divergence from MACD for entry.
You realised that the AUDCAD was shorted in a combination of downtrend and also a bearish MACD divergence.
So it’s a combination of downtrend + bearish momentum. This works great.
Tip 3: Trade not on the first touch, but always the second or third touch of a price level
I’m sure you heard of once bitten twice shy.
The third tip works in the same logic. I will usually let price touch or retest that level a second or third time to establish that it is a strong level. You realised that the sell limit entry was when price retested that price level a third time. Why is this a low risk trade? Simple, if price don’t stop at that resistance level, then any price above is immediately a wrong trade. Thus risk is clearly defined.
This trade is executed and filled in The Alien Room already. We sold at an average price of 0.9870. That’s almost the highest. Immediately following, price plunged.
To know specifically exact entry and exit level, and how to manage a trade, I welcome you to join me in the Alien Room.