Firstly, most forex trades are based on a lose or win scenario.
So you place a buy or a sell trade in the expectation that the market is going to move in the direction that you predicted, and that you will take a profit at a pre-determined price.
If the market moves in your favour, then you win the trade and collect your profit either at a predermined price or by manually closing the trade whilst it is profit.
However – If the market moves against you, then you can limit your risk by placing a ‘stop loss’ on your account, so that you close your trade at a loss but without losing your shirt on the deal.
The amount you lose is based on how much you risked, and where you placed your stop loss.
But what if I based my trading without any stop losses ?
Well, for most currency pairs this is simply not an option as the potential range of movement of the currency could potentially quickly wipe out your entire account.
However there are a couple of currency pairs that historically move within a tight range that makes it possible to predict with a reasonable amount of risk that they will not run away with your trade.
These are the Australian and New Zealand Dollar, and the Euro and Swiss Franc pair, and one of the trading systems that you can use to trade this pair is called ‘grid trading’.
If you look back over 10 years you can see the lowest and the highest price that these pairs have ever achieved. Then you can divide the range into 40 pip price boundaries to form a grid. You’ll see about 70 or so lot ranges – 35 above the centre line and 35 below it.
If the current price is above the centre line you place a sell trade with a take profit 40 pips below the current price. If the price falls – you win the trade, and replace the trade with the same entry price and take profit.
If the price moves up, the trade is left hanging until the price moves back down again (this can take several months or even years, but you should never ‘lose’ the trade because you should not need to close it.
If the current price is below the centre line then you place buy trades on 40 pip grid boundaries, instead of sell trades.
You can work out what your maximum exposure is by calculating how much each trade will cost to maintain as the price moves against you, up to (if necessary) the 10 year range limit.
You should also add on a good margin of safety just in case the price moves outside of the 10 year range.
You may eventually have dozens of open trades, but as long as you can safely cover the drawdown, you should eventually close these trades in profit when the currency returns towards the centre of the range.
So there you have it – a ‘no loss’ Forex Trading system!
Here’s a hint – If you’re trading both the above pairs with a 0.01 Lot trade, you’ll need about $US 5,000, and if your trading 0.1 Lots you’ll need about $50,000.
No trading system is 100% risk-free but grid trading may prevent those sleepless nights experienced by many Forex traders who have stayed up all night nursing a losing trade only to see it crash through the stop loss at 5am.
However, this can be a very profitable trading system that has returned profits of 5 – 6% per month, which is a great deal better than many other forms of investment.
Kindly submitted by experienced forex trader Malcolm Waters.