The Forex market can lure the novice Forex trader into trading scenarios that appear very attractive at first glance but turn very quickly into a losing trade.
Many a Forex trader will relate to this experience:
- Price has been in a consolidation channel for one or two hours.
- You place an entry order to get taken in at the top or bottom of the channel.
- Within a few minutes your trade is in and within a few minutes more you are looking at a loss of -10 pips, then -15 pips, and then your stop gets taken out.
- Price severely moved for hours but as soon as you got into a trade you were taken out within minutes for a loss leaving you bewildered and muttering, "What happened?"
In the early stages of gaining trading experience, it is good for the novice Forex trader to go by a checklist every time before entering a trade until certain habits become ingrained.
Just having a procedure in place that has to be executed before pulling the trigger on a trade can prevent the Forex trader from quickly entering a trade just because there are some sudden movements on the screen and the trader is worried about missing an opportunity.
Yes, disciplining oneself to take time and go through a checklist first may mean missing some good opportunities occasionally. On the other hand, it will prevent losing trades often.
For a very cautious approach to trading the new forex trader can use this Failsafe Checklist to determine whether the potential trade setup is likely to be high probability or low probability.
Avoid Going Long If:
- There is negative divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
- MACD on the 4 hour or 1 hour chart is pointing down.
- Price is well above the Central Pivot Point for the day in a Sell Area. (For a free pivot point calculator go here: http://www.vitalstop.com/Forex/pivot-point-calculator-download.html )
- Price is below the 200 EMA (Exponential Moving Average) on the 4 hour and 1 hour chart but above the 200 EMA on the 15 minute chart. (With this setup on the 3 times frames price is bucking the overall trend and can turn against you at any time.)
- Price is above a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
- Your stop is not below multiple layers of support such as a significant previous high or low, pivot point, or Fibonacci level.
Avoid Going Short If:
- There is positive divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
- MACD on the 4 hour or 1 hour chart is pointing up.
- Price is well below the Central Pivot Point for the day in a Buy Area.
- Price is above the 200 EMA on the 4 hour and 1 hour chart but below the 200 EMA on the 15 minute chart.
- Price is below a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
- Your stop is not above multiple layers of resistance such as a significant previous high or low, pivot point, or Fibonacci level.
The Most Important Lesson Of All
Implementing this Failsafe Checklist strategy may reduce the number of trades the Forex trader participates in. However, here an important lesson is learned – patience! Waiting for a high probability setup can make many demands on a Forex trader's mental resources and emotional strength.
This is probably the most important lesson the new Forex trader will have to learn. Using a Failsafe Checklist like the one above can make the Forex trader slow down, engage in thorough analysis using the technical indicators available, and really start to make progress as a trader.
Why not print off the Failsafe Checklist and keep it near the computer for consultation before pulling the trigger on any trade?