How to Let Profits Run

Filed under: Learn Forex Trading |

I would like to show you an example today of how to let your profits run in the forex markets by using price action to guide you. I will do this via a trade example on the EUR/USD pair, which for those of you that still don’t know is the pair for the euro and the United States dollar.

Figure 1.

Figure 1.

 

To begin with, take a look at Figure 1. This is the daily chart for the EUR/USD pair. What you can immediately see is that this pair is in a downtrend. The 8-day exponential moving average is crossed well below the 21-day exponential moving average, and the chart is visibly moving down from left to right. In this kind of trend, we are better off looking out for any bearish price action signals to find an entry in the market, and to ride this bearish trend down as much as possible.

 

As you can see, in the middle of the chart, a nice pin bar formed, so I put an order in (on Forex Tester around the middle of 2008) to go short at a 50% retracement of the pin bar, with a stop loss placed just a few pips above the high of the pin bar, and no target set at all aiming to manage the trade. This order was filled, and price started to move down.

 

When a bullish pin bar formed, I moved my stop loss to a few pips above the high of this pin bar (the second candle after entry), but fortunately, this was not hit and price continued to move down. When a bullish candle finally formed, I moved my stop again to just above the high of the previous candle. Again – this was not hit. However, when a bullish engulfing pattern formed, I moved my stop again to just above the high of this candle, and this was hit for a massive profit of around ten and a half times the risk. So, was this the right time to exit the trade? Well… why not take a look at Figure 2 and decide for yourself!

Figure 2.

Figure 2.

2 Responses to How to Let Profits Run

  1. If only it worked like this in real life. Almost anybody can trade a historic trend in Forextester or using an MT4 EA in Strategy Tester mode.

    Ian Foster
    May 21, 2013 at 3:54 pm
    Reply

  2. The point of Forex Tester is to practice trading in a realistic environment – so unless you memorise years and years worth of data – then it should be just like trading it for the very first time. However, with MT4, you do tend to see what is coming when you scroll back.

    JayG
    May 23, 2013 at 9:25 am
    Reply

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