What is the best method to increase the equity curve?
This answer does not have one universal truth. Various Forex traders will without doubt answer this question differently. However, with that cautionary statement behind us, we do want to explain one concept that has the potential to accelerate a trader’s equity curve. Before we get started you might want to check out our Double Trend Trap Strategy or our momentum custom indicator, because a proven strategy with our indicator can improve your accuracy and that will help increase your equity curve.
MAKING SUBSTANTIAL GAINS
An equity curve of a Forex trader will never ever be without its ups and downs. The levels of drawdown and accompanied volatility in relationship to the return vary greatly from trader to trader, which depends on the risk appetite, trading style, strategies, etc. Obviously the main goal of each Forex trader is to improve and optimize the profitability vis-à-vis the risk involved.
Improving one’s edge is a long-term process, and usually does not come overnight. That is why each Friday we post an article which tries to provide a valuable nugget of vital information for Forex success. If you agree with this let us know down below in the comments section. With each article, Forex traders can work on improving their edge.
First of all, making substantial gains is a product of a successful business model. Trading is a business and needs to be treated as a business before consistent profits can be made. A trading plan, risk management, money management, balanced trading psychology, trade management etc. are all key ingredients of such a model. These elements are prerequisites.
However in today’s article I wanted to emphasize a couple of elements that will enhance the route to success and profits. Here is the “Golden Triangle”:
1) Use the TOFTEM model for assessing potential trades
2) Enhance win rate % and R:R ratios by understanding where the wide open spaces are
3) Implementation of trades with trade management and trading psychology (patience, lack of fear, discipline and without emotional imbalance)
These concepts lay the ground works for providing Forex traders with a substantial edge. All of the three elements of the golden triangle have been discussed in previous and recent articles – especially the TOFTEM model and the wide open spaces concept. But what links these two together? The answer is market structure.
The market structure is a method which allows retail Forex traders to interpret the charts the same way as a big institutions. The best way to grasp this concept is by joining our live trading room. Here we analyze and break down the market structure session by session.
In general though the market structure is a method which analyzes price action (momentum / correction), chart patterns, key levels, support and resistance, and Fibonacci to understand and identify the TOFTEM model and wide open spaces concept.
Understanding and trading market structure allows Forex traders to identify higher reward versus lower risk opportunities. And it is exactly the success rate of finding those high reward to low risk opportunities which provides Forex traders with an enhanced edge and a substantial boost of their equity curve.
The TOFTEM model and the wide open space concepts are tools and processes that allow traders to understand and grasp the market structure and identify areas which have a higher probability of boosting the equity curve.
BEST PIECES OF THE PIE
How can a Forex trader best capitalize on the wide open spaces? The answer is simple: by actually trading them. The answer might sound redundant but actually allowing the trade to capitalize on the space requires a sturdy trade plan and balanced execution of the plan.
Let us take a look at a practical example on the GBPUSD.
Step 1) is there a trend and if so, which direction?
Yes in this example the trend is up. Price is making higher highs and higher lows and is in an established uptrend due to the presence of trend channel with 3 hits on the bottom of that channel.
Step 2) is there an opportunity?
Yes price has bounced made a retracement back to the bottom of the uptrend channel and the 50% Fibonacci retracement (blue). This provides a major discount within this uptrend.
Step 3) are there any filters present?
There was a key resistance level (orange) and weekly trend line (purple) but those have actually become support after the break. There is another layer of resistance (red), however those levels are a substantial distance away from current price.
Step 4) Is there a trigger?
Yes there are multiple triggers. First of all, a break of the resistance line (magenta) indicated a potential breakout trade setup earlier. At the moment a break of the resistance line (purple) indicates the end of the downside correction. A break of that line signals the change of market psychology and is an important line in the sand for bulls and bears. The downside break of the support line (green) would be counter trend reversal setup.
Step 5) what is the entry method?
The entry could be at the immediate break of the trend line. Other options are zooming in to lower time frames to trade the break of a smaller consolidation, the pullback, bounce or continuation. Read more on entry methods.
Step 6) what is the trade plan?
Considering the fact the upside has a tremendous wide open space ahead of it, capitalizing on that space is how a trader can boost the equity curve.
Obviously one winning trade on its own would be good. But what happens if a trader does not recognize the wide open space (green boxes) and cuts the winner early and short (blue line)? The answer is simple: a lot of profit potential is left on the table.
In this example the Forex trader is maximizing potential reward by:
- Aiming partly for a fixed take profit at a key level of the market (tops)
- Allowing a trail stop to capture extra price movements if resistance breaks
With our specific trail stop methodology, this trade closed for a 280 pip gain versus a 60 pip risk, or a 4.7:1reward to risk ratio. A couple of trades like that and the equity curve starts to look very nice.
The trader can also reduce the risk somewhat on any one particular entry (breaks and pullbacks) by scaling in as the trader is waiting for more confirmation at multiple spots on the charts.
The Forex trader maximizes the reward and minimizes the risk on a trade.
Do you think that the market structure could help boost your profit potential? Let us know down below!
As always thanks for sharing this article and wish you Good Trading!
Latest posts by Chris Svorcik (see all)
- Big Trend Warning: the US Dollar Ready for Major Lift Off in 2nd Half of 2014 - July 24, 2014
- EURCAD Continues With Down Trend – Is It Ready For Another Setup? - July 23, 2014
- Why Trading AUDCHF Today Is Better Than EURUSD - July 22, 2014
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