The 40/125 Forex Trend Trading Method
The 40/125 Forex Trading Method
Trend trading can experience spectacular gains by capturing huge price moves, but also can experience a long series of losses.
With trend trading, the 80/20 principle applies where there is an unequal distribution of gains. Losing 60% to 70% of your trades with trend trading is common. And even with that, a handful of the 30% to 40% of your winning trades will be responsible for the lion’s share of your returns.
This presents a bit of a dilemma for the average trader. If you have low trading capital and/or low tolerance for pain of losing then you’re at a disadvantage.
Making money and then giving it back can be mind-numbingly tedious causing your enthusiasm for trading to dwindle. To help, the 40/125 Forex Trend Trading Method was designed to help you avoid being papercut to death by trading losses while still taking advantage of huge price moves.
A good example recently occurred in the euro/U.S. dollar currency pair. The EUR/USD was in a steady downtrend until early 2017, but began a slow rebound in Q1. By April the 40-day simple moving average (SMA) was approaching the 125-day SMA. On April 19, the 40-day SMA crossed above the 125-day SMA signaling a potential long entry. This was confirmed by the Moving Average Convergence Divergence indicator (MACD) crossover on April 18, which acted as a secondary confirmation. The trigger was the price high of 1.0960 from March 27, which was matched on April 25 (see “Euro trigger,” above). The stop loss is set at two-times the 14-day average true range (ATR), about 129 pips.
You can add to your long position to enhance returns. In our euro example, price traded back-and-forth in a range until the currency pair gained more than its initial risk, which set the stage for a potential second entry. On May 16, the conditions were met that would have allowed you to scale in up to an additional half of your original position. This gave you greater reward potential magnifying your risk/reward ratio if the trend continued (see “Adding to a winner,” left. Your stop loss would be adjusted to two times the current 14-day ATR.