To simplify this writing, I assume that you already know the basics of trading forex, like openning a trading account, depositing money into it so you can start trading, how to buy, sell, make an order, set your limit and stop loss for each currency pair you are trading, how to withdraw money from your account… etc. If you still don’t know any of these basics, please read the free ebooks at the download section, or ask your trading broker directly.

I don’t know why most training lessons/books have to be so politically correct. For example, they tell you when you buy the pair EUR/USD, you actually buy the Euro and sell the US Dollar; and when you sell it, you actually…

STOP!

That confuses me a lot. I would prefer to consider the currency pair EUR/USD as an object, like a car, for example. But then I would have a little problem… When I buy a car, I put down my money to pay for it. And when I sell the car, I get back my money. That’s perfect. But what about the situation where I sell it first? Am I supposed to get the money first? Not forex trading. Whether you buy or sell a currency pair, you’ll have to put down your money first. You’ll never collect money in advance. So trading a currency pair is not like trading a car. But it’s more like sport betting, although it’s such a bad comparison. With that analogy, when you buy a currency pair, like EUR/USD, it means you put your money down to bet that the pair will move up later. Similarly, when you sell it, you bet that the pair will go down later. The outcome is obvious, if the pair moves like you expected, you’ll win. Otherwise, you’ll lose.

Every trader learns the basics pretty fast, especially when they lose their real money! No classrooms can teach you better than trading losses, because it may haunt you all day and night for a long time until you get over with it. That’s why I’d like to skip the basics and get to the main concepts of this strategy.

The first important question is “how can you determine the high and low for each currency pair you want to trade?” And the next equally important question is “for how long will that high and low be valid?” If you know the answers to these two questions, than profit is almost guaranteed from your trades.

The second question above gives rise to another question: for the near future (like tomorrow), will the high/low stay the same? move up or down a little bit? or will they move far away up, or far away down? And what should you do in each situation?

For example, you could determine the high and low for the currency pair EUR/USD at this time as high = 1.2700 and low = 1.2600, or make it simple: 1.2600 - 1.2700. That means at the moment, the rate for this pair can move up and down within this range from 1.2600 to 1.2700. But how about tomorrow? Will the rate still move within this range? Or more narrow from 1.2650 to 1.2680, for example? Or will it break the range and move up to 1.2800 - 1.2900?

If the forecasts for the near future stay the same in terms of high/low, the technical term for that situation is “range market.” Similarly, if the high/low forecasts move far away from the current situation, it is called “trend market” (I can’t find better terms for this, so I’ll use it in this writing).

With that in mind, let’s look at the main concepts in this strategy:

1. In terms of “buy low sell high,” not every trade can be a winning trade. But to maximize rewards and minimize risks, every trade has to be entered at a good bargain. To accomplish this requirement, you should never buy or sell a currency pair at market (current rate). But you should always make an order instead. For example, the current range for the pair EUR/USD is determined to be 1.2600 - 1.2700 while the current rate is 1.2650/1.2653 (1.2650 to sell and 1.2653 to buy). You shouldn’t just go ahead and buy or sell the pair at the current rate, because the rate tends to stay there (in the middle of the range) for most of the time. Besides, you can’t know for sure which direction the rate will go, either to the high end or the low one. But if you make 2 orders, one to buy at 1.2600, and the other to sell at 1.2700, then when the rate moves to either one of these ends, the system (your broker) will enter the trade for you. When the rate moves towards the other end (in range market, usually to the middle), you will be in the profit zone.
2. Since you can’t watch the market 24 hours a day, you should always enter take-profit (or limit) and stop-loss level for each trade. You might hate the idea of limiting your profit when it could have been a lot more, but setting a limit ensures that you get profit instead of no profit, or even loss.
3. Never enter a trade without meeting all of the requirements you set out in your plan. You’ve got to be patient when the market gets slow. Remember that having no trades is better than having losing ones.
4. Never enter a trade in a hurry without doing your homework. Note that you will never run out of trading opportunities in forex market. Five full days each week, there will always be good opportunities for you to enter a trade and win.
5. Emotions play a big role in forex trading. Asking you to get rid of all emotions in trading is like asking you to be a saint, which is totally impractical. But there are procedures to make your emotions work in your favor instead of against youself.
6. To ensure continuation of your daily trading, you should not spend more than 20% of your balance in open positions at any moment in time (except when you start with only a small balance). You need enough money in your account to cover rate fluctuation and losses, in order to hold your positions until profitable exits.
7. Practice “no greed/no regret” habit: there are times that you decide to exit a position too early, leaving out a sizable profit-taking potential. Naturally you regret the decisions. But if you think about it, there’s nothing to regret about. Since you don’t know the future, you can’t utilize ALL of the opportunities and get the best out of each. In reality, you only hope to use a very small percentage of those opportunities to make profit. Therefore, trying to get the highest margin out of every trade is not a good long-term strategy. But rather, you should focus on consistency, making profit every month or shorter period.
8. Finally, a practical question is “how much should I set the stop-loss and limit for each trade?” The answer really depends on whether it’s currently range market or trend market. In trend market (where rates tend to break out of its current range), it’s closer to 50-50 chance that a stop-loss is breached (in other words, rates may go either way, assuming that you don’t have all the information to predict the near future). In that case, reducing stop-loss and increasing limit will profit you more. For example, you predict that rate for the EUR/USD pair will break out of range in the up trend tomorrow. So you buy the pair at 1.2650 at the moment. Since the trend market is predicted, you may want to set the stop-loss level at 1.2600 (50 pips down) and limit level at 1.2750 (100 pips up). If the rate moves to 1.2750, you’ll profit 100 pips. Whereas if the rate moves down to 1.2600, you’ll lose 50 pips. Assuming the number of winning trades equal the number of losing trades, you will profit in the long run.In range-bound market, however, increasing your stop-loss level will increase your chance of winning. Let’s take the example above in range market. In this case, you would want to set stop-loss level at 1.2550 (100 pips down) and limit level at 1.2700 (50 pips up). You may lose more money than you gain from the trade. However, the probability that you win that trade will substantially increase. It’s closer to this pattern: double your stop-loss will double your chance of winning (suppose we have 16 trades):
   

   Limit	Stop-Loss	Winning Ratio	Losing Ratio	Profit | Loss
   100 pips	-50 pips	4 trades (25%)	12 trades (75%)	- $200
   100 pips	-100 pips	8 trades (50%)	8 trades (50%)	$0
   100 pips	-150 pips	12 trades (75%)	4 trades (25%)	$60

In the table above, if stop-loss levels are set at the same distance as limit levels (100 pips away, as in the middle row), the winning chance equal losing chance, so there’ll be no profit in the long run. The top row represents the case where if you narrow the stop-loss level in half, you also reduce the winning chance in half (only 4 winning trades instead of 8), thereby increasing your losing chance by 50% as well. In this case, you win only 4 out of 12 trades, and incur a loss of $200.

Finally, the bottom rows represents the case where stop-loss levels are increased 50% (from 100 pips to 150 pips), your winning chance is also increase 50%, from 8 to 12 trades out of 16 trades. The 12 winning trades out of 16 will give you $600 profit.

While it’s only a theoretical estimate, the table above gives you an idea that in range-bound market, if you increase stop-loss level and decrease limit level, you’ll make more money than the other way around. Note that this condition will be reversed in trend market, where narrowing stop-loss and widening limit will eventually brings you more gains.