It is unusual for the forex market to make substantial moves out of the blue, it does of course, no question about that, you can see some very large bars on the daily chart when this has occurred, and there lies some of the issue with the psychology of forex trading. Although the market will move a limited amount usually, say on the EURUSD around 50 – 100 pips a day, it is a tendency for trades to expect the unusual hoping that the market will make that big move in their favour.
Using The Average Daily Range For Forex Trading.
The average daily range is usually calculated on a 5 day basis, and you can use this for profit taking, if the market has moved around the same amount that is has over the last 5 days on average it is unlikely that it will move any more. If you have a look at most daily charts you will see that there is about one unusually big candle in about 40, so if you are expecting a big move from your trade, you are expecting a 1 in 40 chance that it will do so, and that’s pretty low odds. Forex trading is about odds and probability, and if you are trading the lower probability expectations then you will not make a profit in the long run.
Forex Money Management.
You are never sure how much the market will move, and this is why good money management principles are essential to maximise your profits but also to actually make a profit in the first place. Using the average daily range is a good way to identify a profit taking area, but you do not have to close all your trade, it may be that the trend will continue over the next few days, and if you still have a part stake in that trade then you can capitalise on the move. To improve your chances of taking advantage of a surprisingly large move, you need to look at the fundamental situation and the upcoming news announcements, like the Non Farm Payroll, or a major speech by the FOMC in the USA. These events can potentially cause big moves, and by taking these into account, you are improving the odds quite substantially from 1 in 40 to maybe as low as 1 in 10. The most important thing is to be aware of the current market movement and what might potentially change that.