2Bull Forex Blog

Many forex traders want to trade on auto pilot and simply follow trading signals generated by a system, without having to make subjective judgments. Here we are going to give you one for FREE which is proven in terms of its profit potential.

The system is Richard Donchian’s 4 Week rule and has been the basis of many successful trading systems around the world.

Big fans included trading legends such as Richard Dennis, so if its good enough for him its good enough for you!

The system was originally developed in the late 70s to trade commodities but can be used on any trending market and currencies trend well.

Now this system is so simple it consists of just one rule and here it is:

1. Close any short positions and go long whenever the price exceeds the highs of the previous 4 calendar weeks.

2. Close any long positions and go short whenever the price falls below the lows of the previous 4 calendar weeks.

If the system is run with a SAR (stop and reverse), the above system will always maintain a position in the market (either long or short).

Does it work?

Back test and you will see it does.

Of course it works very well in trending markets ensuring you are on the right side of every big move -
but like all trading systems there is a downside:

It will get whipped in a choppy sideways market and here you may wish to consider some filters:

A common solution to this problem is to enter on the 4 week rule (the breakout), and to exit on a shorter time frame such as 1 or 2 weeks.

Traders can also use other exit rules i.e. exit when a moving average is broken. For example, applying a 10-day moving average as the exit - A 10-day moving average is one-half of the entry signal (four weeks is of course 20 trading days) is period we like. You can also experiment with ADX RSI and MACD filters if you wish.

Many traders ignore this system; after all it’s not trendy or complex like chaos theory or artificial intelligence based systems, or full of mystical nonsense like Gann, Elliot Wave or Fibonacci - but it works.

Simple systems work better than complicated ones as they have fewer elements to break. If you are interested in making money long term and have a disciplined nature you will like this system.

If you believe complexity will beat the markets, they move to a scientific theory or enjoy the buzz of trading frequently - you won’t like it - This system is all about making money long term in a disciplined fashion.

The 4 week rule is simple you can customize it to restrict losses, by adding filter and it will have you on the right side of every major move - do that and you have great profit potential.

So if you want to trade forex on autopilot and make big long term gains, consider this free system and you maybe glad you did.

If you want to win at forex trading longer term money management is something you must consider. When dealing on leverage, you need to protect what you have - if you don’t you will get wiped out.

Many traders make basic errors when trading and here we will look at them and give you simple tips to avoid the errors and increase your overall profitability.

1. Not Understanding Standard Deviation of Price

Ask most forex traders do they understand the above and you will be met with a blank look yet, it’s essential to understand it and volatility, otherwise you will never know how to place stops in places where the odds are in your favour.

If you don’t know what the above is, make it an essential part of your forex education as you really need to place and trail stops behind random volatility.

Placing a stop close may appear good risk control - but if the chances are high it will be hit, then you have simply gained nothing. By trying to avoid risk you can actually create it.

2. Do Leverage

As you will have to have stops outside of random volatility you will need to do leverage. Many traders are in a hurry to make money and leverage up to high put the stop to close and get hit. You need to give the market room to breathe and that means wider stops and lower leverage.

3. Trade Breakouts

If you only trade valid breakouts you have a great method of risk control and an obvious stop ( below the breakout point) and if you are selective in the breakouts you take the odds of success are even higher which leads to the next trading tip.

4. Cut Your Trading Frequency!

If you only focus on high odds big breaks then the odds are on your side even more and your stops are less likely to be hit. I know traders who trade no more than once a month but make triple digit gains.

You don’t get paid for trading often in forex trading you get paid for being right - that’s all.

5. Trailing a Stop

Most traders get so excited that they have a profit they can’t bare to give any of it back so what do they do?

They bring the stop to close and get stopped out by random volatility and lose.

If you want to make money you have to take calculated risks and if you want to run big trends keep your stop well back.

A good level to trade is a close behind a significant moving average and the 40 day is a good one. Sure you will give a bit back but that’s inevitable but this method will keep you with the big trends longer.

6. Buy Options!

If you want to deal with volatility and get staying power then consider options as that’s what they give you - the ability to ride out short term volatility and providing the market trades in the money before expiry you have a gain.

The only point to keep in mind is when placing options trades and buying them to get plenty of time on your side and buy at or in the money puts and calls.

Forex money management is all about taking calculated risks at the right time and defending what you have - volatility is your enemy. Most traders can spot trade direction but fail to stay with trades simply because they can’t get their money management right.

If you follow the above tips you will take calculated risks at the right time and be able to handle and cope with volatility and seek bigger longer term gains.