When trading Forex, your entry should be “low risk”.
A low-risk entry occurs when the opportunity for a strong trend exists and you can get on that trend with a relatively tight stop and a reasonable win rate.
One of my favourite scenarios for low-risk entries is during periods of low volatility. As we break out of the period of low volatility and expand into a period of high volatility, often a trend will occur.
The Relative Width Indicator (RWI) is designed to systematically identify these periods of low volatility for you. This makes identifying low-risk entry points a breeze.
Here is a blown-up example of the indicator in action:
Timeless and universal
Ideally, when you trade an edge, you want it to be timeless and universal (hat tip to Ray Dalio for this concept). This means that it repeats itself on a number of timeframes and markets over a long period of time.
We can use the RWI to identify these scenarios on a number of markets and timeframes. (Yes, these are cherry-picked examples, but they come from an in-depth study and a lot of real trading experience.)
Here are opportunities on the weekly chart of EURUSD:
Here is an opportunity on the daily chart of NZDCHF:
Here is an opportunity on the 4-hour chart of Gold.
Here are opportunities on the 1-hour chart of the Dow Jones Index:
Here are opportunities on the 15-minute chart of GBPUSD. (Spot the failed breakout too.)
It’s not about winning; it’s about how much money you make
This indicator is not trying to be perfect. You will have losses when these breakouts fail. The key is that when you do win, often you win big.
Paul Tudor Jones said it’s important to be able to win only if you are right 20% of the time. By identifying periods of low volatility, you can have large R-multiple winners, which means that if you only win a small percentage of the time, you will still be profitable.
We are talking about being robust here. The good news is that by identifying low-risk entries, you should be able to win more often than not anyway. My point is don’t get scared of the losses; losses don’t matter. Losses are simply a cost of doing business. What matters is how much money you make in the end.
The importance of a systematic process
Using an indicator to systematically identify the period of low volatility has a few key benefits:
- Everything is very clear, so you make less (or no) mistakes.
- You can easily back-test your ideas.
- You can use an algorithm to automatically execute your trades.
While the concept of low volatility breakouts is simple, it is much better if you can easily identify them in a systematic way. The RWI indicator is a smart way of doing this.
How to get the indicator
You can access the indicator for a small fee. We have versions for both trading view (shown above) and MT4. Simply click on the link below.
About the Author
Sam Eder is a currency trader and author of The Consistent Trader and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and industry traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter or get FREE access to his acclaimed How to Be a More Consistent Trader Short Course.