Forex Trading Strategy with Price Action Basics

Now that I have a trading plan as well as some form of money management in place, I will need a trading strategy. Accessing http://www.forextrainingworldwide.com/ website I found a number of successful strategies and they are simple and easy to execute and seem to be profitable if I stick to the rules of that strategy. I will be focusing on the Price Action strategy and in this article I will be discussing price action basics and not setups as such, that will follow in up and coming articles.

Why trade with price action? Looking at all the strategies available the common denominator within all of them was that every chart had price action. What is price action? The best way to describe it's the “footprint” of money. Financial markets are where money is exchanged between market participants, and this exchange of money leaves a trail, this trail is a market’s price movement or price action and it can be observed on a price chart. The price action strategy can be traded in any financial market and on any time frame. Trading any financial market means that I can trade commodities (gold, silver, oil), Index's (SP500, UK100, etc) including Forex. The time frame I will mostly be trading in is the D1 and H4 which suites my currently life style. As I discussed in my previously article  Forex Trading Plan, Forex Training Worldwide mentions the following "DO NOT CHANGE YOUR LIFE FOR TRADING. We can help you change trading to suit your life."

Human beings ultimately behind the price movement of the Forex market and it seems that human emotions are relatively predictable especially when it gets to the matters of money their actions in the market often result in price action formations that repeats itself periodically. So by learning how to read these price action charts correctly it will allow me to use my strategy successfully due to the way the market thinks. A simple way of explaining this is by combining price action setups with core support and resistance levels and dynamic support and resistance levels. Core support and resistance is where I can see that the market reached either a peak or bottom at some point in time this does not mean that price can not break out even higher or lower, but if I can see that in the past when price reached that level and it bounced down or up from that key level of support and resistance then the probability the market may follow  this pattern once again giving me the best chance of getting into a profitable trade.

 One of the main things that stand out with the price action strategy is that I have a clean canvas with no noise. What do I mean by this? Normally the videos or tutorials I have see in the past all display charts with dozens of colours  and lines these are known as indicators. I am not speaking against indicators as such but nothing can beat price that should be our strongest indicator. As a trader I should be able to look at any chart and decide where and how price will move in any any financial market. It seems once again I need to keep all aspects of trading simple and not over complicate which may interfere with my decision making, please note that there are many ways to create a confluence and indicators are one of those tools. 

I will keep you updated with future trade setups and see if they are profitable or not

LET THE JOURNEY BEGIN!!

Forex Trading Plan

I learned that a Forex trading plan is one of the most important pieces of the puzzle of becoming a consistently profitable Forex trader. Let's admit it like it or not we've all been brought up in a society that has some sort of boundaries or rules which in turn brings order and structure and a trading plan is just this. Having a written out pre-defined trading plan means I'm making an effort to hold myself accountable to something, this is necessary because there is no one to be accountable to as a trader.

It seems that my emotions can run wild especially when I start calling the trades correctly and over-confidence starts to kick in. One of the best ways to not let emotions influence my trading activities is to have a defined trading plan that describes in concrete terms what I will do in any given market scenario. Many traders do not attempt to have a trading plan because they aren’t really sure where to begin but in http://www.forextrainingworldwide.com/ website you will be able to download a trading plan template with a set number of questions and it's also designed in such a way allowing  you to add things to as you go along. 

I'm going to mention some of the key elements a trading plan should include

• Have a financial goal, after all that is why you are learning to trade.
•  It's important for me to keep a balance in my life, therefore I will have to decide in which time frame will suite me best. Forex Training Worldwide mentions the following "DO NOT CHANGE YOUR LIFE FOR TRADING. We can help you change trading to suit your life." This is very reassuring due to the fact I work nights and find myself asleep during the UK and US trading  timezones, but they have assisted me in finding a strategy that suites my requirements and lifestyle.
• I have to define my entry strategy, in other words create a mini check list which will identify that trade as grade 1,2 or 3
• Determining the risk to reward scenario on any potential trade setup
• Adjust my position size on the trade to meet my necessary stop-loss distance, NEVER adjust my stop-loss to meet a desired position size, this = GREED.
• Exit strategy  BEFORE entering the trade will this be a fixed profit target or will the trade be managed with a fluid stop loss.

There is no concrete way to make a good trading plan but at least my mentor has supplied me with a good template which sets me on the right path and in time eventually I will add my own ideas or concepts. One of the key thing to remember is that the whole point of a trading plan is to keep me accountable and to keep me on track of objective thinking and this is really the only effective way to consciously make an effort at eliminating emotional trading mistakes.

Lets see if I can practice what I've learned.

Forex Trading Journal

According to my understanding one of the key areas that many traders fail upon is creating or keeping a trading journal. For some reason people blow this off but it's an aspect of trading that truly defines and separates the disciplined and organized traders from the rest  who continually lose money and blow out their trading accounts. I just realized that there is a recurring theme with all my posts discipline, is Forex Training Worldwide trying to make a point here? I guess by me starting this blog I'm already on the right path.

The purpose behind a trading log  or journal is for me to log every trade I entered and exited and over time, I will build my own track record and an equity curve which will be very important tools in gauging my performance. Logging all those trades I will have metric data which will indicate certain patterns like

• What am I doing wrong
• What am I doing right
• If am over or under trading 
• What time of the day works best for me and my strategy  
• What strategy works best for my personality 
• See if I'm being too aggressive, risking too much 
• See if I'm being too passive, risking too little 

Forex trading success is defined by the end result of a series of trades over time and not the end  result of ONE trade, having a trading journal can help me from falling into this trap. I believe from what I have read and learned that a trading journal will help me create a Forex trading plan, and over time by regularly maintaining my  trading journal and by me viewing my equity curve these factors dictate what my next move in the market will be.

When logging all my trades in a trading journal I must avoid the trap that most trades seem to fall into, concentrating on pips or percentages, how many pips I'm up, how many pips I'm down. Instead I should track my performance in terms of pounds risked vs. pounds gained (risk reward), which can ultimately be reflected in the number “R”, instead of percentages or pips. 

I must keep in mind that I'm learning here how to make money, and making wise investment decisions, not pip collecting.

Forex Money Management

What does a stop loss, limit, profit target, spread, margin, have in common? They are all related to money management, these are systems which are put in place to make sure I make money and try not give it back to the market. The course material goes into detail explaining the above terms in how and when to use them.

The main function of money management is to help  me manage my emotions. It seems that I need to take a logical approach in my decision making knowing that every trade setup taken there is a calculated risk. By doing that I have now taken an unknown variable and replaced it with some certainty, which can help me remove the emotional side to trading. The course states that many begging traders are largely unaware of some or most of the basic concepts of effective Forex money management, and this is a major reason why so many traders fail to make money over the long-term in the markets. 

How much should I risk on a trade?

The question should be how much money do I have as disposable income that I can realistically afford to lose? This approach does seem to be subjective, but through the course they have supplied me with a few tools to help me gauge how large or small my position size should be, and it also helps me calculate how much money I potentially could loose. I also learned that I should never risk any money in the markets that is not truly disposable, doing this will start me on an “even” emotional playing field, because I will have no emotional attachment to my trading money.

Risk Reward

It seems that proper implementation of risk reward is how professional traders make money, but many traders take the wrong approach to risk reward by worrying first about the potential reward and last about the potential risk. I need to first calculate the risk involved in any potential trade setup AFTER I've determine the most logical place to put my stop loss. Once I've done this, I then can determine what the potential reward is.e.g. If I risked £100 on a trade, I ideally want to aim for a reward of at least £200 or more; the R:R would be 1:2. The idea is that if I can make at least 2 times my risk on all my winning trades, I will, over a series of trades, offset my losers to the point of turning a decent profit.

Position sizing

Position sizing allows me to risk the same amount of money no matter what trading strategy I trade or how large or small my stop loss distance is. Having a wider stop loss on a trade doesn't mean I'm risking more money or that by having a smaller stop loss on a trade I'm risking less money, therefore I can adjust my position size up or down to meet the necessary stop loss distance. Once again logical place to start is with my stop loss on a trade setup, after I've figuring out where to place my stop loss, I THEN calculate the number of lots I can trade to maintain my pre-determined risk amount. Thankfully once again Forex Training Worldwide has supplied me with tools to easily work this out.

If I don't logically manage my risk on every single trade it will be impossible for me to manage my emotions. The better I manage my risk and money in the Forex markets with a trading strategy, the easier it becomes to manage my emotions, if I know exactly how much I can lose, and exactly how much I can make on every single time I enter a trade I'm unlikely to become emotional.

Keep you posted Happy pipping!!