Forex Holy Grail

A trading system can also be know as an edge. An edge allows us to trade without fear and uncertainty because it has a higher probability of a decision taken actually happening over the other but within a series of trades. The question now is what happens when you have found your edge like price action trading and you still unable to profit from trading? This article hopefully will give you some insight in how to fine tune your edge.

Over trading could be causing you to fail. Normally over trading can be linked to trading in lower time frames due to the fact we have more entry signals appearing. However trading lower time frames has much more noise and randomness in the market and sometimes may be difficult to identify key support and resistance levels. By changing to a daily time frame is smooths out the noise, giving you a more accurate picture of the market. Another benefit in trading the daily time frame is due to the fact your edge will appear when the daily candlestick pattern closes and this is when most traders are watching charts planing their next trading day. It's true that you will find less signals on a daily time frame but when they appear it will become a higher probability trade.

As mentioned above I stated that when we identify our edge we should execute our edge without fear and uncertainty. So what are the reasons causing you to doubt your edge? It comes down to how much success you had in executing it. The more we continually execute our edge successfully the more confidence we gain in it, therefor by mastering your edge such as price action trading on a daily timeframe it will help you eliminate confusion and limiting the number of variables in making that essential trading decision.  

Another key area is to keep your trading simple by avoiding hours in analyzing fundamental data, technical data on the erroneously belief it will give you more insight into the future track of the markets. The problem with this thinking is that ALL variables are ultimately reflected via the simple and natural price movement of a price chart.

A good risk / reward ratio is of the utmost importance and should be part of your trading plan. Having this in place allows you to survive and saving you the heart ache of blowing your trading account. One way in achieving this is by making sure your winners are larger than your losers, therefor when your edge appears always try aim for a risk reward of 1:2. In the following diagram we can see that there were 14 trades placed where 8 trades failed and only 6 were winners, however if you add the winners it will be larger than your losers.

Patience and discipline are other tools which must be added to your trading plan. Wait for your edge to appear, dont be in a trade just to be in one. Once again if you trade the daily charts it will allow you to train this mind set due to the fact you will see less signals appearing in comparison to the lower time frames. Please note that I'm not saying that you shouldn't trade lower time frames but you should only look at these once you have the experience and reading the market. I currently trade daily, 4H and H1.

Apologies for using the heading Forex Holy Grail because there are none, but I believe if you use some of my suggestions it can contribute toward your trading success. The internet has made the FX community a lot smaller giving us access to many resources and trading ideas and by learning from one another it may just help your edge to be a little more effective than before.

Happy Pippping!!

Trading Key Levels with Price Action

Bare bones trading is the simplest way to trade in the Forex market. So what is bare bones in Forex trading? I believe all that's needed is a Daily chart with price action and no indicators. The question now is how do I identify a valid trade setup with entry and exit points? This is where Horizontal or Key levels come in, which is the“core” component of my trading strategy. In this article I will be discussing how to identify these levels and why it should be a fundamental part of any trading strategy. I will not discuss signals at this point in time as there will be other articles  elaborating on this.

There are two types of horizontal levels, these are know as support and resistance. Support levels are usually below the current price. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. Support does not always hold and a break below support signals a new willingness to sell. Once support is broken, another support level will have to be established at a lower level. Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. Resistance levels are usually above the current price. Resistance does not always hold and a break above resistance signals shows a new willingness to buy. To draw these lines you will have to connect all the highest highs to establish a resistance level and all the lowest lows for support levels (This is a very basic explanation in how to establish support and resistance levels, further research maybe needed to learn how to identify these levels correctly).

Why do I trade off these horizontal levels? Everything starts with horizontal levels and all traders pay attention to these key levels in the market, because they know that these levels are significant and can thus have a strong impact on the direction of price. Below are some of the reasons why and how I could use horizontal levels:

• Helps me define my risk by giving me a price level to place my stop loss 
• Provide me with confluence or confirmation level to trade from
• Helps me define my profit target

How are these Horizontal levels formed? The more I study charts the more I see that price never moves in a straight line. Let me illustrate this through the diagram below, here we can see price is in an upward trend and as it makes new highs it also creates resistance when it falls away from these highs, then as it pulls back the previous high / resistance actually turns into support. Old resistance becomes new support in an uptrend, and in a down trend old support becomes new resistance, also known as swing points.

 

 The way that I take advantage of these horizontal level swing points, is to watch for price action signals forming near them as the market pulls back. Look at the yellow circles in the illustration above, these are the swing points at which I want to watch for obvious price action signals to form. By doing this I'm trading from a point where various confirming signals can be seen within a trending market.

It seems that I can also trade horizontal lines in a range-bound market with price action, this is also known as channels. This normally occurs when the market has not found a upward or downward trend but finds itself in a range where price  often swing between support and resistance. In the illustration below we can see an example of what a range-bound market might look like. When price is obviously bouncing back and forth between a horizontal support and resistance level, we can wait for price to hit one of the boundaries of the range and then wait for price action signals to form there.

 Trading with channels as seen above gives me obvious levels to define my risk and reward. Risk is defined just beyond the trading range high or low from the boundary I'm entering near, and reward is defined near the opposite end of the trading range.

In conclusion horizontal levels are very important in the market, and by combining them with a price action signal allows me to have a very effective trading strategy. Price Action signals will be discussed in future articles.

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!!