Trading the Forex market has became very popular in the last few years.
But how difficult is it to achieve success in the Forex trading arena? Or
let me rephrase this question, how many traders achieve consistent
profitable results trading the Forex market? Unfortunately very few, only
5% of traders achieve this goal. One of the main reasons of this is
because Forex traders focus in the wrong information to make their trading
decisions and totally forget about the most important factor: Price
behavior.
Most Forex trading systems are made off technical indicators (a moving
average (MA) crossover, overbought/oversold conditions in an oscillator,
etc.) But what are technical indicators? They are just a series of data
points plotted in a chart; these points are derived from a mathematical
formula applied to the price of any given currency pair. In other words,
it is a chart of price plotted in a different way that helps us see other
aspects of price.
There is an important implication on this definition of technical
indicators. The fact that the readings obtained from them are based on
price action. Take for instance a long MA crossover signal, the price has
gone up enough to make the short period MA crossover the long period MA
generating a long signal. Most traders see it as .the MA crossover made
the price go up,. but it happened the other way around, the MA crossover
signal occurred because the price went up. Where I.m trying to get here is
that at the end, price behavior dictates how an indicator will act, and
this should be taken into consideration on any trading decision made.
Trading decisions based on technical indicators without taking price
action into consideration will give us less accurate results. For example,
again a long signal generated by a MA crossover as the market approaches
an important resistance level. If the price suddenly starts to bounce back
off that important level there is no point on taking this signal, price
action is telling us the market doesn.t want to go up. Most of the time,
under this circumstances, the market will continue to fall down,
disregarding the MA crossover.
Don.t get me wrong here, technical indicators are a very important aspect
of trading. They help us see certain conditions that are otherwise
difficult to see by watching pure price action. But when it comes to pull
the trigger, price action incorporation into our Forex trading system will
definitely put the odds in our favor, it will generate higher probability
trades.
So, how to create a perfect Forex trading system?
First of all, you need to make sure your trading system fits your trading
personality; otherwise you will find it hard to follow it. Every trader
has different needs and goals, thus there is no system that perfectly fits
all traders. You need to make your own research on various trading styles
and technical indicators until you find a concept that perfectly works for
you. Make sure you know the nature of whatever technical indicator used.
Secondly, incorporate price action into your system. So you only take long
signals if the price behavior tells you the market wants to go up, and
short signals if the market gives you indication that it will go down.
Third, and most importantly, you need to have the discipline to follow
your Forex trading system rigorously. Try it first on a demo account, then
move on to a small account and finally when feeling comfortably and being
consistent profitable apply your system in a regular account.
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