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.
About the author:
Raul Lopez is a full time Forex trader and founder of
www.straightforex.com a high quality Forex training company.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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