Must Know Facts About the Online Forex Trading Business
Every Forex traders know that there is nothing like perfect Forex trading in Forex world. No single trading method or system is perfect for gaining profit in a short span of time. Rather proper correction and modification can take any system very close to the perfection. Minor changes in Open orders and positions may result in huge difference. We will focus on that factor in this particular article.
Perfect Forex Trading Facts
The World is full of Currency Traders. Each day, $5 billion of transactions take place around the world. However, despite this, million of currency traders approach the market exactly in the same way.
All of them regard the action of the price or use technical indicators; moving averages, MACD, RSI, trend lines, spin, support and resistance points. Following these technical indicators and patterns, traders hope to find a trend and predict where will be the next market. But the problem with this approach is that it involves only one component of what really moves the market. It does not consider the fundamentals, ignores the news, ignores the market confidence and ignores any other dynamic market.
As a trader myself, I realize that technical indicators are useful. However, to take advantage of better market it is important to take account of other components. It is true that it is not easy to see the inside of the market, but there are two tools developed by broker which I like to keep an eye on, it could help make better business decisions also.
Perfect Forex Trading System Facts
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.
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.
Using limit orders to get better prices
A limit order is a pending order that you place above or below the current market price, depending on which direction you’re trading. If you’re trading long, you place a limit buy entry below the current market price, then, IF price rotates down into your limit buy order, you will get filled long. If you’re trading short, you place a limit sell entry above the current market price, then, IF price moves higher into your limit sell order.
Limit orders give you the power to get into a trade at a price of your choosing. The only ‘catch’ is, you may not get filled at all on the trade, but if you do get filled you know you got a good entry price and a better stop loss placement than if you had just entered at market or on a stop entry.
One good example of using limit orders to get a better entry price is discussed in my article on ‘the trade entry trick’. The trade entry ‘trick’ is essentially entering a price action signal on an approximate 50% retrace, i.e. entering on a limit order as price retraces to the 50% level of a pin bar for example. This gets you a better entry because it significantly improves the risk reward profile of a trade by allowing you to place a tighter (smaller distance) stop loss, making it more likely that you’ll make 2R or more on a trade.
The other big advantage to getting a better entry via a limit order 50% retrace (trade entry trick) is that it gives you more flexibility in your stop loss placement. You can either take the trade with a tighter stop loss as we discussed above, or you can use a normal distance stop loss (in the example of a pin bar, a normal stop loss distance would be the full length of the pin bar from high to low). As I discussed in my trade entry trick article linked to in the previous paragraph, using a normal stop loss distance with a limit entry order on a pin bar for example, allows you more ‘breathing room’ in the trade.
Remember; limit orders allow you to ‘let the market come to you’ by only entering if the market retraces to a price of your choosing. You have to be prepared to miss the trade, but as we discussed above, the advantages of a better risk reward profile on the trade and increased flexibility in stop loss placement are nothing to sneeze at.
Set up trades at the end of each day
Analyzing the markets and setting up trades at the New York close, is a very easy and effective way to improve you trade entries. Doing so, removes the noise and mental confusion that comes with trying to trade from intraday charts. Monitoring your trades just once or twice a day also helps you avoid the temptation of fiddling with your trades unnecessarily as well as the psychological ups and downs that come with day trading.
The daily chart time frame carries more ‘weight’ (relevancy) than its lower time frame counter-parts. So, just the very act of focusing on daily charts is going to significantly improve your trade entries. Think of the daily chart as a sort of natural ‘filter’ for bad trade entries, since it filters out the noise and irrelevancy of the lower time frame price movement and as a result, the signals on the daily chart are more reliable.
Profitable trading Without Having Perfect Forex Trading Strategy
I want you to stop looking for the ‘Holy Grail’. This will save you time, money, and sanity. Instead find the right system for you because YOU are the secret sauce that will make your trading system work. YOU are the most important ingredient through discipline, patience and practice to identify the highest probability setups consistently. A perfect system is not what we’re after. A system that we can follow consistently and refine over time is now our goal.
Here is an investing expression that applies to your psychology when trading:
In fact, I’ll go further and say from my experience, trying for good enough is better than trying to be the greatest.
You will focus on consistency and confidence in your trading system over perfection. Your system should be comprised with indicators you’re comfortable reading and a money management system that will allow you to act calm under uncertain market conditions.
Many traders we work with rely on indicators to give them entry and exit signals. This is because indicators can provide clear and easy to understand signals of price action. Your ability to read and act on the indicators in line with your money management system will become the strengths that no one can duplicate but you. This is will become your niche and how your edge will develop over time.
Let’s assume you share this strength and I’ll show you how 2 different traders implement an imperfect strategy. Of course, it’s natural to want to get every pip the market presents just as it’s natural to want to hit a hole-in-one. However, Tiger Woods and most golfers know that par will win you a lot of money on the tour. Similarly, professional traders know that it’s not about the perfect trade but a number of good trades that will allow them to take a proper amount of what the market is offering.
In conclusion, professional traders focus only on taking trades that meet their pre-trade checklist based on strong money management rules and indicators they are comfortable reading. Amateurs hold on to every trade without the mental fortitude to accept a loss. I would suggest trading in smaller sizes so you can practice the strategy of the professional. This is, making each trade by itself insignificant and using the collection of trades in your strategy as your edge.
The bottom line: Perfect Forex Trading System
In general, there is no perfect Forex trading system, but it is important to take into account the other components that make up a market and not only adhere to the action of the price and technical patterns. The two tools described here are useful for collecting investments and finding support and resistance strong levels in the market.
Further reading: Investopedia article on what successful traders do.
You are required to have some skill to identify, and that should not be used on your own perfect forex trading system. But from time to time, these tools are a great understanding and you can help operators to find an advantage in your Forex trading.