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