The system requires you to
follow (a little) all currency pairs in order to define the losers and the
winners. This does not mean you will have to sit all day monitoring various
currency pairs. In fact, in most cases it will be enough for you to define
direction of all currency pairs once a week. For me it usually takes around
half an hour per week and then check back direction of the moves of all the
pairs around ten minutes a day.
The idea of the system is to
notice a big move (swing) before it started and to enter the move when it
starts. The system can be attributed to swing trading, which means you will
have around one or two moves a month. These moves can happen within a range
(most often) and occasionally a breakout will force a trend to start. We will
be more interested in the moves happening within a range.
I believe you know that
securities move within two extremes of the range – the high and the low. In our
case, currency pairs form ranges and stay within them swinging up and down. Our
task is to grab those swings. How do we do that? Let us do that.
Put Forex pairs into groups
You should know the main
currencies in the market and the fact that they are paired with one another.
The main currencies as you know are: USD, EUR, JPY, GBP, CHF, AUD, NZD and CAD.
These are paired within each other. So,
USD is in pairs with all these currencies: EUR/USD, USD/JPY, GBP/USD, USD/CHF,
AUD/USD, NZD/USD and USD/CAD. You can
continue pairing each separate pair with others till you have covered all.
After you have finished doing that you will have 8 groups (with seven pairs inside
each group).
Define the lows and the highs of all currency pairs in
each group
You need to take each
currency pair within each group and define limits of their ranges (highs and
lows). Sounds like a lot of work? Well, I did not promise you the easiest Forex
trading system (but the best). Fortunately, this can be done very fast at the
end of the week in a matter of one hour. These limits can stay the same within
a month or even half a year, so you will not have to redraw your support and
resistance levels too often. This will help you to be proactive and know in
advance what you are waiting for. In this case, you wait for reversals at the
both ends of the range.
Let us see how to do it.
Let say you want to define
limits (highs and lows) in GBP (British pound) group. A logical place to start is
to take gbp/usd pair (one of my favorite) and define its’ high and low (our
playground for the pair if we choose to trade it in the end). We do it looking
at the past prices. Take daily chart of the pair and you will see that the low
of the range is around 1.5300 area and the high around 1.6200 area. So, if you
see the price of the pair approaching one of the areas you should know that a
reversal is more than possible. You should therefore place trend lines marking
those areas of support and resistance.
Your stop loss will be hit.
It means you will have loss on the position. But there is nothing to worry
about. There is not a single trader in the world that would have never had to
close his position with loss. Losses are part of the game. So is risk
management! So is making profits!
The more experience you gain, the more you taste of the latter and less of the
losses.
You then move to another
pair: gbp/jpy and do the same, then eur/gbp and do the same till you finish the
category of GBP. You then know the playgrounds of all pairs in GBP category.
Having finished that you go
to another group, let’s say EUR and do the same thing you did with GBP group,
you identify highs and lows in all Euro pairs. Then you take AUD group, then
JPY till you have defined all highs and lows in all pairs in all groups.
What do you do then?
Winners become losers and losers become winners
So, you have these big
groups and a lot of currency pairs within those groups. What happens next? You
start looking at price action of all currency pairs trying to figure out which
is the biggest winner group and which is the biggest loser group. Why is that
necessary? Because, one day winners will lose power and become losers and
losers will gain strength and become winners. Yes, that’s exactly what happens
in a range! Winners reach the limit of the power (by coming to top of the
range) and losers reach the limit of their weakness (by coming to the bottom of
the range. That’s where shift of power occurs.
Others call it change from
bull to bear market. This change can happen a few times a month or only a few
times a year. In Forex these changes are more often. Your task is to spot the
timing of the power change and to take advantage of that. The change happens at
the top and bottom of the range of currency pairs. That’s why it is important
to have those areas on your charts.
You will fast notice that if
some currency is very strong it usually is strong against all other currencies.
At the time of writing AUD is the strongest currency, although it is starting
to lose ground. It has been running for quite a while now and might reverse
soon. CAD might take second place among the strongest.
The biggest losers seem to
have been USD and JPY. This may continue or may change soon. Let us not worry
about that for now.
You then also identify those
who are in the middle: GBP, EUR…
By having this information
it is very natural to wait for the areas and select the best moment for
shorting previous winners and going long on previous losers. How do you do
that? Do you just go short when some pair simply reaches resistance? No, you wait
for signs of reversal! The pairs might get stuck for some time in those areas
and form short term ranges there (100-200 pips size) and even try to break the
top (or the bottom), so you do not want to jump in too early. I have wrote a
lot on those reversals in my previous posts (so dig a little on the blog), but
I can briefly mention that these are: chart patterns, 123 pattern, candle
reversal patterns and a few more formations that happen at the extreme ends of
a range.
Select the best candidate from a potential winning
group
I have already said that if
some currency strengthens it does against all currencies. However, you will
notice that some pairs will be stronger, others medium strong. What you want to
do is to choose the strongest one and put it against the weakest one. It is
like in sports, when two strong teams meet you cannot be sure which will win,
but if very strong team plays with a very weak one you can start making money
bets on the potential winner.
Do not trade winner against winner or loser against
loser. Trade the biggest winner against the biggest loser.
The same can be applied
here. If you know that EUR and GBP can possibly strengthen now you will not be
willing buy or sell EUR/GBP pair. It is not logical. These two are potential
winners in the short term. Why place a winner against a winner. Place those
against those that were recently very strong. At least, a short term reversal
should take place and you will grab a nice amount of pips.
So, if AUD was the greatest
winner, there will definitely be at least a short term reversal and it will be
the greatest loser. So, you would be looking at eur/aud and gbp/aud pairs to go
long. (gbp/aud has already been running up for a few days).
What about exits?
You will have to mark now
all support and resistance levels for the chosen pair (you are going to trade
in reversal (let’s say gbp/aud). The fact that you should keep in mind is that
previous support becomes resistance and vice versa. So, if 1.5000 level was
support in gbp/aud, it has become a resistance now, since the pair has changed
its’ course upwards.
You will also notice that a
lot of these areas are of minor importance. Which would mean that the price
will probably go through them and go to the next level. What you will have to
do is to identify key level where the price might meet too strong resistance
(or support depending which direction the price is going) and possibly fail to
break the level. That’s where you should plan your exit. In case of gbp/aud it
will probably be 1.5500 area. If that is broken the next very strong resistance
lies in 1.5900 area. Have in mind these areas while determining places for
taking profit.
Adding to a position
Initial position that you
enter when a reversal pattern is confirmed and broken and the price goes in
your expected direction is only the first position that you can take. You can
add to a position on retracements (for example: if gbp/aud starts falling and
you expect it to continue going up). The pair has hit resistance now and is
coming back to previous resistance (which is now support) 1.4900 area.
Again, it is not good to
just enter longs in that area. Wait for reversal and only then add to your
position. In this way you can add two, three sometimes up to five (depending
how strong a swing is) trades to your line. You would then close it all when
the pair hits your target. Or if there is a strong counter trend move your stop
loss will be triggered.
DO NOT FORGET TO SET YOUR
STOPS AND MOVE THEM AS PRICE CONTINUES MOVING WITH THE PREVAILING TREND.
What if the expected reversal does not take place?
Final thoughts
I do believe you cannot go
into too many directions if you want to be successful in trading financial
markets. Therefore, you should not concentrate on too many strategies, but
choose one or two (maximum three) you are going to use in your trading career.
My major mistake that I made when I started trading was this: I practiced too
many strategies. I blew up my first Forex account back in 2005. When I did more
analysis of the market I noticed certain tendencies that enabled me to come
back to the market and start trading profitably. Wish you good luck too. Yes, you can!
Hope the article was helpful. If it was I would be grateful if you tweeted it, liked on Facebook or any other social media. Thanks for reading.
Hope the article was helpful. If it was I would be grateful if you tweeted it, liked on Facebook or any other social media. Thanks for reading.
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Aug 16, 2012 – Today I want to share with you the best Forex trading system that I know and have been using for years to make profit in the biggest securities ...
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