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Forex Trading: The Perfect Forex Trading System
By: Raul Lopez
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 http://www.straightforex.com a high quality Forex training company. |
