I would like to introduce a simple, yet complex system for successful forex investing over the long term. Forex trading can be extremely rewarding if you have the right
tools in your arsenal. The system that I have developed over the years consists of a few simple tools that anyone can use for success in forex, or any other other platform.
Success in forex trading takes discipline and patience above all other things. Make a plan and trade your plan. There is no substitute for hard work, and diligent study.
You must be informed and keep up with current events happening around you globally. Information is power in forex trading. Due diligence is needed. Market Sentiment is impacted by current events. Seasonal patterns occur in forex trading, and it is your responsibility to monitor news releases, currency rate changes, global events, such as terrorism attacks, earthquakes, hurricanes, elections, equity markets, commodity markets, etc.
1. You need a platform/broker
2. You need to keep a daily journal of your trades, and of your chart studies.
3. Pick one currency pair to use as your main venue, and watch it as long and as often as you are able to do so. Learn and understand the correlations between that pair
and any other pair(s) or markets. There are major currency pairs, and there are cross pairs. The movements on one pair is influenced by the movements of other pairs and other markets. This is called CORRELATION. The movement in a major pair is often preceeded by movement in cross pairs. The movement in one major pair can signal a move in a correlated pair as they often track each other. For example, euro/usd and gbp/usd have historically moved together. When one of them spikes in a certain direction, then the other pair follows it, generally speaking. Most of the time they correlate, but sometimes they disconnect, depending on market sentiment. So, pick a pair of your choice, and learn the CORRELATIONS for that pair. You can add more pairs to your arsenal after you have mastered this first pair. Limit your focus to what you can handle.
3. Money Management is the most crucial aspect of any trading. Make a budget and stick to it. Discipline is essential to good money management. We are forex traders and investors. We are not gamblers. We manage risk. My system will put you into lower risk to higher rewards if you follow it diligently, with conviction, and discipline. Successful traders know the risks and rewards of their positions, and have the patience and discipline to hold that position until it meets their target.
4. Interpreting the chart of your chosen pair is the key to success. The forex market is dynamic and alive. By diligently studying the chart of your chosen pair, you will begin to see patterns evolve. I love to fish, and over the years I have learned to find patterns in a lake or in a bay that put the odds in my favor. I learn where the structure is, where the current flows, where the baitfish are, and the times of day that are productive. If you find good structure, plentiful food, ambush points, and favorable current movements, the odds are that you are going to catch fish. Simple, yet complex. Apply what you learn to what you trade, just like fishing. There are certain tools in fishing, and certain tools in trading. The tools of my system are nothing new. Common tools available for free to anyone, but when used together are powerful. My system uses tools that I have learned from other systems and from observing price movement over time. They include moving averages, fibonacci retracements, pivot points, swing highs and swing lows, and the Momentum indicator. Keep it simple. Too many indicators will find you trading the indicators and not the price movement. The forex market moves in certain patterns that are often repeated. Once you recognize these patterns, you place your positions in a location that will exploit those oft repeated patterns. I will choose a currency pair to illustrate these patterns for you.
I will teach you to think outside the box.
5. Set up your chart. The chart that I have chosen to use for illustration purposes is the GBP/JPY. This pair is a monster at times. They call her the BEAST. The correlations to learn for this pair are the USD/JPY, the GBP/USD, the Dow, and the S&P. If you monitor the correlations, then you understand the GBP/JPY. You must also learn to recognize candlestick patterns, such as Head and Shoulder, Pin bars, Morning Star, Evening Star, Three Crows, and King’s Crown. Go to Peter’s page http://www.forexpm.com/chart-patterns/ to learn about these patterns. I also use the ZigZag indicator to show me wave patterns. Elliot wave theory is very complicated, but the Zigzag will make it easy to follow waves.
Open a new chart for for GBP/JPY. For our purposes we will use simple moving averages, called SMA’s. To begin your chart setup, go the monthly chart of GBP/JPY. We will begin our journey there. From your list of indicators add the momentum indicator. The default mom is usually set at 14. Drag and drop the mom into your chart. It will open an indicator for you below the price chart. Next, drag and drop the same mom into your new indicator window, and change the parameters to 10. You now have 2 moms in one window. One will show the previous 14 candles and the other one will show the previous 10 candles. You need to add a zero line, or, as in my case 100 on the levels section of your mom. In my chart, above 100 is bullish, and below 100 is bearish. The 10 candle mom will cross over the 14 mom to indicate direction for us. Look at the slope of the moms. Are they pointing up or down? Are they crossed? Do they agree? If they are sloping opposite of each other, then we know that one is bearish and one bullish. That is a mixed signal. Range trade is expected in this case. If they agree and are sloping together in the same direction, then it is indicating a strong trend.
Now compare the price movement with the moms. Above 100 (or zero, if your platform is different than mine) and both agreeing and pointing upward, should show as an uptrend on your price movement. Below 100 (or zero) and pointing downward should show a downmove in price action.
Next drag and drop another mom into the main chart again and change the parameter to 5, with a 100 level of its own. This will give you a second indicator window showing the 5 candle mom. Then drag and drop a second mom into the second indicator window with a parameter of one, and a level of 100 of its own. Each mom has its own 100 level. Color code the different moms to distinguish them from each other. Make each mom a different color. Now you are set for indicator windows.
6. Now from your list of indicators, add the 5 sma high, 5 sma low, 5 sma open, and 5 sma close. This is an extremely powerful tool. This will form a channel for you to monitor. Study your monthly chart, weekly chart, daily chart and 4 hour chart. Notice how many times the price will retrace up or down to hit the 5 sma high or 5 sma low. This channel will follow the price action for you and will give you targets for exits and entries. Look for breaks of this channel to determine trend. Above the 5 sma high is very bullish. Below the 5 sma low is very bearish. Intraday traders can target retraces on the 4 hour and hourly chart. Longer term traders will target the daily and weekly 5 sma high/low. With our trading strategy, we look for what the pair is doing. It will be trending up, down or sideways. We have a different strategy for each situation. In the next article I will teach the strategy, but for now, the goal is to learn the chart set up, and to recognize patterns from price action. Study the different time frames to see how price action reacts with the combination of the 4 moms and the 5 sma’s. The 1candle mom can actually be predictive if you know what to look for. It will nail a retace every time. Then you will know where the price is going and where to enter/exit. Look for all 4 moms agreeing in an upward slope above 100 and you will find a strong uptrend. Many times they will be below the 100 but pointing up. This is telling us that a retrace of the downtrend is ocurring. Mixed moms tell us that range trade strategy is to be used. Conversely all 4 moms below 100 and pointing down in agreement is very bearish, and indicate a short strategy.
7.Now that we have moms and the 5 sma channel in place, we need targets to aim for. For this we use fibonacci retracements with extensions, larger sma’s, and medium sma’s. I use muliple sma’s to act as support/resistance, and when combined with fibs and fib extension, they are simple, yet very powerful. Sma’s will tell us many things.
Add some large sma’s to your monthly chart for Geppy (gbp/jpy). Use the 22 sma, 55sma, 100 sma, 200 sma, 300 sma, and 400 sma. Make each SMA a different color in order to distinguish them from each other. The reason that I use so many sma’s will become evident when you switch to different time frames. Different time frames will place different priorities to certain sma’s.
Now we look at price action as it relates to sma’s and fib points. Notice how price will respect certain sma’s on certain time frames. Notice how price bounces and retraces at certain sma’s and fibs. For my fibs, i use the 23, 38, 50, 61, and 76. Different currency pairs will bounce at different fibs. Geppy likes the 50% fib a lot. Notice the price action on the larger time frames in relation the the 50% fib. Gbp/usd likes the 76 fib a lot. Make sure your fib tool has extensions of 138 and 161. These are very powerful fib points.
Now study the relation between fibs and sma’s.
Then study the relationship and direction of the different sma’s. Look at the slope. Are they moving up or down, or sideways. Are the smaller sma’s crossing the larger sma’s? In what direction? These are lagging indicators, but they show trend really well. Look for multiple sma’s and fibs touching each other. This is powerful support/resistance and price will most likely bounce there on the 1st attempt. We call this cluster support or cluster resistance, because there are more than one. For example on the daily geppy chart, if you see the 100 sma and the 38% fib occupying the same space, that is very powerful resistance or support, depending on trend direction. Short term traders can target these clusters as an exit point, knowing that price will most likely bounce and retrace on 1st attempt there. It usually takes more than one attempt to break clusters. Retraces and reversals can occur near clusters on any pair. Exploit this condition, using our strategies which will follow in another article. A bounce from a fib or sma is called a rejection. Rejections are very powerful and profitable exit points. Retraces follow rejections most of the time and will target other sma’s and fibs. A rejection of an upward trending Geppy means that it ran into sellers in the form of stops. Sell orders, take profit points, and stop losses will be sitting there waiting to be activated. Buy orders will be sitting above it. When setting a target on a long position you need to take into consideration whatever the spread of your pair is. Price can touch the sma/fib and retrace without hitting your order because of the spread. Set your targets accordingly.
Using the monthly/weekly chart is a lot more accurate than the shorter time frames. Less noise and fewer false signals. Larger pip gains. Forex trading all about making pips. It does not matter how large or how small your starting balance is. Start out with very small lot sizes and aim for positive pips. Your balance will grow every month if you follow the rules. Learn to exploit what you see on your chart. Do your own trading don’t rely on anyone else with your money. Trade what you see even if it is different than what you think it will do.
The market will target the sma’s and fibs, and it will either bounce there or it will break out there. Trust your charts. They wont lie.
