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Trading on the Forex market has become 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 by trading the Forex market? Unfortunately very few, only 5% of traders achieve this goal. One of the main reasons for this is that Forex traders focus on the wrong information to make their trading decisions and completely forget about the most important factor: Price behavior.
Most Forex trading systems utilize technical indicators (moving average (MA) crossover, overbought/oversold conditions on an oscillator, etc.) which are just a series of data points plotted on a chart; these points are derived from a mathematical formula applied to the price of any currency pair. In other words, it is a price chart drawn in a different way that helps us to see other aspects of the price.
There is an important implication in this definition of technical indicators. The fact that the readings from them are based on price action. Take for example a long MA crossover signal; the price has risen high enough for the short-term MA to cross the long-term MA, creating a long signal. Most traders see this as “the MA crossover pushed the price higher”, but the opposite happened, the MA crossover signal formed because the price went higher. What I am trying to explain here is that ultimately price behavior dictates how an indicator will move and this should be taken into consideration in any trading decision taken.
Trading decisions based on technical indicators without considering price action will give us less accurate results. For example, a long signal is generated by an MA crossover as the market approaches an important resistance level. If the price suddenly starts bouncing back from this important level, there is no point in taking this signal, the price action is telling us that the market does not want to go higher. Most of the time, under these conditions, the market will continue to fall, ignoring the MA crossover.
Don’t get me wrong here, technical indicators are a very important aspect of trading. By watching pure price action, they help us see certain conditions that are otherwise hard to see. But when it comes to pulling the trigger, the inclusion of price action in our Forex trading system will certainly tilt the odds in our favor, producing higher probability trades.
So, how to build a perfect Forex trading system?
First of all, you need to make sure that your trading system fits your trading personality; otherwise, you will find it hard to follow it. Every trader has different needs and goals, so no system fits all traders perfectly. You need to do your research on various trading styles and technical indicators until you find a concept that works perfectly for you. Make sure you know the nature of the technical indicator being used.
Secondly, incorporate price action into your system. So you will only get long signals if the price behavior tells you that the market wants to go up, and you will get short signals if the market gives you a sign 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 to a small account, and finally practice your system on a regular account when you feel comfortable and are consistently profitable.
