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Thursday, August 16, 2012

Best Forex trading system

Hi, I have just come back from holidays and it took me some time to compile the post. Hope to get back to regular posting soon. Hope you will enjoy the post. I have already described a number of useful and profitable trading strategies that one can trade in any financial market. 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 market. I believe the strategy can be adapted to other financial markets, not just fx. The method enabled me (at times) to double my account and even if the profits were not that spectacular at times it still helped me stably to increase my deposit (on monthly basis). As any strategy it requires time, patience and risk management to master the system, but your efforts will be rewarded if you do not give up. 

When you finish reading this article I recommend you to reread it again and also read my other posts below:

Top 15 Forex trading strategies
How to trade Forex news effectively
Ways to trade 123 pattern
Methods of using RSI indicator
How to apply macd in Forex

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.

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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. 

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.


What if the expected reversal does not take place?

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. 

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. Enjoy your day.

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.