I have been trading forex for more than 5 years and at the same time trading other markets like the precious metals market, the stock market and the futures market. Along the way, I have been exposed to various strategies and techniques to trade the forex market. The proponents of these techniques will usually try to explain how you can use their techniques for entry and exit of your trades in the forex market. I have to admit that a sizable number of the techniques that I have come across can be complicated and utilises a number of indicators and other methodologies before you can take a trade or exit one. Usually, it is usually spelt out in a clear methodological manner and is usually accompanied with illustrations on a forex chart.
Over the years however, I have come to a realisation that you do not have to depend so much on the indicators. In fact, the use of too many indicators and technical tools can sometimes ‘blur’ your own ability on the actual price action when you are looking for an opportunity to trade. I realized that it is better for me to keep things as simple as possible and most importantly, to always be ready for an opportunity to appear and to execute my trading plan without thinking too much or thinking too deeply of the technical indicators and the trading signals. The problem with having too many indicators is that, the more indicators you have, the more signals you require and this can lead you to becoming more emotional than you really need to be. The ultimate downside is that it prevents you from seizing an opportunity when one appears on the screen.
So what then do I use to identify potential opportunities in the market?
One of the things that I use to trade is demand and supply levels. Having traded forex for more than 5 years and teaching students from all around the world, I notice that my own students would expect to trade using complicated lines and systems. It sometimes surprises them when I shared with them that what they really need to see when trading forex is the chart itself and the price action on the charts. Most have learned from others before coming to me and it has been ingrained in their head that the chart needs to be made complex in order for them to trade profitably. Most technical analysis books would have presented to them what they would have expected, but for me, the most effective tool in trading are the candlesticks. Some students of mine would appreciate me sharing this with them while others might still have thoughts of using the technical indicators that they have been taught. I believe, to each trader his own but for me, I just love trading naked, with nothing more than candlesticks and some moving averages.
Sometimes, simpler is better and I think that adage goes along fine with trading the forex market. For most traders, they would have shared with you if you had asked them that they use layers upon layers of indicators back in the days when they were just starting up. I believe that for most of us, this is also true. We feel more secure when we are covered with multiple layers of blanket when we are sleeping in the dark as a kid. This particular need to feel secure sometimes is brought into our adult life and even our trading life! What we need to realise is that the multiple layers of technical complexity may not always protect us from taking a loss when we have too and it doesn’t always help us enter at a more favourable position.
Lets just face it. The more indicators and the more information that we require in order to make a decision, the more distracted we are going to be from focusing on the most important thing that is on the chart, the price itself. We need to remain focussed on price action when we look at a forex chart. As such, this bring us to the topic of supply and demand levels which is something that has been in use hundreds if not thousands of years ago. The law of demand and supply will determine price and its eventual movement. we should be concentrating on price and its behaviour. It is the only clear and hard evidence that you should use when making a decision to whether let go or load up on a certain currency.
When you look at price on a chart, it will tell you at which price levels demand has surged in and at which level supply has taken over. These are what we call major price activities, transactions that occur with one side of the market overwhelming another, hence causing the price to reverse at a certain point on the charge. Hence, as a trader, you would be waiting to buy when demand is greater than supply and to sell a currency when supply is greater than demand. Yes, it is that simple but most traders do not have the patience to wait for the price to arrive at that favorable position, preferring instead to over trade and causing themselves much hurt to their capital along the way.
Keep in mind then that trading can be simple. Do not complicate things for yourself. Make it a point to become a disciplined trader and to utilise your knowledge of demand and supply to your advantage. Now, let’s look at the chart below and see how we can apply the demand and supply dynamics when we trade the eurusd.
Looking at the above EURUSD daily time frame chart, you can see that price reacts to demand and supply levels marked in yellow. These levels are important levels that we have to pay attention to when price approaches them. You have to be prepared to be patient and wait for a candlestick signal that tells you price has a high probability of reversing before taking a trade. This is the hard part actually. The waiting and staying disciplined not to enter until a price action signal appears and also to enter the trade without hesitation when the signal you are waiting for has appeared on the chart. The areas from where price starts to reverse back to the downside after touching them shows you that there are more sellers than buyers at those levels. Accordingly, price areas that that reverse back to the upside after price have touched or remained in a certain area for a while shows you that there are more buyers than sellers at those level. What matters to us most as traders is that we are on the right side of the trade and our trade is with the majority of those in the market that has the price moving in the direction that benefits them and profiting them. For those who are buying when nearly everyone else has bought or is selling when nearly everyone else has sold is never going to make money on a consistent basis. It is only when you sell at a supply zone and buy at a demand zone that you have the highest probability of gaining the biggest reward and growing your capital substantially.
Trading in itself is a competition where money is transferred to the informed and the disciplined from those who treat the market like a casino and who often than not over trades and gives little regard to the virtue of patience. Always remember to look for confluence levels too. When there is a demand area for example that coincides with a Fibonacci level for instance. There areas of confluence can give you a high probability trading opportunity. They come around once in a while but these are trades that has the potential for you to make a big winner.
I personally have tried various indicators like stochastic, MACD, Bollinger bands, Parabolic SAR and others that you might heard of and might not have come across. I realise that it is price action coupled with supply and demand levels and other confluence factors that gives me the best trade. At times, the market refuses to give you a signal and when thing become difficult, it is best to sit out the market until it provides you with something that you just can’t refuse. Ironically, some of my best trades are those that stare at you in the face and which you can’t miss. At that point, it would be best for you to cast fear out and take a trade with keen discipline.
I hope that this article has benefited you as you go on with your forex trading journey. I am a trader and I wish to be profitable. I have the same wishes for you too. All the best for 2014!