Table of Contents
Support and Resistance
No technical indicators
The 4 hours and daily trend
Solid money management
Stop loss placement
Patience, no emotions, no outside influence
Don’t do this
Price pattern breaks
Fibonacci retracement levels
Support and resistance
Cutting profits short
Letting losses run
50 Pips A Day Forex Strategy
Stop loss management and take profit levels
Before you start to construct your trading system, you must first think about what is the trading style that suits you better. Do you want to sit in front of the computer the whole day entering and closing trades on the 5 minutes time frame or do you think that trading on a higher time frame will suit you better?
My advice to you is very simple and clear: always seek to trade on the higher time frames. It is easier to trade this way and it will make you much more money in the long term. If you are a beginner in trading, it is best for you not to day trade until you gain experience. Trading on small time frames carries high risk due to short-term random moves that are almost impossible to predict.
Not to mention that trading this way makes you vulnerable against economic news events that come out multiple times per day and usually have a big impact on the small time frames. Even after you get more experienced by trading successfully on the higher time frames and you think you are ready to day trade, my advice is do not trade on any interval smaller than the 30 minutes.
Moreover, when you do decide to day trade, consider it as a backup trading style, day trade only when there are no trade setups according to your system on the higher time frames. Always seek to trade on the higher time frame. Nevertheless, as I said before, if you are a beginner trader, and you probably are,
I strongly recommend that you develop your trading system around a higher time frame like the 4 hours or the daily. Forget about day trading for a while. Build your trading system and trade on the 4h/daily charts until you start to add to your account consistently.
With the above in mind, the next thing you should decide is what you will include in your trading system from the technical point of view to help you win as many trades as possible. Decide what will be the core technical parts of your trading system. From my experience, I can tell you which are the tools that work best in forex trading, that have a great rate of success and they repeat over and over again with excellent results.
These are price trends, support and resistance levels, Fibonacci ratios, price patterns and bar patterns/candlestick patterns. These are the things you should consider including in your system. They are the most popular things in the forex market thus, they have the highest rate of success.
You surely know what a trend is and you know that you see them on your charts over and over again. The trend is a core principle of the forex market or any market for that matter and should always be taken into account when constructing your trading system. It is always easier to trade with the trend than against it. A trend signifies that the majority of traders decided to push the price in one direction.
You must always know what that direction is and trade in line with it. If you want to know everything there is to know about forex trends, how to spot them by reading the price action, how to recognize when the trend is changing without the help of any technical indicators, you can check out the book Follow Price Action Trends that explains this in great detail, with many chart illustrations, and puts it together into a complete forex price action trading system that can yield thousands of pips by trading these changes in trend.
Support and Resistance
Support and resistance levels are also a key component of the forex market; a large number of traders out there emphasizes them on their charts and base their trading decisions on them. Therefore, it is advisable when you decide how to construct your trading system that you take them into account.
Fibonacci ratios are another forex tool that works extremely well in the forex market. Just pull up any chart and draw your Fibonacci levels from the start to the end of any big move in one direction or another. You will see how many times these levels act as strong support and resistance zones where price bounces back to resume the previous trend.
Price patterns and candlestick patterns are also very popular with the vast majority of traders therefore, they too have a great rate of success. Price patterns are used as signals that price is preparing for a move in a direction and candlestick patterns are used mainly as a confirmation when entering a trade.
If you want to learn in great detail about all of these above powerful trading tools and master them, you can take a look at the Trade the Price Action book that explains them very well with many chart illustrations and puts them together in the form of an extremely powerful price action trading system.
In conclusion, these are the things that you should include in your trading system because there are by far the most successful tools to trade the forex market. It is completely up to you to decide if you combine them all in your system or just use some of them. There will be more about these powerful tools in a later section where you will learn how to avoid making trading mistakes when working with them.
No technical indicators
Now that you have an idea of what would be best to include in your trading system you also must know what not to include in it. Do not use any technical indicators in your trading because they are absolutely worthless, and they will lose you money in the long run. You might win a trade today using them but you will surely lose all that money back and more by the end of the week. You should consider yourself very lucky if in the course of a month you manage to break even by trading with indicators.
All indicators are based on past price action, the macd, rsi, or stochastic are not leading indicators. They are only leading you to losses. Being constructed of past price action they are all lagging behind the price. By design they follow the past price action therefore, even if the signals they give would be accurate they are useless because they come too late for you to capitalize on them.
Always remember one thing: price leads the indicator, not the other way around. Do not be fooled when you do a back test on your charts and you see that using an indicator or a trading system with indicators would have made you thousands of pips. That is just a trick. Real time trading has nothing to do with back testing. When you put that indicator to work in real time, you will soon see that you are wasting your time and money.
Always remember that price tells the indicator what to do not vice versa. The ultimate indicator is and always will be the price action itself. You should focus only on reading and interpreting the price action movements and not overcomplicate your trading system with useless indicators.
From my experience, this moving average is the only indicator that is worth incorporating in your trading system. It is the most important moving average of them all, all retail and professional traders keep an eye on it therefore price tends to bounce when it touches it.
However, it is best to use it in your trading system as guidance, as a confirmation of what price action tells you and not as a tool to base trading decisions on. For example, if your system is designed for the 4h chart, you will want to read the price action on that chart to know what the trend is.
After you do that and see that the current trend is up or down, you can then look at the 200 EMA on the same chart to confirm and enforce your price action reading. Let us say the price action trend on that chart is up. If that specific forex pair trades above the 200 EMA at that time on the same chart then you have a confirmation of your price action reading.
You can check out the Trade the Momentum book for a complete trading system that uses this moving average along with some other powerful concepts of trading to make 200 pips per week or more.
Let us see a chart with this moving average so you can better understand how price reacts to it.