Playing the Trading Game of Probabilities!

In forex trading, as far as predicting price goes, nothing is a certainty and anyone claiming otherwise has never traded the markets or is selling a pot of gold at the end of a rainbow.

Predicting price direction is based on probabilities. Either the price has a higher probability of going in your favor or it does not.
Identifying the areas on a chart that offer the highest probability for a successful trade is the skill. From a technical perspective, start with what is happening NOW, what is the current trading environment?

  • Trending
  • Mean Reversion Trading (Ranging)
  • Reversing

Look at the higher time frames first to establish the trading environment on monthly, weekly and daily charts. What is the big picture?

Following this and based on your trading style (intraday, swing or position) move to lower timeframes to identify entries (intraday (30 min/hourly), swing (4 hourly, daily), position (daily, weekly).

Let us look at each one in detail:

A. Trend Trading

Entries for trend trades can be Breakouts (above or below key price levels) or price Pull Backs in the direction of the overall trend. A typical trend trader tends to look for much bigger moves over days, weeks, or months. Big trend happens only about 20% of the time but when they do it can mean big rewards if you can deal with the false breakouts of key levels and trend pullbacks that turn into temporary or permanent reversals.

Targeting a shorter-term trend (a swing) in the direction of the overall trend is a common approach used by many traders.

B. Mean Reversion Trading

Identifying the average price of an instrument and buying or selling when price moves or indicates it is moving back towards this average is called mean reversion trading or range trading. Ranges can vary in size and last from minutes to months. This is the nature of the market.

C. Reversal Trading (Counter Trend)

Picking the end of a trend (selling a top (on an uptrend) or buying a bottom (on a down trend) is an approach that is used by a lower percentage of traders. It is a tricky game identifying these tops and bottom and not for the faint hearted. Many professionals adapt their approach to the constant changing market environment that they are faced with.

Mastering one approach and only waiting for those conditions to present themselves is wise thing to do if you are just starting out. As you gain experience, knowledge, and confidence you can start to adapt to the market and introduce innovative approaches.

Making sense of price movements is key. Learning how price reacts to support/resistance zones, round numbers, Fibonacci levels, trend lines, moving averages and candlestick formations is a start. Add to this an understanding of the impact of economic releases, correlations, individual currency analysis and market sentiment and you are starting to think like a pro. Alternatively, you could ignore these factors and focus purely on technical analysis.

There is no right or wrong approach to trading or specific tools that will guarantee consistent profits. Remember, it’s a game of probabilities, so give yourself the best shot by following a process that puts the odds in your favor.

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