Here we will look at the basics of a good forex trending system for long term forex profits. There are many different ways to make money but the system basics below will be seen in most of the best forex trend following systems.
Keep It Simple!
Many traders make the mistake of thinking the more complicated and clever they make a trading system, the more likely it is to succeed and their dead wrong. The first point of your forex trading education, you need to understand when trend following is:
Simple systems work best, because they have fewer elements to break than complicated ones and are more robust, in the brutal world of trading. Complexity and cleverness have no place in seeking forex profits – keep it simple and you will increase your odds of success.
If you want proof of the above consider this fact:
Over 50 years ago 95% of traders lost money in forex trading and the ratio remains the same today.
This is despite all the advances we have seen in forecasting methods. Technological advances simply do not making trading easier and the appliance of science, is not the key to success – having a simple forex trading system and executing it with discipline is.
Support and Resistance
All successful forex trading systems take into account support and resistance and use it to execute trading signals. Support and resistance are simply levels that have been tested more than twice and allow traders to isolate areas of value, to execute trading signals against. While trading systems look for support and resistance levels to hold (and trading against them can be profitable) there is a more profitable way of using support and resistance:
If valid support and resistance levels break, you have a breakout on your forex charts and using breakout methodology is one of the best ways to make forex profits.
Fact: Most major trending moves take place form new market highs or lows and if you go with these breakouts, you will catch some of the best trends. Most traders don’t like trading breakouts, as they want to get in at a better market price and wait for the pullback. Of course, in most instances it doesn’t come and their left watching the trend develop without them being in it!
If you learn to incorporate breakouts, in your forex trading system, you will have greater profit potential.
Following the Tend
Once a trend is in motion you need to follow it and stay with it. If you could catch just 50% of every major trend, then you would be very rich. Following a trend is not easy, as you will always have volatility present and pullbacks. You must decide if they are simply retraements within the trend or trend reversals. To do this, you need to decide what is normal volatility and what is a trend reversal. For this you will need to understand volatility and we will return to this in a moment.
Spotting Trend Reversals
Human nature tends to cause short term price spikes away from fair value. These spikes are short lived and prices quickly return to fair value. These spikes can be of various sizes but they never last long. If you understand this, then you can look for them on forex charts and use technical indicators to trade contrary to the move and get in at important market reversals.
When the trend is in motion your aim is to stay with it – when prices spike to far from fair value you will look for contrary trades and the above is easily spotted using technical analysis and forex charts.
Confirming Trading Signals
If you are forex trend following then you don’t need to predict where prices may go you will simply confirm every move. It’s a common error to simply buy into support and sell into resistance and predict the levels will hold. This of course will see you lose, as all you are doing is hoping and guessing and that’s doomed to failure.
The best trading systems all confirm with momentum indicators which show that price velocity is changing. For example, if prices dip to support, you don’t just buy - you wait for momentum to shift away from support and then execute your trading signal when they have confirmed support has held. This way you are trading the reality of the level holding, rather than simply hoping or guessing. If you do this – you will put the odds in your favour.
Exit Points and Volatility
Any forex trading system which is successful takes into account price volatility. This will enable you to place your stops (and trail them) outside of random volatility, stay with trends and spot potential reversals. One of the major dilemmas for successful trading systems is - to place and trail stops for optimum risk / reward and an understanding of volatility is essential to do this.
Understanding Confidence and Discipline
The above is a very brief overview of some of the most common elements that make up a successful forex trading system. If you incorporate them in your trading system you can enjoy currency trading success.
Building a trading system to successfully follow forex trends is easy, but the catch is you must have confidence to apply it with discipline, when you hit a losing streak. If you don’t have the discipline to apply your trading method you simply don’t have one.
So if you want to make money forex trend following - use a simple system, which is robust, trades the odds, that you understand, can apply with discipline and you can enjoy currency trading success.