How To Be Successful Forex Trader-The Search for the Holy Grail

Many traders spend years and years trying to find the holy grail of trading. That magic indicator or set of indicators that will make them rich easily, known only by a handful of traders.

The Truth is that there is NO Holy Grail

There is no indicator or system that will make you rich easily. The best traders have no holy grail, it isn’t their system what makes them superior traders, they have other characteristics such as self-discipline, patience, they work hard, they take calculated risks, they do trade consistently based on a trading system (it does not need to be THE PERFECT SYSTEM, just a system), they follow it follow it rigorously, they know they will never stop learning so they have their mind open to every possibility, and most importantly, they have accepted the risk, they know deep in their hearts they are risk-takers.

How come there is no Holy Grail?

Because the market changes. The market is never the same, each moment is unique, patterns are just similar. If all patterns are unique then the outcome of each one of them is statistically independent from one to the other. If every pattern is different, then all set of indicators or systems will fail from time to time.

The two most common mistakes traders are likely to make in this subject are:

Most traders try many systems or set of indicators and them drop them out because they failed a few times. They never give them the time required to accurately test the system.

Another common activity is when traders start out with an easy system, when it fails, they add an indicator that could had kept them out of that particular trade. Then it fails again and they add another indicator. They end up with a very complicated system that is hardly tradable. Then they drop out the system and the process starts all over again.

The important thing here is the valuable amount of time lost in these practices. Some of them spend a lifetime trying to find the nonexistent: the Holy Grail of Trading.

FACT - There is no holy grail. It isn’t wise to try to find the perfect system or indicator that will keep you out of losing, because losing is just part of this business, like spending in raw material in any other kind of business. Instead, you can focus in one indicator/system that will keep you in the market when good moves happen. With good money management and a good risk reward ratio, the odds will be in your favor!

Technical Analysis, Technical Indicators, Time-Frames

There are different periods in which a currency pair could be charted: monthly, weekly, daily, hourly, 30-minute, 5-minute, etc.

Each timeframe has its unique trend; this is the reason why there is no absolute trend for any currency, take the following charts for example.

EURUSD Hourly Chart

[Chart 30]

EURUSD Daily Chart

[Chart 31]

In these charts, a swing trader focusing in the 1H chart could assess: well there is no trend (ranging market) right now for the EURUSD while a long-term trader could assess: the trend for the EURUSD is clearly up. Which trader is wrong? No one, both of them are correct. Both of them have effectively determined the trend in the timeframe they are focusing on.

Of course, the market condition in the 1H chart is most likely to continue for the next couple of days while the market condition in the daily chart is likely to continue for the next month or so.

The same goes when we use indicators. Sometimes the same indicator could be signalling the opposite signals on the same currency pair on different time frames.

Take for instance the following charts:

GBPJPY 15 Minute

[Chart 32]

GBPJPY 4H

[Chart 33]

On the first chart (15min) the stochastics are in an oversold situation however, at the same time, in the 4H chart the stochastics did give a sell signal (crossing from the overbought territory to the neutral territory). The reason for this simple, remember all indicators go back n-periods to make a calculation, in this particular case, the 7 period stochastics in the 15 min chart went back 8 candlesticks to complete its calculation (1.75 hours). The stochastics in the 4H chart also represent 8 candlesticks but those 21 candles represent around 1.5 days worth of data. The market conditions are completely different during those periods.

Obviously, it is better to trade when many timeframes indicate the same market condition (i.e. both, the 15 min and the 4H chart indicate an oversold condition). When this happens, the probability of success of the given signal increases enormously.

Is important to realize that the longer the timeframe the more impact it will have in the market. For instance, an oversold condition in the 4H chart is more important than an overbought condition in the 15 min chart. More important because the “signaled market condition” will last for a greater time in longer time frames than in the shorter time frames.

Which timeframe should I use?

When trying to decide which timeframe to trade in we must take in consideration two important factors: the time dedicated to your trading and your personality.

How much time a day/week are we going to dedicate to our trading? Obviously if you have a day job and do not have the possibility to monitor your trades, then it would be better to focus on the 4H or 1H chart, and even daily charts can work out. If there is a possibility to monitor your trades then you can use the 30 min charts.

On the other hand, if you are a full time trader, then you have the possibility to trade shorter timeframes such as the 5 or 15 min charts.

However, we must almost consider that when you are a full time trader there is a chance that trading shorter timeframes does not fit your personality. The same goes for traders with a day job, there is a possibility that trading the longer term just will not work. I have a friend who started trading the FX market using the 1min chart. His trading wasn’t going the way he expected so he moved to the 15 min, then to the 30 min and finally to the 1H charts, where he felt most comfortable trading (and of course profits also increased).

So to summarize, you should use the time frames that better fit your personality and time requirements, and the best way to know which one fits you better is by trading as many time frames as possible, then choose the one you felt most comfortable with.

Technical Analysis, Technical Indicators, Important Consideration about Technical Indicators

Remember that some indicators work best during trending markets while others generate best results under ranging or trendless conditions.

For this reason it is important to choose different indicators for different market conditions. For instance, we could use one oscillator to forecast tops and bottoms when the market is ranging, but once either the top or bottom is broken, we could use the CCI to take signals based on extreme levels.

To trade based only on one indicator could be risky, we need to adapt our strategy to the different market conditions, and combine preferably indicators of different nature, for example, use oscillators in combination with candlestick reversal patterns to get our trading signals.

The other extreme is not good either, using a lot of indicators could complicate trading decisions and we could end up with a system that is hardly tradable.

For now, get familiar with each indicator and pattern studied in these past three lessons. Try to see which one of them fits you better and what combination of technical tools could help you achieve better results.

Technical Analysis, Technical Indicators, Pivot Points

In a few words, a pivot point (PP) is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.
Why PP works?
They work simply because many traders and investors (including bank and institutional traders) use and trust them. It is known by every trader that the pivot point is an important measure of strength or weakness of any market.
There are several ways to calculate the pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).
Warning – some pretty boring maths ahead. The good news is that almost all charting platforms will automatically calculate this for you and draw the lines on in whatever pretty colour you like. But as this is the ADVANCED course we think you should have a basic idea of how they are calculated.
Pivot point (PP) = (High + Low + Close) / 3
Take for instance the following EUR/USD information from the previous session:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2436
So, what does this number tell us? It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. In addition, if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. In both cases this condition is likely to sustain until the next session.
Since the Forex market is a 24hr market (no close or open from day to day) there has been an ongoing battle deciding at what times we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT (obviously the high and low in between those hours).
Besides the calculation of the PP, there are other support and resistance levels that are calculated using the PP as a reference.
Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2 ) = R1 + (PP – S1)
Where, H is the High of the previous period
L is the low of the previous period
Continuing with the example above, PP = 1.2436
S1 = (1.2436 * 2) - 1.2474 = 1.2398
R1 = (1.2436 * 2) – 1.2376 = 1.2496
R2 = 1.2496 + (1.2436 – 1.2398) = 1.2338
S2 = 1.2436 – (1.2496 – 1.2398) = 1.2534
These levels are supposed to mark support and resistance levels for the current session.
In the next chart we have calculated the PP and the support and resistance levels for September 5th.
S2 = 1.2616
S1 = 1.2579
PP = 1.2545
R1 = 1.2508
R2 = 1.2474

[Chart 1]

Vertical lines separate sessions (4th and 5th of September). As we can see, the market went rapidly below the PP level. From that point on, we should be careful with longs, and start thinking on shorts, because the sentiment of traders and investors is turning to “net short”.

Notice how the PP represents a resistance on early September 5th. Notice also S1 rejected twice the price as it approached the S1 level representing good trading opportunities. Finally, S2 marked a good support, this indicates weakness on current bears, which tells us that the sentiment is not as strong as it was at the beginning of the trading session.

On the example above, the PP was calculated using information of the previous session (previous day). This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so, we are able to see the sentiment over longer periods of time. In addition, we can see possible levels that might offer support and resistance throughout the week or month. Calculating the weekly or monthly pivot point is mostly used by long term traders, and as we said, it gives us a good idea about the longer term trend.

Technical Analysis, technical indicators,Bollinger Bands (BB)

Indicator was developed by John Bollinger. This indicator consists of three different components:

- A simple moving average in the middle

- An upper band, which is calculated by adding 2 standard deviations to the middle MA

- A lower band, which is calculated by subtracting 2 standard deviations to the middle MA.

The principal objective of this indicator is to measure the volatility at any given moment relative to historical volatility of any given currency pair.

Bollinger Bands Usage

Usage No 1 – Volatility. When the upper and lower bands expand it indicates more volatility relative to previous periods. When the bands get narrower it indicates the volatility at the moment is lower than the volatility of previous periods.

[Chart 24]

Usage No 2 - Bands as support and resistance. Sometimes the extreme bands can act as important support and resistance levels.

Thus, we can take trades as the price bounces off the bands, as prices break out the bands, etc. This type of trading is recommended on pullbacks or retracements and during trendless conditions (to scalp). Of course, with the help of other technical indicators the signals will increase their accuracy.

[Chart 25]

The signals that are taken in direction of the trend offer much better accuracy than those taken against the trend.

The psychology behind this signal is that most of the time the market will be inside both bands. When the market reaches either band, it will tend to retrace or switch directions to the other side as “it has reached its normal deviation”.

Technical Analysis, technical indicators,Stochastics (STC)

Developed by George Lane in the 50´s. Stochastics compare the last closing price relative to its trading range over the chosen periods. The values of the stochastic oscillator range between 0 and 1, or more precisely between 0% and 100%.

When the reading of the oscillator is near zero, it indicates that the last period closing price closed near the bottom of the n-period range. A reading close to 1 indicates that the last period closing price closed near the top of the n-period range.

A 9 period stochastic will measure the last close relative to the last 9 periods low and high range.

There are three types of stochastics: fast, slow and full stochastics. The slow stochastic is simply a smoother (less whipsaws but less sensitive to price fluctuations) version of the fast stochastic. The full stochastic adds an additional parameter which makes it even smother than the slow stochastic.

Stochastic Usage

Usage No 1 - Overbought/oversold conditions. Stochastics are probably the most used indicator for these purposes. A buy signal is given when the readings are below 20% and rises above this level (buy signal – oversold condition). A sell signal occurs when the reading is above 80% and falls back down below that level (sell signal - overbought condition). When the market is trending, it is advised to take only those signals that are in direction of the trend.

[Chart 19]

As we already mentioned, stochastics are probably the indicator that gives overbought and oversold signals more accurately. The signal is triggered when the indicator returns to the neutral territory from an oversold or overbought condition.

Usage No 2 - Divergence trading. As other indicators, stochastics also give divergence signals.

[Chart 20]

This is the same chart we used for the RSI divergence. As you can see the RSI works better and signals a clearer divergence. Either way, the divergence is present.