Creating Your Forex Road Map

01/22/2013 9:00 am EST

Focus: FOREX

Marc Principato

Director, SMB Forex training Program

Is it possible to estimate where your forex pair is going far in advance? Marc Principato of SMB University Forex Training Program says it is, and when you develop this skill, you become a better trader.

When new traders enter the forex market, they install their platform of choice and then ask the following question, “How do I know which way my forex pair is going?” They usually seek the answer by immersing themselves into the world of confusion. Amazingly enough, newer traders already come to the game with the preconceived notions that their brokers love. Ideas such as “I will figure out where this market is going by watching the news.” or “I will choose an oscillator for arbitrary reasons and trade off the signals on the smallest time frame possible, because more detail must be better.” If you have some years of experience, then you know what kind of fun those ideas usually lead to. Imagine as a beginner, someone handed you a price action blueprint that revealed the price points that offered the greatest probability and potential and minimized the relative risk? Imagine if you had a forex road map.

Is it possible to estimate where your forex pair is going far in advance? It is. One important concept new traders must learn is that human emotion expresses itself in the form of price patterns or sequenced movements in the market, and these patterns are repetitive. Markets, which are now dominated by computers, are still driven to extremes by emotional forces such as fear and greed. This concept of market functionality is not new. The Elliott Wave Principle and Harmonic Patterns are built on this particular premise. These behavioral perspectives offer an excellent framework to begin analysis and strategy development from.

So what advantage do you gain from utilizing such a framework? Let’s say you are able to identify where you are in a particular market pattern. Let’s say this pattern began to emerge two days earlier. Since you have been tracking this emerging pattern, you are prepared to act at certain points. Instead of reacting to random market noise like most uninformed traders, you are waiting for price to reach a high probability price point that is predetermined by the pattern. Like anything in trading, there is no guarantee you will get the expected outcome from that particular level, but that is why we teach our students how to validate our patterns using intermarket correlation and volume analysis.

And when you get a good grasp on how this works, you can then take it a step further. This is when you are able to see a broader pattern emerging and using this information not only for the high probability turning points, but also as a way to gauge potential and risk for smaller patterns that appear more frequently within. For example, if you see that you are within a bullish four-hour pattern, and you are still 85 pips away from its completion point, then you know two things:

  1. Your intraday potential is to the upside. That means you are avoiding shorts or expecting much less from any short setups that may appear on the smaller time frames.

  2. You are expecting more from long setups on smaller time frames and can better justify aggressive entries and sizing on continuation patterns.

Imagine how this kind of perspective can guide your trading decisions. This information provides a level of confidence that is very difficult to achieve when utilizing conventional methods of analysis.

Remember one of the biggest problems new traders face is a lack of structure. When you learn a perspective that is based on human emotions expressed in price patterns and build some guidelines around such patterns, you are now transitioning from the uninformed reactionary trader to the informed and patient trader. Operating with such a methodology allows you to focus on the most relevant market generated information. Learning how to operate from such a perspective is not that difficult provided you are willing to invest in the appropriate resources. The choice you make here can mean the difference between a long and tedious learning curve or a shorter and more productive experience. For many this can be a tough choice but only you can decide how important your education is.

By Marc Principato, CMT, Director, SMB University Forex Training Program

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