Simple Concepts for Trading the Financial Markets
The following information provides a basis for developing an effective trading strategy. The concepts shown can be utilized in any market.
What You Should Do and What You Should Remember
Look for the highs and lows (tops/bottoms) on your charts. You can mark them off with horizontal lines. These price levels are the short- term support and resistance levels. Don’t be too particular about the exact prices you mark off. Just look for tops and bottoms. The approximate midpoint of the distance between short-term support and resistance can also be marked off. Prices often retrace to these areas and reverse, so these are levels to watch. These prices that are marked off will be referred to as your reference points.
Good setups can be found at any time, and anything can happen in the market at any time. Sometimes the best setups are found when the market is moving slowly and sometimes when it’s moving more quickly and with greater momentum.
Don’t count on finding a method or system that will point out profitable setups 100% of the time. Trading is a guessing game. You have to be a consistently good guesser to be consistently profitable. Take “educated” guesses that are based on proper interpretation of current market conditions.
The way to become a good trader is to spend many hours watching the market and many hours reviewing what happened in the market. Understand what’s relevant to watch for and what’s irrelevant.
Proper understanding of relevant market attributes, such as price action, will help you in perceiving probable market direction and help you to develop market “feel”. Expect to put in many hours of watching various market conditions before you develop a feel for what will happen next.
Don’t concentrate on an idea you have regarding which direction the market is going to take. Look for the evidence, in other words, of what the market is actually doing now. If you see evidence that you should open or close a position, immediately at a given moment, do so without hesitation. The trades you place might not seemingly correspond at the time to where you think the market is going, but later you may see that you made the right moves.
Any single candlestick on a 1-minute chart can be used as a price “reference range.” The logic is that the market will move, and move significantly relative to your position value, within a relatively short amount of time. The Bid and Ask prices will not be the same ones you opened a position at, and you will be in a profit or loss zone soon after you opened that position.
When looking at a pair of candlesticks, use the first one as your reference range. The Close price of the second candlestick is what to watch. If the Close of the second candlestick is either higher than the High price of the first stick or lower than the first stick’s Low price, you have a breakout. It’s a breakout from the reference range of the first candlestick. This simple pattern can be found at the beginning of many profitable trades and illustrates the type of price action that we are looking for in trade setups. (Wait for the second candlestick to take its final shape at the end of the minute.)
The reference price range of the first candlestick in patterns like these should not be passed (or at least not passed by much) by prices subsequently moving in the opposite direction if the pattern will, in fact, be seen at the beginning of a profitable trade. In some cases, the market can retrace to a point slightly past the reference price and then continue back in the profitable direction soon after. Closing the position too soon in cases like these could incur unnecessary losses. It’s a judgment call that will turn out to be correct or incorrect largely based on your feel for the market, price action, and other factors collectively.
Always look for the price that the market won’t go beyond. On a chart, it’s a level that the market touches and then begins to move away from in the opposite direction. It can “bounce” off of this level quickly or reach it and then begin to slowly move away from it. In some cases, the bounce level can be predicted exactly (previous tops and bottoms) and in other cases it will be discovered only after the market has bounced off it and moved on. If the market is climbing, look for price action and previous support/resistance levels to indicate the price that it won’t go above. Vice versa, if the market is falling, look for price action and previous support/resistance levels to indicate the price that it won’t go below. In either case, trade with the newly started trend.
The support/resistance levels that you can mark off at tops and bottoms are nothing more than key prices near which the market can bounce. Sometimes the market will hit the line exactly and then bounce. Sometimes it’ll just stop short or just pass and then bounce. The market can also pass right through.
The other components of price action to look for is the relative speed, volatility, and momentum of the market. If the range from High to Low for each recent 1-minute candlestick is 4-5 pips and the current price jumps 10 pips, that can signal momentum in a given direction. Look for more frequent ticks and larger High to Low ranges for the subsequent candlesticks.
These points are primarily what you need to take into account when developing trade entry criteria for a trading strategy. The other major components include risk and reward calculation and the corresponding trade volume determination. Collectively, this material will enable any trader to come up with a profitable trading system.