What is Your Forex Trading Strategy in 2016?
The forex strategies that you employ as part or your trading plan are important even though this forms about 10 % to 20% of your overall success as a forex trader. The internet being a reservoir of vast information abounds with numerous trading strategies, not all of them are good because among many other factors, they do not consider the true nature of the forex market. They assume the forex market is a physical system governed by physical laws.
Is The Forex Market Efficient or Random?
In picking or developing a forex trading system or strategy, it is important to understand how the forex market works. Modern financial theory rests on very weak and inaccurate foundations. Some scholars have postulated theories such as Efficient Market and Random Walk theories in an attempt to model financial market’s behavior.
While these theories appear good on paper, they do not model true market behavior. Consequently any forex strategy built on an efficient market model or random walk is bound to fail. This means a forex trader with a ‘faulty’ trading system is bound to fail.
All naturally occurring phenomena like rivers, mountains, flowers, clouds, the cosmos etc. exhibit an ordered structure, a repeatable form based on identical or nearly identical subunits making up the whole. In mathematics this is called self-similarity.
The forex markets are not random neither are they efficient. At first glance, the forex markets may appear random, but price oscillations actually exhibit a high degree of order otherwise known as Chaos; a concise summary of mass human expectations regarding the future.
Our understanding of the financial market behavior was advanced significantly by Mandelbrot, the great mathematician. He showed us that financial markets, like the fern leaf picture on the left, are fractal in nature and exhibit self-similarity. We now know that forex markets are nonlinear systems and behave like natural phenomena and thus, Newton’s classical mechanical framework cannot be used to explain them successfully.
Which way in 2016?
Today we know that the forex market moves in waves (either impulse or corrective). A bullish wave structure is shown below consisting of 5 waves (1,2,3,4 and 5) and 3 corrections (a, b and c). This is the underlying structure of every financial market including the forex market. This is called an Elliot Wave, based on Elliot wave theory, emanating from studies in the 1930’s by R.N Elliot. We also now know that the underlying structure of an Elliot wave is fractals. Fractals are all over nature. Thus, our trading systems and strategies revolve around the fractal nature of the forex market due to the fact that markets are indeed a natural function and not a physical system. This is because the forex market is simply a manifestation of the cumulative mass psychology of buyers and sellers, all of whom are subject to their own irrational fears, greed and other emotions. These different behaviors of the buyers and sellers eventually leads to price changes and different phases of the forex market.
To this end, we apply techniques and strategies that incorporate fractals, market structure, wave analysis from the context of Ichimoku theory and advanced chart patterns whilst embracing risk management and good trading psychology.
As an example, last week, we traded to great effect several advanced patterns that appeared on different time frames all throughout the week.
The example below shows the formation of a bullish Cypher pattern on the EURUSD M15 chart that was traded on 19th February 2016. We traded this and many other advanced patterns that appeared on numerous time frames because the market moves in waves and is fractal in nature.
As you can see above the pattern was going to complete at point D upon which we opened a long trade(buy limit) expecting for it to hit target number 1 and 2 shown on the chart for our profits. As you can see below, the seemingly random market did hit both targets and the profits were booked.
Till then happy trading and best wishes!!!
Trading Futures, Options, Stocks, Indexes, Forex and other financial derivatives involves substantial risk of loss. Please be advised that all information published on this blog is intended for informational purposes only. Do not consider any post, chart, signal etc. as trade advice. Only trade with capital you can afford to lose. The author of this blog is not in any way responsible for negative outcomes resulting from action taken due to information on this blog.