I feel that I need to tell you, potential or practicing trader, the raw truth about forex trading. This is one of the most complex careers that you will take up.
Please note that I said complex, not hard or impossible.
The reason I define it as a complex career is that there is too much information out there about it.
You will find books that promise to make you the best trader ever, some indicators claiming to be the Holy Grail, mentors who seem like they have made it, and expensive trading systems that are only as accurate as driving with your eyes closed.
The problem with all this information is that most of it is either false or meant to sell you trading aids, or, it might be right but the problem comes from the way it is presented. I talk from the point of someone that downloaded hundreds of indicators and trading strategies to the point that I knew them by name when I searched on Google! Haha!
By the time I had realized that the perfect money maker did not exist, I had begun going bald from scratching my head. My knuckles were painful from punching my monitor. The most painful thing I felt was in my head, knowing that I would never make money as a trader.
Anyway, this is not all that important. What matters is that I found out four truths about any online trading strategy:
1. There is no one strategy that will ever guarantee you 100% success rate.
2. All strategies must make losses at one point in time.
3. The best strategy is one that has been tried over and over again, and its accuracy noted.
4. Almost all strategies would work if they were used in the right manner at the right time.
The other important thing that you should keep in mind is that a strategy is much more than a combination of tricks, indicators, and concepts. It should also provide information such as:
Trade entry and exit
Size of the positions
Your trading personality, and
However, if you just download any system then set to try it out on a real account, then you are only inviting the risk of losing all your money. A trading strategy is a roadmap that tells you where to go, and at what time.
Without it, you will be consumed by many predators that lie in wait for the careless traders.
With those few by-the-way words, we can now head out to the battleground and look at two powerful strategies that you can apply in the online trading markets and make a living out of them. The aim of this post is to prove that online trading is simple and can be simplified further by acquiring the right information.
We shall only cover the technical part of the trading plans. In short, you need to be able to determine your lot size, trading personality, and so on.
Are you ready?
A doji is one of the simplest yet very powerful candlestick patterns used in technical analysis. It is a skeleton candlestick that neither represents a rising or declining market. When it forms, we say that there is indecision in the market. In short, during the formation of that candlestick, neither the buyers (bulls) nor the sellers (bears) were strong enough to win the battle.
Now, when a doji has formed, millions of traders are usually looking at it. They wait, with eagle eyes, for the next few candles to give them the potential direction of the market.
Identifying the Proper Doji Candlestick
Most of the time, whenever I come across a strategy that uses the doji, the traders usually have the wrong doji candle in their methods. Well, maybe it works for them, but for me, such dojis lead to failing trades. In my opinion, and from personal experience, a proper doji should not be bullish or bearish at all.
Look at the image below:
In this image, you can see that the doji on the left has a tiny streak of green where the body ought to be. I would never perceive it as a doji since it shows that the bulls won the war.
However, if you look at the second and third dojis, you can see that they are black in color. Neither of them is green or red.
You can customize your charts (I use MT4 and MT5). With this platform, you can color your bars as you wish. To have dojis that easily stand out, right-click on inside the MT4 or MT5, choose “Properties” then “Colors”. Find “Line chart” and use any color of your choice. This will help you avoid using the wrong candlesticks while hunting for dojis.
Identifying Areas of Strong Support and Resistance
In this approach, we are going to combine the indecision candlestick (doji) with areas of strong support and resistance.
You must have noticed by now that a little knowledge of identifying support and resistance as well as basic candlestick patterns like the doji is necessary. However, these are simple concepts that you can grasp as we go along. In addition, I might just craft a post soon on both concepts. Just be sure to stay in touch.
For the sake of refreshing our minds, let’s recall that Support refers to a zone below the current market position where price tried to go lower but failed and bounced up. Resistance, on its part, refers to a point above the current market price where the price tried to go higher in the past but failed and fell back down.
Support and resistance are some of the oldest and most popular trading methods used in forex. All the same, they retain their effectiveness when properly applied. There is no right or wrong way of identifying these areas as long as they work in your favor. Therefore, do not assume that the way I identify mine here is the fixed approach.
Below is an image of support and resistance like I would identify them:
If you asked me, a strong area of support should have been touched by the market several times in the past. In the above image, you can count at least three points where the market touched the zone and bounced back up.
Similarly, if you look at the resistance zone, the market had touched it more than three times. Whenever it did, it would reverse and fall away from the zone.
Therefore, in this lesson, make sure your support and resistance zones are distinct and very clear.
One mistake made by traders when identifying these zones is using lines to highlight them. The market does not follow any definite rules and will behave as it wants. In short, it might come to your support and resistance drawn as a line and appear to have broken it. When you think it has passed the zones, it comes back and reverses from its earlier direction. So this is the real market.
To be safe, make sure to draw your support and resistance like zones and not lines. You will understand this some more as you keep practicing.
Second, the timeframe that you choose might influence your trading results. If you asked me, I would recommend that you trade on the 1-hour charts and above, only. Smaller timeframes are prone to sudden market volatility and might not respect some of the concepts that we have applied here.
The overall idea here is to act like snipers. We shall identify support and resistance zones since the markets have the tendency to slow down or reverse there. Once we do that, we shall wait for the price to come to those points. At the same time, we shall look out for perfect dojis to form. After that, we are going to apply a little candlestick formations knowledge to determine the potential market directions then pull the trigger.
On the same note, we shall apply the Risk to Reward Ratio (RRR) concept to determine the profitability of our trade(s). This ratio helps to reduce your losses by ensuring that the trades that you take have more earning potential than what you risk in the trades. You can read my in-depth post of this magical formula here.
Trade Example 1
In the above image, we have our system in action.
We had drawn both our support and resistance zones. We then sat and waited for the market (price) to touch either of those points. Luckily, it was not long before it went down to the support zone.
The next step was to wait for the perfect doji to form. Fate was on our side yet again as a doji candlestick formed a few candles later. Assuming that we all understand the basic candlestick formations, we waited for a bullish pattern to form. At this point, we can only look for “buy” trades as selling at a support zone is equal to committing suicide.
As you can see, a bullish engulfing candlestick pattern formed. We waited for the candle to close before taking the trade.
However, did we take the trade?
The answer is NO!
If you understand the concept of Risk to Reward Ratio, then you will see that the Take Profit level (next major resistance zone) is equal to the Stop Loss level (major support zone below the trade entry point).
In respect of the concept, we can see that the RRR of this trade is 1:1. We are risking the same amount that we seek to earn. This is not the best type of trade, so we go hunting for another one.
Although we ignored it, the market went straight up into the take profit area. Had we taken the trade, it would have been a sure winner.
But hey! No regrets in this game! Wait for the next opportunity. You must remember you are not always that lucky in the trading market.
Trade Example 2
In our second trade, we use the same method as described in the concept.
First, we drew our support and resistance lines. Then we waited patiently for the price to reach any of the two points.
Eventually, the price went to the support zone and took some time before rewarding us with a doji candlestick. Once the doji came, we waited for a predictive candlestick pattern. The pattern that was formed after the doji was another bullish engulfing pattern although some traders would argue that it is the railroad candlestick pattern. Either way, both patterns tell us to buy.
Before pulling the trigger, we had to calculate the RRR. We do this by looking at the distance of the Stop Loss (the distance of the nearest major support area) and the Take Profit (the distance of the nearest resistance level).
This time, the Take Profit is about three times the distance of the Stop Loss. If you already read my RRR post, you would know that this is a perfect trade as it has a RRR of 1:3. Therefore, we would have taken it!
As you can see, the market went all the way to the next resistance level without struggling :)
Trade Example 3
Now, this one’s for you.
First, look at the support and resistance level.
Second, do you see the perfect doji?
Third, do you see the “sell” candlestick patterns that formed near the resistance level?
Fourth, is the Take Profit distance more than the Stop Loss distance?
Yes, this was a promising “Sell” trade that had a RRR of over 1:3. Therefore, had we taken it, it would have given us some nice and easy pips :)
Like I mentioned before, the strength of any trading strategy is to test it out before using it on a real account. You need to practice this approach until you can easily craft it and identify the best trades.
In addition, do not be discouraged as any system is prone to losses from time to time. Better still, by using the RRR concept, you are guaranteed to always remain profitable.
Our second powerful trading strategy uses what we call Elliott Waves in conjunction with support and resistance. Some people trade the waves without the zones. In my experience, I have always found it hard to predict where the waves start, pause or end without the use of support and resistance. Therefore, we are going to incorporate these zones in this trading approach.
Well, the Elliott wave method is also old and loved by most of the best traders that I know. It is a challenging method for beginners, but, with dedication and practice, it becomes quite easy to interpret and reap profits from it.
Just like the name suggests, the Elliott Waves concept is made up of up and down waves. It is based on the fact that the market moves in an orderly manner that can be identified and used to make very accurate predictions on the direction of the price.
Typically, the Elliott wave comprises of two types of waves: impulse and corrective. The impulse waves move in the direction of the trend while corrective waves move opposite of the main trend. I hope you already understand too well that the market moves in both up and down movements.
Look at the diagram below for better understanding:
Elliott wave pattern during a uptrend
Elliott wave pattern during a downtrend
Anatomy of the Elliott Wave
From the two figures above, try to capture the following anatomies to help you in identifying the waves.
Wave 1: This wave begins from a support area (during an uptrend) or a resistance level (during a downtrend). It moves in the direction of the main trend.
Wave 2: This wave moves against the direction of the main trend. It should never retrace (go higher or below) the starting point of wave 1. If it does, then the wave count is inaccurate and should be repeated. It is a corrective wave.
Wave 3: This is usually the longest wave and can never be the shortest. If it is ever shorter than waves 1 and 5, then the wave count is wrong and should be corrected. It is an impulse wave.
Wave 4: This wave forms after wave 3 ends. It should never retrace below or above the starting point of wave 3. If it does, then the pattern is invalid. It is a corrective wave.
Wave 5: This is the last wave of the Elliott formation. It marks the end of the trend and introduces a potential reversal. It is an impulse wave that should never retrace below or above the starting point of wave 4.
Trade Example 1
As always, my analysis needs to start from somewhere. In this case, we had a major support zone. Therefore, we would be expecting a bullish wave to form from it.
If we adhere to the rules of Elliott waves, wave 1 should be the starting point of a new trend. I only trade wave 3 for several reasons:
1. It is a little difficult to know when an Elliott wave is forming before waves 1 and 2 respect the anatomy of the concept.
2. It is the longest wave and will usually give good pips when calculated right.
That said, we wait for waves 1 and to be formed in the right way. Wave 2 should start at the end of wave 1 and not reach the starting point of wave 1. If this happens, then we can hope for wave 2 to be completely formed.
If wave 2 starts reversing before reaching the starting point of wave 1, then we can enter our trade for wave 3. I use candlestick patterns for my confirmation. However, you can enter once wave 2 reaches halfway through wave 1.
Place the Stop Loss below the major support area (start of wave 1). Place the Take Profit at least 2 times higher than the height of wave 1, near the next resistance level. In this case, the RRR is already factored in since wave 3 is expected to be longer than wave 1. However, be careful not to place the Stop Loss too far from the start of wave 1 as it may damage the RRR.
As we can tell from the above trade, it followed the principles of the Elliott wave. Once we entered the trade at the end of wave 2, we enjoyed a smooth ride up until the next resistance level where candlestick formations predicted the end of wave 3. This is where we got out with some juicy pips!
How about we look at another similar application of the Elliott waves concept?
Trade Example 2
Can you try to explain this diagram before reading any further?
If you explained it as below, then you are ready to start practicing the Elliott wave principle in your demo trading!
So, we are going to start by identifying major support or resistance zones then wait for the market to enter the zones. In the above figure, we had a potential “Sell” trade as the market touched an area of resistance.
As per the anatomy of Elliott waves, we waited for wave 1 to emerge from the resistance zone. It would be valid once it hit a minor support level on its way down and bounce back upwards. This would mark the beginning of 2.
If wave 2 retraced (opposed the main downtrend) and did not go into the area of resistance where wave 1 originated, then we consider it valid. Once it starts reversing back down, then we consider wave 2 completed.
The end of wave 2 marks the beginning of wave 3 which is our entry trigger. You can confirm this using any candlestick pattern. Once you open the trade, place your Stop Loss beyond (outside) the major resistance zone. Your Take Profit should be on the next support level at least 2 or 3 times the length of wave 1.
Once your target has been acquired, you can close the trade.
As you can see from this trade example, our trade went the full distance and entered our would-be support level. We would have also won the second trade with a satisfactory RRR!