The Fundamentals of Trading

Part One

Hello All

My name is Simon and I am going to share with you a wealth of information I have gleaned over the years I have traded. I joined this forum back in 2008 mainly for a free news service, and wasn't really all that interested in using the forums. Its time in my evolution as a trader to really share and try and make the process of FX trading easier for those less skilled and experienced.

Some information about me

I have been trading in a diverse range of markets including FX for about 30 years now, when I started we used to look at End of day charts for the stock market, so a long time and the world has definitely changed some in that time. I have been seriously trading FX for approximately 12 years now so I would say I am reasonably proficient at it. I certainly make a large portion of my living from it and like all traders I have been through the whole gamut of systems, indicators, and whatever else can be dreamed up to try and make money from it.

My Methods

Where to begin, over the years there has been so many ways to trade I have lost count of the "methods" I have used so I would rather tell you about how I arrive at my trades and this should make far more sense.

For the past several years I have been a naked chart trader. I don't use any aids or hindrances as I like to call them on my charts at all. Let me make this point very clear every indicator is lagging so by the time the indicator provides enough evidence for you to go in its too late you missed it or at least the better part of the trade. The only way I know how to trade Forex is by using price and the signals that price gives you, now I know what your thinking reading this yeah yeah everyone says that of course you read price, but do you really read it, the amount of traders I have met that say they are a price action traders and are not is truly staggering, they have not the first idea how to interpret a chart, can they find a pattern, but how do they know that pattern is high probability, this is what I am going to share with you.

Let me put this out there if you are doing what the herd or books are telling you in terms of analysis then your wrong, if you are following the herd because they are telling you a level or a trade then you are wrong, you only need to follow the few with enough money to make a difference, move when they move sit when they sit. The best skill you will posses as a trader is patience i can't stress this enough.

When a big bank makes a move everyone knows it cause the balance between buyers and sellers shifts and the chart reflects a big move up or down, ask yourself this question:

Q - What do you think the bank that made trade wants to happen next.
A - They know the herd (retail traders) will jump in cause that pushes the price in the direction they want or more importantly it gives the bank enough market liquidity to get out of the trade with a profit.

So who's the smart one is this scenario, certainly not retail, don't believe me take any 1 hour chart look for a big move and then see what happens next, either price keeps going as retail piles in but with less force and the bank liquidates their position and takes profit, or it starts to retrace as the bank who made the initial move completely gets out of it and soaks up all excess liquidity. I 'll admit this is a simplistic example but that's essentially what happens.

Let me also put this out there that 99% of the action you see on an average chart is useless to you as a trader, its just there to show you the balance in the market where buyers meet sellers and vice versa, range bound markets are what we see most of the time. Can you make real money from this action without real risk I personally don't think so, we need the imbalance in the market to really put our trades where they can be most the effective and the most profitable.

Lets get Started

As I have said earlier I don't have one particular method that I use in fact I have several that I adapt depending on what price is offering, some are better than others, some days you get burned other days you kill it but the most important skills you have as a trader are these in no particular order:

1. Patience
2. Reading Charts
3. Money Management

Now lets deal with them one at a time:

1. Patience

I dont need to write a short story on this all traders know what I mean here stop trading cause your bored, you don't need to trade everyday, you only need trade when the market presents a opportunity otherwise its like an ex girlfriend ignore it as it never ends well. Trade only when you think there is a better than average chance of making money.

2. Reading Charts

Most traders dont know how to read a price chart, most traders would think a bunch of candles trending upwards with a 20SMA confirmation is a buy signal or stacks of volume means an opportunity, all completely wrong and shortly when I get to charts we will look at some examples.

3. Money Management

Let me ask you this when you go to put a trade on at what part of this process do you think about stop loss, if you said its the last thing you do then we need to talk, if you said its the first thing I do then I congratulate you, when I look at a price level I consider where I can get out before most things as you can really only decide on the rest when you know where you need to get out, again more on this later in charts.

So who notices something about these 3 skills, that's right you control all of them, for the most part the FX market is it own beast, and you will never have control of it, but these 3 skills you can practice and own, the mastery of these skills is what will separate you from the many failed traders.

That is the end of part one - part two shortly.

Simon

Part Two

Lets get to it, I want to start with charts as this is the foundation of all trading and what we are looking at that help us make decisions. For the most part all of the candles that you see on a chart are useless, very few actually display and imbalance between a buyer and a seller, and fundamentally this is what creates our trading opportunities that have the high probability of success.

So let me be clear I am not going to go back 5 years to show you some obscure fact I am going to show you current charts and what I am waiting for, whether they work or not. I am not trying to impress you just show you what I am doing:

The attached NZD chart has some important levels

1. 6594
2. 6734
3. 6848

Now I know what you are thinking yep so what, anybody can pick these levels and for the most part that is true, but the real trader knows what to do with these levels. Lets break it down

1. Do you notice how when price left these levels the pace in which is happened, it was sudden and harsh, only big money can make this happen, the ranges that develop after the initial move is where retail is trading, the initial move is where the real money is.
2. Notice that the first time this level is re tested it normally holds and is met with a fast acceleration out there, also notice that when the level is tested a second time how badly it breaks down compared to the first time. This is absolutely crystal clear with 6848, great level NFP last friday got into the level then straight back out with buying pressure.
3. 6791 was a minor level so it was never holding for the long term it was hit first up today in asia, when retested it broke down miserably a few hours later, these are not flukes or rare events this happens all the time.

When you look at this chart I want you to really look at it, concentrate on those levels. Notice also the trip from 69 to 68 this morning was rapid, why is that because see all the action on the chart to the left of this fall, lots of trading, so lots of buys and sells the market had soaked up all the orders so price can only fall after this.

So let me tell you what I traded today so you can see this in action:

- I shorted it at 6830 with a small stop just above 6850
- I did this cause the break of 684o ish was clear
- There was very little buy orders or demand in the chart below this level we had clear air until we get to 6730
- This meant I could place a small stop and run a pretty good risk/reward ratio, as it is the trade sits at break even at worst.
- I should get 100 pips out of this trade for doing nothing other that riding between two good levels which the market has to do to get to the next block of orders.

Part 3 coming soon with more examples

Part Three

First a quick trade update NZDUSD has now broken right down through minor support at 6791, so this confirms with europe now open the path should be clear for a run to 6735, where I will take profit and close the trade as always patience and time will tell.

So following on from the last post one of the major things I do is not try and be correct and guess what might happen next I wait for the big money to play their hand and then tag along and take advantage. The NZDUSD trade is a perfect example of you don't have to always try and pick tops and bottoms you only need to identify where the gaps are where the stops might get a run and trade this, these are pips just waiting to be mopped up every week.

Lets look at another example

The GBPNZD is a favourite of mine it always seems to be super volatile and creates some of the best opportunities:

The levels I have identified are:

- 20971 - 21000
- 21158 - 21187
-21266 - 21298

The first thing to say here is that the first level will be a stop off point not a reversal the reason for this is twofold
1. Not enough time from when the level was created to when its been revisited not enough time for orders to build up
2. Not a big enough retrace from the bottom, most of the time you are going to see the cup filled at least the cup being the formation completed when price reaches the second level at 21158

This first level at 20971 do you see how price is banging around at 20970 to 21000 its not moving away from it, meaning there is a balance of buyers and sellers, this is exactly what you don't want to see if you are shorting it, cause its going to break and its going to the upside in my opinion.

The next level up at 21158 there will be more selling here, mainly cause more time has elapsed since it was created, also it was a very direct couple of hours of sustained movement away from this level, this will ensure some shorts pile in here.

The third level starts at 21266 this is where I think is the first chance for reversal of trend is, it will depend on where nzdusd is in relation to it at the time, but its the best chance.

so this begs the question how would you trade it, well there are a few ways:

1. You can wait for the break of 2.1000 and start buying when price starts trending above 2.1020, using a small SL below 20970 and take profits at 21150
2. You can wait for a touch at 21266, and then short the first pullback to this level, however the first touch needs to be sold heavily for this pullback to be in play.

I am not trading this at all, as I have other positions at the moment but this is a couple of safer ways to play it.

Part Four

Lets talk about patience, this is something that traders really don't give the attention it deserves. Let me put this out there are you running a business when trading if the answer is yes then restraint should be easy for you. The thing about patience is its the mindset you bring to trading that ultimately decides how patient you are.

I run a trading business so when i sit down at my charts I have to make decisions based on high probability if that means I wait for 4 days, 4 weeks, 4 minutes then i do so, as every loosing trade takes you closer to extinction as a business.

Most traders when they start out treat it like a hobby this is a huge mistake, I guarantee you if you change this mindset to that of a CEO running your own business then you will start to see trades in a totally different light. you will start to develop the patience needed to run a successful business, only taking the opportunities with the highest probability.

The next time you go to make a trade ask yourself where do i get out, where is my profit, what do I want to see on the chart, where do i need to get filled, only then will you know if you have to show more patience and wait for the correct trade or pull the trigger.

Part Five coming soon

Simon

Part Five

Money Management

I have already established that your trading should be treated like a business so with this being said then MM should be easy. Every trade is like a sale that your business makes, so are you going to get paid or not, some of this depends on your skill as a trader.

Let me give you this, its perfectly ok to be wrong in fact its a necessity to be successful because of the lessons you can learn from it, with that being said its also perfectly not ok to be negligent if a trade goes past the point where its still viable then you need to kill it.

Let me also have you think about this a stop loss is not a mistake or loss in the big scheme of things, its two things a prevention against an unrecoverable loss and a lesson your job is to make sure you get both out of it.

Don't be negligent. there is no sympathy or excuse for this

Live and Learn

I could probably post a whole lot of strategies now but I am not going to do that cause that requires me to go back through a lot of old charts and I don't think this is actually helpful because rarely does a trade setup exactly the same way twice, this is why mechanical systems don't work but that's another story. I would rather teach real time its much better from an understanding point of view and you know I am the real deal as I won't wait until the market produces a result to cheer about it like some of the muppets in this market, good or bad we cop it on the chin together.

What I would like to do now is post charts that are live and work from there its here that you can post questions and I will do my best to answer them for you.

A few things I won't address before you ask

1. I will not discuss any sort of indicator or mechanical tool I simply don't believe in them so I won't answer anything related to this
2. Don't ask for analysis on pairs these requests will be ignored. I am not your signal service. I would prefer you do the work and I will offer input, this way you learn to fish rather than me giving you the fish.
3. I live in Australia so I am normally awake during Asia and Europe, the US i tend to miss unless something big is happening.
4. I don't pay much attention to levels on really small TF under 30 minutes as they are mainly noise not levels, 1h and 2h chart is a favorite, the EOD for confirmation of trend.
5. I won't discuss who i trade for nor will I talk brokers or market makers, their are contracts around disclosure so I won't divulge any of that so don't ask.

Subscribed!

GBPUSD

Its time for a chart this is an upcoming trade but may be a week or more away, so now is the perfect time to speak about it.

The first chart is where we are now and where we are heading, the second chart is where the level to trade might be.

You will notice that GU has been really all over the place up and down and no where in between, very hard to read, when a pair behaves like this the edges are the only place to trade, forget the middle you get your fingers burned off trying to pick this, so with his in mind lets talk about the first chart:

1. It should be said I have a leaning to the downside for this pair at the moment, but reveral in the main trend can be super powerful profit targets for the long term shorters fueling hard reversals. I think the big number at 1.40 is literally irresistible to the market I also think with the comm dolls getting a breather this will drag on the pound somewhat.
2. The area from 14350 to 142 if you look left on the chart there was a heap of buying and selling action there which made sure we ground lower through this level. pairs have to do this but always remember this is when you don't want to be in a trade better to get in when there is less chop and clear air can be obtained.
3. There is a big block of action between 14060 and 14180 so when 142 breaks properly no point playing a breakout cause its heading straight into more action, this is also the reason that 14065 is not a good level for a bounce my guess right now is that it will be a limp touch there won't be a significant bounce back at this level. Also 14065 has now been used twice in the recent times my feeling is it will bust next time around.

The second chart is a look a bit further down. The first real pullback for this pair is going to be 13925, we could easily bounce 80 to 100 pips quickly off this level. I hear you asking why is that:

1. Look at the acceleration off that level last time around that takes serious cash to achieve that, the market will be piling up buyers there
2. The safe play here is to let it touch and watch the reaction, see hoiw many buyers we have and then if its good wait for a pull back into the area, many many times this will be the one to get as the first move tests the water and the second move is what the market waits for to confirm it especially when the pair has come down a lot. A really good example of this is to look immediately left of the this level it came down and then back quickly and then took off. The big acceleration zones are where the market imbalances are that's where the orders stacked and waiting, patience and chart reading are the keys as mentioned earlier.

AUDUSD

The aussie is moving into the sweet zone we now have a confirmed dead cat bounce at 7540, this basically means that we are not going higher from here, market is chomping through the orders at these levels, as soon as that has finished the break lower will come.

Immediately below 7540 to about 7480 if you look left on the chart there is a big f@cking mess of orders where buy and sell happened and we got range trading for a while, so I am thinking it going to burn through here pretty quick. Most of the action is done already here.

What I want i see is a hard touch and and even harder rebound at 7435, this tells us whether we have buyers in the game at this level. The last time we got here was 3 weeks ago, and the reaction was strong and immediate.

How to play it,

Option 1 - wait for the touch at 7435 and then look at what the action is like if forceful then wait for the pullback to get in to go long.
Option 2 - If the touch is sloppy and sluggish and not reactionary, then I am going to look to play a stop loss order below 7400 as there isn't a lot to get in the way of shorts after this level.

One important bit of info for this pair as well, The comm dolls are affected by commodity prices in the Aussie's case mainly gold and oil, interestingly the Gold price has rallied a fair bit today but the aussie except for a brief moment at news time has fallen into a hole, whilst you can never really trade correlations if you were a buyer of AUDUSD then be afraid be very afraid because the big sellers in the Aussie today aren't listening to fundamentals, which means that the Aussie is going south in my opinion.

Hi sweetaction, thank you for sharing and for your time

Hi Simon, Great thread and information here. A quick question in reference to your AUD/USD post above - Option 1 - The term "forceful". Could you define that a little for me? What do you consider forceful?

I know it would vary with the pair being looked at for instance, a forceful reaction on GBP/NZD could be well over 100 pips on a 1H stick whereas GBP/USD not so much. But for example this EUR/JPY 1H chart below. I had this level marked and it rallied about 60 pips in a single 1H stick on the touch. In my mind that's a fair reaction for this pair and I'm waiting to see a pullback for more information. What would your thoughts be on this? Thanks in advance.

Chris

(Same 1H chart)

Zoomed out to see the level further left.

Zoomed in for clearer view of current action.


P.S. I agree with your take on AUD/USD

Hi Chris

Forceful is not about pips its about the vertical nature of the move

check out the candles in AUDUSD

29 Mar 1500
29 Mar 1700

these are forceful moves its not how far they have been its what they signify and the size of trade that takes out all the sellers and creates this candle that matters. I measure forceful based on what happened prior and what happens after, this is the only way to know if the move is significant.

Gotcha! I see what you mean on those AUD/USD bars. Thank you.

Good Morning Everyone

Lets have an update on where we are at:

Updates

NZDUSD

During the US session we got a little news which forced the NZD to pop up a little, which has caused this trade to sour a little we are still in it but with the SL at 6830 probably going to loose this one during asia today. That is trading and we move on if this happens.

EURAUD
This is an interesting pair it reached some sell orders last night at 15140 and has bounced nicely back from there, whether this is a reversal point, i doubt it the AUD has some room to go further down in my opinion so I think its a rest stop and their are better opportunities further up the line for a short.

GBPNZD
The news certainly gave this pair a kick in the pants, the level we spoke of yesterday between 20971 and 21000 held nicely as it turned out and if you played a short from here then you mopped up 200 pips. I still like the buy stop strategy from 21020 upwards as NZD dosen't look finished to the downside I think the news was a minor blip on the radar and the trend will continue upwards after this little pause towards 21150 and then 21260.

AUDUSD
Confirmed dead cat bounce at 7540, there are no buyers here as I suspected so I am only looking in one direction for this pair and that's down. The level at 7435 looks to be the next major target. wait for the reaction lets access once we see what the balance between buyers and sellers is.

Good Luck
Simon

Chart Reading

Most traders don't have a clue how to really read a chart, I am not trying to insult anyone or talk myself up, its just a fact that when presented with the noise of the market most traders are not very good at reading whats in front of them.

So I thought I would share with you what I am looking for in a chart, lets have an example

GBPAUD

Attached below is the current (as of time of writing) 1h chart for the GBPAUD. I should say right at the outset that I always take a look at the EOD charts as you want to try and trade with the predominant trend if possible, but for the most part I am happy to play both sides, keep in mind selling is always faster and more rewarding than buying but more on that later.

So this first chart I have attached you see the latest swing highs and swing lows. I have placed some comments on the charts. The fundamental message I want you to take away from this is that the textbooks on trading tell you that you find support and resistance in the middle of the choppy backwards and forwards sideways motions and ranges of the market

COMPLETE BULLSH!T

If that is all you get out of the chart then awesome welcome to the first step in becoming a real Professional price action trader. The next step is that while the chop is necessary action in the market your best opportunities come only from:

1. The big imbalances in price where buyers and sellers are worlds apart so price reacts violently
2. Using the levels above and below the chop to take advantage of the market action as price moves through it.

Remember that the only way guys on trading desks get their orders filled is to move price to the next block of activity where price reacted strongly last time around, so this means big accelerations followed by sideways and range markets with news helping breakouts from there to move the market around. Learning this is vital to being able to recognize the behavior and then taking advantage of it.

So the next big question is where is this pair going now, I am glad you asked:

The next chart illustrates a channel created by the failure of 19030, price will inevitably have a go at this channel its far too irresistible for the big money they know they can catch the express train right through to 19030, they won't miss their opportunity.

Do we trade at 19030, well at this stage I am saying no and the reason is immediately to the left of you, check out the 3rd chart

1. 19030 has been used and abused a bit lately, its also taken a long time to fall last time through a sure sign the buyers are starting to win this war
2. Look at the level above 19220, nice and clean this should ensure a nice clean hit and retrace
3. If 19220 corresponds with 7435 in AUD all the better.

Simon

Demo Accounts

I want to dispel something here that I think is a hindrance to your trading,

If you want to be a Pro Trader, never ever open a demo account

I can't say this loudly enough because as soon as you are not using real money

1. Is your trading a business when on demo
2. Are you taking losses seriously, when its real money its as serious as a heart attack
3. Are you patient in waiting for your price

I bet the answer to all of these is NO

You can't learn to be a good trader if you are on a demo account, let me ask you this question:

Q - Why do you think your broker offers demo accounts

A - Because they don't want you to feel the panic, the nervous twitch, the sinking feeling in your gut that you might of made the wrong call, the demo's work for the brokers in lulling you into a false sense of security, don't fall for it.

Stop Loss

The information is pouring out of me today, I feel this intense feeling to keep writing so lets talk about stop loss, and I want to give you an example.

There is a trader I mentor, when we first started together he was using a 30 pip SL hard and fast no matter what the trade was, he was entering trades based on time of day, i mean it was all wrong. I started with the basics with him and I want you to as well.

NEVER EVER OPEN A MARKET ORDER

Market orders are your brokers best friend, why i here you ask its because its an impulse decision its not a considered position that you have researched and taken for the most part. I will only use a market order if I have:

1. Done the research on a level
2. Know the acceleration might keep me out of it with an placed order
3. Know exactly where my loss and profits targets are before hand.

I have used stop losses ranging from 150 pips to 5, seriously if you have a target you are saying to the market I want you to bend to my will as I am not flexible enough to read the information you are presenting me and make a decision on where it should be, its literally that simple.

Lets again relate this discussion to our business at what point do we need to make sure that the rest of our business is not at risk, when most traders get that they start setting appropriate stop losses. I laugh when a trader tells me, ohh look I only enter at the London open, I exit at London lunch, I use a 30 pip SL, and I am making 20% a month.

Read between the lines this is someone that dosen't have the first clue what they are doing, be like me be more flexible, work out the loss part of the equation first before settling on entry and exit, capping losses is making profit in the long run.

Simon

Hi sweetaction, thank you in advance.

GJ we have a level at 156 another at 154,5 and another at 159,5 I'm doing this correctly?
If so, the 156 level will hold the price and make the return to the 159 level or goes first to 154 level?

Sorry to sound like a silly question but I'm trying to understand.

Trading Styles

I hear all the time people say are you a swing trader, scalper, intraday trader, and my answer is always the same

WHY THE F@CK MUST I BE LABELLED

Dear Trading community a professional trader is someone with charting skills, matched with appropriate money management/business acumen and patience, that's it nothing more nothing less. Let me ask you this question

WHAT DOES IT MATTER WHAT I AM

I mean what are you going to do with this information, if I say I swing trade are you going to think to yourself, well I can't do that or I am scalper so that doesn't suit me. You are putting yourself in a box by doing this and casting self doubt upon yourself, this is a business destructive behavior.

I only ever wanted to be a Pro Trader because I wanted to make my living from it, how it came about and how trades got labelled I did not care about and you shouldn't either. Remember people that ask this question aren't traders, cause they are closed minded they are people that aren't thinking outside the box and will ultimately miss the opportunities on the charts that are right in front of them because they are only seeing the world from a very narrow view.

Simon

Hello Seahorse

let em ask you this question

on the 24th Feb
we had a level created at just under 156.00
it was then touched on the 25th Feb and twice on the 29th Feb

so look at price now its not looking too bullish is it
thats because its had 4 looks already at this level

The level below this is 15515 this is the first look at how many buyers we have.

for now in my opinion 156 will not hold

This chart might help explain a level I drew in AUDUSD