I'm often asked by budding traders about my predictions for certain currency pairs and where I see it going. And when I give them my answer, it truly never seizes to amaze me the questioning 'look' I get in return.
For my answers are never "this pair will go UP" or "this pair will go DOWN". In the answers I give, I will ALWAYS say "it depends"... and this fact vexes a lot of people. How then, without a prediction of the future... can I, minibahn, make a lot of pips?
I never have and strongly suspect, never will be able to predict future price movements. And that's not to say I haven't tried to over the years. Sure, I've tried... but without much success like many others out 'there'.
So, without this ability to predict the future... how can I then possibly trade profitably? The answer is simple. I don't predict... I just trade on the basis of price action using pivot levels. The rest is simply a matter of statistics & probabilities, managing Reward:Risk and of course, money management. Let's just take a look at GU M15 on 16 July as an example (see chart below).
GU opened below the Daily PP indicating that the bias is down, whilst the MA channels also pointed down indicating that the immediate trend is also down. Which means to say, shorts are favoured. What we then see is that GU did indeed fall to test the Daily S1.
Though I was not around to take the trade, at this level... upon failure to go through the Daily S1 (and despite the negative bias and trend), the principle of buying support & selling resistances hold true. Going long just above the Daily S1 with a SL perhaps 20-30 pips below makes sense on many levels. IF you are right, and it goes up to test the Daily PP you'd stand to gain more than 100 pips whilst risking say 30 pips. That's a 3.33 R:R, which is excellent.
Even if you were wrong, the worst you can do is to lose 30 pips. And you know what else? Below Daily S1, at your SL level, it's now a good opportunity to go short (and this time with the daily bias and immediate trend on your side). Again, with a SL above the Daily PP, your target would be the Daily S2 at 1.6126 which is a good 80-odd pips away... more than enough to erase your earlier 30-pip losing trade.
So, you see... you don't need the ability to predict the future movement. All you need is the knowledge of price action (via S/R, pivot points) and sound trade management (minimizing losses on losing trades via SL, maximizing reward:risk and good trade/daily money management).
This approach is not new and I certainly did not invent it. I am a mere practitioner of this method of trading that has been used successfully over the years by many, many professional traders. So, stop trying to predict... instead try to see and also listen to what the market is trying to tell you... and just tag along. You and your trading account will do a lot better. This, at least, I can DEFINITELY say, WILL happen! :-)
Fixed Ratio Money Management
It's been a while since I last blogged about Money Management, what many consider to be the most important yet overlooked subject in trading. As one of the three (3) pillars of trading success (the other two being Mind and Method), I therefore feel that I have an obligation to share more of my thoughts on the matter.
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