Monday, January 25, 2010

Trading S&R , a Guide to my Trading Methodology

I have received some requests from people who have been interested in learning more about my manual support and resistance trading system inquiring about the specifics of the system and how it may be traded successfuly. It seems that there is a lot of confusion regarding how I choose my entries and how the system is globally traded. The objective of today's post is to draw some light into the steps I take when trading this S&R method so that other people can start trading this same way successfuly. The method uses incredibly sound trading tactics based solely on price action and I believe this is one of the simplest and most effective ways in which anyone can trade the forex markets.

To begin with, I am going to tell you the steps that I take when I go into trading my S&R trading methodology. By following these steps you'll be able to get a lot more into my thought process and realize why I take the trades that are executed on the demo account (which I comment and signal on twitter). You will see that the steps require a great deal of discretion and that practice is the most important thing to trade my S&R method in a successful manner. One thing which I believe is great about this system is that as one gets experience with it, market behavior starts to show in a much clearer fashion. So what are the steps I take when using this method (my day trading S&R tactic) ?

1. Take an instrument you want to trade

2. Open up a one hour chart and other charts if you want to

3. Based on this information answer the question : Where is the trend going ? It is very important for you to be able to answer this question clearly. The system depends greatly on your ability to know where the market is globally heading. That is, you should be able to follow the trend. If the picture is not clear to you, then do NOT trade. As a wise trader once said "It is always better to lose opportunities than capital". Also do not overanalyze the situation, look at the chart. During the last 20 hours has price gone up ? or down ? If you can clearly say where the trend is likely headed then go to 4.

4. Now that you know where price is going you should locate support and resistance levels. The trick here is that you are going to wait for price to reach a resistance after a new low (in downtrends) or a support after a new high (in uptrends) and when price tests that level you are going to get into the trade in the direction of the trend. You should set your SL at a break of the resistance/support level you entered and the TP at the low or high price reached (which is a support or resistance level).

5. Before placing the trade make sure that you only place it if you can achieve a risk to reward ratio of at least 1:2, most preferably 1:3 and make sure that you trade a lot size such that you risk only 2% of your trading capital. Using the TradingBuddy EA mentioned on a post a few days ago should greatly help you with the accurate money management of trades.

As you see, the system is based on some very simple principles. You have to follow the trend, you have to enter on favorable spots (buy low, sell high) and you should have adequate money management with a very favorable risk to reward ratio. This tactic makes sure that it will be extremely hard for you to blow an account. You need to lose 50 consecutive trades to wipe an account and each trade you win buys you at least 3 loses. Trading this method will make you better at judging price action and will make market action much clearer to your eyes. In a few months you will be great at judging overall price direction and you will feel comfortable trading without any indicators.

However you should understand that this is no holy grail. Often you will not read market direction appropiately or price will reach your SL before continuing in the direction of the trend. This is normal. This method intends to allow you to have a fair share of loses, that is, you can lose 60% of the time and still come out with a profit. The key is to follow the method and learn from your mistakes. A trading journal in which each trade is recorded is VITAL to the success of anyone who wants to become a good manual trader.

If you would like to learn more about money management and the use of automated trading systems to trade the forex market successfully please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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