Price action trading
Trading pullbacks is one of the most profitable forex strategies, and many traders are obsessed with making it perfect. They use Fibonacci levels, Elliot waves or ADX to identify the best entry and exit.
They are many technical indicators designed to help you identify the strength of a trend, with ADX and EMA crossovers among the most popular. When you are trading pullbacks, the ADX indicator might tell you whether the trend is gaining momentum. Knowing the strength of a trend in forex will help you define your risk/reward ratio.
The accuracy of your strategy will depend on your skills and experience. As you know, every strategy could be profitable if a smart guy uses it. You might choose to trade pullbacks with simple price action analysis or use Fibonacci tools.
Trading pullbacks with Price Action
The forex prices move in trends or ranges. When the price is moving in a trend, you will see pullbacks where the price makes a move in the opposite direction. The pullbacks are also known as retracements or corrections of the trend.
The idea of trading pullbacks is to place your entry from a better position to catch a larger move. As you can see in our example, when the pair is moving in a downtrend, you might Sell it after the pullback to catch the slide.
To define your entry, you can place support and resistance levels or Fibonacci retracements. The retracement could be 30%, or even 60%, of the initial move and then the price to continue with the trend direction.
In our example, the price retraced about 30% before it was stopped at the resistance level, and then it dropped further. The price making a 100% recovery of the initial move could be a sign of consolidation or trend reversal.
To be a successful trader, you always need strict risk management and control of your emotions. This means you should not risk more than 5% of your account, and the risk/reward should be 1:2 or greater. You can lose 50% of your trades, but when you win, you better win big.
Why most forex traders fail
As you know, trading forex comes with a great risk. According to the forex brokers’ data, 75% of traders lose money when they trade CFDs. There are many reasons why forex traders fail, but I will point out my top three reasons.
Somehow, the forex brokers succeed in creating the illusion of easy money: ‘You can just click one button, and you will make money’. They just forgot to tell you that with the same button, you might also lose. In fact, 75% of traders lose money, which means the forex brokers make profit, not the traders.
The misconception of the high leverage is also a problem. If you plan to trade on a standard account of $100,000 with $100 deposit, you will most probably lose your money in less than 10 seconds.
90% of the forex gurus who manifest themselves on social media will tell you that fundamentals are not important because it is all priced on the charts. They claim that you can solely analyse the price action and make profit. Yes, you can see it all on the charts, but that is past data, and you need to make a decision on future data.
In my view, ignoring the fundamentals is a big mistake. Whatever your price action analyses tell you, if the ECB plans a rate cut, the Euro will most certainly drop in value.
Lack of Education
In general, most people are lazy. We prefer someone else to do our work; some guru will tell us what to do, or some robot will trade and make us profit. To know which currency will gain value, you must understand economics, but this is hard. It is much easier to follow some technical indicators on the chart.
Instead of searching for the ultimate indicator, you better search for the answers to two fundamental questions:
- Who moves the forex market?
- Why do they trade currencies?
If you can’t answer these questions, whatever indicator or robot you find online, you will always lose in the long run.
How to be a profitable trader
You must have a clear idea of what you are doing and why you are doing it. You must pull yourself out of the conspiracy world where the evil banks chase your pocket money and realise who really makes profit when you lose a trade.
For example, when EURUSD increases 60 pips, it is probably because some of the major banks bought Euros in exchange for US dollars. If you follow the forex market long enough, you might get why the banks constantly buy and sell currencies.
Understanding the fundamentals is crucial for your success. Otherwise, you will not be able to say why you take certain actions. The price action analysis won’t always be a good argument for placing a trade. You will have the feeling you are missing something.
To become a profitable trader, you must simplify your trading strategy. By drawing ducks and butterflies on the charts, you might get the most likes on TradingView, but do you actually understand the reason behind the buy and sell orders?
Trading pullbacks could be a profitable strategy, you sell the pullback in a downtrend and you buy it in an uptrend. It looks easy on a screenshot, but defining your entry when you trade live is not always so clear. Make sure to trade not only with the trend but also with the market sentiment.