Who ever said Forex trading has to be complicated and difficult to understand? Probably all those experts you listen to on webinars that offer to train you their successful trading system; isn’t that interesting? I’m not saying that trading is easy either, but it’s about making it simple.
When I first started trading, I was overwhelmed by the number of indicators offered by default on the Forex trading platforms, and they can be confusing. Here’s the thing, you don’t need all of them. Instead, just find the ones that work best together, and incorporate those into your trading strategy. In this trading system, you will just need two indicators, probably 3, and understand 2 concepts which have already been covered in the Forex basics section of the website.
What you need
First, the indicators:
Trader’s Dynamic Index (TDI)
This indicator combines the relative strength index (RSI), moving averages and volatility bands to provide a picture of market conditions – whether the markets are overbought or oversold, as well as the position of price in relation to support and resistance levels. As you may know, moving averages tend to create support and resistance levels, and by combining them with the RSI for overbought/oversold conditions, you get all this information in one indicator. If you’re worried your real-time Forex charts are going to be messy, don’t worry because it’s been simplified to only 2 lines. We’ll look at how to use them later.
Synergy APB indicator
This one only paints over the candlesticks into red and blue to make it easier to determine whether you should be looking to buy or sell. You can do without this one, but normal candlesticks are harder to read because of the wicks at the top and bottom. This indicator helps you to narrow your focus, which is a good thing.
Stochastic indicator – optional, used for confirmation
The stochastic indicator is installed by default on every MT4 platform, and the other 2 can be downloaded in the link at the bottom of the page. It is added for confirmation of market conditions.
Then the concepts applied:
Find out more about this in the link: Pivot points strategy
These tell you whether the price has reached a support/resistance level so that you can determine whether it will bounce off these levels or break through them.
Also described in the post 5 secrets of Divergence in Forex
It informs you whether there’s any more buying or selling power in the markets so that you can go with the stronger side.
With all the indicators added to your Forex chart, you should get something like this:
How to place trades using this system
With all the indicators in place, you can know whether the markets are in a great position to enter a trade very easily, unless you’re still not familiar with divergence and pivot points.
When to enter a trade
When using this system, the first thing I look for is divergence, as this is one of the most powerful aspects to Forex trading. To illustrate this, I’ll show you a trade I made yesterday using this system to short the EUR/USD:
You can see how the most recent peak had formed a higher high from the previous peak, yet the stochastic indicator had formed a lower high peak. This is a classic bearish divergence that shows buying power is almost exhausted and it may be an opportunity to sell. That’s the first step.
Next, you need to know whether the markets are overbought, and you can confirm this in a number of ways. The same stochastic indicator could be used, but we need confirmation, which can be got from the resistance level formed around the 1.076 level. Furthermore, you can see the exhaustive candlestick pattern forming near the resistance level. Now we have confirmation to sell.
Finally, when do you enter the trade? According to the TMS system, we should wait for a signal from the TDI and Synergy TPB indicators, and it comes in the next candle. The red line of the TDI indicator crosses the green one upwards, which is a strong sell signal. This brings the total number of signals to 3: bearish divergence, stochastic overbought and TDI cross. At this point, it is already safe to enter the short position, and that’s what I did.
However, a more conservative trader should wait until the Synergy TPB indicator turns the colour of the candlesticks red. The conservative trader would have been a lot safer and would also make a profit from the trade, but probably not as much as an aggressive trader like me would have. How you choose to enter trade will depend on your trading strategy as everyone will have a different risk appetite. (Learn how to choose a trading strategy)
When to exit the trade
When you leave the trade is just as important as when you enter the trade, and this is where you really need to rein in your emotions. As you can see from the chart above, the euro took a beating and if you had a short position you would already be counting your money. The TMS trading system, though, requires that you hold on until several things line up.
First, you want to keep an eye on your support and resistance levels. In our case above, that would be around the 1.068 mark which is going to be a support level. I myself have the take profit set at that level, backed by the 200-day SMA. Second, keep looking at the stochastic indicator for signs of oversold conditions. Finally wait for the red TDI indicator to cross below the green one and the candles turn blue due to the Synergy TPB indicator.
If all goes well, the prices will drop to the anticipated level and all signals will line up, but things aren’t always perfect. Which is why you should always consider risk-management on Forex. The best ways to go about this would be to either set a trailing stop, or partially close your trade. Confirm whether your broker allows the latter option, and it is one factor to consider when choosing a Forex broker. This way, you get to lock in the current profits you already have while being positioned for more potential gains.
So, there it is, a simple way to trade the Forex market without having to clog up your Forex trading platforms. You can also use this system in most timeframes, all timeframes in fact, except the M1, M5 and M15 charts because they can be very choppy and unpredictable.