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Playing the Trading Probabilities Game

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In forex trading, as far as predicting price goes, nothing is a certainty and anyone claiming otherwise has never traded the markets or is selling a pot of gold at the end of a rainbow.

Predicting price direction is based on probabilities. Either the price has a higher probability of going in your favor or it doesn’t.

Identifying the areas on a chart that offer the highest probability for a successful trade is the skill.

From a technical perspective, start with what is happening NOW, What is the current trading environment?

  1. Trending

  2. Ranging

  3. Reversing

Look at the higher time frames first to establish the trading environment on daily, monthly and weekly charts.

Following this and based on your trading style (intraday, swing or position) move to lower timeframes to identify enries (intraday (30 min/hourly), swing (hourly/4 hourly, daily), position (daily, weekly).

The three main trading approaches are…

A. Trend Trading

Entries for trend trades can be Breakouts (up or down at key price levels) or price Pull Backs in the direction of the overall trend.

Targeting a shorter term trend (a swing) in the direction of the overall trend is a common approach.

A typical trend trader tends to look for much bigger moves over day’s, weeks or months. (Unfortunately these moves only happen about 20% of the time but when they do it can mean big rewards if you can deal with with the false breakouts and the pullbacks that turn into reversals.

B, Mean Reversion Trading 

Identifying the average price of an instrument and buying or selling when price moves or indicates its moving back towards this average.

c. Reversal Trading (Counter Trend)

Picking the end of a trend (selling a top (on an uptrend) or buying a bottom (on a down trend).

Many professionals adapt their approach to the constant changing market environment that they are faced with. Although choosing one approach, mastering this and only waiting for those conditions to present themselves is probably best if your starting out, personally i adapt.

Making sense of price movements is key. Learning how price reacts to support/resistance zones , round numbers, fibonacci levels, trend lines, moving averages and candlestick formations is a start. 

Add to this an understanding of the impact of economic releases, correlations, individual currency analysis and market sentiment. Alternatively you could  ignore these factors and focus purely on technical analysis.

There is no right or wrong approach or specific tools that will guarantee consistent profits.

Personally I have had more success when I started thinking beyond pure technical analysis. 

Trading is a game of probabilities and winning more than you lose is the name of that game.

So give yourself the best shot by mastering an approach or a number of approaches that work for you and identify the right tools and knowledge to give yourself the best opportunity.

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