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The forex market can be unwieldy at times, but when we strip from it all of our indicators and assumptions, it is pretty basic. I don't want to over-simplify things, but you need to train your eye to find higher highs and lower lows in the markets. Once you do that, you have the basic understanding you need to trade successfully!
The forex never rises or falls over a long period of time in a straight line. Instead, it kind of walks up or down. In other words, it takes steps. In a downtrend, it might fall for a little while, come back up some, and then fall again. This is a simple 1-2-3 pattern that can result in very good trades.
As the market rises a little and then continues its downward spiral, the highest area that it retraced to becomes natural resistance. There is a reason the market turned around at that price, and chances are that when the market reaches that price again, it may turn around again.
So if you see a currency pair taking 1-2-3 steps down, you could trade this way - short the market when it breaks the low of the first step, and use the high of the second step as your stop loss. By trading this way, you aren't forcing your trade on the market. You are simply using the information the currency pair gave you.
And that is the element of trading that most of us miss. It is not our job to tell the market which direction to go. It is not really out job to determine where the market is going next. We are to simply analyze the clues the forex gives us and trade accordingly.
If the forex isn't giving any clues that we understand, then we shouldn't be trading at that time. Wait until you can interpret the market better and then enter your trade.
Many traders have said that they would rather miss a good trade than be in a bad one. Certainly you can't take this to the extreme or you would never trade. But it does give some insight on the mentality that profitable forex traders have.
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Source by Christopher M. Hall
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