What does a “Good” FX trade look like?

Posted On 04 Nov 2014

Since returning to London after my extensive trip of the United States, I have mainly been focused on my own trading and conducting regular sessions in the Online Trading Academy live XLT room. Each XLT session lasts for about two hours in duration and involves live trading and analysis in real time market conditions. The sessions are perhaps one of my favorite things to do out of my various duties as an instructor and mentor with OTA. I enjoy the environment mainly because it gives me the ability to interact with the students as things are happening right in front of us, allowing me to answer their questions as they come along and get a good sense of what they are thinking as they prepare to take trades.

The reason I think that this is such an important dynamic within the XLT is because, as I’ve mentioned many times before in my previous articles, the mental game or the nature of one’s psychology plays such a huge part in the overall success of a trader’s system and methodology. I like my students to question an opportunity and weight consequences on the outcome of that trade before it even happens. As human beings this is a natural part of our thought process, considering that we are programed on the deepest sub-conscious level to consider both the good and the bad outcomes of any action that we take. Obviously with this in mind, the activity of trading invites us to question the outcomes and possibilities of that trading opportunity just like we would anything else. Sometimes a great setup can be right in front of us, yet we find it almost impossible to place the trade because we’re already concerned with what may or may not happen if the trade does indeed reach the entry point.

I invite you to consider this system of events within your psychology and to look at the times when you may have done the same thing yourself in your own currency trading. Let me now address a live XLT program, which I led a few weeks ago. The session like many others, presented us with a varying degree of trading opportunities throughout the two-hour duration and as we looked over and analyzed the information that the market was providing us with, we highlighted key setups, which matched our patented core strategy. Here at OTA, the patterns that we look for are based on the institutional levels which are created by unfilled orders. If there are more willing buyers than there are willing sellers at any given price, this results in demand being greater than supply, therefore prices must rise. Likewise if there are more willing sellers than willing buyers at a price level, this equates to supply now being greater than demand and so we would expect prices to fall. Institutions have the greatest amount of firepower in the markets and so it is their unfilled orders which we look for on the charts, as they have deep enough pockets to create such large and imbalances between demand and supply. The biggest market players may not be speaking to tell you what they are doing and why they are doing it but if you know what you’re looking for and you can be objective in your analysis, you can find their footprints when they leave them behind. Take a look at the below example:

The above chart represents the GBPUSD currency pair and is taken from a snapshot of a live XLT session I was holding around the open of the London session. According to my analysis the pair was beginning to show some strength after a longer term downward trend had been taking place. The chart was telling me that now was not the time to do anything, however there was a low risk, high reward buying opportunity a little lower around 1.6000, shown to me by the way prices had strongly rallied from the area where the institutions had been attempting to buy the pound before. The supply zone above current price was also a good shorting opportunity for a short-term trade but did not offer quite as much potential profit as the lower buying opportunity. Having gone through the analysis with the students in the room, we drew out lines as you can see and set up our orders.

As is quite common after finding a setup, some of the students wanted to talk about the opportunities before placing their trades. I remember clearly that one student in the room did not feel comfortable with the buying setup I had highlighted on the chart as he felt that the level was not good enough. The same student did like the upper shorting opportunity however because he felt it was a good level based on its structure. This discussion led to an interesting look at the labels that we like to put upon things and the significance and importance this then gives them.

When a student was explaining to me why he did and didn’t like the levels, I invited him to consider what his meaning of a ”good” level and a “bad” level actually was. His response was solid and he told me that he based his description of the levels upon the odds enhancers scoring system he learned in class. It turned out that his analysis was suggesting to him that the demand zone had a one point lower score than the supply zone and because of this, he did not want to take the low buying opportunity. I praised his objective analysis because this is what I want to see the new traders do. Most new traders make emotional buying and selling decisions in the marketplace but here was a student learning that rules were the most important part of building consistency in FX trading. However, after the session had finished I e-mailed him and asked in what his scores were on a grade of 1 to 10 for both levels. He responded to me saying that that the demand level came out as an 8/10 and the supply level came out as a 9/10, hence him choosing the shorting opportunity over the buying opportunity. Let me show you now how the setups worked out:

The above chart shows the outcome of both trading opportunities and we can clearly see that the supply zone and the demand zone both produced great results. While the upper supply zone only gave us a trade of around a 3:1 reward to risk ratio (which is great), the lower institutional demand area gave us a much longer-term wealth trade with a far higher reward to risk ratio in excess of 8:1. My point is this: you can have a number of setups in front of you and it is vital to have trading rules to distinguish between the opportunities you are happy to consider and those which you are not.

We do have to ensure that we have a logical cut off point that does not also remove us from a worthwhile trading setup. My suggestion would be to employ a rules-based trading plan which allows you to grade your setups, much like our students who use the OTA odds enhancers and then take trades which come out at a high enough score and discard those which fall below that. This way you will avoid the common issue of attempting to cherry-pick your trades and end up not taking each and every one that actually meets your trade plan requirements. Plan the trade then trade the plan without trying to second guess yourself and you will no doubt begin to achieve the all important consistency required for successful trading and investing in today’s global currency markets. I hope this was helpful for you.