My Seven Keys to Trading

I am doing this currency trading series for Interbank FX, but I thought that what I was sharing about what I have learned would be great to post at Baby Pips so I will also share each installment here.

I train in MMA (mixed martial arts) twice a week with one of my best friends. It’s a physical chess match as compared to the electronic chess match that is trading. I was speaking to my jiu jitsu sensei (teacher) after class today and the subject of what I did for a living came up. I explained that I was a currency trader and expected him to give me a blank stare. Instead, he began talking about pairs and pips and I realized just how far forex has reached into the mainstream. He began asking about the “how” of trading. Realizing that obviously there was no way I was going to teach him all he needed to know about what it was to be a trader and how to do it, I broke down what I did into seven categories as they came to me. I am going to share those with you now and over the course of seven updates, go into detail about each.

I started off talking about respecting fundamentals, which probably sounds funny coming from a self-proclaimed Chartologist. But my mother always taught me, “do the thing you are most likely not to do and do it first”. For me, that’s news, data, and economic events. Since I am so into the charts and price action, it’s easy for me to neglect the economic scene so my first task each day is the economic calendar and a scan of the economic landscape. I follow fundamental traders and experts in the field and this gives me the fundamental information and sentiment I need.

After that, I discussed trading times. In other words, WHEN you choose to trade is – in my opinion as important as WHAT you are trading. Time reflects financial center participation. Certain times of the day have more volatility than others. The example I shared with him – knowing that he was likely to sit down in the evening and look at the Asian session – was the difference between 8:00am and Noon (EST) and 8:00pm and Midnight; two four-hour chunks of time, just twelve hours apart but (literally) an ocean apart. If anyone were to sit down to look at the earlier half of the trading day and then assume that the action that occurred during the European/U.K./U.S. session would be similar to the price action for the Asian session, they would be surprised by the difference. Knowing the rhythm of the trading day in terms of volatility and pip movement can be – in part – gleaned from a look at the economic calendar, but there is a certain constant to price movement in terms of it normal rhythm. In martial arts, we never expect an anatomical response even though we do have a certain assumption that when we kick someone they will move back. One move follows the next based upon certain likelihoods– but one person can react wildly different from another, as can the market day to day. There are certain likelihoods we can consider and watch for. I’ll have a much more in-depth discussion of pip movement later in this series.

I next moved into my topics of choice these days and that’s Directional Bias. I explained that the most well-followed chart in any market is typically the daily time frame and because of this the market trend (accumulation, distribution, mark up, mark down) of the daily must be respected. Furthermore, it’s importance that can help determine which time frame(s) to consider depending upon the individual intraday market trend of each time frame that may be set up for an eventual entry.

I sensed he was growing a little weary. When someone gets me chatting about the markets, good luck shutting me up…

I told him after next class I would explain market trends and clarity, levels that are “in play”, proximity and volatility, and finally harmony. And that’s exactly what we’ll do in the next update as well.