When a Forex trader decides on an online currency trading system there are 4 things they should consider. Those 4 things are Context, Trend, Signal and Momentum. Regardless of the trading system they choose all 4 of those things need to be taken into account otherwise, the trader will fail at trading Forex.
All of these are discussed in my eBook, the 26 Reasons Why People Fail Trading Forex. But here is the short version of why these are important.
Context
Context is important because a retail trader does not have the benefit of knowing when they come to work in the morning who and what companies, governments or hedge funds might be buying or selling in the market. If they did, there job would be much easier. Context is a zoomed out perspective on the currency pair you are trading in at least the timeframe you are taking your signals, if not higher. If for example, you are trading the hourly chart then zooming out on the hourly so that you have a forest-perspective rather than a tree-perspective helps you see overall what the market is doing relative to the timeframe you are trading. The Daily timeframe may be down for the year but the hourly may be up and as that is the more relevant timeframe for you to trade you will be looking to trade long. Understanding context, leads to trend.
This chart is zoomed out to show the current hourly Context for the EURUSD
Trend
The trend is like the force in Star Wars. Remember the phrase, “Let the force be with you?” I am taking some liberty with that saying but the trend is the direction that the market is flowing and it is easier to trade with that trend, flow or “force” then against it. So, from our zoomed out perspective we make a determination based on what “has” happened which direction the trend is going for the current timeframe that we are trading. Notice I said “current” and pay attention to the word timeframe. If you are scalping your current situation is much more volatile and you must add flexibility to your trading style because the Forex market, on shorter timeframes can and will turn on a dime and once they have turned will turn back. Trend then leads to signal.
Signal
Once you have a handle on context and trend you will be looking for a clear and precise signal that is objective. In short, it will be based on mathematics. To say it another way, you should be able to program your signal so that it is not arbitrary or subjective. There are many well-known trading signals which are in fact, subjective. Top traders use objective signals that are in the direction of the trend. I personally use the RSI to generate these signals. Not overbought or oversold signals however or divergences but reversals as defined by Andrew Cardwell and as you will find on this website and in my eBook, RSI Fundamentals: Beginning to Advanced. Reversals are statistically the best signal to trade on RSI when trading with the trend. Signal leads to momentum.
Momentum
Do you always trade when you have a signal? No. Not all signals are combined with momentum. If you do not have momentum in the market when you trade, in particular when you are trading hourly charts and under and if you are a day-trader meaning you do not like to leave trades on overnight, then you need momentum. The closer your trade occurs to momentum the better chance you have of succeeding in the trade and with little or no drawdown. One of the top traders in the foreign currency world said that his style of trading was to find momentum in the market and place a tight stop.
If you wish to trade successfully in Forex you will need to include these 4 elements in your online currency trading system. I can assure you if you do you will be highly successful.