The art of day trading forex is similar to that of any battle. Sun Tzu in “The Art of War” said, “Military tactics are like unto water; for water in its natural course runs away from high places and hastens downwards… Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions.” So is true of forex day trading and the forex market itself. By understand how the forex market moves, you will thus understand the art of forex day trading.
Similar to water, the forex market takes that path of least resistance, flowing if you will from one area of support to another area of resistance. When one force overpowers the other (buyers out number the sellers, or vise versa) the market shift direction, and flows until the same happens at a different price level. Understanding basic support and resistance (S/R) is vital to your forex day trading success or failure. By knowing where the price is likely to stop this will enable you to more proficiently place stop losses, take profits, and form entry strategies. Not knowing and understanding how the market moves is like going into battle without knowing your enemy. You see the forexmarket is like any other foe, it repeats itself in patterns over and over, and thus allows you the trader the opportunity to recognize these chart patterns, know, and then capitalize on them.
So lets examine how the market moves a little bit more in depth so that we can profit from it. Like was mentioned before, the market will flow from one area of support to another area of resistance. If the market is selling off it will not turn around and move up until the sum of buy orders is greater than the sum of people looking to sell. How can we know where this will be. In short you will never know exactly where the market is going to turn, however you can do everything in your power to make an informed decision. When looking for turning points in this market you have to ask yourself a few important questions. Where has the market turned before, and second what other importance is there to that price level. So you find an already proven area of, lets say support, now what other importance is there to that level?
1.) Is this a pivot point level or an important fib retracement level?
2.) Does this level coinside with a proven trend line?
3.) In my case I use the 60EMA and the 200EMA, so is this level at the same point as one of my moving averages?
4.) Is this S/R level at a round psychological number such as 1.5000,1.5100, 1.5200 ect….
5.) Finally when looking at other major currency pairs, are they showing they are at an important level of S/R as well?
These represent most of the “additional” points that can add to the significance of an already proven area of S/R, and the more you have coming together at one price point the higher the probability for a successful day trading setup. Literally every single price move can be summed up by the fact that the market moves from S/R over and over. It is the simplest of forex trading strategies in theory, but one of the more difficult to master. However when understood and used properly it literally personifies the art of day trading forex. After identifying an area you feel is key you must then know when to place a trade. The article entitled Forex Entry Signals for Day Trading – When to Enter will illustrate what to do after a key level has been discovered. Until next time, Happy Trading!