TRADING STRATEGY
What are common views about how prices move and what may halt its travel and how would you challenge them?
• If price approaches support and resistance like a freight train, do you pass on a trade that needs to break through to a target? • Do prices at round numbers, like those ending in “000”, interrupt prices that are travelling, or should you ignore them? • Do prices at Fibonacci numbers really mean anything or are they just certain distances away where price is likely to statistically pause or reverse?
Do any of these common views about price bring value to your trading strategy or are you best to ignore them? Te answer to that will be influenced by the average winner versus average loser, as to how accurate your trading needs to be. Can you ride out any jiggling around at these areas and trade on?
Consider how price has approached well-regarded stopping areas. Price leaves clues and that’s the basis for technical analysis.
Assumptions Of Price- Sequencing
When developing trading systems I find it useful to use price-sequencing assumptions when considering how prices may move and how I might trade them.
Assumptions are made to simulate what most closely resembles real life or what’s most logical. It’s important to be clear that assumptions are not reality. Price can
move erratically, be raw and brutal but we need some interpretation of the way the market moves to work with when thinking about what makes sense and where to start. If we’re looking at price candles we know the open and the close, but we need to assume an order for the high and the low if we’re not drilling down to a smaller timeframe to determine it. Tis is important for assumptions around whether our stop loss or profit targets are hit first.
Close higher than open (Up candle)
Assume that the open price occurred followed by the price trading down to the low, then up to the high and finishing on the close price. That is, the low occurs before the high on an up candle. If price managed to close higher towards the latter part of the candle than the beginning then it’s logical to assume that the high occurred last.
Close lower than open (Down candle)
Assume that the open price occurred followed by the price trading up to the high, then down to the low and finishing on the close price. Tat is, the high occurs before the low on a down candle. If price managed to close lower towards the latter part of the candle than the beginning then it’s logical to assume that the low occurred last. (Image 3)
Some traders choose to use computers to back test their trading systems. In order to back test a system everything must be put into a systematic formula with assumptions. When we do trade
FX
Image 3
a back tested system it’s important to appreciate that the actual results will be different than our trade assumptions at times because price may move erratically within a candle.
The Language Of Price
I chose to talk about trading in simplistic terms that focus on what price is doing. For example I refer to “up candles” and “down candles”. We don’t need fancy words that may be in common use amongst other traders. At the end of the day it’s just you and price. How you fare will be how compatible your system is with actual future price movements.
Price Is Simplicity
Now you may be thinking, but this is all just so damn simple. Yes it is. I want to challenge you to get back to the basics. Ask yourself, “what story is price telling me that I may use to profit in subsequent price movements?” Price is simplicity, it is what will ultimately define whether we win or lose. Trade with a focus on it as your primary technical indicator and you’ll trade with clarity. Price really is the best technical indicator.
Rachel Hunter FX TRADER MAGAZINE July - September 2013 69
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