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Trading success over the long term has a 95% failure rate. It’s a tough and painful journey that I am just beginning to discover the realities of. From my own experience, what I see on forums and how I see trading products being marketed I see the main barriers to trading success as being:

• Gambling
• Impatience
• Get rich quick expectations
• Laziness
• Overtrading
• Undercapitalisation
• Unrealistic goals

I intend to cover each of these problems individually in upcoming posts. The long and short of it is that the 95% failure rate is about right. The large majority of that figure is made up of people who should not be trading in the first place.

Access to markets over the internet has just provided another vehicle for get rich quick people to take your money if you believe that you can buy a magic system to make easy money with no effort or education.

Forex is not a scam – but lazy people who get taken in by get rich quick will always be there and will always account for the huge failure rate numbers in any worthwhile venture that can bring financial freedom. Be it trading, online marketing, network marketing, ‘no money down’ real estate or anything else.

Trading is a long, hard and painful slog which requires a substantial amount of starting capital and a couple of years to learn. Approach it any other way and you will crash and burn.That’s probably 90% of your 95% failures right there.

If you’re prepared to take a couple of years learning through experience while siphoning away a chunk of your income to fund a properly capitalised account then you stand a decent chance of joining the 5% who enjoy trading success.

So on that note I’ll cover some of the barriers that people doing it properly face and how I am learning to overcome them. Stay tuned.

Not being one to pick out tops and bottoms and trend reversals I can’t help feeling that the euro bear market could at least be stalling or going into a consolidation range or possibly even turning around.

These last few weeks EURUSD has been strengthening despite negative US data and all the talk of double dip. Perhaps all the fears of Eurozone debt contagion and falling apart were a massive over reaction. It certainly felt like it at the time, but something I’ve noticed in my short time watching the markets is that when a spark of fear ignites it can cause mass waves of hysterical panic not unlike those scenes from 1950s sci-fi/horror movies.

Add to that the short selling speculators (guilty as charged!) jumping in to ride the waves and you’ve got some substantially big moves down. Anyway I won’t try and understand the psychology behind the herds of lemmings scrambling over each other to run over a cliff. My approach is to just see where the big money is going and ride its coattails. And on that note let’s look at some price action that looks to me like the EURO might be bouncing back or at least gaining a bit of stability.

The Monthly Chart

The monthly chart for EUR/USD shows a PIN bar, not the best or biggest size but it’s already ‘done some of its work’ by reaching levels of the lows of the early 2009 candles. So is it going to stall and reverse here?

Weekly charts

Looking at the weekly charts it certainly seems to be on the way up and compared to recent upward attempts this one has bigger, greener candles. Last week’s bullish engulfing candle looks quite strong – if it was at a swing low point it would be a nice buying signal for a swing trade (few days to a couple of weeks). Also notice how it has closed well above the pivot/psychological level of 1.2500. Also that diagonal trendline I’ve drawn is the neckline for a reverse head and shoulders formation:

The Daily Chart

The daily chart shows the reverse head and shoulders formation more clearly, as you can see the neckline has already been broken. If the pattern plays out then the minimum upside objective should be around 700 pips from the break of the neckline at around 1.2380 – which is well above 1.3000

Would be nice if it plays out, however as I recently saw with USD/CAD these patterns don’t always work out.

The Big Picture

As always it’s important to zoom out and look at the big picture. Looking at the weekly chart for EURUSD going back to 1994 you can get an idea of the primary trend direction. As you can see since early 2008 this pair has been making lower highs and lower lows. Since there is no strong indication of the primary trend change or consolidation we should assume that the prevailing trend is in place until proven otherwise.

So is this a turnaround we’re seeing here or a bump in the road? Is this a short term up trend which is just part of the peak and trough cycles of the primary and intermediate trend? Price rarely moves in a straight line up or down so does a move up to 1.3000+ then a corrective bounce look at all likely?

I’m long with a 2% risk split into 3 positions, targets are:

• 1.2700 – take 1/3 profits and move the stop for the other 2 positions to break even for a risk free trade
• 1.2900
• trail the price by 200 pips if it breaks 1.3000

Lets see what happens….

USDCAD ended up not going to parity and beyond as I’d hoped in my previous post. So the 2 open positions I had open were stopped out at breakeven. I banked 75 pips at the first trouble area and profit target so it didn’t work out as expected but trade management and tiered profit targets still made it a winning trade.

Maybe it will hit parity again – let’s wait for some price action confirmation on that one.

last week I decided to put on a short position on USD/CAD. The trade idea is that I believe that it is now resuming it’s downward trend to parity and beyond.

The trade signal I took was off of the weekly chart making this a fairly long term trade which I split into 3 positions with 3 profit targets. The first target has been hit and the stop loss is now at break even making this a risk free trade with some profits already banked. here is the trade idea with charts.

The week ending 11 June 2010 showed a bearish outside (engulfing) bar which looked to me like a retracement on a counter move in a strong downward trend. This bar is shown with an arrow. I placed my entry at the red dotted line which was below the low of the bar and also 25 pips below the big round number 1.0300. I entered at 1.0275:

On the daily chart there is a head & shoulders continuation pattern (if it was a reversal pattern it would be a reverse head and shoulders) which added weight to the idea that the CAD would continue to strengthen against the USD over the medium to long term. From what I can see here this is a resumption of the downtrend that brought us to parity a few weeks ago.

I have indicated the head and shoulders with red arrows, the neckline is drawn with a thick dark blue line. The light blue shaded area shows the distance between the top of the head and the neckline which is a distance and ultimate downside objective of about 565 pips. The neckline was broken at around 1.0400 so 565 pips south of that lies at around 0.9835.

And finally looking at the 4H chart I drew a descending trendline beginning at just prior to the head in the head & shoulders formation going all the way down to where price is now. Although it has been breached a few times it seems that price is respecting it more often than not:

So – based on these three timeframes, chart patterns, trend lines and price action signals I put on a short position with the following profit targets:

Entry@ 1.0275

• Target 1 – 1.0200 – closed for profit of 75 pips
• Target 2 – 1.0000
• Target 3 – trail the price by 200 pips when it hits parity.

Stop loss was initially at 1.0425 but moved to breakeven (my entry price) when the first target was hit. This is a risk free trade with some profits already taken.

Even with a winning system you can end up in the losing 95% of traders if you haven’t got the psychology aspect down. However it has also been argued that some people place too much emphasis on the pycholological aspect of trading and look to fix this area if their system stops performing.

For many people (myself included) developing a trading psychology to win in the long run is the result of painful losses that should never have occurred if some simple rules had been followed and not deviated from.

Trading Psychology = Rules and the ability to STICK TO THEM

I have found that the large majority of my losing trades have been the result of not following a strict set of rules, overtrading and gambling. If we could all trade like machines and stick to the rules then life would be a lot easier, less stressful and more profitable.

Unfortunately for myself and a lot of new traders this lesson is almost always learnt the hard way. Patience, discipline and sticking to the rules for every trade with no exceptions is very hard to learn on a demo account. It’s also something you can read and have drummed into you over and over again but still have to learn the hard way.

How do you learn to stick to your rules?

Assuming you have a set of rules, a strict trade criteria and preferably a checklist then sticking to them is something you can work on at the beginning of each trading day. The way I do this is I have 3 print offs stuck to my screens and around my desk and I read them every morning before I start trading. They are:

• My trading beliefs
• My trading rules
• My trading checklist

After reading the book “Market Wizards” by Jack Schwager (a must read for anyone serious about trading) I formed a set of trading beliefs which are the core of my whole approach. This is the first print off that I read in the morning before I even open my charting software and look at the markets. These beliefs are:

• Money is NOT important
• It is OK to lose in the market
• Trading IS a game
• I’ve already won this game in the long run
• Mental rehearsal is important for success
• All trades that follow the rules are winners regardless of the outcome
• All trades that do not follow the rules are losers regardless of the outcome
• I read my trading rules at the beginning of every trading day
• I follow my checklist before puttong on ANY trade

Over time the sheer repetition of reading these trading beliefs at the beginning of every day will engrave them into my subconcious to the point where putting on a trade without following my rules and checklist will feel so wrong that I simply won’t do it.

Do you have a set of trading rules, a solid trading plan, a set of trading beliefs and a checklist? If not I suggest you get some.

Over the last couple of weeks my trading has turned a real corner. I’ve had an excellent win ratio and even made 25% of my account in the last week.

I don’t expect that to happen every week, but I can see consistent long term profitability and am very optimistic about the future of my trading and financial situation. So what is the penny that dropped and made this happen?

Location

It’s so simple a concept to grasp but so hard to put into practice until you’ve lost enough trades over and over again (on a demo account!) for its importance to sink in. Let’s look at some recent price action formations on the 4 hour spot gold chart from last week. I can see 4 very nice outside (engulfing) bars and a not so nice looking PIN bar. Of those 5 entry signals only 2 of them worked out, one of them being the not so nice PIN…

Is this a failure for price action as a means of entering and exiting trades?

Or is it because the location of the signals made the bad ones untradable? Let’s look at the same chart now but draw some lines where price has recently stalled and reversed:

Now that we’ve split recent price movement into pivot zones we can make decisions on whether to take trades or not and if so where to set stops and take profits either partial or total.

That may be a great looking outside bar but is it heading right into a strong support/resistance area where price has stalled and reversed a lot recently? Here’s the above chart again with the price action signals and the “first trouble areas”:

And here’s the chart again this time with the support and resistance pivot lines & some Fibs which you’ll see line up nicely to produce confluence. Does what happened with price make a bit more sense now?

Do you want to trade into one of those?

How about waiting for it to break through one of those into the next pivot zone – do you think that if it does that it might at least test the next support/resistance line? What if you set an entry order at a break into a pivot zone and a profit target at the next support/resistance/fib level? (I’ve been doing exactly that all week )

Learning how to watch price behave predictably around pivot zones and which trades to take, which trades not to take has really turned things around for me.

Knowing exactly where to enter, exit and set stops is something anyone who wants to consistently and regularly extract money from the markets should learn.

Having a look at the cable on the monthly, weekly and daily charts could we be in for a trend change?

The monthly chart shows a pretty strong pin bar although it’s not A+ because the open and close are not within the open and close of the previous candle. Still that said it’s got a very long wick, it’s reacted to a key support level and it’s on the monthly chart…

It’s also bounced off the key support level at 1.5000 and looks to be testing a confluence of another major resistance level at 1.5300 which is in confluence with a fib ret.

Going in a bit to the weekly chart there is no clear price action candle although the change in direction is quite evident:

Could it be time to look at entering a long position?

Not quite yet I don’t think…

Looking at the daily chart you can see that price is testing the 1.5300 level which forms the neckline of a reverse head & shoulders formation. So if this plays out we should be looking first for a temporary downward move to around the 1.5000 area, then a bounce back up to 1.5300:

which if breached successfully – could well be the start of a trend reversal…

If  only forex was that predictable – this is the cable after all. I’ll we watching for a short down to 1.5000 followed by a long back up to 1.5300 then a breach of 1.5300 up to who knows where.

As always price action confirmation will be the trigger of any such trades.

Nothing is certain in any market, no “holy grail” indicator, wave theory or guru can tell what direction price will actually go in the future.

So those who equate trading with gambling do have a point in that there is no such thing as 100% certainty that a trade will go in your favour. However it is possible to stack up the odds so that your trade ideas have a very high probablitilty of being right. This is far from gambling – especially when you become ultra picky with your trades and only take the very best looking set ups.

Here are a few ways I’m honing my trading style to filter out nothing but the very best trades with the highest probability of success:

1. The Trend

Trade in the same direction as the general trend. Is the price making higher highs and higher lows? If yes then it’s trending up. Is it also trending up on the higher timeframes? Look at this daily chart of AUD/CHF – would you take a short trade if all your indicators lined up to tell you to?

Let’s zoom out a bit to get a look at the bigger picture:

Are you gonna short that?

How about if we take a look at the weekly timeframe to get a look at the even bigger picture:

Nothing but long trades for me on this pair. I’d safely assume that a long trade will have more success than a short trade on this pair – wouldn’t you agree?

The trend is your friend

2. Support/Resistance, Fibs, Big Round Numbers & Confluence

Since I freed myself of all indicators I’ve started paying close attention to key price levels at recurring support/resistance, Fibonacci retracements and big round psychological numbers. Knowing where these are and having them plotted on your charts can prevent you trading into them and getting whipsawed out. Also it can help you set stop losses and profit targets that have a high probability of being hit (or not if it’s your stop!).

So lets’ go back to our friend AUD/CHF on the daily chart (I don’t trade lower than the daily timeframe) and look at what levels there are around where the price is at the moment. As you can see below I plotted a support/resistance line at the psychological big round number 0.9700 as the price has bounced off it several times recently:

I have just drawn new Fib levels from around the most recent low at around 4th Feb this year to the high on 10 March:

So with support/resistance lines and fibs I now have my ‘pivot zones’ to watch for and watch out for if I see a price action trade signal that’s near one of them. I also know where to set stops and profit targets which have high probabilities of success.

3. Wait for confirmation (price action)

Sticking with this AUD/CHF example we can clearly see that there is no trade to be had at the moment on the daily time frame. It’s moving down against the general trend, just above the 38.2 fib level. It may well break down to the 50.0 fib – and in fact that’s exactly what I want it to do but I will not take a short trade in it doing that.

What I’m looking for is for price to come down and hit the confluence of the 50.0 fib + the lower trendline (the sloping blue line). If it does that I’ll then wait for confirmation in the form of price action. This could be a hanging man, a bullish engulfing candle, a bullish inside bar (or 2 or 3) at around 0.9525.

Until then it might take 2 weeks to get there and look like this:

Or it might do something completely different – nobody knows!

All I know is I would like to see a bounce off the lower trend line in confluence with the 50.0 fib level with a clear price action signal for a long trade up to the 38.2 as the first profit target and 0.9700 as the second:

But that brings me on to the next and most difficult point of high probability trading that I’m struggling so hard to master:

4. Patience

How many times have I heard the following:

• “See what’s on the charts not what you want to see”
• “Wait for confirmation – never jump in early”
• “Wait for the set ups to come to you”
• “Having no position is a position in itself”

And I’m still overtrading and taking less than perfect trades.. This will come with time. I’m going to imagine that I’m trading $100/pip and just hang out waiting for those really nice looking trades. I’m currently changing from having 2-3 trades open at any one time to only taking 5-7 a month. That’s a big change – but a good one none the less!

5. Trade Management

One thing I’ve been guilty of a lot recently is not managing my trades effectively. In line with imagining I’m trading $100/pip the golden rule above all others is the preservation of capital. Key points being:

• Always enter a trade looking at how much you stand to lose not gain
• Never let a winner turn into a loser
• Getting stopped out at breakeven or for just a few pips profit is nothing to be annoyed about

So when I’m in a trade I’m looking to move my stop to breakeven and create a risk free trade as soon as I can – but without getting stopped out early. Also banking some early profits with part of the position. There is no fixed pip amount rule here as it’s entirely dependant on the size of the stop and the pivot zone, but at roughly 1/3 profit I look to move stops to breakeven.

At this stage of my career I’m woking on the ‘cut and minimise your losses’ part of trading. When that’s down and I’ll turn my attention to ‘letting your winners run’.

After switching from indicator based mechanical systems to pure price action trading I’m hoping this one isn’t just a fluke but actually the start of something very very good indeed.

For now I have stripped my charts clean of all indicators and am trading purely price action around price pivot zones, those pivots being made up of major support/resistance levels, big round numbers and Fibonacci retracement/extension levels. The more of these levels that come together in confluence the better.

The idea is to notice when price is around major pivot levels and wait for price action to trigger an entry. In this case EUR/JPY was trading just below a fib level. A bullish engulfing candle just below the fib signalled a possible long trade.

So rather than just jumping in I placed a buy stop entry order about 10 pips above the fib at 123.20. The next day the order was filled and the price started movnig up to my target profit which was the next major resistance level – which is also the neckline of the reverse head and shoulders formation at 124.92. I set my stop initially below the low of the bullish engulfing bar:

At about 50 pips in profit I moved the stop to breakeven for a risk free trade. Since then the price has now moved about 84 pips in my favour so I’ve moved the stop to  123.60 locking in 40 pips profit. If I had a larger account I’d have put on 2 positions and taken 1/2 profits at 124.00 (80 pips) and let the other half run to 124.92 (if it does)

Still going for 124.92 – will update this post in the next few days.

UPDATE

Well my broker let my demo account expire which I agreed with them wouldn’t happen as I have a live account with them and I need a demo account to test on over periods of months… So I lost this trade.

However the target profit of 124.92 was hit on Monday 29th and the price has since continued up past 127.00 and looks to be climbing higher:

As you can see I’m posting screenshots from Dealbook360 instead of Metatrader now.

As previously mentioned, if I had a bigger account I’d have taken partial profits at 125.00 and stayed in for the rest of the move with another position. But that’s a more advanced strategy I’ll look at when I’ve become consistent in making profitable trades within just one pivot point zone.  I’m happy with a 172 pip ’scalp’ for the mean time.

What’s that you say?

Growing your trading business by not placing any trades?

One of the most important lessons I’ve learnt recently is to stay out of the market when there aren’t any signals to enter. Patience really is golden in any type of trading and the ability to wait on the sidelines for the trades to come to you is essential if you’re going to make good money from this over the long term.

But it’s really hard sometimes, especially for new traders like me. You can see all that action happening on all the pairs and you don’t have any positions open. Nobody likes leaving pips on the table, but that’s a part of making it in the long run.

I’ve found myself looking at the charts for all the pairs over and over and over again searching for that signal that I might have missed. Just so I can get in on something at least and know that my money is working for (or against) me. It’s never ended up well.

• See what’s on the chart and not what you want to see
• The set ups will come to you and there’s no way you can try and will them or force them
• Having no position is a position – you’re protecting your capital and profits until a setup that fits your system does show up.

There’s nothing worse than having a run of good trades, some very nice profits – then burning it all away by over trading. It’s almost as bad as losing capital for the same reason.

I might implement  some profit locking rules whereby if I hit a certain amount of profit in a month/week I take out that profit from the account or stop trading. Something like:

If you reach 20% profit in a week stop trading for that week

If you reach 75% profit trading for a month take the rest of the month off

Professional traders not only know when and how to trade profitably – then know when to not trade to stay profitable.