The unbounded nature of free will when applied to Forex trading it leads to disaster. The Rules are often broken since the rules collide with emotions . The way, and only way, is to execute a clear plan irrespective of emotions . Practicing consistent execution, when faced with the enticement and Lure of potential unlimited money, will make successful traders out of every one over a period . Forex markets demand discipline and perseverance. People with strong opinions tend to lose in the speculative business. People with flexible attitude and obedience succeed . fear and greed in the right proportions always help you keep your account balance safe. The conundrum of speculative business is that Greed gets you IN and Fear keeps you OUT and vice versa. Hence we have to adapt our strategies to take advantage of those Twins.

Markets are always right. The outcome of any trade we take is either profitable or not but never right or wrong. Losses are a cost of trading , we have to treat it as an expense. For example in a real business you invest in fixed assets and other overheads and you have to spend money on various aspects of business to see if you would make a profit or not. Losses also are just that . That is the fundamental understanding you need to have. When we trade we take a risk and outcome could be profitable or not . The name of the game is to stay in the Game consistently. The only secret is your attitude towards trading.

When you want to trade Forex or for that matter do anything know 3 things

Know the Rules, Know the Stakes , Know When to Quit

Let us start with the 6 P’s Prior Proper Planning Prevents Poor Performance

We  need to know the Rules before we engage . The lay of the land of the Markets are always controlled by many forces which are beyond any person or groups control for any sustained period. The only action we can take is to put together a trading plan, execute it and change it when necessary. It is akin to setting out on Seas and changing course when we realize we are heading in the wrong direction.

There are many schools of thought, on, which analysis is best for consistent profits in markets. Some swear by Fundamental analysis and some by technical analysis. However the truth is a nothing exists by itself and we have to have a holistic approach if we have to make and keep the money we make.

The approach we propose is KISS – Keep it simple and safe. KISS is based on 4 tenets .

* Wave theory
* Market Sentiment
* Traditional technical analysis
* Timing

We shall delve into each of those in detail with examples and then put everything together to form a strategy.  Stay tuned

Elliott wave theory applied to FOREX trading

In nature every event has a characteristic ebb and flow to it. Any movement is always a result of application of energy in generic terms

The natural energy behind every happening in the universe tends to occur in waves. This can be observed from wind to tidal waves to cyclones to financial markets. A couple of brilliant human beings in our history delved into the subject of the natural phenomenon. One of them was Fibonacci and the other was R.N.Elliott .  Fibonacci gave us the golden ratio which showed us the unmistakable relationships with in nature creations and natural progressions. The golden ratio of 61.8 is evident time and again in the financial markets.  R.N.Elliott looked at various price charts of financial instruments for patterns and proposed the wave theory popularly know as Elliott Wave Theory . The price patterns time again depict fractals. A fractal is a geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole, a property called self-similarity. Some of the most beautiful rendering of fractals are shown here

The price charts always show patterns unfolding in waves and can be discerned easily by a trained eye. The are is to find a pattern which will give us an entry with minimal risk and maximum reward probability. More on that later. The EW theory was further researched and propagated by Frost & Prechter through a life time work on this subject. For those readers who wants more on the theory can buy  a classic written by Frost & Robert Prechter, Elliott Wave Theory . The summary of the theory is that waves unfold in either impulse or corrective patterns and the rules state that the impulsive waves show up as 5 waves and corrective as 3 waves. I will discuss briefly below the most important parts of the Elliott wave theory we need to have as the baseline. We are not going, nor is it essential, to go into the intricacies or end less wave counting, rules, guidelines, exceptions and history. My objective is to discuss only the essential parts as it applies to our objective of using it as a building block of our trading strategy to trade currencies profitably day in and day out.

If you notice in the picture the impulsive waves advance  both in bull and bear markets(in Forex markets the Bull and Bear markets are anyway not very meaningful since it is base currency that is relevant ). The waves are denoted from 1-5 and the corrective waves, which essentially happens to correct the previous run, are denoted as A,B,C . So, Impulsives are always 5’s and correctives are always 3’s, this forms the crux of EW.It makes sense because nothing can run in straight lines and progress is only possible when the advance is more than the correction. Impulsive waves dont always point up and corrective waves always dont point downwards.

Now as mentioned briefly above, the waves would be unfolding in impulses and correctives at multiple degrees or time frames and the following classification mentions the different degrees of waves.

Grand supercycle: multi-century

Supercycle: multi-decade (about 40-70 years)

Cycle: one year to several years (or even several decades under an Elliott Extension)

Primary: a few months to a couple of years

Intermediate: weeks to months

Minor: weeks

Minute: days

Minuette: hours

Subminuette: minutes

However for our trading purposes we typically concern ourselves from  Days(Minute) to Intraday(subminuette). Let me again remind here i wont be going in depth into the whole history and all the minutia of EW since i am here only to present strictly what we need . Please be cautious that waves do not happen in vacuum and that is where an overall awareness of the larger picture is essential. .

Like any other technical analysis, EW by itself can never be used in isolation and hence it has to be handled with a lot of caution. The 2 things i look for in EW are a) on a higher time frame is it an impulsive wave or a corrective and how does the wave look on the lower time frame b) Corresponding momentum

If we can simplify the concept of waves , the waves with the highest Risk/Reward possibilities are are waves 3,5 and C . This one simple awareness inspires us to find those waves in a pattern and fins an ideal entry point, so we could ride the wave . Our strategy always is to be in tune with the trend on the higher time frames. The typical time frames to spot larger trends are Day, 240 min and some times 120 min. Once you identify this, then zoom into a shorter time frame and find a setup to get in the direction of the larger trending wave and the ride will be smooth. The harmony would be so smooth when we catch the wave. Although i never rode the waves on the Seas as a surfer, i can surely imagine the feeling of riding those  and yes i have surely been on the Forex waves and it is is sweet.

A typical example would be 1) I spot a wave 1 ending on a 240 minute time frame. 2) I shall wait for the retracement 3) Go onto a 5 or a 15 minute time frame and look for an entry at the end of wave 2 and we take a long position in anticipation of the wave 3 ride 3) If wave 3 unfolds all is well, if  we are wrong our risk is very minimal since we will stop out just below the start of wave 1

All this needs to fit into the larger picture of the 4 tenets of our KISS strategy. The other 3 tenets need to validate this entry else we dont get in. So on to the the other 3 tenets .. Traditional technical analysis , Timing and Market sentiment . More to follow