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How You Can Learn to Trade Any Market in Any Conditions »
Are There Any Single Trading Systems and Methods for All Markets?
The main problem with most trading systems is that they tend to stop working and can only be applied to certain financial instruments under certain conditions.
Go to any trading forum and people will be posting up their new systems just to be asked questions like:
What pairs does this work on?
What timeframe does this work on?
How long has it worked for?
Wouldn’t it be great if there was a method that worked on all markets in any conditions on any timeframe?
Well the good news is that there are – the bad news is that they take longer to learn and are discretionary methods as opposed to systemised methods. Although there is one school of trading that uses systems that work in almost all markets which I’ll cover in another post.
What the heck is discretionary trading?
Great question! Discretionary trading is where you choose to enter and exit a trade based on the quality of the set up. The signals are taken from price behaviour or as it’s commonly referred to as “price action”.
Price action is considered by many (myself included) to be the most effective, profitable and satisfying of all trading methods. Instead of using chart indicators to show you when to buy and sell you look at what the actual candles/bars are doing and look for common reversal or continuation bars and patterns to form. Shall we look at some examples?
Single bar/candle price action signals
Just to illustrate the universal aspect of discretionary price action trading I’ll take examples from a range of forex pairs, commodities, stocks and indexes. Let’s start with a very popular and reliable reversal bar/candle – the pin bar:
This PIN bar on the EUR/USD 1 day chart (each bar is 24 hours) is a reversal signal. You can see that price has gone up, reversed on itself and then closed lower than it started. This signalled a move from around the 1.4000 mark down to through the 1.3800 area – a move of over 200 pips.
Notice that by taking this bar as a signal you catch the move right from the beginning. An indicator based signal would not have signalled this move until after it started happening and would have triggered a few bars late. A lot of indicator based signals do this and miss entire moves just to signal an entry after the move has happened.
OK next up we have the engulfing or ‘outside’ bar. This candle (I’ll use a candle chart in this example) engulfs the previous candle because it’s range (the high and the low) is outside that of the candle before it. This means that there was a lot of activity in both directions during this session and on this occasion the bears won. That makes this a bearish engulfing candle or a bearish outside bar:
This one in the first circle is a bearish engulfing candle on the spot Gold (XAU/USD) 1 day chart. See the move that came after it? Also notice the 2 pin bars in the circles afterward and what happened immediately after them.
In japanese candlestick terms the first pin bar is known as a ‘hanging man’ and the second is a ‘shooting star’.
OK – ready for another one?
The first 2 types of reversal bars are pretty popular and tend to work out a lot of the time. This next one is a bit trickier. Sometimes referred to as an ‘inside day’ (when using a 1 day chart) the inside bar precedes a large move a lot of the time. Unlike the pin bar and outside bar you don’t necessarily know what direction an inside bar is going to go. What the inside bar shows us is a consilidating quiet market – a bit of a calm before the storm. And as you can see on the below daily Microsoft (MSFT) chart some pretty large moves are preceded by inside bars:
What Do YOU See?
So to conclude these price bars/candles are everywhere on every chart for every instrument on every timeframe. Take a look at this 4 hour chart for the Dow Jones (DJIA). I’ve marked out all the ones I can see (Probably missed a few!) – can you identify which ones they are and see what happened after each one? Some of them don’t work out but this isn’t a 100% success method by any means. It can be pretty reliable though when you combine these bars with other factors such as support & resistance, trend direction, fundamentals, divergence and more:
1 Method – Many Markets
So there you go – a single method you can use to trade pretty much what you want (within reason). Obviously some markets have their quirks but on the whole this method does not go out of date, applies to all instruments and fits on all timeframes. I should warn you however that the lower the timeframe the less reliable the signals are.
This is by no means a definitive guide to discretionary price action trading as there are a lot of other elements, but hopefully now you have the gist. Check back for more updates on how to use other tools such as support/resistance to filter out the less reliable signals.
Also – whatever system or method you trade if you don’t have sensible rules and risk management you won’t get very far – even if you have a profitable edge. To take a system like price action or any other method and become profitable in the long run download my free ebook Professional Trader 101 -Start Your Home Trading Business in 5 Easy Steps
Posted in Trading Systems | Tags: trading methods, trading systems
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