How to Trade the Forex Markets – Part 2
Steven Primo has been actively involved in trading the markets for over 35 years. His trading tenure began in 1977 when he was hired to work as a Floor Reporter – or “runner” – on the floor of the Pacific Stock Exchange. As a Specialist he traded through the Crash of ’87 and was responsible for making markets in over 50 stocks. Primo left the Stock Exchange floor in 1994 to focus on managing money and to teach his own unique approach to trading the markets. Scores of students, from beginner to advanced levels, have gone on to become successful traders after being introduced to Primo’s proprietary methods of trading.
When I first began trading on the floor of the Pacific Stock Exchange, I traded the same way 99% of the public trades – I tried to pick tops and bottoms. If I surmised the market to be oversold, I went long. But if the market appeared to be overbought, I went short. On the trading floor of the Exchange this strategy worked great about 9 times out of 10. Not a bad winning percentage. But it was always the 10th trade that gave back most or all of the profits I had just made from the previous nine. Sound familiar?
It wasn’t until I came in contact with a group of elite traders that I learned how to trade with an edge. Today I’ll share with you one of their secrets – an edge that has saved me literally thousands, if not hundreds of thousands of dollars during the course of my 35-year career as a trader. This edge is called the confirmation method and it transfers onto any market, especially the Forex markets.
Click here to sign up today for a live webinar with Steven Primo where you’ll learn more about the quantified trading strategies for trading the Forex markets Steven developed from over 35 years of professional trading experience.
As I mentioned earlier, most traders attempt to buy at the exact bottom and sell at the exact top, regardless of market, time frame, or choice of trading strategy. But just where is the bottom and just where is the top? As we’ve all seen in the current market environment, Forex currency pairs can go as high or low as they want, and much more than anyone could have ever anticipated. Rather than try to pick a bottom, which is often a recipe for disaster, the only thing needed is for a trader to wait for confirmation. This is the assurance that the currency pair has concluded its downward course and is now once again headed in an upward direction; much like a train leaving the station for its desired destination.
So what exactly is confirmation, and how do we apply it? A buy confirmation consists of when the Forex currency pair, in an uptrend, has sold off to a satisfactory buy level and then reverses and trades higher than the previous bar’s high. Conversely, a sell confirmation consists of when the Forex currency pair, in a downtrend, has risen to a satisfactory sell level and then reverses and trades lower than the previous bar’s low. We buy and sell currency pairs only on confirmation, regardless of the strategy used.
The chart below (Fig. A) shows a common trading technique used by many Forex traders – going long once the stochastic oscillator has gone into “oversold” territory (“overbought” for sells). Had we purchased the AUD/USD at point (A), when the indicator first went below the 20 threshold and into supposed oversold territory, we would have most likely held on to a losing trade for an extended period of time. But had we simply waited for confirmation at point (B), we would have entered the trade only after the currency pair had traded one pip above the previous day’s high, a signal that the AUD/USD had begun to move in our desired direction. Ironically, this is where most traders would have “thrown in the towel” and exited their original losing position! Using this method would have saved you a lot of money, grief, and heartache. The purpose of waiting for confirmation is not only to get us IN at the beginning of a trend, but to keep us OUT of bad trades as well.
(Fig. A)
This edge works in any direction…
(Fig. B)
And in any time frame.
(Fig. C)
As you have just seen, if one trades the Forex markets without using confirmation they are simply guessing as to where to place their buy or sell orders. This guesswork is relative to top picking and bottom fishing; styles of trading that will eventually yield negative results.
Ultimately, just because a Forex trade has been confirmed does not guarantee that it will become profitable. But by waiting for confirmation, one can substantially increase the odds for a successful Forex trade. Confirmation is the verification that a directional move has concluded and that the trend has once again resumed. A Specialist always waits for his trade to be confirmed before entry.