One of the most common psychological bias in trading is to think that to figure out a complex problem, you have to use complex tools. It explains why the mainstream and loser traders are mainly using such weird indicators like RSI, MACD, Bollinger Bands, … Displaying complexity on your screen with a lot of indicators can be comforting by having the feeling to have an edge on the complex Market with complex trading system. Thus, you can think you understood something that nobody else did. Some secret formula by blending different technical components.
This psychological bias can lead to such beautiful and charming screens gallery like this :
Better to see that in a museum… You can have a lot of fun and artistic ideas by browsing the forums of the famous Forexfactory website. Often, the logos of the trading systems are as beautiful as the graphical indicators. To be honest, there are others psychological bias involved here. But it’s another topic.
No suspence here : the indicators are laggy and almost useless.
Raw informations of the Market
Instead of seeking the information into complex and ugly indicators, we can start by asking these questions : what is the raw data printed on your charts ? What is the source of everything when you look at your chart ?
And we can use the same point of view as usual : if the mainstream traders are doing something, let’s do the contrary. We will print nothing (not even the price data) on our trading screen :
Why displaying this stupid screen ? Because, we can see the 2 most important informations of the Forex : the Price Action value on the Y-axis and the Time on the X-axis. The same with the Price Action candlestick :
Now you can do yourself a favor : hit the Ctrl+Y under Metatrader to print the timelines.
Yes, it can sound really dumb, I know. But you’ll see that the printing of these tiny dotted lines can help you a lot to improve the winratio of your trading system… In order to discern the entire specific timing problem, we have to move on another topic.
One of the most interesting statistic in the Forex world
I will not speak about the shitty statistic about the 95% loser traders or another unverifiable stupid statistic. I will explain that you can check by yourself this little but really interesting statistic :
Between 98% and 100% of the candlestick printed on your charts have an open price different to the lowest price for a bullish bar and an open price different to the highest price for a bearish bar.
What does that mean ? It means that the vast majority of the time, the first price move on the Market is the wrong one…
Here is my stupid MT4 Expert Advisor displaying statistical data about the opening and lowest/highest price. You can run it on every pair you want and notice that information : around 99% of the bars on your charts have an open price different to the highest/lowest one. To be more concrete : if you see a bullish bar forming with an open price equal to the lowest period price, you can expect that the price will reverse.
I could write a lot of things about this but we will sum up in order to reuse this information easily. Generally speaking, the very first movements of the candlestick are the wicks, as the last ones. The core body of the candlestick is very often created and generated in the middle of the period time candlestick formation.
Let’s take an example with the EURUSD, last year during May 2014 :
It’s the monthly chart of the EURUSD. You can see that this bar was important for 2014 as the price have tanked since this moment. Now, we can “zoom” in by looking at the Daily timeframe :
Here is one of your best Forex friend : the previous tiny dotted lines. It’s really interesting to see the price movement inside May bar. We can split this monthly bar in 3 main parts :
- The red area : the price goes up in the very first day of the month
- The green area : this is the core of the month, all strong price movement is here : SELL
- The blue area : the price retraces a bit before the month closes
The red period of time shows you that the first movement of the month is not the main one. As a profitable trader using high probability setup, we prefer to catch the main movement of the price : the center of the monthly bar. In order to improve our timing entry on the Market, we can think about taking only the very best setup by entering the market only during these green periods of time : the core of the bar.
Use the time to improve your winratio
The funny fact is that you can use the previous informations on all timeframe because of the fractal nature of the financial Markets. If you like high-probability setups, you can even use it on M30/H1 timeframes. I imagine you know as a trader that it’s better to trade intraday during the London and New-York session as the volatility is more important. This is the same principle : the beginning of the day, the price goes really often in the “wrong” way. It’s called the asian session. The main activity, the core of the day is during the London session and London/New-York session overlap. And the end of the daily bar, it’s the end of New-York session, often against the previous price action activity.
To demonstrate this I choose the current Daily EURUSD candle formation of today (writing article date : July 9th 2015) :
Sounds familiar ? Here comes the colors…
So maaaaaaagic !
- The red area : the Asian session
- The green area : the London session and New-York start session
- The blue area : the end of the New-York session
Of course, it’s not an absolute rule or law. The Market will not behave like that every day. But it does it really often and knowing that will provide you an edge.
Depending on your trading style, you can adapt these informations on the timeframe you prefer. Personally, I like the Daily and 4 hours timeframes. Here is how I use this information in my trading process.
Concerning the Daily timeframes setups : I never trade (or very exceptionally) the Monday and the Friday. Why ? Because it’s during the red and the blue period of time. It’s often retracement period of times with a lot of wrong signals. The Monday and the Friday are very often wicks of the Weekly candles. Here is an example with a previous GBPUSD trade I took during February :
The main movement of the week is done the Thursday. You can see the strength of this reaction the next weeks…
You could argue that I’m missing some trade opportunities by avoiding trading 2 days per week. You are right. But if you backtest heavily, you will realize that it’s more profitable to avoid some loser opportunities these special days than taking all opportunities of the week, including the winners and the losers.
The last example is on the 4 hour charts. This is the trade I took last week, it was an easy & quick trade :
This was a perfect timed setup for me because this H4 engulfing bar printed in the middle of the week, the Wednesday. You can see where is the price now… By trading only the Tuesday, Wednesday and Thursday on my H4 charts, I drastically improve the winratio of my trading system.
To summarize : if you want to take high-probability setup, use the time. It’s as important as the price itself. And avoid the very beginning and the very end of each period of time you are trading.