Do you know what separates the profitable Forex traders from the losing ones? It isn’t an inherent trait or some super-human ability. Of course those things might help, but what truly separates the two groups is the fact that the successful traders never make the first move.
What exactly does that mean, you ask?
That’s what this lesson is all about. By the time you finish reading it you will know what it means to always let the Forex market make the first move. We will discuss the significance of confirming price action on the daily time frame as well as the importance of staying both proactive and reactive at all times.
Let the Market Show Its Hand
Are you a hardcore poker player? Neither am I. In fact I’m not much of a gambler at all, which could be ironic given the fact that I have been mildly obsessed with trading since 2002.
At any rate, one of the main objectives of any good poker player is to never show his/her hand of cards. This is because the more information you offer to your opponents, the easier it becomes for them to figure out your strategy which in turn gives them the ability to strategize against you.
Now let’s make things interesting and reverse the roles. You become the opponent in the example above and the market becomes the one whose job it is not to show its hand.
But here’s the kicker…the market always shows its hand! At least in the case of setups that are worthwhile.
The market will often try to disguise these “tells” as something else, but the clues are always there. The challenge is seeing these tells for the clues they are.
Part of that ability comes from sheer practice and experience. But the other, less obtuse part of that ability can be found in the next topic.
The Daily Time Frame Is the Secret to Success
For those who have followed me for a while, you know that I always favor the daily time frame above all else. And there’s good reason for this. Put simply, the daily time frame holds more weight and is therefore more “accurate” than the lower time frames.
At the risk of stating the obvious, this is because there is more time that goes into forming a 24 hour candle than that of a 1 hour candle or a 4 hour candle. But what may not be so obvious is the relationship time has with liquidity; or as we see it on our charts, price movement.
The fact that the time required to form a daily candle is 6 times greater than that of the 4 hour candle cannot be overstated. Said another way, the liquidity in a 24 hour candle is 6 times greater than that of a 4 hour candle, 24 times greater than that of a 1 hour candle and 48 times greater than that of a 30 minute candle.
I think you get the idea. The point is that the more liquid a market is, the more consistent the behavior. While this isn’t always the case, it is certainly true more often than not in the financial markets. This is why price action strategies work so well in the Forex market, among other reasons.
The end result is that you are essentially trading a more liquid market when you trade on the daily time frame. Of course the Forex market remains the same across all time frames, but the daily time frame gives you more liquidity to work with which in turn leads to greater consistency.
Before we move on, it should be noted that a 24 hour period will not be exactly 6 times greater than every 4 hour period within it due to fluctuations in liquidity throughout the day. But the general idea of greater liquidity is all that’s needed for purposes of this article.
A Case Study in Trading With Patience
Waiting for the market to make the first move is all about staying patient. In fact I feel safe in saying that the number one attribute of successful Forex traders is patience. It’s a requirement if you are going to let the market make the first move.
So what does staying patient and letting the market make the first move actually look like?
The combination of the two can come in several different forms. It could be a pin bar at key support or resistance or maybe it’s a wedge break. Regardless of the strategy you’re applying, raw price action is the perfect vehicle to achieve this style of trading.
Something as simple as a bullish pin bar at support is a great example.
Instead of buying on the first or second retest just before the pin bar and suffering through the drawdown, the patient trader would have waited for the market to show its hand. That tell, or clue, came when the market formed the bullish pin bar at key support.
Of course the market won’t always play nice and offer such great signals such as this. In those cases you’re better off keeping your trading capital where it’s safest – in your trading account.
The power of waiting for a candle to close can be another simple, yet extremely powerful way of letting the market make the first move.
Before we get into the details of the setup, let’s take a look at the broader pattern in focus.
As you can see from the daily chart above, EURNZD had carved out a wedge pattern over the better part of a year. The wedge was well-defined and had a minimum of three touches on each side making it a tradable pattern.
Now for the actual setup. For that let’s move in closer to see where the pattern broke down.
The first thing I want to point out in the chart above is the intraday break below wedge support. This false break not only illustrates the power of waiting for the market to show its hand but also trading from the higher time frames.
Those who lacked patience and sold this pair before the day closed were in for a nasty surprise. This is why it’s important to always wait for the market to confirm the break. We do this by waiting for the candle to close below support in the case of the setup above.
As soon as the market closed below wedge support we had a confirmed break. This was the first time the market had truly shown its hand in terms of the direction of the breakout.
The market showed its hand once again on a retest of the broken support level as new resistance. The bearish rejection bar signaled that the bears were in control and wanted this market lower. That was our sell signal and the result was a 480 pip move lower over the coming weeks.
Proactive Trading vs. Reactive Trading?
At this point it may seem like this is a reactive approach to trading, where we are reacting to what the market does. In some ways this is true, but it doesn’t tell the whole story.
The best Forex traders use a blended approach of both proactive and reactive tendencies.
To explain the difference we are going to separate the trading experience into two halves. The first half is all about taking action. It deals with what we do and what we don’t do on a daily basis. This is the reactive half.
The second half of the experience addresses defining those actions before they ever happen. It deals with planning for every possible outcome beforehand. This is the proactive half.
This combination gives you the best of both worlds. On the one hand you are planning your trade so that no market movement is unexpected. Yet on the other hand you are always waiting to react accordingly to whatever the market throws at you.
As Forex traders it’s important that we always remain on the defensive. This applies to everything from setting our position size to allowing the market to make the first move.
Always remember that your first job as a trader is to protect your capital, your second job is to make money. If you approach the market with this mindset each and every trading day you will be that much closer to achieving consistent profits as a Forex trader.
Regardless of the way you trade, it’s important to always let the Forex market make the first move. This allows you to simply react accordingly and keeps you from guessing as to which way the market might move.
By applying the methods discussed in this article you can begin using the market’s own movements to effectively put the odds in your favor. You do this by patiently waiting for the market to close beyond the confines of a pattern such as a wedge or form a pin bar at a key level of support or resistance.
But being a great Forex trader isn’t just about reacting to what the market does. It’s about planning in advance for all possible scenarios and then reacting according to your plan. This approach allows you to be both proactive and reactive, which is what’s needed in order to maximize profits and minimize risks as a trader.
Are you guilty of trying to make the first move as a trader? If so, did this article change your way of thinking?
Leave your comments or questions below. I look forward to hearing from you.
If there was one ‘most significant thing’ that I have been learning inside the Daily Price Action course it is this – to see the potential coming up and wait for it to happen. This Price Action system is inherently very simple and most people could learn it in a pretty short time. But the self-discipline of watching and waiting takes longer to master, in my experience. Another good article, Justin, thank you.
Absolutely! You hit the nail on the head. That is why I always say that trading Forex can be simple but it’s never easy.
Have a great weekend.
awesome post Justin. This has been my biggest problem!!! I am generally correct in the direction of the big moves but get in far too early!!! and as a result 90% of the time get shaken out…This will change now…
Thank you. I’m glad you enjoyed the post. 🙂
Keep me updated on your progress.
will do Justin…I shall be joining your daily price action group very soon…
Very true. I’d add wait for the confirmation after the breakout. What i mean is sometimes a security breaks out, closing – even on a daily timeframe – above/below the trendline, but comes right back the next day. It’s a false break, i’m sure every one has an example of such a thing in mind. I’ve learned to wait for the rejection on the next candle after the breakout.
I would use limit orders only to see them filled AND the SL hit just after that. By waiting for the confirmation of the rejection from above/below (retest, essentially, which is taught here) then the setup is that much likely to be profitable.
In your EURNZD example above it’s the bearish rejection bar that 100% validates the setup.
Of course beginners will say “But what if it drops without retesting” then all the pros smile and respond : “So be it. There is always a next trade.”
Better to build your capital slowly but surely rather than watching it being eaten bit by bit because of impatience or desire to just be “in”.
You are 100% correct. The retest is always the best way to go as it helps to “reset” the market and also confirms the setup. If a market doesn’t retest the level after a breakout, it’s on to the next setup.
Namaste JN 🙂
but in case above of EUR/NZD bearish pin bar on retest where we had put our stop loss
I assume you mean as in the attached chart? You wouldn’t want to place your stop loss that tight if you entered on that first retest.
You always want to hide your stop loss above the last major or minor swing high (see attached chart).
Great article Justin. I just want to thank you for unlocking the trader in me. Your simplicity and subtlety towards your analyses is amazing. God bless.
Thanks, Percy. It’s my pleasure. Let me know if you need any help along the way.
The waiting would of killed me lol but i am learning that patience is key, once you identify a set up, one should wait for a breakout. Stalk the trade like a predator stalks its prey
Ur rt mentor, I was caught on this last week on NZDCAD.
GREAT ARTICLE JUSTIN…
Thank you so much for keep sharing..
my problem that i could not solve yet is putting stop loss for example your wedge break where to enter? after confirmed daily bar break or after rejection pin bar & stop loss for this wedge pattern?