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My Favorite Trading Strategy

May 21, 2008
What I'd like to do in this very short article is give you an overview, looking at the strategic level, of how I trade my favorite setup, which will be the one referred to in most of the analysis on my website. We're talking, 'the big picture'.

Too many people make a critical error in focusing exclusively on their entry triggers, and trying to enter on every occurrence of that signal, without ANY consideration for where that trigger is occurring within the bigger picture market structure.

Too many novice traders spend far too long trapped in this stage of learning. They discover a new trigger and a part of their mind then becomes excited that maybe they've found the holy grail of trading. It doesn't matter if it's an EMA 10/20 crossover, or perhaps a MACD crossing above zero, with stochastic rising, and RSI above 50. It is NOT the holy grail. It is just an entry trigger.

The fact is:

* Market Structure tells you where to trade.
* Entry triggers tell you when to get in and out of your trades.

Focus on defining the structure of the market first, and then look for a trigger.

Let's say for example that our entry trigger is a candlestick reversal pattern... in this case a Bullish Engulfing Candle. Where would you find the higher probability trade?

Would it be at the top of an extended rally, where the Bullish Engulfing pattern is pushing straight up into the overhead resistance?

Or is the higher probability trade where the Bullish Engulfing pattern shows that a major support level has held and there is significant profit potential still available from the entry point to a projected target at the overhead resistance level.

It's exactly the same entry trigger, but obviously the market structure tells us that the second entry is the higher probability trade.

REMEMBER: The market structure (in this case Support & Resistance) tells you where you should trade. The trigger tells you when to get in or out.

Now, market structure doesn't need to be just support and resistance. YOU need to consider, 'what is the reality of price action as you see it? What do you believe causes price to move?'

Have a look at a number of charts... What do you see?

Is it perhaps a framework of support and resistance levels defining areas of price stall or reversal in the market?

Do you see a "rubber band" type concept, with the market reaching extremes and then reverting to the mean, or centerline moving average? Moving back and forward between the upper channel line, the centerline, and the lower channel line.

Do you see swings? Higher highs & higher lows, lower highs and lower lows, with impulses of momentum in between?

Define how you see the bigger picture of market movement. What is it that you see when you look at charts? What is the market structure? And only then should you look for an entry trigger that gives you a low risk and/or high probability trade within the context of your bigger picture.

So, what do I see as the reality of price movement? How do I trade? What is my strategy?

Well, in this short article I can't go into the tactical level - I can't talk about my entry and exit triggers, and trade management strategies. It would take a whole book because it's not just a simple indicator based entry or exit. It's based on price action - on an understanding of the nature of movement of price. That takes a long time to develop, and it's something I'll cover in my website in a lot more detail.

However, for now I can share a very broad overview of my strategic level trading concept. At least my favorite one anyway.

The reality of price movement for me is supply and demand. And that supply and demand leaves footprints that can be read in a price chart.

All price movement, all turn points, and all areas of support and resistance are a function of the balance or imbalance of supply and demand.

In particular, the key areas which allow for low risk or high probability entries, are areas of support and resistance.

I trade within a framework of support and resistance.

I define all major support and resistance based on a higher timeframe, and then look to profit from movement between these areas on a smaller timeframe.

For me, my markets of choice are forex & equity indices. The longer timeframe for defining major support and resistance, is an hourly chart, and the trading timeframe is anywhere from a 1 to 5 minute chart.

The strategy works with other markets as well, because it's based on the truth of price movement. And because markets are largely fractal in nature, you can adjust the timeframe to suit. Say you wanted to trade the daily charts - then you just get your major support and resistance off the higher timeframes - being weekly or monthly charts.

So, the major support and resistance areas are placed on the chart, and I'm looking for any low risk or high probability trades (based on my entry triggers as defined in my trading plan), going long off major support or going short off major resistance.

And for the price movement in-between major support and resistance?

If it's an uptrend I look for low risk or higher probability entries at areas of minor support.

If it's a downtrend I look to go short at low risk or high probability entries off minor resistance.

And if it's a sideways trend, then I aim to identify low risk or high probability entries off both minor support and resistance.

Key point though for all entries - It must be a low risk or high probability entry, based on the clearly defined criteria in my trading plan

So there you are... It sounds simple when looked at from this high level overview. The reality is though, that it's really hard. The statistics of failed traders clearly show that. Success takes a long period of time. Whether you relate to my view of the markets, or prefer some other method of defining market structure, spend a lot of time just watching price movement. Learn to 'read the tape' as it used to be called, internalizing the patterns and flow of movement of price. It takes time. Be patient, and embrace the challenge.

Stop just blindly entering at every occurrence of your entry trigger. Remember:

* Market Structure tells you where to trade.
* Entry triggers tell you when to get in and out of your trades.

Happy trading,

Lance Beggs
About the Author
Would you like to learn more about how I trade the forex and equity index markets? Check out the articles, videos and trading resources on my website right now at www.YourTradingCoach.com
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