Laurentiu Damir - Trade the Price Action - Forex Trading System

Trade the Price Action

By Laurentiu Damir

Copyright 2012 Laurentiu Damir

All rights reserved . No part ofthis book may be reproduced or transmitted in any form or by any means,electronic or mechanical, including photocopying, recording, or any informationstorage and retrieval system, without prior written permission of the Author.Your support of authors rights is appreciated.

Tableof Contents

I have been trading currencies with decentsuccess so far and I decided to present to you my complete detailed trading system.This strategy addresses people that have yet to succeed in the currency market,the people that have been trying hard to construct a winning strategy that willallow them to make some profits in the forex market. I know this process isvery frustrating but you have come to the right place. Ive put together thispowerfull strategy for myself after about one and a half years of frustrationwhen everything I tried did not seem to work for me at all. After all thatscreen time, studying the charts endlessly, reading countless books, articles, forums,I have come to the conclusion that the most powerful things, the things thatwork best in the foreign exchange market are the following: trend, support andresistance zones (both horizontal and diagonal), Fibonacci ratios andcandlestick patterns/price patterns. Consequently, I came up with this priceaction strategy that incorporates all of the above, and since then, things havebeen working out great for me.

As this is a strategy based on priceaction, it doesnt use technical indicators. As far as I am concerned allindicators are lagging behind the price because of the simple fact that theyare constructed with past price information.This makes them useless inpredicting future price movements. The price action itself is the bestindicator that you can have to help you make a lot of winning trades in theforeign exchange market. You just need to learn how to read it and this isexactly what you will find out with this strategy. The only indicator that Ifind useful is the 200 period exponential moving average or 200EMA applied onthe daily chart, but not because it has the ability to predict future pricemovements, after all, it is just like any other indicator based on past priceaction, but for the fact that a large majority of the traders out there seem tobe keeping an eye on it to the point that it becomes self fulfilling. If youlook at a daily chart with the 200 EMA on it you will see that price very oftenreacts at or near this moving average which means that there are a lot oftraders that take into account this 200EMA and base some of their tradingdecisions on it. The exact same story is valid for the candlestick patterns. Thestrategy I made includes the 200 EMA inserted on the daily chart, but only forconfirmation that it is in line with our price action reading, we do not base tradingdecisions on the moving average.

The 4hours timeframe zoomed out to themaximum is the best timeframe to trade if you want to make money. A smallertimeframe than the zoomed out 4h is intraday trading and it wont make a verysuccessful trader out of you in the long term because of the many random pricemoves on the lower timeframes generated by the never ending economical news . Thezoomed out 4h chart gives you an overview of what is going on in the market, ittells you which is the dominant trend and how you can profit from it. Tradingon smaller timeframes is very risky and I do not recommend it. In this strategyI use the 4h timeframe, as it is a conservative strategy, it is designed tomake you money in the long run, and you will find that it is extremelyreliable. This is not a get rich quick type of forex strategy, you will not be makingtrades all day long, every day of the week. Substantial profits are made withjust a few trades per month. Also, your live account platform from your brokerhas to have the New York closing time for their charts, if they dont, use ademo account from a broker that has this like Fxdd or Fxlite, do all thepreparation work on that demo account and use the live account only to ente thetrades into the market. Now, I will walk through the components of the strategyI mentioned earlier and discuss them in detail.

This is the most important part of thestrategy. I will explain how to identify the trend by looking at price action, whichis the most reliable way to do it. As you probably know, you have a trend inplace as the price starts to make higher highs (HH) and higher lows (HL) orlower highs (LH) and lower lows (LL). Here is an example of a downtrend:

Now lets see an uptrend:

As you can see, when a trend is in place,price goes strong in one direction, than it corrects itself going in theopposite direction or just stalling/ranging for a period of time and after that,another impulsive move in the initial direction, another correction and so on. Thisis what constitutes a trend.

The important thing when identifying highsand lows is paying attention to see if they are of the same amplitude, like inthe picture above for example. Here is what I mean:

In the same example after the third HHprice made a very small move in the direction of the trend followed by a verysmall correctional move (circled in the picture above). That is not a HH as itis not of the same size or amplitude like the previous HHs. That is a smallwave within the bigger wave.

One more example to illustrate this:

In this example you habe the same situationwhere there are small waves contained by the bigger wave. This bigger wave isthe one that has significance for the overall price action on this timeframe,those three minor waves are of a smaller degree and they should not be takeninto account when deciding how to label your trend on this timeframe. Okay, nowthat you have an idea about how to identify a trend, lets see how a trend changesits direction and identify that exact moment from a technical point of view.

In the chart above you can see we have notone but two changes of trend. Starting from the left we see a clear downtrendwith the price making LH and LL. In order for the trend to change we have tosee a breach of the last LH, right at that horizontal line. Until that happensthe trend is still down.

You can see that eventually the price brokethe last LH, made a small correction and then continued upwards changing thetrend from a downtrend to an uptrend. So, the trend changed when price stoppedmaking LH, broke the last LH and made a distinct point in the market situatedhigher than the last lower high. This point on the above chart is the first HHthat price makes after breaching the last LH of the downtrend. After this wecan see another change in trend from uptrend to downtrend. The price continuesup and makes three HHs, but it cannot make a third HL as price, like in thefirst change of trend, breaches the last HL at the second horizontal line inthis chart to make a new low at a price level which is lower than where thelast HL of the uptrend is situated. It then makes a correction move and goesstraight down confirming that a LL has been formed and a change in trend hastaken place. Remember, a change in trend only takes place after the last LH orHL is breached, price makes a correction and shoots through the newly formed HHor LL confirming the validity of that new HH or LL. Only at this time you knowthat the trend has changed. Here is another example to understand theimportance of this: