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How Professional Traders Approach the Market

The reason trading with price action is possible  is because whilst the Forex market is unpredictable, the humans who trade it are not. The traders and organisations who participate in the market operate out of habit and are logical professional investors who quantify all available information to come up with a fair exchange rate. Given similar situations and information symmetry, market participants behave the same way and are risk averse and they study new information coming in and quantify before giving feedback. Causing the market to pause/breath, move again pause and breath repeatedly. It is these habits that create the outcomes. This is the reason that the same patterns tend to repeat over and over again in the markets and also the reason that a lot of traders will tend to get stopped out time and time again and they trade the same patterns the wrong way.

For this article we will refer to unprofitable traders as “retail traders”.

Stop Entering When the Pro’s are Taking Profit

The chart below shows a common pattern in the Forex market. Note the key differences of where the professional enters and where the retail trader enters. On the left you will notice the retail trader buys and takes a long trade when price is at an extreme high. Soon after this the retail trader is stopped out as price moves lower from this high. At around the same time the retail trader is stopped out, the professional traders are entering the market in trades to get long. When price moves higher the professional trader will cover their long trades and start taking profit. The professional traders will begin to leave the market after making solid profits. At the same time, the professional traders are leaving the market, the retail traders are starting to get long again…the process repeats itself

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The difference  above is from where each trader enters their long trades. Whilst the professional trader waits for price to retrace back lower, the retail trader gets long from the extreme high. The graph above highlights why entering trades at extreme highs or lows without any retracement can be  dangerous.The best way to avoid this scenario is to enter from value areas in the market.

Taking Trades from value areas
These value areas are where the professionals look to enter their trades.  Basically value areas are retracements of price from an extreme high or low in to support or resistance. Rather than entering from the very high or low of the market, value can be found when price rotates. Price never moves in straight lines and has to move both higher and lower no matter how strong a trend is.

A common saying for this scenario is; buy any weakness and sell any strength. What this mean is if price moves lower (weakness) from an extreme high then price can be bought from a value area, and if price moves higher (strength) from an extreme low, price can be sold from a value area.

Below are two price charts. The first chart shows price moving from an extreme high back lower. This is price showing weakness and moving in to value for a possible buy entry. Notice if the trader had of entered a long trade from the high they would have been stopped. If they had instead bought a long trade when price showed weakness and moved back lower they would be entering around the same time professionals are entering from a value area.

The second charts shows the same scenario, but with a short trade to sell. Price moves from the extreme low back higher. This move higher is known as a retracement back into value.

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Trading Reversal Signals from support and Resistance areas.

After a trader understands why it is so important to enter from value areas, and how to identify them, they have to add a few other key ingredients to find high probability trades. The next two ingredients to be added after the value area are;

The best trades are when there are many factors all pointing in the same direction. Obviously the more factors you can add as confluence for your trades, the higher chance they will have of working out. Below I have attached two examples of adding both key price action signals, solid support or resistance levels and formed at value areas in the market. Both these setups were high probability setups due to the many factors they had in their favour.

 

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Summary

In Forex, the only way to make money is to buy low and sell high or buy cheap and sell expensive. A very common trading saying that can get traders into trouble is “The trend is your friend”. Whilst this saying is very true, many traders don`t know how to blend into the trend without inertia kicking in.  You need to successfully trade with the trend and also enter from value.

The Forex Market has this effect on traders too.

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Happy Trading

 

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