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“It’s nothing but gambling” seems to be the general response when I mention to anyone that I’m planning to trade on the FOREX and commodities markets. For this reason alone I've got to have a go..
So how am I going to this? Well I'll admit now, I don't know. In that respect I apologise for the title of this article, since what will follow is by no means a method, but the underlying principle which I will base my eventual rules on. What I am striving towards is a method for trading Foreign Exchange (and anything else my broker will let me) based on rules which I understand. That's obvious you might say, nobody would do something like this unless they understood the rules, that would be crazy. My response? You'd be surprised. When I started looking into foreign exchange trading I spent a fair amount of time trawling through forums, looking at discussions about other peoples strategies. Many of these posts are excellent, the good ones give an explanation of the "rules" of the system followed by discussion about why these rules work. The best ones are then followed by a warning, that you shouldn't try and just implement the rules, you should try and understand them and make them your own. As far as I can tell most of the people who read them don't and if I'm honest, I can see why. The rules for many of the systems are quite simple, look for this pattern of lines and numbers then buy, wait for it to go up and sell. It's really easy to look at them and think wow, this is like a cash machine, let's go. If you don't believe me, have a look on www.trade2win.com and find a thread called Making Money Trading by a guy who calls himself Trader_Dante. I challenge you to read that thread (which is a challenge in itself since it's now over 200 pages long) and not, by the end of it, think wow...I can do this. Don't get me wrong, if you apply for example the pin bar method explained by Trader_Dante, there's a good chance you could make money straight off and for quite a while. The problem for me is that unless I understand why it works, when an inevitable loosing streak comes along I'm unlikely to be prepared to continue throwing money at, why would I? If I don't have the faith in the rules which comes from understanding what underlies them then the only confirmation I have that the system is a good one is that it makes money. When it stops making money that confirmation is gone and so, logically, there are no reasons to continue thinking the system is good. This isn't to say that other people theories aren't extremely valuable, just that until you understand them and ensure that the way in which you apply them fits in with your general understanding of the subject, you won't really trust them. As a sidenote this is in no way putting down the aforementioned pin bar method. Indeed having read the thread in question several times and a whole host of literature on the area (known as price action trading) it is actually one of the core elements of the method I plan on using. More on that method next week, the main point here is that my method as it develops will be based purely on concepts which I (think that I) understand from first principles, not lifted 'as is' from someone elses methods on the basis that they say they work.
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