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The title may be catchy but truth be told there is no such thing as the BEST system - only what's best for you.
In my experience, however, trading on what's called Support & Resistance in conjuction with Candlestick Analysis have proven to be one of the most reliable forms of trading out there. There are several techniques to isolate support and resistance on a price chart but the basic definition no matter what is as follows:
SUPPORT: A price point on the chart for which the market has historically had a difficult time moving below.
RESISTANCE: A price point on the chart for which the market has historically had a difficult time moving above.
Definitions aside, i do not want to bog you down with a technical explanation of Support & Resistance and Candlestick Analysis. The recommended reading from previous posts should have you up to speed on that. But a couple of online resources that i have found particularly helpful in putting it all together, that are dedicated strictly to candlestick trading can be found here:
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Click Here! - an amazing e-book that explains the essentials of candlesticks and gets you profiting sooner rather than later.
Great resource if your education budget is limited, too!!
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Oh and one final thing...don't be thrown off by the fact the author talks about stocks or commodities during his analysis. It doesn't matter! Candlesticks have been around so long because they are adaptable to absolutely any market.
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What i really want you to understand is WHY these 2 forms of trading work so well. I want you to clear your mind of all those indicators and the dozens of variations that you've been reading about, and focus on ONLY these 2 things for now. These 2 methods alone can make you rich over time without ever having to look at another method in your life. There! You should now be able to breath easily knowing that there is all of a sudden much less to learn.
So, what makes these 2 methods of technical analysis so powerful? Simply put, they capture the essence of market psychology. They tell a very clear story of what the market is "feeling" as a whole and what the market is likely to do next.
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Set-ups from some of my previous trades will make this very clear:
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Look at the first chart. Did you see how price tended to bounce around very specific price points and had a hard time getting away from them. I simply used the top resistance line in conjuction with a Spinning Top candlestick formation to tell me that this was a likely turning point.
So, that's a potential entry point. What about a stop loss? A stop is ideally located at a point that would tell you that the trade will likely no longer work. When you enter a short position, you basically want the currency pair to drop or lose value. If it goes up or gains value then you're losing money. How far up does it have to go before you decide to pull the plug and take your loss? If the pair has moved up a reasonable distance above the established resistance line, then it is more likely that the pair will continue going up. Best to get out and preserve your capital. What about a profit target? How about at the bottom of the range where price is likely to re-bounce?
This above was just a simple illustration of how you need to think about planning a trade. There can be many variations in the time frames you use, how you can enter the trade, how you can exit it and set stops. But in essence the basic steps do not change:
- Search for a set-up on a suitable time frame
- Look for entry point on that set up
- Set a suitable stop loss
- Look for exit point.
- Be disciplined and do not change plan mid-trade.
Now look at the second chart. This is just text book set-up!!! Look at how many times price has challenged these trend lines!
These are not some well-picked examples and as your own research is clearly indicating, these are only a couple of common variations of how Support and Resistance can be used. These kinds of trades litter the charts on all time frames. You just have to train your eye to see them by practicing. And these points help keep your trading adaptable, helping you pick out both range-bound (like this case)and trend trades (like the second chart)
You need to realize that reactions to these areas of S&R are not just flukes. They become important reaction points because they reflect the very basic human emotions of fear, greed and regret. This is what drives the decisions of most traders. Price has a memory is what they say, and i believe it to be 100% truthful.
Think about it, if you fail at something it is a very basic psychological response to associate a repeated future attempt with that previously failed attempt and, consequently, hesitate. Alternatly, if you do not try again, you will no doubt regret it if the attempt would have proved successful.
Most technical indicators you've been reading about are lagging or REACTIVE in nature, meaning they are a derivation of what the market has already done. They have no predictive power per se, except that they may be self-fulfilling (if many people are looking at the same thing then it could come true). Now I'm not suggesting indicators don't work as a means of trading, I'm just saying i personally don't use them often. When i do, i don't use them in the traditional sense (more on that in the future)
Support and Resistance and Candlestick analysis are PREDICTIVE. They reflect the market's emotions and illustrate with high probability what might happen next.
Again, please take this advice seriously...You would be doing yourself and your trading career a huge favor by focusing your study of Technical Analysis on these 2 topics. I have only touched on the power of Support and Resistance and Candlesticks in this post and i hope i have convinced you that it is worth further study.
In addition to the ones i suggested in earlier posts, there are literally dozens more books you could read on the topic. Books are great but in my almost 7 years trading, i have not seen an online resource as credible and dedicated to the study and implementation of support and resistance as this:
This program is so worth its weight in gold as it goes way beyond the call of duty as far as quality information. A large part of this course is dedicated to the topic of this post, but it also looks at so many other things to help kickstart your trading career. It is a COMPLETE package from A-Z. This is by far one of the more credible programs in the industry today.
I cannot give you a magic formula here because there is none. What i have shown is a very basic approach to trading support and resistance that is no more or less valid than any other variation you will surely come across. That is the beauty of S&R...it's so dynamic. Experiment with what you read in the recommended resources and test everything (more on testing systems later). You will find your niche!!
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