The simple technique that will help you find the best trade opportunities

It’s not about the entry system you use, but the pairs you choose to trade what will make you a successful trader.”

There are a few things that I wish someone told me at the beginning of my trading career. The most important of them would be: stop looking for the perfect system, and focus in choosing the right currency pairs to trade.

If someone did, and assuming I followed his advice, It would had saved me years of frustration... maybe two or three years (perhaps four)?

I know you have been trained to look for the best entry system in the world. How do I know this? Because at one point I was a novice trader and I was looking for the same thing... plus I’ve worked with hundreds of beginner traders who were/are looking for the same thing: The Perfect System, the system that is right 95% or 100% of the time...

If you are still looking for that system, please STOP, here are a few reasons to stop now:

1 - You will save months or even years

2 - You could have the best entry system in the world, you could also have the perfect timing, but if you pick the wrong currency pair, sooner or later, the market will turn against you.

3 - A system that is right 100% of the time DOESNT EXIST

It doesn’t matter what formula or indicator you use to time your entries, if you go long, when you are not supposed to trade that currency pair, or worse yet, when you are supposed to go short, you are going to get stopped out.

Sure, you might get lucky once or twice... but the overall result will be negative.

This is why I think the analysis you do before you open your trade, is actually more important than the actual entry.

You need to forget about trading just one currency pair, even for novice traders, it doesn’t make sense to trade something that you have no idea what it is likely to do, does it?

Do me a favor and put those probabilities on your favor alright?

Once you learn what the market is likely to do, you’ll begin to do marvelous things with the market, regardless of the system or strategy you use.

The best currency pair to trade

I get asked the following questions at least 5 times per week:

What is the best currency pair to trade? If I’m a newbie what currency pair should I trade? How many currency pairs should I focus on?

As most newbies, when I began my trading journey, I only traded the EURUSD, and sometimes the USDCHF. It wasn’t until a few years later what a mistake it was.

Let me tell you how I see it. If you trade only one currency pair (like the EURUSD), there will be times that the EURUSD is clear and its ready to be traded, but there will be other times that it’s just too difficult to trade it, it’s not clear, you’ll have no idea what the EURUSD is likely to do, but because you are trading only the EURUSD, you’ll force yourself to take trades.

Like I said, when I began my trading career I just traded the EURUSD and sometimes the USDCHF, imagine what my results were at that time. I was a consistent trader, but from the negative side, I had consistent losses.

Now I realize how important it is to define the right currency pairs to trade.

And to answer the first question:

The best currency pair to trade (each day) is the one with the clearest market condition, the one you are more “certain” about its future movements (we’ll never have complete certainty about future market movements, but for sure we have an idea about what the market is likely to do right?).

So, if you like to trade only one currency pair, then the best currency pair to trade that day is the one where it’s clearer what the market is likely to do.

If you rather trade two or more, do the same thing, focus on the 2 or more currency pairs that have the clearest market conditions, the ones you feel most comfortable with.

Of course, if you are a newbie you should start analyzing two or three, but once you get more comfortable with your analysis, you should add more

 

currency pairs and then trade ONLY the ones with the clearest market condition.

Now, let me clarify something, it doesn’t mean that if you analyze, let’s say, 6 currency pairs per day, that you will have to trade those 6 currency pairs.

Instead, you should pick the ones with the clearest condition. If you find that only one has a clear market condition, trade that one, if you feel comfortable with more pairs, then pick the best 2 or 3, on focus on them.

The idea is to filter out the currency pairs that don’t have a clear market condition, forget about them, and trade only the ones that you feel most comfortable with aka the ones with the clearest market condition.

You see the difference about trading this way?

Trading is all about using the probabilities in your favor, choosing the right currency pairs will definitely help you stay on the right side of the market.

What type of analysis should I do

Tell me if this sounds familiar:

I will go long if the RSI reading breaks up the 50 mark, and the EMA(21) breaks above the EMA(50). I also need to see a CCI divergence to confirm my trade.

Too complicated isn’t it? Why do we like to over complicate things? We are especially good at it.

We are good at complicating what is simple, and overcomplicate things that are already complex. And believe me, this gets worse and worse as 9

you become more experienced, we keep adding and adding complex indicators making our trading a total mess.

We end up with a very complicated system that we can’t even follow.

For some reason, we tend to think that if something is complicated, it must be thoughtful, on the other hand, we think that something simple is not going to work…

From what I’ve seen and my experience, that couldn’t be further than the truth.

Some traders even get better results when they start their trading career. The reason for this is that as traders become more experienced, they discover new indicators and keep adding and adding them to their strategy.

While when they were newbies, they just focused on a simple indicator… making it easier for them to make the decision to trade.

Luckily for us, we can change that.

We all now about the KISS principle: keep it simple, stupid. Adhere to this principle. I do it myself.

When the system has just a few variables, fewer variables could go wrong.

When the system is simple, we can clearly identify our signals.

When the system is easy to follow, it’s easier for us to gather important data to analyze the results and make further improvements to the system.

So now you know... If you find yourself trading with tons of indicators and complicated rules, throw everything away and start all over again. Go back to the basics; you don’t need all that stuff.

Simplify your trading and ask yourself:

If I’d use only one indicator to define the trend of the market, which one would I feel more comfortable with?

If you don’t feel comfortable enough with only one indicator, add another one as a filter. Test it in a demo account and make the necessary changes until you feel comfortable with it.

Remember, a simple system will ALWAYS be better than a complicated one.

This is how I analyze the market

“There are many characteristics of successful traders, I believe the most important of them all is the type of analysis that they do before they start to trade.”

No matter what entry system you use, the kind of risk and trade management you use, if you are not trading the right currency pair, you will get nowhere.

In the following sections I’m going to explain to you how I do my analysis.

This type of analysis has allowed me to filter out the bad currency pairs from the good ones. 

Market Condition vs. Trend of the Market

I base my analysis on what I call the market condition, which is a slightly different concept than the trend of the market.

The trend of the market refers to market general direction (uptrend, downtrend), while the market condition refers to what is the market likely to do in the following hours/days (bullish, bearish, ranging, undefined) and it is measured by the way the market reacts to important support and resistance levels.

Focusing in the market condition is far more practical than using the trend of the market because it suggests what you can do right now on the market: go long, go short or stay on the sidelines.

On the other hand, if you focus in the trend of the market, it might be in an uptrend, but what if it is in a pullback or retracement? See the difference?

Now, let me ask you one question: Is it possible to have a bearish condition in an uptrend? Or a bullish market condition in a downtrend? Yes, it is possible.

To make sure everything is clear, let me show you this chart: 

   

In this chart, clearly the market is in an uptrend, the general direction of the market is up (it has higher highs, and higher lows).

But it is also in a bearish market condition, because the market is likely to react to the upper green resistance level.

So instead of looking for long opportunities based on the trend of the market, I’ll rather start looking for short opportunities based on the market condition.

You see the difference?

Following the market condition gives you actionable advice that you can use to take timely decisions.

In the following section I’ll show you exactly how to determine the market condition.

Types of Market condition

The market condition answers one simple question: what is the market likely to do in the following hours/days.

At any moment, the market is doing one of these four things:

The market is going up (bullish)

The market is going down (bearish)

The market is ranging (rangebound)

The market is undefined (undefined)

Bullish market condition - If you know the market is likely to continue its way up, what would you do? You’d look for long opportunities right? Why would you go short and try to take advantage of a small retracements, if the market is likely to continue its way up? In a bullish market condition, upward moves will last longer and will move with more momentum…

Bearish market condition - Now, what if the market is likely to continue its way down? You’d look for short opportunities; there is no doubt about it. And of course, you’ll ignore every signal to go long, right? Likewise, in a bearish market condition downward moves will last longer and will move with more momentum.

Rangebound - Some traders say that the market ranges about 70% of the time, whether it’s true or not, we need to be ready to trade ranges too. Once we identify them, the only thing that we need to do is look for long opportunities around the bottom of the range, and short opportunities around the top of the range. That’s it.

Undefined market condition - There are also times when the market is just difficult to trade, we look at the charts and see no clue of what it is likely to do. This is when we need to stop trading that currency pair and try to focus on others with clearer market conditions.

Those are the four types of market conditions that you are going to learn to identify to trade with better results.

So this is what I do every morning:

I look at each one of my charts, and ask myself:

Do I have any idea what this currency pair is likely to do?

There are 3 possible answers here:

1 Yes, I know what this chart is likely to do

2 No, I have absolutely no idea what this chart is likely to do

3 I might… but not sure.

If the chart is clear and I know what it is likely to do, I put it on the tradable side (the currency pairs that I’m going to monitor throughout the day to look for trade opportunities), if I’m not sure or I have absolutely no idea what the market is likely to do, I put them on the non-tradable side for the day (I will not monitor these currency pairs, until the next day).

The currency pairs that I trade today, might be different from the ones that I’ll trade tomorrow. That’s up to the market. I’m not going to force anything, I’ll let the market tell me which currencies are the ones with the most profit potential.

But there is still one unanswered question (very important by the way):

How to determine the market condition?

To do this, you need a methodology that answers the following questions:

How do I know when the market is likely to go up?

How do I know when the market is likely to go down?

How do I know when the market is ranging?

How do I know when I’m not supposed to trade a currency pair?

I’ll get there, don’t worry… but first I need to make sure you understand a few concepts that are essential to determine the market condition.

Support & Resistance levels

Once you know what the market is likely to do, your trading will become much easier, less stressful and believe me, more profitable. So we are going to spend a few pages on this...

Having a clear understanding of support and resistance levels will help you answer the following questions:

What is the market likely to do?

Where should I place my take profit and stop loss orders?

Where should I enter my trade?

In this section we’ll focus in the first question.

Support level: Is a level in which the market has been rejected at least twice, keeping the market from reaching lower levels.

Resistance level: is a level in which the market has been rejected at least twice, keeping the market from reaching higher levels.

Is it important for me to understand why the market has been rejected from these levels?

No, it isn't. I don’t care why the market was rejected from an important level, what is important for me is to determine what the market is likely to do on the following hours/days (after the rejection has happened) so I can profit from it.

It’s not important to determine why the market moved up or down, what is important is: whether or not you profited from it, isn't it?

3 Simple rules to draw perfect support and resistance levels

These are the rules that I use to draw support and resistance levels

Rule No. 1: the market needs to get rejected at least twice from the level (not once, twice).

Rule No. 2: the more rejections the level has, the more important it becomes

Rule No. 3: most recent rejections are more important than less recent rejections  

A chart is worth a thousand words :)

 

The resistance level (blue line at the top) is very important, the market has been rejected three times from the same level. If there was another resistance level near this one, with only two rejections, the one marked on blue would be more important (according to rule # 2).

Now, about the support levels (both have three rejections), which one you think is more important?

I’d say support level B (according to rule # 3), because it is more recent than support level A. So If I was trading this currency pair, I’d take in consideration only support level B.

There is also another rule that I always follow: only take on consideration the support and resistance levels that the market is actually taking in consideration. 18

So if there was an important support or resistance level, that once was important, but now the market is not taking it in consideration (the market breaks through that level as if there was no level there), get rid of it.

Why would I trade based on a level that the market is not responding to?

The rule of thumb is: once the market breaks through an important support or resistance level twice, get rid of it.

One more important thing to consider: support and resistance levels are more like zones instead of levels. So don’t break your head trying to figure out the exact level where to draw your level: at close of the candlestick, at the lowest low, etc. Just draw it where it touches the most rejections.

What happens when the market breaks through an important level?

Once the market breaks through an important support level, it becomes an important resistance level. And similarly, once the market breaks through an important resistance level, it becomes an important support level.

This is the psychology behind this:

What was thought as a “cheap” price (the support level kept the market from falling below this zone attracting new buyers), it becomes and “expensive” price (and the market is likely to get rejected when it approaches to this level as bears are likely to take the command of the market around that zone).

The same happens when the market breaks through an important resistance level, it becomes an important support level.

Now, every time the market gets close to an important support or resistance level three things could happen:  

1 The market could get rejected from that level

2 The market could break through that level

3 The market could stall around the level

And this takes us to the holy grail of trading, which is: understanding what the market is likely to do.

Ok, you have drawn support and resistance levels, now what? What can you do with them?

You can use them for a wide variety of reasons, but the specific questions we are going to answer in this section are:

When to start looking for long opportunities

When to start looking for short opportunities

When to look for trades inside the range

When to stop trading a particular currency pair

Remember this is not an entry system (we’ll cover that in another eBook), this is about the analysis you need to do before you start looking for a trade opportunity, which will tell you: what currency pairs to trade and what direction to trade them.

Market swings

Whether we like it or not, the market moves in swings.

When you look at your long term charts (e.g. 4 hour, daily or weekly charts) you’ll see that most of the time, the market moves from one level to the other (from one support level to a resistance level and vice versa).

This pattern repeats over and over again. 20

So let me ask you one question: instead of trying to guess where the market is going, doesn’t it make more sense to follow what the market is actually doing?

It does to me.

 

Anyway, market swings look like this:

Remember this analysis is made on the long term charts (the 4 hour and the daily chart or even on the weekly charts). It doesn’t mean you are going to trade off the long term charts, we are just doing this analysis to determine which currency pairs to trade. We can then move on to the short term charts to look for our entry.

Most of the time, once the market gets rejected from an important level, it goes up or down until it hits the next level. And the process repeats itself.

We are at point 1, the market gets rejected from an important support level, when this happens, since it was rejected from the bottom of the range, it is likely to continue its way up until it reaches the next resistance level (point 2).

At point 2, the market gets rejected again, but now from the upper extreme of the range (resistance level), and we need to start looking for short opportunities.

When we get to point 3, the market is again at the support level, but this time, it breaks through that level, so we know the market is likely to continue its way down, therefore we continue to look for short opportunities.

Point 4 – The market reaches a new support level, and this time it gets rejected from that level, so it’s time to look for long opportunities again.

And so on and so forth.

You get the idea right? We need to trade once the market has confirmed the most likely direction.

When to look for long opportunities:

Look for long opportunities when the market gets rejected from an important support level or when it breaks through an important resistance level:

Rejection from an important support level

  

Breaks through an important resistance level

 

When to look for short opportunities

Look for short opportunities when the market gets rejected from an important resistance level, or when it breaks through an important support level

 

Rejection from an important resistance level

 

 

Breaks through an important resistance level

And the question remains: When should I start looking for long or short opportunities?

The SF Box

The SF Box can help you determine the exact level in which you can start looking for trade opportunities.

Remember what I said before, that you should consider every support and resistance level as zones instead of plain levels. Well, this concept comes in handy right now and here is why.

Every time the market gets close an important level something happens: supply meets demand. There is a fierce battle between buyers and sellers, and the winner will the determine whether the market will break through an important level or get rejected from there.

This battle between buyers and sellers makes the market trade in a small range or a zone, which is what I call The SF Box.

This is why it is not important to find the exact level to place your support and resistance level, as long as it is placed in between the “zone” (which I will clarify in a minute).

Just to make sure it’s clear, pull up any daily chart (or 4H or weekly chart) and you’ll see that almost every support and resistance levels are alright even if you move them a few pips up or down.

This is why we always must consider long term support and resistance levels as zones instead of plain levels.

Let’s take a look at some charts to clarify this idea.

This is the GBPUSD daily chart: