SCOTT WELSH TRADING BLOG

How to Pick What to Trade (Step 3)

How to Pick What to Trade (Step 3)

July 1, 2020

Last week we decided to embark on a journey to beat the market.

And we started from scratch. 

Our goal is to build a system that will easily outperform the market over time and build that system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

Here’s where we’re at so far:

1) We chose Forex for the leverage and because we can trade any size account;
2) We picked a system that suits our psyche (buy-low-sell-high) so we wouldn’t get discouraged, and then did a quick run-through of some numbers to see if it’s profitable at all.

The run-through checked out, so we’re moving on.

Today we’re going to choose something to trade.

In stocks, this is a BIG problem. There are thousands to choose from and we have to pick the right ones. In stocks, people who are novice-level traders can look like geniuses if they happen to pick the right stock. And really smart veterans can look like losers if their stock doesn’t move. Choosing the right stocks can be overwhelming and intimidating. And complicated. That’s why we chose Forex (Fx).

Fx is complicated, too, in its own way. Talking about pips and interest rates and geopolitical tensions can also make a normal person’s eyes glaze over.

But the good news is that you don’t need to know any of that. You just need a system and the ability to follow it. And, of course, something to trade.

In Fx, there really aren’t many instruments to choose from. If we wanted to trade every pair available, we’d top out at about 50 pairs. That’s a lot less than, say, the 8,000+ stocks we’d have to analyze.

The truth is that we don’t even have to look at all 50. We really only have to look at a few.

What are those few?

We start with the “Big 3”.

The Big 3 are the most popular ones. These are the ones that you may see talked about on TV and may have heard of. These also have the biggest volumes.

The Big 3 are: EURUSD, GBPUSD, and USDJPY. Notice they all have USD in them. That’s because the USD is still the center of the trading universe.

Furthermore, these are the easiest to understand.

All you have to do is look at the first three letters of each of those pairs. Take EUR, for example. “EUR” means Europe.

If there is good news in Europe, the EURUSD will likely go up. If news is bad in Europe, then the EURUSD may fall. It doesn’t always work out that way, but it at least gives us a general understanding.

Same with USDJPY. If the United States is doing well, the USDJPY will probably rise. An example would be the fall in USDJPY during 2007-2010 and the rise from 2011-2015. Again, it’s not always perfectly true, but it gives us an idea.

Exotic currency pairs featuring countries on the other side of the globe will probably be a complete black box. Not having a clue what’s going on makes it tougher to trade long-term.

So, we really only have three to look at when starting out. After those three, we can branch out if we need to.

Let’s start with the EURUSD. It has tremendous volume, TV notoriety, and two countries that everyone is aware of.

And we have a buy-low-sell-high system.

How do we know when to take a trade?

In other words, how far does something have to go “on sale” (move away from Fair Value) for us to be interested in a trade?

Here’s how we’ll choose. We’ll look at Average True Range (ATR).

And we’ll get our trade setup using ATR in our next email.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.