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Most traders know of the various patterns that are used to help predict Forex market moves. These chart patterns or formations come with often colorful descriptive names like "head and shoulders," "flag," "gap," and other patterns associated with candlestick charts like "engulfing," or "hanging man" formations. Keeping track of these patterns over long periods of time may result in being able to predict a "probable" direction and sometimes even a value that the market will move. A Forex trading system can be devised to take advantage of this situation.
The trick is to use these patterns with strict mathematical discipline, something few traders can do on their own.
A greatly simplified example; after watching the market and it's chart patterns for a long period of time, a trader might figure out that a "bull flag" pattern will end with an upward move in the market 7 out of 10 times (these are "made up numbers" just for this example). So the trader knows that over many trades, he can expect a trade to be profitable 70% of the time if he goes long on a bull flag. This is his Forex trading signal. If he then calculates his expectancy, he can establish an account size, a trade size, and stop loss value that will ensure positive expectancy for this trade.If the trader starts trading this system and follows the rules, over time he will make a profit.
Winning 70% of the time does not mean the trader will win 7 out of every 10 trades. It may happen that the trader gets 10 or more consecutive losses. This where the Forex trader can really get into trouble -- when the system seems to stop working. It doesn't take too many losses to induce frustration or even a little desperation in the average small trader; after all, we are only human and taking losses hurts! Especially if we follow our rules and get stopped out of trades that later would have been profitable.
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