First I just wanted to announce that I signed my first book deal with Wiley and Sons which is a well known financial publisher. I am going to be writing a book about forex trading. Stay tuned for more info!

One of the most helpful trading habits I learned over the years is how to question the market. Questioning the market means constantly asking what the market “should” do based on technical information available at the time and then considering your answer in light of a more global view. This questioning process will not be helpful if you first do not have a perspective (I wrote about that here) and you have not decided what type of trade intend to take (scalp, day trade or swing trade which is relative to your perspective). Asking the market the right questions will allow you to be a better “listener” rather than an imposer of your own ideas that the market really could care less about.

So what are the right questions? “What is the trend?”, “What is my support and resistance?”, “What is my oscillator saying?”. These are very broad and will not provide any useful information in my opinion. When I begin my questioning process, I always begin a more specific technical view. For example, when I look at the EURUSD pair, it appears show a great deal of bearish momentum in recent weeks. That is obvious from the lower highs and lower lows on the larger time frame charts. Here is my first series questions to the market: Is my 4 hr or larger time frame closing on the low? If so, how does this low compare to the previous low? Is it significantly lower? Or is it slightly lower? (like within 100 pips). Does price demonstrate an immediate recovery off the low relative to the timeframe? Where are we in terms of psychological support? Are we near any whole numbers or other reference pivots?

These questions are not going to yield an immediate trade. They will help me prepare for a reversal if one is in the works, or prevent me from getting long too early if the bearish momentum is persistent. You may be wondering, “Why not just short it if the market continues to provide bearish conclusions?” It’s not that simple. If I have enough information to make a good short argument, I will need to validate that with a setup and volume analysis. Referring back to the
EURUSD example, since it is pushing lows near a whole number (1.3000) and happens to be gyrating around a psychological support area as well, I need to protect myself by lowering my expectations and only looking for scalping or day trading opportunities if they can be validated. Why? At levels like this, bullish retracements out of nowhere are more likely. Why get caught up in one of those?

As a trader you need to realize that much of the information you need to make sound trading decisions is available right on your chart, but not obvious. Questioning the market is a creative process and far from scientific. The purpose is to open your mind to possibilities and letting the market dictate it’s intentions. This is not going to give you the best prices, but it will help you
recognize the dominant momentum in the current price action and better prepare you to participate in emerging opportunities.

—
Marc Principato, CMT,

Risk Disclaimer

*No Relevant Positions