Most Forex trading systems are made off technical indicators (a moving average (MA) crossover, overbought/oversold conditions in an oscillator, etc.) But what are technical indicators? They are just a series of data points plotted in a chart. These points are derived from a mathematical formula applied to the price of any given currency pair. In other words, it is a chart of price plotted in a different way that helps us see other aspects of price. 

There is an important implication for this definition of technical indicators. The fact is that the readings obtained from them are based on price action. Take for instance a long MA crossover signal; the price has gone up enough to make the short period MA crossover the long period MA, generating a long signal. Most traders see it as “the MA crossover made the price go up,” but it happened the other way around, the MA crossover signal occurred because the price went up. Where I’m trying to get here is that at the end, price behavior dictates how an indicator will act, and this should be taken into consideration on any trading decision made. 

Trading decisions based on technical indicators without taking price action into consideration will give us less accurate results. For example, if there is again a long signal generated by a MA crossover as the market approaches an important resistance level. If the price suddenly starts to bounce back off that important level there is no point in taking this signal, price action is telling us the market doesn’t want to go up. Most of the time, under these circumstances, the market will continue to fall, disregarding the MA crossover. 

Don’t get me wrong here, technical indicators are a very important aspect of trading. They help us see certain conditions that are otherwise difficult to see by watching pure price action. But when it comes to pull the trigger, price action incorporation into our Forex trading system will definitely put the odds in our favor, as it will generate higher probability trades.

So, how to create a perfect Forex trading system? First of all, you need to make sure your trading system fits your trading personality; otherwise you will find it hard to follow it. Every trader has different needs and goals, thus there is no system that perfectly fits all traders. You need to make your own research on various trading styles and technical indicators until you find a concept that works perfectly for you. Make sure you know the nature of whatever technical indicator is used. 

Secondly, incorporate price action into your system so that you only take long signals if the price behavior tells you the market wants to go up, and short signals if the market gives you an indication that it will go down. 

Third, and most importantly, you need to have the discipline to follow your Forex trading system rigorously. Try it first on a demo account, then move on to a small account and finally when feeling comfortably and being consistently profitable, apply your system in a regular account. 

About the author: Raul Lopez is a full time Forex trader and founder of www.straightforex.com a high quality Forex training company. 

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