As a professional day trader that specializes in price action trading, I am often asked if price action can be used as a legitimate Forex trading strategy. The answer to that question is a definite yes; however there is a big “disclaimer” that I will throw in with the “yes” answer. You see, price action strategies work in all markets, and that includes stocks, bonds, futures, Forex and any other market that can be charted. I specialize in futures trading, but I have traded Forex and spent quite a bit of time investigating the use of price action trading strategies in the Forex markets. The final answer is that these trading strategies work just as well in Forex as they do in any other market that can be charted and traded. Also, you should understand that price action works on any time frame as well. If moving from intra-day charts to daily charts, you will need bigger stops and targets on the larger charts, but you should understand that the size of the chart makes no difference in how well the strategies work overall.
I said that there was a small disclaimer, so I know you are waiting to hear me explain before you will be satisfied as to how well price action trading works in the Forex markets. As I stated previously, the strategies work just as well, but the problem is not the strategy. The problem is Forex as a whole, because it is a very poorly regulated market. In the case of the futures markets and even most stock markets, there are strong regulatory bodies that set stringent trading rules and guidelines that both traders and all brokers must follow. The rules are too stringent and there are too many checks and balances in most markets for either traders or brokers to manipulate things. While these regulations are improving in the Forex markets, they still have a long way to go. Many Forex brokers are nothing more than legal bucket shops, particularly in the European countries where they are set up like gambling entities. When using these brokers, you are not buying and selling real Forex, but simply betting against the house or other traders as to which way prices are going and the loser must pay the winner.
Because of the lack of regulations in Forex, these brokers often run prices and stops in order to take out your stop orders, when prices may have not even traded at those locations for other broker’s price charts. It’s rigged against you is the easiest way to put it really. You often see advertisements that there are no commissions in Forex either and that’s just not true. You pay a spread to enter, so your commissions are higher than futures in almost every case, so ultimately it’s cheaper to trade futures. While it’s an easy market to set up and start trading with a small account, you can find similar deals in the futures market, so do not fall for those slight of hand commission tricks.
Now that you understand the number one reason why I will not trade Forex, let me tell you some great reasons why you would want to choose futures over Forex markets. We have already established that there is not enough of a regulatory presence to make Forex trading a safe place to put your money yet. We also talked about the hidden commissions, but did you know that you can trade the ES or mini S&P for less than $4.00 per round turn? That means you can scalp out a single tick in the ES and still make a profit on your trade. How many ticks do you need to make just to get to break even in most Forex markets? You do the math and tell me that Forex commissions are free or even cheaper than futures for that matter and see how it works out for you! You might try arguing that the margin is too steep in futures, but most day traders in the ES put up $500 or less per contract, so again, you can trade futures with as small an account as you can trade Forex, but it’s safer and not rigged against you in the end.
I’m not done yet, as there are some other great reasons to trade the futures markets. If you really like trading currencies, then guess what? You can trade just about any currency you want in the futures markets, and just like the ES, the commissions and margin are about the same, so again, futures are much cheaper than Forex overall. But even better, there are mini contracts in the currency futures so that you can start small and trade mini accounts where each tick has a value of only $1.00. The cost per RT is not as efficient as the full size contracts, but if you are looking for a live market that you can trade with a small account, mini currencies are available in the futures market, so no need to gamble in Forex at all.
If you trade stocks, you need a minimum account value of $25,000.00 to maintain your day trader status, but that’s not needed to trade futures, so for this reason alone, futures are the better choice for day traders. Also, you can gain a lot more leverage in futures without the need to buy thousands of dollars of stock. Think for one moment how many shares of Google stock you would need to buy to make any real money when a share is over $600.00. When day trading futures, you get reduced margin costs in almost every market, and as an example, the ES is only $400.00 per contract, so you could stack up a lot of contracts and leverage with a $5,000.00 account, when you couldn’t even qualify for day trader status in the stock market.
There are many horror stories about the leverage in futures, and if you are holding positions through the close of the market, they can create havoc for you if there is a huge move on the open. However, when day-trading, you must exit the market before the close, so this all but eliminates that worry, and that’s why futures day traders get a reduced margin amount. Hopefully you can see the benefits of trading futures over other markets, and even though price action works great for Forex trading strategies, you will be much better off trading futures, or at least trading the currencies via the futures markets where you do not have to worry about under handed brokers taking your hard earned capital. Like any day trading strategy, if you do not know how to trade profitably, you can count on losing your money regardless of the market, but at least make sure that you are losing it due to bad trade decisions and not due to a rigged game that is working against you from the start! Can price action be used as a legitimate Forex trading system? Yes, but for all of the reasons above it is not recommended.
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