“Superiority” in Forex is a word that indicates that there is a “probabilistic (statistically) significant bias in either buying or selling” in the current market situation.
It is also used as a word to mean the “profit-generating power” of the trading method.
For example, “There is an advantage of buying in the current market situation”, “There is no advantage in either selling or buying”, “This trading method has a high advantage”.
By the way, the advantage in Forex is also called “edge”.
In this article, we will introduce specific examples of trading methods that take advantage of superiority, and explain in detail the superiority (edge) in the world of Forex.
If you want to take a look at the trading method first, please see “Specific examples of trading methods that accumulate superiority”.
- In Forex, advantage (edge) has several meanings
- Basic “Superior Market Conditions” in Forex
- How to create a trading method that “accumulates multiple advantages”
- Specific examples of trading methods that accumulate superiority
- How to find superiority and its ideas
- Use multiple hourly charts to take advantage
- Conclusion – In the world of forex trading, where uncertainty is extreme, dominance is the key to success.
In Forex, advantage (edge) has several meanings
In the world of Forex trading, edge is used in several ways.
First of all, when it is said that it is an “advantageous trading method”, it means that it is an excellent trading method that can make a total profit by repeating trades with that trading method.
In addition, the term “dominant market situation” refers to a market situation in which the selling and buying forces are unbalanced (buying and selling are biased) in a certain chart situation of the exchange rate, and one of them is advantageous in terms of probability.
Another expression is “a market situation in which an advantage is occurring”.
In this “advantageous market situation”, the trend of exchange rate movements can be predicted probabilistically (statistically), so it is possible to derive judgments such as “In this market situation, it is a probabilistically advantageous trade to have a long position”.
In other words, an “advantageous trading method” is one that stochastically clarifies the “advantageous market situation” and then compiles the trade decisions for entry and settlement into rules.
Traders themselves have their own advantages and disadvantages
An often forgotten and very important factor when considering the superiority of Forex is the “advantage of the trader himself”.
In Forex trading, no matter how high the advantage of the trading method used, if the trader who uses it (that is, “you”) does not have an advantage, you will not be able to take advantage of the superiority of the trading method.
Some of the main advantages of traders include:
- Skills to accurately execute buy and sell orders by analyzing charts according to trading rules.
- Mental stability that allows you to calmly cut your losses and re-enter without hesitation at the next entry opportunity even after cutting your losses.
- A skill that allows you to verify whether your trading method has an advantage (or whether the advantage of your method has decreased).
Forex traders who possess these skills and mental stability have better qualities than other traders, which has a positive impact on trading results.
In other words, it has an advantage over other traders.
If the trader himself has a high advantage, even if the superiority of the trading method itself is not very good, it may be possible to make a reasonable profit in total performance.
For example, even if you use “small loss and large profit trade with an extremely low win rate”, which is a trading method that many Forex traders find difficult, you will be able to raise total positive results by repeating entry and loss cutting casually against the background of a stable mentality.
It can be said that this is the work of the trader’s own high superiority.
Basic “Superior Market Conditions” in Forex
From here on, we will look at market situations where you have an advantage – that is, where the balance between buying and selling forces is unbalanced and one side has an advantage in terms of probability – and how to actually utilize that situation in your trades. Let’s take a closer look at the method.
A horizontal breakout is a fundamental market situation that creates an advantage.
The “typical and basic market situation” where an advantage occurs is a breakout of the horizontal line (support line and resistance line).
For example, in a situation where the support line breaks out in the downward direction, the selling force is stronger, so the theory of Forex trading based on superiority is basically to have a sell position in this situation.
It may sound obvious, but this simplicity is important when considering superiority, and as a first step, a simple view of price movements on the horizon is a very effective approach.
Many Forex traders think too hard about price movements, and they can’t even take the first step, and they are stuck in a state where they can’t do the verification work.
Let’s start simple and dig into the basics.
Focus on the principle of the horizontal line (support and resistance line)
When a line breaks out, there is a temporary one-sided price movement in the direction of the break.
For example, when a support line breaks out in the downward direction, there will be fewer buy orders for the following reasons, resulting in an imbalance between selling and buying.
- “Sell orders for settlement,” which are the losses of buying forces, are likely to occur like dominoes, and the exchange rate is likely to fall.
- It is easy to be temporarily flooded with “new sell orders” to ride the winning horse.
- Witnessing the vigorous decline, a mood (market psychology and atmosphere) arises among market participants to refrain from placing “new buy orders”.
For this reason, the price movement during a horizontal breakout is considered to have an advantage.
If you are unsure about understanding horizontal lines, please refer to the article below.
explanation What are Support and Resistance Lines? How to draw them, how to use them
How to create a trading method that “accumulates multiple advantages”
However, of course, it is difficult to win in Forex with a trading method that only breaks out the horizontal line.
Just as you can’t win in total even if you simply repeat the trade of “long above the moving average line, short below it”, Forex is not a sweet world so that you can make a profit only by the breakout of the rough horizontal line.
Therefore, it is important to “accumulate (combine) advantages” when creating a trading method.
An easy-to-understand approach to combining advantages is to accumulate “advantages that appear in a direction that is in sync with the trend.”
Specifically, you can think of ways to stack multiple advantages such as:
- The advantage of following the direction of “rounding up and down highs and lows” in accordance with the Dow Theory.
- Dominance to break out chart patterns.
- Price action advantage.
- The predominance of indicators (technical indicators).
Below, we will explain the advantages of each.
Advantages of following the direction of “rounding up/down the high and low prices”
In general, “a market situation where the highs and lows are rounded up” is a situation where it is considered advantageous to have a long position.
The reason for this is that the high has been renewed, and the recent low is higher than the previous low, indicates that the buying force is stronger than the selling force.
The exchange rate begins to trend upward just before falling to the previous low (upward due to buying pressure).
This means that many traders will appear who want to “buy” at a higher rate than the previous low regardless of whether they are sold or sold, and the mood of the market is that “I want to buy at a cheap rate, but I want to buy before it rises” It is thought that it is easy to work.
If the selling force is similarly strong (selling and buying are in equilibrium), the highs will not be renewed over and over again, and the lows should be maintained or renewed below.
However, this is not the case, and the fact that both the highs and lows are showing an upward trend (rounding up) means that buying is advantageous in the current situation.
Advantages of breaking out chart patterns
Market conditions that break out of chart patterns such as simple ranges, triangle holding, and flags (trend lines) are considered to be situations where an advantage is being created, just like a horizontal line breakout.
Not to mention the upper and lower limits of ranges, ascending and descending triangles and the upper and lower limits of flags tend to act as resistance and support lines.
Therefore, it can be said that there is an advantage (unbalanced selling and buying forces) even in situations where these chart patterns break out.
Advantages of price action
Price action refers to the price movement of candlesticks, and includes price action based on a single candlestick and price action based on a combination of multiple candlesticks.
Some famous examples of price action are the “pin bar”, “great yang line/great yin line”, and “morning star/evening star”.
Another characteristic and beneficial price action is one that represents “fake”.
As an example of false, the “pin bar” that appears across the horizontal line is important as it suggests that the breakout of the line may have failed (it has become a false breakout).
As a price action very similar to the pin bar, the price movement that reversed and returned stronger than the momentum of the breakout (the length and number of candlesticks) also falls under false marks.
Price action can be used as one of the advantages because there is a background of buying and selling that led to the formation of such candlesticks, and the “bias between selling and buying forces” is shown there.
Superiority of indicators (technical indicators)
Indicators (technical indicators) such as moving averages, RSI, Stochastic Oscillator, and MACD do not have any notable superiority on their own.
However, in situations where well-known and highly used indicators by forex traders give clear signs, there is a tendency for price movements that cannot be ignored.
For example, the 200-period simple moving average is a popular indicator that attracts a lot of attention, so there is a possibility that some influence may occur, such as determining buying or selling pressure by the bull bear position or acting as a support or resistance line of the moving average.
Similarly, the MACD in its default state can be said to be a well-known indicator used by many Forex traders, so the situation of sign occurrence such as the direction of the MACD line and the crossing with the signal line may affect both positive and negative (false occurrence).
In this way, the use of indicators in combination with other advantages may reinforce the dominance of trading methods.
How to accumulate these advantages and combine them into one method
The recommended advantage as an axis to summarize these advantages is the direction of rounding up or down of high and low prices (=trend direction).
In other words, select only the market situations where the chart pattern breaks out in the trend direction, and trade when the price action associated with the breakout direction appears and the indicator is giving a signal in the breakout direction.
By identifying and limiting the situation in this way and narrowing down the situations where multiple advantages occur at the same time, it becomes possible to find valuable trading methods.
By accumulating advantages, the advantages that were small and unstable on their own will be reinforced in a mutually complementary manner, making it easier to have a stochastically advantageous position.
Specific examples of trading methods that accumulate superiority
Let’s look at the example of the FX trade method using the advantages that I have explained so far (Payment rules and cash management rules are not included.).
The advantages used in this FX approach are mainly related to horizontal line (support and resistance lines).
The feature of the method is that it is structured to take a position in a situation where it is difficult for the rate to move in the opposite direction, supported by multiple lines, against the pressure of price movements to resume large trends.
Also, as mentioned above, keep in mind that the dominance of FX traders themselves is also an important factor.
Setup Rules ~ Advantage-Stacked Trading Methodology
The setup rules for this technique are as follows, make sure all of these conditions are met, and then proceed to apply the trigger rule.
- All of the following conditions must be met (the following conditions are for buying. The selling point is the opposite).
- There is a clear uptrend on the hourly chart above the time frame to be traded (highs and lows are rounded up).
- On the hourly chart to be traded (the same applies below), it is a range market or an ascending triangle (= a clear resistance line is formed).
- It is breaking out in the direction of the trend on the upper timeframe (fighting above the resistance line at the upper end of the range).
- The resistance line has either rolled and reversed to become support, or a “small range (more than 10 candlesticks)” has been formed in the form of entanglement (straddling the line).
The diagram below is a diagram illustrating a state in which the setup conditions are met (a state in which advantages are accumulated).
The image below shows a case where a “small range” is formed in a situation where the resistance line reversals and becomes support.
The following figure shows a case in which a “small range” is formed without breaking through the resistance line (entangled with the line).
Trigger rules – time your entry
Once you have determined that the setup conditions are met and the market situation is favorable, the next step is to execute your entry when the trigger conditions are met.
The image below is an enlarged view of the part labeled “Form a small range” in the previous setup diagram.
The trigger rule for this method (including the loss-cut rule) is as follows: Under this rule, if the price of a pin bar with a clearly small candlestick and a long beard passes the high price, it becomes a buy entry (the selling is the reverse).
The advantage used in this trigger rule comes from the price action indicated by the candlestick beard.
For example, “lower whiskers” indicate a strong push down, but a stronger push back, which may put the selling power at a disadvantage in the short term — a possible bias in trading.
This trigger rule is based on this short-term advantage.
- In the “small range,” a distinct “lower beard pin bar” appeared.
- Ideally, the pinbar beard should be at least three times as long as the actual candlestick, and the overall length (range) of the pinbar should be greater than the average of the most recent candlestick group.
- If you pass the high of the lower beard pin bar, you will enter.
- Even if you don’t pass the pinbar high with the candlestick right after, you can enter if you pass the pinbar high in the small range.
- The loss-cutting line is “the lowest price in a small range.”
- When a “small range” is formed again after a loss, a trigger can be applied to re-enter (but only once).
Regarding the settlement rules for profit confirmation, the following methods are mentioned, but I will not go into details this time.
- The price range of the range that was the premise for this breakout is the target rate (based on the premise that the price movement follows an N-shaped wave).
- Determine the target rate based on the risk-reward ratio (set it to “n times the price range up to stop loss”).
- The target rate is the most recent high-low price of the top time frame (if the risk-reward ratio cannot be secured at 1 or higher, it will be postponed).
Settlement rules need to be adjusted according to one’s trading style and risk tolerance, so careful verification and practice are required to make decisions while considering the overall balance of the rules.
Be aware that if settlement rules are not set and applied properly, you will not be able to take advantage of the advantages you have accumulated thus far, and in some cases, the rules may even have the opposite effect.
Explanations on actual charts
Now, let’s look at how the advantage is generated by following the specific market conditions in which this method is applied on actual charts.
The past charts used in this article are the 5-minute and 15-minute charts of the dollar-yen and euro-dollar.
All of the charts we have used are in a state of accumulated advantage by satisfying the conditions of the setup rules, so please check them one by one with your own eyes.
Case 1: “Ideal Buying Pattern.”
The chart below is a case where a resistance line was formed with nicely aligned highs, then a “small range” was formed across the line, and a pin bar with a lower whisker appeared at the lower limit of the small range.
The upper time frame is in an uptrend, and the trend is currently pausing.
The selling forces pushed down several times, but each time they were brought back up to the same high, and recently the lows have been consistently cutting up, indicating that the selling forces are becoming inferior.
Finally, the resistance line was broken above and a “small range” was formed.
At this point, the selling forces are losing their ability to defend the resistance line, and are now fighting using the high of the small range as a defensive line.
After a short period of stagnation, a pin bar with a lower whisker appears.
This indicates that the push down by the selling forces has been easily negated by the buying forces, and there is a possibility that the selling forces do not have the power to push down any further at this point.
At this point, the following advantages have accumulated
- The advantage of the trend direction of the upper leg (it is always easy for buying forces to enter the market in anticipation of a trend resumption).
- The advantage that the resistance line, which has been recognized and resisted many times, has been surpassed (orders for “buy to close out” and “buy new” orders begin to increase = buying pressure increases).
- The advantage is that the resistance line has rolled over and become support (the probability of the market returning to the range is beginning to decrease).
- The advantage that a “small range” has formed against the upper limit of the range and is no longer coming down from there (indicating that the power to push down into the original range is decreasing further).
- The advantage that a pin bar, which is a “negative downside sign,” has appeared in the “small range” (indicating that the probability of a recent decline has further decreased).
In a situation where these advantages have accumulated – that is, a situation where “the possibility of the rate going down from there is small” – it is finally time to take a buy position.
The pin bar that triggers entry appears on the ninth candle after the resistance line is crossed at the close, which is the earliest entry timing (we do not recommend any earlier entry timing for this method).
) Since the price range to the stop-loss inevitably narrows, it is an ideal pattern in terms of the position and shape of the small range.
Case 2: “A case of a small range pushed too deep.”
The chart below shows a case where a small range formed across a resistance line has pushed deep enough to close in on the lower limit of the original range.
In this case, we still wait for the setup to be in place and for the advantage to build up, and enter on a breakout of the high when the triggering pin bar appears.
This pattern requires attention to the risk-reward ratio, depending on the profit-taking rule, because the price range to the stop loss is also wider due to the wider price range of the small range.
The third pin bar that appears after the resistance line is broken at the close is too early for the rule, so we will forego it.
If we had entered at the high of this pin bar, the loss line would be the low of this pin bar (because at this stage the only low that can be treated as the lower limit of the “small range” is the low of the pin bar), and the result would be a loss settlement.
The reason why the setup rule specifies “10 candles or more” as a requirement for a small range is to watch for such “appropriate push and pullback price movements.
Although it is on a case-by-case basis, generally, entries that are “post-arbitrage” tend to be favorable in terms of superiority.
Case 3: “Case with huge entry pin bar.”
The chart below shows an exceptional case, where the triggering pin bar turned into a giant candlestick.
The setup and trigger conditions are both met, and the advantage is firmly stacked, so entry can be made without any problem according to the rules.
Moreover, the tip of the pin bar has become slightly stuck in the line, and there is a possibility that this line will function as support, so the rationale for using the low of the pin bar as the stop-loss line has become clear.
However, since the price range to the stop-loss line is very large, it is important to consider the risk-reward ratio in this case.
As for the superiority of the price movement, the existence of overwhelming buying power in the short term is indicated at the end of the lower whiskers, so it is appropriate to enter the market after adjusting positions if possible.
However, it is desirable that these points be verified and examined in advance and rules be established according to each trader’s acceptable financial risk and mental risk (i.e., whether the trader can withstand the price volatility that may occur later).
Case 4: “Case with two layers of ranges.”
The chart below shows a case where the range has been split into two layers.
You can see a clear resistance line forming below the highest point of the range (the high on the left edge of the chart).
In terms of the rules of this method, the focus is solely on the highest price of the range.
If a “small range” is formed below the highest price, a full-scale attack or defense may occur when the highest price is exceeded, which would hinder the advantage on which this method is based in the first place.
Therefore, we should wait for a roll reversal through the highest (lowest) line of the range, or for a “small range” to be formed in a way that intersects (straddles) the line.
As a common case, a resistance line formed inside a range will roll reversal and a small range will be formed on the line, which is seen rather frequently.
In this chart, we can also see such a formation.
Case 5: “Sell Entry at a Loss.”
The chart below shows an example of a sell entry that cautiously waited for a trigger advantage to occur but ended up losing money.
The chart shows the importance of position size adjustment rules, as it was a relatively wide stop-loss range.
Trading with the same lot size (position size) for any entry can cause major problems in terms of risk management, so we recommend that you simulate and make rules well in advance.
Case 6: “A case that shows the importance of respecting the superiority of the method’s rationale.”
The chart below shows the importance of the condition in the setup, “A small range should be formed with a resistance line straddled (entangled) or supported by a roll reversal.
At first glance, the conditions appear favorable, but a “small range” has formed at a distance above the original upper range line.
This is hardly a situation where the price is supported by a roll-reversed line, and the only basis for supporting the decline is the lower line of the “small range” and the advantage provided by the low of the pin bar.
As a result, the price movement of the push to the upper limit of the original range resulted in a break below the lower limit of the “small range” and a loss settlement.
In this method, the “small range” must be formed by either straddling the line at the upper end of the original range or by a roll reversal of the line to provide support.
The reason for this is that in order to gain an advantage, it is necessary to take a position against a “price trend that is difficult to move lower in the short term.
For example, when a “small range” is tied to a resistance line, it tends to be in the process of trying to break above the range, so it is considered to be in an “upward trend” in the short term.
However, once the price breaks out of the upper limit of the range, it tends to become a “scene of adjustment (decline),” and there is a possibility that the price is in a “reversal downward trend” in the short term.
Therefore, when a “small range” is formed at a position like this case, there is a possibility that the price will be pushed back to the upper limit of the range or to some lower price in the range.
In order to limit the risk of such a price reversal and to hold a position, the setup is set up with the condition of either straddling the line (straddle the line) or backing the line (roll reversal to support), making it difficult for the advantage to be impeded.
Case 7: “A case in which the trigger condition was loosened because the setup was met with favorable conditions.”
The last chart you will see is a case where the setup has been met with favorable conditions and a solid accumulation of advantage.
A clean triangle (descending triangle) chart pattern has formed, and the breakout of the support lines that make up the descending triangle (the formation of a small range) is also ideal.
A “small range” was formed as the price broke out of a clearly identified support line and tangled with the line.
A small candlestick continued near the lower limit of the small range, and we were waiting for a pin bar at the point where the buying power would finally give up.
What appeared here, however, was a pin bar with a half-way whisker.
Normally, there is no problem in letting such a candle with a potential trigger that causes hesitation go through from the standpoint of superiority.
However, in a case like this, where the setup is met with favorable conditions, it is reasonable to use discretionary judgment to make a sell entry with a risk appetite.
As long as you have a position based on a series of advantages, it is not always possible to enter a position with a perfect score.
It is important to learn the flexibility of trigger judgment as well as the rigor of setup judgment through past chart verification and trading practice.
Characteristics and Summary of the “Advantage-Stacked Trading Methodology”
In this trading method, a number of advantages are accumulated with the objective of riding the price movements of a temporary stagnation (range) that occurs in the upper hourly trend and from which the trend continues again.
In the “Setup Rules,” advantages are accumulated based on the condition that the power of the forces resisting the trend reversion (the “selling forces” in the case of an uptrend) is weakened, which is confirmed by price movements.
The “Trigger Rule,” which defines the timing of actual entry, consists of confirming price action indicating that the counterattack by the opposing forces has failed in the final phase of the trend resumption, and entering the market when a short-term advantage is generated.
As you can see from the above, I hope you have understood that it is possible to form the framework of the method by accumulating simple advantages that everyone is familiar with.
To build on this trading method as a starting point and develop it into a more practical, full-fledged trading method, careful verification of past charts will be necessary.
If you are interested, we recommend that you try to verify past charts based on this trading method.
How to find superiority and its ideas
Although commonly known advantages that form the basis of trading methods can be utilized without any problem, it is difficult for such advantages by themselves to be noticeably effective.
Therefore, the approach of successfully combining and accumulating various advantages is effective, but this method is also not straightforward for beginners.
Therefore, please read the following article first to learn “how to formulate a hypothesis of superiority and verify its validity based on past charts”.
explanation I will teach you how to verify forex. How to create a trading method
Continuing further, please refer to the article below, which details “specific examples of individual advantages and how to combine them”.
explanation What is a setup? How to create the key components of a FX methodology
By reading these articles, you will gain a better understanding and practice of how to find an advantage, how to verify it, and how to construct a specific trading method.
Use multiple hourly charts to take advantage
Even a single advantage may be applied across multiple time charts to further demonstrate its superiority.
Example of using the advantage of “exiting the high-low of the pin bar”
For example, when using the advantage of the price action “pin bar high-low breakout,” after entering a trade when a pin bar trigger is established on the time chart, if a “pin bar high-low breakout” is also established on a higher time chart that includes that pin bar, then an additional position is taken. This is a trading idea.
This is based on the judgment that the larger time chart “reflects the trading intentions of more market participants,” and that it is reasonable to take a bullish position if a sign of superiority appears on the larger time chart.
Needless to say, in this case, it is necessary to clearly define rules regarding position sizing (money management) because the amount of loss will increase as the position increases.
Conclusion – In the world of forex trading, where uncertainty is extreme, dominance is the key to success.
No one knows the future, and forex price movements are always uncertain as to what will happen next.
In such a foreign exchange market, it is necessary to follow probabilistic trends in order to repeatedly enter and exit the market, risking margins.
This is where the “edge” comes into play.
In other words, traders identify market conditions that have a probabilistic trend (i.e., an edge) and trade by accumulating such an edge.
As the advantage is literally the rope of last resort for Forex traders, they are required to capture the advantage in every possible way, take advantage of the advantage, and refine and improve the advantage.
The above is what is FX “advantage”? I explained about the examples of trading methods and how to create them.
We also recommend this article
