The Four Elements Of A Successful Forex System by Dean Malone.

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2 Fellow Trader, The techniques and concepts I will outline in this report are the direct result of many years of my own dedication to the art of trading. Through all of my intensive research, testing, and real live "in-the-trenches" trading, I have developed a strong set of concepts and techniques that have given me the edge I needed to become a full-time professional currency trader. The trading principles you're about to discover are these very same techniques - the actual results of all of my hard work and dedication over the years. I have used these very same principles since I discovered them for the first time, and continue to use them every single day that I trade. When applied properly, these very same techniques can potentially make a significant difference in your trading as well. So, let's jump right in! Allow me to start by asking you a question: Do you ever feel that the trading method you're currently using has great potential... but it somehow doesn't perform as well as you think it should? Sometimes, it may almost feel like something is "missing" from your system. Some overlooked aspect that may be preventing your trading system from getting the best performance that you KNOW it can do. Somtimes, you may see absolutely "perfect setups" for a trade only to have the market do the exact opposite of what you predicted. It can be extremely frustrating, and causes you to second guess not only each trade you place, but the system itself! You're not alone - I was once in the exact same boat. When I first started trading, I never fully understood why the trades I spent a great deal of time researching would end up losing. Everything I thought I knew about trading was showing me what I thought to be perfect conditions to buy or sell. At first, I would jump right in making trades with great

3 enthusiasm. But, over time, I found myself second-guessing my entries and hesitating to "pull the trigger. Even after a trade had been placed, I would watch with each new tick anxiously dreading if this trade would be a winner or a loser. Most of us get into trading to be our own boss, and reduce the stress that comes with a standard 9-to-5 day job...not to spend hours attempting to confirm each trade only to be a nervous wreck until the trade has closed! I just knew that I had to be overlooking something important...so instead of starting over to create yet another system, I decided to spend my time understanding WHY my trade setups were failing. Finally, after many years of devoted research, I stumbled upon the explanation of why I was losing my "perfect setup" trades! This discovery was far removed from anything I had considered before, which is why I believe most traders have no clue this is happening to them. The best way to explain this phenomenon is to first examine the "odds" of each Forex trade. Even though the vast majority of Forex traders never see a consistent profit (more than a 90% failure rate), the fundamental "odds" of each Forex trade aren't really all that bad. Speaking strictly from statistical analysis, the Forex market can move only one of two ways...up or DOWN. Because of this basic yet fundamental fact, every trade placed in Forex has roughly a 50% chance of becoming a winning trade at some point while the trade is open. Then why is it more than 90% of traders are unsuccessful when this fundamental principle behind each Forex trade says the odds should be closer to 50%? The answer may come as a shocker, but if you aren't able to turn a consistent profit in Forex, there is a good chance that your problem is all in your head. Allow me to explain...

4 Let's do a quick experiment. When you look at this picture, what do you see?: Most everybody automatically recognizes this picture as a "face"... And most everybody would be WRONG. In reality, this picture is nothing more than 3 circles and a straight line. Our brains automatically recognize this "pattern" as a face, and we believe it without question. Not only do most all of us believe this picture is a "face"...we are willing to both fight for and defend our answer. Even if you stop reading here to take a second glance, your brain refuses to see this picture in any other way. No matter how "hard" you look at this picture (or for how long), it is almost impossible to NOT see a "face". Our minds have us extremely convinced of exactly what we are looking at, even on a subconsious level. This is a very good example of apophenia, which is defined as: Apophenia - The act of discovering meaningful patterns in data that do NOT actually exist.

5 Now don't worry - this isn't a bad thing, and you don't have some disease. Everybody experiences apophenia occasionally, and is a normal part of being human. While apophenia is relatively harmless in nature (spotting shapes in clouds, for example), it is responsible for millions of losses in the Forex market on a daily basis. The scary part? Most traders have absolutely no idea this is happening, and therefore can't prevent it from happening. What Makes Apophenia So Dangerous To Forex Traders? To better understand the problem, let's do another experiment with something a bit more relevant to the Forex markets... What do you see in THIS picture? (HINT: It's not a face...) Do you notice any type of pattern in this chart or areas of support or resistance? Where would your current system or trading method tell you to place a buy? about a sell? How

6 Most skilled traders would see quite a few things almost immediately: This is the same chart as above, only with a few lines and some labels drawn to highlight key areas of support and resistance, trend channels, a chart formation and two levels of clear breakout points. You've probably seen these types of trend lines and chart patterns before, and may have even noticed a few things that aren't drawn out on the chart above. These would be some pretty great observations of a skilled trader, except...

7 That is not a price chart. In fact, this isn't a chart of anything at all. It is built completely by randomly generated numbers with an exact 50/50 chance of up vs. down. In other words...this is a chart of about 500 "coin flips". Yet...it seems to have all of the characteristics of a standard Forex chart, doesn't it? Right now, you may be wondering: "How can this be possible? Why does a completely random chart show so many strong similarities to a Forex chart? The Forex market and this completely random chart have absolutely nothing to do with one another...yet we are still able to easily identify some extremely striking similarities. This is exactly how apophenia can cause losing trades! You see, when looking at any chart, our brains will begin to automatically identify patterns and formations that seem to make plenty of sense to us. We eventually become absolutely convinced of the significance of these patterns. And the worst part? We begin to believe these patterns mean something...and we are willing to fight for them. Just like the "face picture" from before, no matter how hard we look at this chart, we can not help but see the patterns and formations. In our minds, because we begin to see these patterns in almost every chart we look at, this makes them very signifigant! Let me ask you another question: When you became aware of the fact that the chart you were looking at before is completely random, how did you react? I'd be willing to bet a number of people reading this report didn't believe the chart was actually random even after I revealed it...and most likely these same readers still don't believe that it's random.

8 This is because we see what we want to see. Levels of support and resistance, chart patterns, candlestick formations, and more give us comfort in our ability to trade these charts. We believe it SO strongly that we actually see these exact same "patterns and formations" in a completely random chart, and are willing to bet our hard earned money that these patterns have strong significance in how the markets move. If a man was flipping a true coin (always a 50/50 outcome) and allowed you to place a real money bet of $1,000 to see if you could predict his next coin flip, would you place that bet? What about if you were allowed to sit and watch him flip the coin 500 times first, and graph the results? Could this help you determine what is going to happen next? Most everybody would not take this bet. The fact that you can watch 500 coin flips before making your decision does not change the outcome! Regardless of what has happened in the past, a "true coin flip" will always be 50/50. Yet...a few minutes ago, many of you were convinced you could predict the chart you were seeing before it was revealed that it is completely and totally random. These two scenarios are no different from one another, and is the very reason why most traders FAIL in Forex trading! - This is why traders are absolutely convinced in the power of their own systems while money continues to slowly drain from their account. - This is why traders don't understand what is happening when the "perfect setup" causes losing trade after losing trade. - This is why many traders begin to second guess the very concepts that they are trading, and lack the confidence to "pull the trigger" on the next trade regardless of how "perfect" the setup looks.

9 Eventually, the constant struggle between what is actually happening and what we think is happening becomes too much. How do you know what is real, and what is simply being imagined as signifigant? Traders can spend YEARS "chasing their tail" in an attempt to find the "correct pattern" - the one elusive "truth" to the market that will allow them to turn the corner in their trading. But for almost every trader, this moment sadly never comes. So what do the professionals have that the rest don't? How can we as traders filter out these "imaginary" views of the market to be able to see what is REALLY going on? In order to do that, you will need to understand exactly what makes the market move and behave how it does. Once you do, filtering out the "noise" becomes much easier...

10 THE "FOUR ELEMENTS" CONCEPT EXPLAINED In order to break free of the apophenia pitfall that plagues ALL traders, you need to understand how to spot the difference between what you are creating with your mind, and what the market is actually telling you. This is the ONLY way you will be able to understand if the trades you are placing have the same probability as "flipping a coin", or have a solid foundation made up of strong market fundamentals. The Forex market has a set of four (4) elements that are directly responsible for how the currency moves, and why it 'behaves' the way it does: Price Action Market Sentiment Trend Volatility Volatility It doesn't matter if you're day trading, swing trading, making long term plays, or scalping for a quick profit - each of these four elements play an important role in both how the market moves, and when it should be traded. Each element accurately describes a different portion of the anatomy of the Forex market. By monitoring each element as you trade, the probability of incorrectly interpreting the market drops dramatically. Why is this? You are using the fundamental components of what the Forex markets made of in order to make your decisions, as opposed to what you've simply trained yourself to recognize as 'important'. This allows you to avoid many of the 'false signal' traps that apophenia creates! Let's examine what each of these elements are first before we go over how to use them properly in the creation of a successful Forex system:

11 Price Action Quite literally, price action is nothing more than what a currency pair "does". It is the actual up and down movement of the currency pair, and creates the price chart itself. In turn, price action is directly responsible for creating all of the familiar elements of technical analysis: Support and resistance Candlestick patterns Chart patterns Creation of trends, counter-trends, and breakouts (the 3 main market conditions), and much more... Many traders I've met attempt to trade the markets with price action alone. While I've seen some success, it is usually quite limited and inconsistent. The random chart test from before describes a large problem with using price action on its own, and explains why this element alone is simply not enough data to make an educated decision. As you may remember, it is extremely difficult (if not impossible) to distinguish between a completely random chart and an actual Forex price chart simply by using price action alone. Because of this fact, building a Forex system with only price action is like trying to predict the outcome of a coin flip based on previous coin flips - it just doesn't make much sense. Now, don't get me wrong here... price action is very important! It is the very fabric of any Forex chart, and gives the market its heartbeat. I use price action every single day when I trade. It would be virtually impossible for me to be a consistent trader if I didn't. However, like each of the other three Forex elements, it is incapable of providing enough data for you to be able to tell the difference between a genuinely meaningful trade setup, and the patterns that are created from nothing but "noise".

12 Volatility Volatility is defined as the speed at which the market is moving. This is a very important element of a successful Forex system, but is unfortunately ignored by many traders. I've always been very confused by this...why would anybody in their right mind ignore volatility? Out of the four elements, volatility is easily the most predictable! Each and every day, like clockwork, bank sessions close and open around the world. Each banking session is responsible for movement in that currency during that time. For example, the US markets are open from 9:00am to 5:00pm Eastern time. During this time, the US Dollar will move more often than times when the US markets are closed. It's a basic fundamental principle that will never change. Not only do we know for certain when the market will move, but the patterns in which the market "speeds up" and "slows down" are extremely predictable: This is a graph that measures volatility in a currency, which I use in my trading every single day. It doesn't take a genius to understand how this graph moves... As the market "speeds up", the line rises. As the market "slows down", the line falls. Notice the smooth movement up and down, and how simple it is to read. Even beginner traders can determine, by looking at the right edge of this graph, that volatility is "slowing down", simply by the well defined 'wave' patterns volatility creates every single day. Why would you want to trade a currency when it isn't moving? Even if the other elements are all screaming to enter the market...it all means nothing without volatility.

13 Market Sentiment This element is definitely one of my favorites for the simple fact that many traders have absolutely no idea what this is, or how the heck to apply it. However, this isn't a difficult principle at all. Every trader will always have an 'opinion' about the market. Is the market bullish, or bearish? In other words, will this currency go up or go down? Look at any specific currency pair and think about your opinion of it. Are you not influenced by the way you feel or believe about that currency pair or the market conditions that may affect it? Now realize that every participant in the market has an opinion of their own and a feeling about that currency pair. This combined feeling of every trader no matter how big or small... creates the very momentum that drives the market. This is known as market sentiment the prevail market attitude and is the very cornerstone of why the market moves up or down. Our job as a trader is to gauge what we think the market is going to do in order to achieve a favorable outcome. We cannot tell the market what we think it should do. So, the only thing we can do is respond to what the market is doing as it is happening. In other words, the ONLY way that any trader can be successful is to gauge the overall sentiment of the market, and act accordingly. If you don't have your finger on the pulse of the overall sentiment and direction of the market, how will you know if any of your trades will 'line up' with how the market will behave?

14 Trends This element is a staple of Forex trading, and is actively "considered" by almost every trader I've ever met. We ve all heard it said, Trade with the trend because the trend is your friend. I could almost say that it's "Chapter 1" in the Forex handbook. And what's more...defining and trading with a trend is extremely easy. Simply looking at a chart from left to right (as easy as reading this sentence), one can see if the market is trending up, down, or sideways with a skill level that is almost nonexistent. However, many traders forget to consider that at some point, the trend is going to end. Even the newest Forex traders know that trends don t last forever. But...we don't always know when a trend has reached the end of its move. "Picking" the exact end of a trend as it is happening is next to impossible! This same concept applies to how a trend begins, too. The only real certainty in a trend is when it is established. This means that the trend has been strong for a certain amount of time, and is statistically a real and true "trend". Because of this fact, trends are extremely good in determining the direction the market is moving overall...but terrible in determining where to enter or exit the market. A trend alone can never make a complete trading system, but is yet another extremely important factor in how the Forex market moves and behaves.

15 Each of these elements are essential to creating a successful trading system. But, as I have pointed out, each element lacks necessary market information to be traded on their own. In other words, all four elements must be used together in order for them to be effective. When a trader uses these elements together, a natural harmony occurs that I refer to as "market synergy". The word "synergy", in this case, is defined as the cooperation of a number of different components to create a result that is greater than the sum of its parts. In other words... While each of the four Forex elements are usually traded separately, combining them together creates an entirely different market look that is better than trading any number of the elements on their own. Creating this market "synergy" can be seen as the key to unlocking the hidden potential of the four Forex elements. When combined, all of the 'missing information' disappears, because these four elements have the ability to fit together as snug as puzzle pieces.

16 How You Can Use This Information From here, you have a couple of different choices... One option is to use what you have learned to seek out four completely separate systems that each fundamentally utilize one of the four Forex elements. Basically, find one system for each of the four elements (giving you four systems in total). Of course, even if you can manage to keep up with four systems simultaneously...you must be able to use these systems together! Remember, each of the four elements do not make good a foundation for a trading system on their own - they simply lack fundamental pieces of information, and must trade with one another! The only logical option would be to research, test, and develop one system that can utilize each element properly (create a "synergy" between the elements). This is the path I chose to take many years ago, and have made it my life's work to perfect this style of trading. After many years, I truly believe that this is the best way to trade any currency pair on any timeframe in the Forex market. The best way to understand the proper way for each of these four elements to work together in this powerful "synergy" is to see it for yourself! By downloading this report, you also have been given access to my "Synergy Blog":

17 On this blog, I will not only reveal much more about the connections between each of the elements, but will use real examples of the trades that are generated directly as a result of the four element "synergy" method. Remember, this is the very same method that took me from a hobbyist trader into my dream of being a professional Forex trader. Now, I want to help you to do the same in any way that I can. So, be sure to check on the "Synergy Blog" every day, and learn from me as I dive deeper into this amazingly powerful method! Until next time,

18 About The Author As a recognized authority in the Forex market, Dean Malone has been interviewed and quoted by CNBC, Reuters, CNN, Wall Street Journal, and others about the Foreign Currency market, its effect on the economy, and how investors and traders can trade the currency markets. Dean began trading stocks and commodities online in the early 1990s as a hobby. With an entrepreneurial spirit, a background in public speaking and a remarkable talent for teaching, Dean worked his way from a sales representative to a national trainer for a Fortune 500 company. Building on his experience and turning his hobby of trading into a profession, Dean was selected to be a national trainer for one of the first retail Forex trading platforms in the U.S. Since 2002, Dean has taught tens of thousands how to trade stocks, options, and foreign currency while at the same time sharing his vast knowledge of trading. He is a registered NFA member and CTA. Dean Malone CompassFX Currency Director Licensed 3 and 34 Broker Registered NFA Member #