All You Need To Know About Devising A profitable Forex Trading Strategy Interested in forex trading but don’t know where to start? You’re in the right place. We’ve put together a handy guide on how to devise a profitable forex trading strategy. Let’s make one thing completely clear: No forex trading strategy will guarantee success all the time. And there is not one single forex trading strategy that works all the time for everyone. There is always a margin for error. If you come across an article claiming their trading strategy always works, they cannot be trusted. That said, traders without a strategy are essentially gambling. You need to have a strategy for two reasons: 1. Avoid and reduce risk in your trades. 2. To increase your potential earnings from forex. While many strategies are very different, there are some general rules all strategies should at least loosely follow. Before coming up with a trading strategy, you need to have a sense of what you are trying to achieve. If you are not entirely sure what you’re trying to achieve, you cannot appropriately set goals for your strategy. But that’s just the beginning. In reality, there is so much to consider and what actually makes a forex trading strategy profitable is quite debatable. Let’s look at the most important things you need to set up a profitable forex trading strategy. Without knowing the basics, your strategy will not work You cannot simply copy a trading strategy you found online and expect it to work. The person who introduced you to that strategy knows how to implement it. They know the inner workings behind the strategy. You need to understand concepts such as price action. You need to understand how to use such techniques to find where the money is or where it might soon appear. If you attempt to use the strategy you found in an environment where there is not much volume or liquidity, it is very likely it will not work properly. When there is not much money to be made or a good point to enter the market, both long-term and short-term strategies can be inadequate. The simplest strategies work best As is often said about many things in life, simple options often work best. The more variables involved in your strategy, the more things can go wrong and get in the way of making your profit. As you are likely a retail trader, this is especially true. You don’t have so many advanced tools at your disposal. If you’re a beginner, you can easily get confused by the numerous tools and indicators on your screen. Simple strategies also require less thinking, which means they are easier for you to focus on. More importantly, the simplest strategies are the easiest to learn and most profitable. Beginners ideally should focus on these strategies as they present an opportunity to earn and learn at an early level. Complicated strategies may also mean moving funds from numerous locations. Such strategies are known as forex arbitrage strategies. With each movement, there is a potential for things to change or to incur fees. Complicated strategies can be stressful and make it harder for traders to predict the outcome of their trading activities. They also require an understanding of more complicated things. If you don’t understand them completely, you are increasing the risks involved. Leave the more complex trading strategies to professionals. Keep these options off the table until you fully understand what each one involves. How to decide what kind of strategy to implement? Most likely you will make your own strategy by copying others and shaping it to work the way you want it to. This then depends on what kind of trader you are. Would you consider your approach to trading aggressive or careful? Aggressive traders are looking to make profits now, while careful traders are more likely to take their time and prefer using long-term strategies. Essentially, how quickly do you expect to make a profit? Further to the above, you also need to consider how much time - including looking at charts - you are able to spend actually trading. A lot or a little can make the difference between being a long-term or short-term trader. Are you a scalper or a daytrader or one of the many other types of traders? For each type of trader, there are numerous popular trading strategies. It is important to remember that as a forex trader, you are your own boss. No one is telling you how to trade. For some, this is liberating, for others, it can mean they are lacking a direction. If you need more rules, you can try algorithmic trading, which can be a good choice for beginners. You also need to think about how much stress you can take. Some strategies can be more difficult than others. Long-term strategies work well when they follow a trend, but this can take a very long time, sometimes years and, to appropriately implement them, you need to be very, very patient. Some strategies don’t work in certain environments. For example, strategies for long-term profits do not work well in short timeframes and vice versa. You also should remember to use different strategies for different market instruments. What works for forex will not necessarily work for stocks or cryptocurrency. Finally, whatever strategy you decide to use, it should have a growth plan and a size plan. You need to be thinking about how this plan will change as time goes by. This is important because when you first implement your strategy, you may aim to gain something like 5% of your account with every trade. As you become more successful, that 5% becomes a bigger sum of money. For example, 5% of £1,000 is £50, while 5% of £10,000 is £500. Your forex earning potential has increased, but so has your risk. You need to always know the percentage you are willing to risk. What are the most popular trading strategies? Trading strategies come and go while some stick around for the long run. The main reason trading strategies become redundant or evolve into new strategies is due to the rapid pace in which technology is moving forward. Many of the most common strategies used by forex traders require them to have a good understanding of trends. Here are some of the easiest to learn and most profitable strategies in use today: Moving Averages In order to use this strategy, you will need to understand how moving averages (MA) work and the different variations of moving averages, such as the simple moving average (SMA). Moving averages are worked out by selecting the closing prices of a particular time, ten days for example, and dividing them by that same number. They are useful because with them we are better able to see trends and reversals as we are focusing on the average price over a period of time instead of the current price, which can fluctuate significantly in a short time frame. When the current price is above the moving average, this is seen as an uptrend and when it is below the moving average, it is seen as a downtrend. When the MA swaps from an uptrend to a downtrend, this is called a trend reversal. It is at these key points traders seek to buy or sell. If a downtrend becomes an uptrend, this is seen as a signal to buy. When the opposite happens - an uptrend becomes and downtrend - this is seen as a signal to sell. The MA is usually identified with tools or indicators that are displayed on charts. It should be remembered that moving averages only show past prices. They do not give you the current price. Because of this, you cannot solely rely on them, especially in regards to sudden price decreases. Traders that follow the moving average should also understand how to take advantage of trends and the pitfalls of following them too closely. Fibonacci retracements Most brokers offer you the ability to use Fibonacci retracement tools. To truly take advantage of Fibonacci retracements, you also need to know that a currency pair is on an uptrend or a downtrend. Traders who use this tool will look for points where the trend is momentarily reversed and will either buy or sell before the trend continues. To use the tool, you have to draw the line on the graph retracing this dip in the trend. With this retracement, you are able to identify certain points - 38.20%, 50% and 61.80%. These points are often seen as moments where the trend will likely continue, and so traders will set buy or sell orders at those moments in anticipation of them occurring. If the instrument is trending upwards, it is a great opportunity to buy at a cheaper rate and sell later on as the trend continues. If the instrument is trending downwards, it is a great opportunity to sell at a higher rate before the trend continues. Before retracing the dip, ensure it has finished first by waiting for the trend to continue upwards or downwards as it should. This is vital because if it continues to follow the dip, the strategy will not work. Ideally, you should not solely rely on Fibonacci retracements when making your trades. Your analysis may be wrong and it may benefit from additional tools to confirm what steps to take. It is also highly advised that you place stop-losses above or below retracements just in case. Channel pattern Trading using a channel pattern strategy also requires a good understanding of trends. Most brokers also offer the ability to view channel patterns on top of charting software. They can be used to measure downwards trends, upwards trends and when the market is stagnating. A channel pattern attempts to identify the highs and lows of a trend. Specifically, by placing a channel pattern on your charts, you can take advantage of the dips in the trend, as a trend is never completely straight up or straight down. If an instrument is trending upwards, traders seek to buy at points when it momentarily dips down before continuing to trend upwards at which point they can sell. The reverse is true for the opposite, a downward trend. When an instrument is trending downwards, traders seek to sell at the momentary dips upwards. With Channel patterns, it is very important to spot the signs of a trend ending because this will mean that your channel pattern is no longer relevant. If you fail to spot a trend changing, it can result in losses. Double tops and double bottoms With this strategy, as with some of the others we have highlighted, you can make a profit both ways; if the market is on the up or if it's on the down. Again, to properly implement this strategy, you will need to understand trends. This time, when a trend is about to blow out of steam and a new trend is about to emerge. A double top is where an upward trend peaks twice before a trend reversal starts and a double bottom is where a downward trend bottoms out twice before a trend reversal starts. Both instances are fairly common and in most cases, you will notice that the second top or bottom will never reach the same highs or lows and the first. When a double top has taken place, it is a sign to sell the instrument. But before doing this, make sure you set a stop-loss, just in case the trend doesn’t break and instead continues upwards. If the new trend continues down, decide on a point to sell, ideally two times lower than the stop-loss. For a double bottom, you should look to buy an instrument before it starts to trend upwards. Again, you should place a stop-loss just in case the old trend continues instead. You cannot rely solely on double tops and double bottoms. This is a strategy you can only really implement when one of the two specific scenarios takes place. They are also great for identifying moments to change your strategy because a trend has ended and a new one has started. These are just a few strategies people are using today and there are many other strategies out there. Before deciding which one to use, conduct a good amount of research and understand what you are about to undertake. Knowing when you need to change strategy Most obviously, you need to think about changing your trading strategy when you are losing money. But you should be careful when deciding to do this. Though you failed on your first attempt, the strategy may still work. Perhaps a second time around could prove more successful. Or maybe it just needs some adjustment. And sometimes you may have just missed the right opportunity to implement your strategy. This doesn't mean the strategy will not work, but the outcome may not be as big as you expected. The primary thing you need to consider is your risk-reward ratio. In other words, how much are you willing to risk to earn? Ideally, your risk should be small and your reward should be large, but it also depends on how much income you have. They should never be the same and the reward should never be lower than what you are risking. The closer the two numbers are, the more risky the trade is. A small price range should be considered risky. Don’t risk too much for too few pips. Instead, look for bigger rewards with less risk. Think of it this way, why would you risk £50 for £5? Is it really worth your time and energy? Many professional traders would never advise chasing a profit of only a few pips. They would consider closing a trade with a gain of 50 or fewer pips a failure. To them, they may as well have lost money, and in a sense they have because they haven’t earned what they were expecting. If the market becomes very stagnant, then the ups and downs of currency pairs may not be worth attempting to exploit. The profits you can make will likely be minuscule and you are increasing your chances of losing money. Strategies should change with the market. The idea behind your strategy can stay more or less the same, but as the market becomes more volatile or less volatile, you need to reassess your goals. Specifically, at what price to buy or sell. To do this, you should be looking at charts, watching the news and reading articles to get a sense of where the market is going. However, there will be times where you will notice your strategy needs to change because certain things haven’t happened. For example, if you set up a buy order, but after a few days your target buy rate is not met, it may be best to close it, reevaluate the market and come up with a new plan. Not only was your previous evaluation of the market potentially wrong, but in those few days, conditions are likely to have changed. Who knows? The market may even reach a lower rate than you expected, which means you can buy cheaper, increasing your chances of making a profit. Don’t miss that potential opportunity with outdated buy orders. As you trade more you will see what parts of your strategy work and which don’t. Cut out unnecessary elements and streamline your approach. If you realise that these aspects are too hard to follow or you don’t fully understand them, you should consider learning how to properly use them or just removing them from the equation. The best way to do all of the above is to keep a journal of your trades to track your progress. This will allow you to properly evaluate the effectiveness of your strategy and make the appropriate changes.
What is the single biggest reason why most traders end up losing money in the market? It’s simple: They do too much – they think too much, they look at charts too much, they trade too much, they risk too much and on and on.The most successful traders and investors of our time spend 99% of their time waiting for opportunities and studying the markets, rather than trading them. Approximately 1% of their trading effort is spent executing trades and managing positions. In other words, most of the time they are doing NOTHING. Can you say the same? Or, are you spending 99% of your time entering and managing trades and only 1% of your time waiting patiently?If you have ever read my articles on What Crocodiles Can Teach us about Trading or The Sniper Trading Approach, it’s obvious that my trading style is a low-frequency, high-conviction approach. So, why should you adopt a similar approach with your trading? Read on to find out…The ‘hunt’ involves A LOT of waiting.Just as a Crocodile spends most of its time stalking its prey, a profitable trader spends most of his or her time stalking good trades. You want to trade like a predator, not the prey in the market, what I mean by that is, you want to be the trader who is waiting patiently in the ‘bushes’ for the ‘easy kills’. You do not want to be the masses of prey (amateur traders) who get ‘eaten’ by the professional traders every week.How do you accomplish being the predator and not the prey? It’s simple really, waiting, waiting and more waiting.I like to say I am in “hurry up and wait” mode for the right market conditions to present themselves. What this means is, I am actually excited to wait, because I know waiting means I am exercising self-control and being patient and disciplined, and I know this is how you make money in the markets. I have no problem waiting for the right setup to form with the perfect market confluence, sometimes for weeks or even months.The reason is simple, because I know for a fact that trading with high frequency is how you lose money in the market and trading with low frequency is how you become a profitable trader. Every trader eventually learns this fact given enough time and experience in the market.Warren Buffet is a master of doing ‘nothing’My favorite concept and metaphor for teaching people how I trade is that of a sniper. The sniper trading approach as defined in my article on this topic, is basically that I wait patiently like a sniper for my predefined trade criteria to align, rather than trading or ‘shooting’ at everything like a machine-gunner.Perhaps not surprisingly, this is also how the ‘greatest investor ever’ manages himself and his activity in the market. I’m talking about none other than the great Warren Buffet, of course. Think about how he manages billions of dollars – it isn’t by entering the market every day, that is for sure! All you need to do is read a book about him or watch the recent documentary on him, “Becoming Warren Buffet”, and you will see he is an extremely patient and precise investor.Not only is Buffet patient and precise about the transactions he makes in the market, when he is ready he dives in, boots and all. Sometimes, he even buys the entire company! You would call Mr. Buffet a low-frequency and high-conviction investor. As traders, we can learn a great deal from Mr. Buffet. Whilst we are doing something a little different than long-term investing or ‘buy and hold’, we should indeed model our swing trading approach after Mr. Buffet.Here is a good quote from commodity trading extraordinaire, Mr. Jim Rogers from The Market WizardsI just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should sit there until you find something.You see? The point here is that most of the time, profitable investors and traders are doing ‘nothing’ and by nothing, I mean they are not entering trades or managing trades. They may indeed be studying or analyzing the market in the meantime, but this would count as ‘stalking’ their prey.Change how you think about doing ‘nothing’It is innate for us humans to want a ‘quick thrill’ in all that we do. Constantly checking social media on our phones has been proven to increase the amount of dopamine (the feel-good chemical) in our brain, for example. We are a society addicted to doing what feels good more often than doing what IS good. We are born with a gamblers or speculators brain, seeking instant rewards and thrills in life and with money.When it comes to trading, the ramifications for such behavior can be severe.It can lead to treating your trading account as if it is a slot machine. Many traders end up entering trades, one after another, as if they are pulling the arm of a slot machine over and over in a casino. Of course, the difference is, we typically expect to lose at a casino, so most of us don’t take money that we need. In trading, many people believe they will be profitable because of some ‘innate ability’ they have and so they often risk more than they should or trade with money they really can’t afford to lose. Of course, once they start trading and get the dopamine fix, it becomes an addiction that leads to blowing out their trading accounts.How do you change this poisonous trading mentality?One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop. – Jim RogersThe way that we circumnavigate our own flawed trading mindsets, is to simply understand, accept and then embrace the idea of doing nothing. Embrace what you consider ‘boring’ and mediate on it. Eventually, after a few big trading wins that resulted from you waiting patiently for highly confluent trades, you will start to re-align your thought processes and the dopamine rush you used to get from entering trades and messing around with them while they were live, will shift to the periods of time you are waiting and stalking the market. When you feel like you’re not doing enough, you’re in the right zone, you must master being able to do nothing and you can do this by finding something else to replace that ‘void’.Once you realize that being patient and studying the market or simply not even looking at the market at all, will make you more money in the long-run than the opposite, your brain chemistry will begin to ‘flip’, and soon you’ll be looking forward to the ‘hunt’, even if it means waiting two weeks between trades.ConclusionThe Market is slower than we imagine, and trades can take a long time to play out. Take the chart below for example: It shows that patience is needed to grab the big moves, and we must ignore the short-term ‘shake outs’ that cause most traders to over-think and exit prematurely…The price action setups that I trade don’t appear extremely often, and when we apply my TLS filtering rule and wait for that confluence, the trading opportunities are reduced even more. My trading courses can share my trading strategy but they can’t force you to be patient and wait it out for the right opportunity to arrive. It’s one thing to be confident in spotting trades, but are you confident in your ability to not over-trade even in the face of constant temptation by the charts? If you know this is your weakness (and I assume it is for most reading this), spend MORE time getting that aspect of your trading right, and I guarantee you that your account balance will thank you.
Trading forex can be both interesting and rewarding if one can spend the time learning how it really works. First you have to build a base or foundation. That includes developing a strategy that works for you, finding good money management techniques and training your mind to be disciplined in all facets of trading. Remember, at the end of the day you must muster up enough courage to pull the trigger for any strategies developed to work.What you will learn in this article is a pullback trading strategy that utilizes stochastics, simple support and resistance as well as Fibonacci retracement ratios to time trades in the direction of the primary trend. In my opinion, simple strategies work best in trading. And as simple as this strategy appears, keep in mind that no system is a bad system as long as it works and produces results for the owner. My honest advice is that you should stick to what works for you. If your strategy produces more winners (profits) than losers (losses) stick with it but re-evaluate it from time to time because market conditions might change so re-evaluations allow you to incorporate new changes in the market you trade into your strategy.Terminology Used In This ArticleBefore we go into the discussion of this strategy, it is important for us to understand the key technical analysis tools we will utilize in this strategy. Don't worry if you don't fully grasp the definitions below. They will become clearer when I walk you through my strategy.Stochastics: It is based on the rule that, within a period of strong market action, a market will tend to close towards the upper end of the range, while in downtrends, the price will close near the bottom of the range. Stochastics is made up of two lines; %K and %D that oscillate between 0 and 100. Overbought and oversold conditions are functions of this indicator, which could range between 80 on the upside and 20 on the downside. In addition, stochastics sometimes generates a divergence condition, which occurs when the indicator fails to confirm a move to a new price high or low in the price action.Support and Resistance: Resistance is a price level above the market where supply is strong enough to overcome demand while support is a price level below the market where demand is strong enough to overcome supply. Price highs and lows as well trading ranges can exemplify support and resistance. Rectangle pattern tops and bottoms can serve as good examples of support and resistance levels.Fibonacci Ratios: Are a sequence of numbers in which each successive number is the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 610, etc. Leonardo Fibonacci, an Italian born mathematician around 1170 discovered the relationship of what is now referred to as Fibonacci ratios while he was studying the Pyramid in Egypt. These numbers possess interrelationships, such as any given number is approximately 1.618 times the preceding number and any given number is approximately 0.618 times the following number. Fibonacci levels are relevant to traders because markets often bounce off key Fibonacci price levels. These levels can also act as support and resistance and can be used as projected profit targets. Candlesticks: Are a way of displaying the relationship between opening and closing prices during a time interval.If the close is higher than the open - the candle is white.If the open is higher than the close - the candle is black.Now that the meanings of our technical tools are understood, we will now move on to the fundamentals of this strategy. The parameters are set below:1. The strategy takes a top-down approach to analyze allowing it to start from the higher time frames(weekly charts) and drill down to lower time frames(240mins charts)2. We look for overbought and oversold readings on the stochastics indicator after a pullback in an uptrend and a rally in a downtrend.3. We then watch price actions at our defined support and resistance levels to see if it would hold or violate these levels.4. After establishing support & resistance, we will now plot our Fibonacci ratios to determine which Fib levels coincide with support and resistance zones, keeping an eye on the stochastic extreme readings.5. Our focus is on signals that are going in the direction of the primary trend. We do not take trades or open positions against the primary trends, whether downtrends or up trends.6. Lastly, we use reversal candle patterns as our entry triggers. These reversal candle patterns include hammers, bullish engulfing patterns and dojis etc.7. Putting it all together: A close above the high of the previous days low when the stochastic indicator crosses over from the oversold zone and is above 20 (reading) coinciding with our established support & resistance/Fibonacci retracement and a reversal candlestick pattern gives us an entry.Step OneEstablishing A Trend: Establish an uptrend (downtrend) on the weekly time frame. In this case, EMAs (50,100 & 200) and trendlines are used to determine the direction of the main trend. Below is a weekly chart of EURNZD cross, which has been in an uptrend since July 2007. Step TwoMonitoring Pullbacks: After determining the direction of the trend on the weekly time frame, we will drill down to the daily chart in order to establish the trend (in the direction of the weekly trend) and also monitor pullbacks to know if it meets our strategy as defined above.As you can see below, a pullback is already in place and price has moved into our defined support zone, but we still need to drill down further to 240-minute chart to see what price action and the stochastic indicator are doing. If price is hesitating or consolidating while stochastic is oversold, we then look for a reversal candle and a bullish stochastic crossover above oversold zone (reading above 20).Step ThreeOn the 240-minute chart, price actually stalled ahead of our defined support/fib levels from the daily chart and a few ours later closed above the previous bearish candle to form a bullish candle pattern(bullish harami pattern). Furthermore, our stochastic indicator has already turned bullish above the oversold zone on the formation of the bullish engulfing pattern giving us an entry on the formation of the next candle. Stop losses are set 10 pips below the reversal candle. ConclusionThis strategy works on both downtrends and uptrends provided its defined parameters are followed. I use it as a swing trading strategy but for those interested in using it for day trading a little adjustment might be needed. Furthermore, refining your entries for low risk trades may take you below the 240mins chart, it is still all right as long as you are trading in the direction of the main trend. Depending on how you want to utilize the strategy, either as day trading or swing trading you can set your exit points based on your preferences but for me, I like using trailing stops. As stated in the beginning, simplify, simplify, simplify are the words I read every day as I begin my trading day. I love simple strategies because they work.
Using a forex signals provider can be exciting for some. For others, having used a forex signals service already and having met with some disappointments, one can get skeptical about using such a service already. This brings the question whether one should use a forex signals service. It also prompts the question whether a forex signals provider can generate profits or equity growth for you.So what are the factors to look for when choosing a forex signals provider? This article explores in detail and gives a few tips on how to choose a forex signals provider.Age of the accountSeasoned traders will know that at some point in trading, a trader will no doubt undergo a winning streak. This is often followed by a losing streak. It takes a lot of experience to be able to maintain consistent profits when trading forex.Therefore, the first thing to look for when choosing a forex signals provider is the age of the account. Start by looking at signal providers who have a track record of at least three years. This will tell you the experience of the trader themselves who is managing the signals. It will also show you how consistent the signals provider has been in the past three years of trading.Money managementSome forex signal providers actually use a forex cent account. A cent account, as the name implies allows you to trade in cents. This means that there is very little risk. Copying traders from a cent account to your real trading account with even $500 in equity can be a bad bet.Pay attention to the trading equity of the forex signals provider. In most cases, you will already know upfront on the ideal trading capital and leverage that you should use. This ensures that the lot sizes are appropriate. It will also ensure that your account is closely mirrored to that of the signals provider.Understanding how the signals provider trades (based on their history) will give you a lot more insight. For example, signal providers typically trading in single lots. However, you might find someone scaling in or out of a position. The bottom line is that traders need to also focus on the money management skills of the signals provider and not just how much returns they generate.The brokerNot all forex brokers are the same. Therefore, you must ensure that the signals provider and you use the same forex broker. This will ensure that the slippage and spreads will not influence your bottom line profits. The speed of execution also matters.Using a different broker from the one the forex signals provider is using can result in the target levels not being hit and so on. This can quickly translate to losing positions merely due to the spreads involved.However, if you come across a signals provider that does a splendid job but trades with another broker, then you can always ensure to adjust your trade levels by considering the spreads to minimize losses.Don't fall for 150pips marketing hypeIt is common to come across signal providers who advertise on the average number of pips they make. This can be a great way to attract gullible traders into signing up for the forex signals service.Instead of focusing on the number of pips a signal provider makes, consider the overall profits that they have made. Paying attention to metrics can also help. Drawdown is an important metric that should not be ignored when choosing a forex signals service.The drawdown will tell you the potential losses your account might make in pursuit of the profits.AutomationThere are different types of forex signal providers. Some send the trades via SMS or email while others fully automate the process. You would just have to install an EA or a script to automate the trading.Choosing one of the above is a matter of personal choice. Therefore, traders should explore these options very carefully. No matter whether you want manual forex signals or automated signals, ensure that you always stay in control of your equity and the risks.There are quite a few successful forex signal providers out there. It is somewhat akin to finding the best forex broker. For traders, this means that they need to put in some work and research into the forex signal providers in order to find a service that best matches their interests.
Financial markets are driven by two powerful emotions - greed and fear'. This is an old Wall Street saying we've heard more times than we care to remember, but still holds true today.Whether one admits it or not, greed and fear are two drivers that have a big impact on our lives. Unfortunately, these emotions carry over to our trading, which, if not controlled, can have a detrimental effect on your account.What is greed?The term 'greedy' has a powerfully negative undertone. As a child, we're sure you've all been called greedy at some point. Keeping one's chocolate-covered fingers out of the cookie jar was just too hard to resist for most children.Greed, as per The Free Dictoniary, is defined as: an excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.A clear-cut example of this was the US subprime mortgage crisis, which eventually led to a financial meltdown. Most of the blame is said to be at the hands of the mortgage lenders. It was these lenders who ultimately approved the mortgage agreements for clients with poor credit history and a high risk of default. An example of greed that doesn't include financial gain or material wealth, however, can be as trivial as a family member who scoffs all the cookies without sharing, even though they know others in the house usually want a cookie or two with desert.So, is greed ever considered a good thing? From our perspective, yes it can be, as without greed, humans may lack the motivation required to build and achieve new things. A good example of this is when a company puts together an incentivised compensation program for their sales team, allowing sales employees to earn as much money as possible. When the company makes money, the sales executives make money. Good greed at its finest.What is fear?Fear, as per Dictionary.com, is defined as a distressing emotion aroused by impending danger, evil, pain etc., whether the threat is real or imagined; the feeling or condition of being afraid.Fear is an intensely evolutionary characteristic in human beings that triggers us to avoid danger. It's likely that some of our readers here are afraid of heights, the ocean, spiders, snakes etc. Our prehistoric ancestors had the very same fears, and this is the reason we are alive today. Luckily for us, we do not have to deal the threat of being eaten anymore!Like most things related to emotion and instincts, fear is both good and bad according to the situation. It all depends on how you respond to that fear. If we think about it, the fear itself is just a thought. You have the ultimate deciding power on how you let it affect your actions.So, when is fear good and when it is bad?If the fear of failure or rejection holds you back from doing something that could ultimately benefit you (a common fear nowadays), then we'd have to argue that this is considered a 'bad fear'. In this case, you would be letting fear create exactly what you're afraid of.If the fear of failure pushes you to work harder to avoid failing, nevertheless, then we'd argue that this is a 'good fear'.Fear, quite simply, is ubiquitous. And there is very little one can do to avoid it. Of course, we understand that everyone has different opinions on this widely-discussed subject, so do take the above as simply one view.Does greed and fear have a place in your trading?Unless you're a robot coated with human-looking skin, dealing with greed and fear is inevitable in trading, as it is in life. Greed, for many, is often actually one of the motivations to initially get involved in trading. Quite frankly, we don't feel there's anything wrong with this, since, as we explained above, without greed little would be accomplished in life.As trading is a relatively solitary job, especially for the majority of retail traders/investors, we're often left thinking that we're the only ones who experience greed and fear on the charts. This couldn't be further from the truth. Let's remember that large sums of money are filtered through the markets on a daily basis from large commercial banks, mutual funds and pension funds. We're pretty sure that these guys and gals are human too, and, as such, are also susceptible to these emotions. Greed and fear is universal!Now, let's take this a step further and look at greed and fear through the eyes of a trader named Gary. He has two year's experience in the industry and is relatively content with his trading methodology. However, he admitted that he still struggles with the emotional side of things.In recent hours, Gary happened to come across a 'bread and butter setup' of his around the London open. He calculated his position size, double checked the setup to make sure it was in line with his trading plan and entered the trade. These trades rarely fail, according to Gary so he was naturally confident it would work out.Ten minutes later, price was seen within shouting distance of his stop and there was no economic news scheduled on the docket. As his trading psychology books advised, he tried to remain calm and composed, but fear continued to tap away at him. He can felt his heart thud against his chest, as he contemplated moving the stop to avoid a loss. He rationalized that if he gave the trade more room to breathe, it would highly likely work out. The other side of his brain, the logical side, told him to stick to his plan. A loss is a loss, nothing to be concerned about.If we just pause this scenario here, we're sure that most of us have experienced this: it's the fear of loss and being wrong!Now let's look at the same trade setup, but assume that Gary's trade rallied in favour.… Ten minutes later, price is seen within striking distance of the take-profit target. A rush of joy flooded through Gary. It was at this point in the trade, he began thinking what if this trade is a runner. So, he started looking for other places to move his take-profit order to. Meanwhile, price continued to move in his favour. Five pips ahead of the take profit (according to the trading plan), he couldn't resist the urge and moved the order thirty pips above the next resistance.Was this in the plan? Heck NO! His plan was formed using the logical side of his brain, and by sweeping this logic under the carpet, he left himself in a very awkward position.His eyes alternated between his profit/loss figure and the candles like his life depended on it - he was engrossed!Was there a plan for if price did not achieve the new target? No! So, what does Gary do when price begins trading against him? Of course, he panicked.By not following his plan, he forgot to move his stop-loss order to breakeven when he should have. And due to a recent news event, that was supposed to be low impact, the position is now trading in the red. Gary switches from greed to fear and is cursing himself for not sticking to his plan!This is a common theme among traders, hence why learning to control one's emotions is paramount.How does one look at controlling these emotions?While we feel it is impossible to completely remove greed and fear from trading, here are some methods one can utilize to help minimize the impact.* Risk what you feel comfortable with. If that is .5% of your account, then so be it. This helps one remain objective. * We know it's difficult, but try to limit your expectations. What we mean by this is avoid thinking that this trade or that trade should win. An individual trade, if sized correctly, has very little effect on the overall results if one thinks in probabilities. * Treat Trade with money you can afford to lose. Trading beyond your means is a sure-fire way to make one emotional. Trading with money needed for food or housing is reckless. * trading as a business. Have a business plan in place with specific goals. * Consider taking a break after three consecutive wins or losses. A losing streak can make you feel, well, like a loser, which can promote revenge trading. And a consecutive number of wins can make you feel like you're untouchable. Learn to recognise these signs. Take a day or two to gather your thoughts after such an event, as trading to revenge your losses will not likely do your account any favours, and trading when you think you're George Soros could have you over leveraging. * Try to avoid looking at your profit/loss during the trade. By removing this from view, you're partially eliminating the financial element from the trade. Try to focus on pips/points.
Day Trading Strategies are used by investors to remove or limit overnight exposure, which can be seen as an additional risk to their capital. Though in truth this is less of an issue when trading Forex (where the market is open 24 hours a day five days a week) than it is for other asset classes. Nevertheless following a Day Trading Strategy allows a trader to end their business day flat. That is with no open positions. Thereby avoiding unpleasant surprises (that may result from negative overnight moves) when he or she returns to their trading screen the next day. By the same token of course they run the risk of missing out on any positive moves overnight, though this is seen as the lesser of two evils so to speak. Increasing popularity Day Trading Strategies became popular among the investing public in the internet boom of the late 1990s. As people’s houses and places of work were connected to the internet,so they were able to view and interact with information in real time. One of the most obvious things that individuals could interact with over their new internet connections, was financial markets data. As a result an increasing number of individuals decided that they wanted to take control of their investments and trade for themselves. A new generation of brokerage companies were founded to meet these new customer requirements of which Blackwell Global is one. Anatomy of Day Trading Strategies Day trading activity takes place intraday – that is inside one business day. Traders may buy and or sell numerous financial instruments in that time, but they will aim to end the day with out any open positions, having” squared their books” before the close of business. Those investors implementing Day Trading Strategies may finish the trading day well before the official close of business. If for example they employ monetary targets, as a far as profit and loss are concerned. For example if a trader has a profit target of £1500.00 per day and a maximum daily loss of £500.00, if he or she reaches or exceeds either of those figures, they could well decide to cease trading for that particular day. Rather than risk their profit or incur further losses. Examples of Day Trading Strategies Scalpers Both Scalpers and Swing Traders use Day Trading Strategies. Scalpers are frequent traders who hold a position for a very short time, while looking to collect or scalp a small profit from each trade they do. Or at worst to close a non performing trade for little or no loss. Over the course of a day they hope to achieve many more winning than losing trades, or to have winning trades whose cumulative profits exceeds their total losses, plus any costs incurred. A simple Day Trading Strategy that might be employed by a Scalpers is to monitor how a price respects a moving average, over a relatively short time frame. For example a 10 period moving average plotted on a 15 minute chart. We can see an example of this in the chart below, which is a 15 minute plot of EUR USD (Euro US Dollar) that has been drawn with a 10 period simple moving average in yellow (this line is quite simply the plot of the rolling average of 10 periods of price activity). You can see that we have highlighted two areas within the chart. On the left hand side an area where the price of EUR USD was unable to break above the 10 period MA line and having tested there,moved lower. The white or filled candles here indicate a 15 minute period,where the closing price in the period, was lower than the high.Which itself was often at or close to the 10 period ma line. Each of these failures at the moving average represented an opportunity to short (Sell) EUR USD as part of a Day Trading Strategy. Conversely to the righthand side of the chart we have highlighted an area where the EUR USD price viewed the moving average line as short term support. The price touches but does break below the ma line on consecutive occasions. Then the price subsequently moves higher away from the line, before breaking below once again on the third test of the line. These bounces away from the moving average would have provided an opportunity to get long or buy EUR USD, whilst the break below the MA would have signaled the end of the short term price support. Note though that the price goes on to test at and bounce from horizontal support and then moves back above the moving average once more. This type of short term price action creates a useful Day Trading Strategy that is exactly type of thing Scalpers can and do exploit. Day Trading Strategies for Swing Traders Swing Traders take a longer term view than their Scalper counterparts but many of them will employ a Day Trading Strategy, to mitigate their overnight risk exposure. Swing Traders are looking to identify swings or changes in price momentum. And once identified to capture as much of a move as possible within a trade. The chart below shows the UK 100 stock index drawn over hourly time frame. We have highlighted overnight gaps with white brackets (gaps are voids in a chart created by a sharp move in the underlying price, which can often be found between the closing and opening of a market) both lower,on the left hand side and higher on the right hand side of the chart. Having gapped lower the price action continues lower and forms a bottom (at a level it will return to on two subsequent occasions). Having formed the bottom the price begins to rally and moves into the gap, breaking above the lower of the two red dotted lines. Just like nature, price abhors a vacuum and it will always try to fill a gap in chart if it can. In this instance we did fill the gap, with the price of the UK 100 index moving through the second of our dotted red lines. The price then pushes on to a prior period high, before gapping lower once more on the following day. We should also note that prior to gapping higher (on the right hand side of the chart) the UK 100 index tested to and through the top of the gap lower, as indicated by the upper dotted line. The index closed above that level as well which was suggestive of a higher open on the following day. Implementing this Day Trading Strategy A Day Trading Strategy for a Swing Trader based on the Gap higher would have been to buy the UK 100 Index on the open or if they wanted confirmation,to buy the index at the point where the price made a new high, above that seen in the first candle of the day, after the gap higher.Then once long remain so whilst the price was above their entry level,. Then subsequently exiting their long position before the close of business. In fact the move to fill the gap lower, the three bottoms and the gap higher,which followed a close above the top of a prior gap, are all signals that a Swing Trader could use as entry points, as part of their Day Trading Strategies. Summary Whether you deploy a Day Trading Strategy as a Scalper or a Swing Trader you will need develop the discipline to make that strategy work for you. As a scalper you will need to get proficient at cutting non performing trades quickly. That means recognising you were wrong and moving on. As a Swing Trader you need to decide if a change in price momentum or direction is genuine. If it is you need act quickly to enter a trade and then manage that and any other positions throughout the day, trying to maximise your profits and minimise losses as you do so. If you don’t think Swing trading is right for you and it may not be. Why not read our article on Spread Trading. Remember that you should always choose a trading strategy that meets your investment objectives,experience,financial resources and risk appetite. One way that traders can gain valuable hands on experience of working with Day Trading Strategies, in realistic market conditions, is to make use of our demo trading account, in which you can create, practise with and refine your own Day Trading Strategies.
First of all I would like to recommend a great document out there - "DB Guide to Exchange-Rate Determination" which was written by Deutsche Bank in 2002 and is overfilled with FX rate determination, forecasting methods which can be used for all short term, mid-term and long term trading. If you haven't read it, look for it, download to your Kindle and take the time. It is worth reviewing. :) In the documents several FX trading strategies are described with reference to many academical papers and literature. One of them - the Forward-Rate Bias strategy. Its results are stunning for longer term FX trading and its sharp ratio has beaten the S&P500 twice. As the DB says: "This is the bedrock of Deustche Banks's Forward-Rate Bias trading system". Forward Premium and Discount It is necessary to understand what Forward Premium and Discount is before diving deeper in to this. Premium - Situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate suffices. Discount - situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period. where N - represents the maturity of a given forward exchange rate quote d - represents the number of days to delivery P - is the premium (if positive) or discount (if negative) F - is the forward exchange rate S - is the current spot exchange rate Forward Bias Strategy - Trading the Bias "Favorite approach to trading the forward-rate bias is to adopt a diversified strategy to exploit the fact that currencies trading at a forward discount tend to outperform those currencies trading at a forward premium". The recommendation is "going long the three highest-yielding currencies in the industrial world and going short the three lowest-yielding currencies in the industrial world. Net long/short positions are put on at the beginning of each month and then closed at the end of each month. This process is repeated each month over time". Long Run Track Record for USD-Based Investors This is truly old backtest and I would be really interested whether it can perform this good in todays market. So if there was a demand for it, I would dive into that ;o) Write a comment if you want to see it.
Each trader applying technical analysis has many postulates he relies on in trading. Quite often it turns out that traders do not go deep into the matter, guided by their market experience only. However, there are effective theories applied to the markets which lack substantial ground. They can be proved by statistics only. This is the kind of theories Fibonacci number theory is attributed to. Originally, this trading instrument was used on a bull market. Traders had to plot Fibonacci retracement levels manually. The Fibonacci conception was gaining popularity. Permanent practice has revealed its many advantages. Fibonacci levels describe the interaction between trend and countertrend markets — 38%, 50% and 62% retracement from the reverse point. As a rule, percent ratios are applied after the trend is determined. Find out the points of percent levels crossing those of price by stretching a grid over the most apparent up or down waves. Great trading opportunities are ensured by converging patterns and retracement levels. It should be remembered that retracements are ineffective in vacuum. Keep an eye on highs, lows and moving averages to make sure a certain level is important. The discrepancy between a retracement and a basic pattern does not result but in a market noise, not to mention an expected profit. The patterns which contain incongruous analysis aspects are not recommended to use. Such incongruity leads to numerous abrupt reversals on price charts. On the contrary, the correlation between Fibonacci levels and patterns ensures highly predictable reversals at narrow price levels. The two examples below are to be of help to you in working with Fibonacci. Using these methods in trading is sure to make your trading profitable and convenient. The first rise/ first fall marks 100% retracement of a trend within a certain period of time. It can be regarded as a reversal warning. 100% retracement alters the major price movement which then terminates the trend it corrects. If a previous retracement level of 38% is broken through, then the old trend can reestablish itself. Most often traders tend to use this level to open positions against the old trend, which minimizes the risk. Overnight grids Find an active market instrument and start stretching a grid either from a low or high registered within the last hours of the session. Stretch a grid to the opposite direction to a low or high of the first hour of the following morning. This determines certain price waves a trader can use in order to find intra-day gaps, break-outs and break-downs. In addition, this type of grids is applied to morning gaps. Stretching across a key retracement, a gap will provide an opportunity of entry to the market with low risks at a pullback.
Nearly every single technical based trading system will rely on you – the professional Forex trader, having the ability to correctly draw support and resistance levels on your price charts. Mapping out your levels is going to be the most important core skill for any serious trader. If you have trouble marking your S/R levels accurately, then your trading as a whole may implode… violently. What is built on a weak foundation will eventually crumble Everyone is going to have a slightly different approach to getting their charts marked out, but it is the end result which counts. I’ve seen some Forex sites posting up their opinions of support and resistance levels so you can just check in from time to time, clone those horizontal price levels on to your chart, and not have to think about the process at all. This is not the right way to go about becoming a legitimate trader. Marking support and resistance is Forex 101 – once you learn the easy process of marking out price levels, you won’t need anyone to supply you theirs. Think about it in this way; It’s really like cheating on a test – you could be copying the wrong answers, you don’t learn anything, and won’t grow as a trader. If you’re reading this, then you probably don’t want ‘a free lunch’ and have the thirst for knowledge with a goal to improve your own chart reading skills. Build good habits early and they will stick with you forever. I am sure you want to be able to independently, and confidently read a price chart – if you’re just piggybacking off of someone else’s opinions, you will never truly get there. So today, I am going to show you the processes I use to plot support and resistance. You don’t need any fancy tools – just your own eyes to scan the price charts. It will be a major determining factor in how successful you are as a trader! In this tutorial, I am going to cut through the confusion, and introduce you to the powerful basics of marking support and resistance. Stop Making Support & Resistance A Complex Task I see all these charts getting posted around on forums, and they look like a child’s finger painting drawing, or the NASA control panel for space missions. This is an epidemic with traders and it is really screwing with their ability to ‘read’ a price chart. Most truly believe that being complicated gives them a competitive edge over their fellow market participants. Sound familiar? With this sort of mentality, traders are really driven to go overboard in the hope they cover every technical basic possible, and make sure nothing ‘slips under the radar’. In order to gain any traction with trading, I truly believe the best place to start is with a clean price chart with some crucial levels marked out, and that’s it. Once you can read a chart using price action and S/R levels, your trading will improve no matter what other strategy you decide to use. Have a look at the chart example below – it’s a classic example of a Forex trader who takes things a little too far! This Forex trader has created an environment that is not practical, and just too difficult to work with. There is absolutely no need to over analyze like this – it’s extreme overkill. If your chart looks anything like this – you can fix this right now as a positive step towards better trading. If you are working with a Forex chart polluted with meaningless horizontal levels, and other unnecessary variables like: trend lines, channels, or even a stack of indicators – making a confident trading call is going to be extremely frustrating. A badly laid out chart is poison to your trading mind-set. It’s very hard to make logical, rational decisions from confusing data. You endanger yourself to falling prey to your emotions. The idea is to be minimalistic with the charts and the markets. In fact, you only need to mark out the significant levels that are surrounding the current price movements at the given time. In some cases we will only have 1 line marked on our charts – as you may have noticed in our Forex market commentary. You will find in most situations it only takes that ‘one well marked level’ to clearly map out, and help you clearly ‘read the situation’ on a price chart. Seriously, anything over 3 lines marked on the chart would start to be considered too ‘busy’ and need some cleaning up. By only marking out the important levels to watch you will keep your charts tidy, simple, and easy to read. This gives clarity back to the chart and to the trader – allowing the identification of good trade setups, and making the anticipation of future price movements much easier. Checkpoint Traders kill their trading at the very core by making a mess of their charts. There is no need to have too much going on, prioritize your support and resistance levels so only the really important ones are marked. This will help keep your chart clean – by doing this you eliminate self-sabotaging confusion and promote high precision trading. Understanding support And resistance Support and resistance levels are proven price areas where buyers and sellers find some form of equilibrium. We generally see a shift in the balance of power between buyers and sellers occur at these levels – this ‘power shift’ generates the classic price reversal patterns we are always on the look out for. Therefore true support and resistance levels are the major turning points in the market. Price doesn’t move in straight lines as you are most likely aware of – instead we see price swinging up and down, creating new swing lows, swing highs, or re-testing existing ones. The more often price does this ‘stop and reverse’ action at a specific level – the ‘stronger’ or more’ significant’ that particular S/R level becomes. Price is communicating to you that “this price level is being defended aggressively”, and could be a good area to look for reversal signals. It’s also worth noting that support and resistance levels that are clearly visible on the higher time frames are considered to be greater in value, and have an increased chance of becoming a price turning point. Just remember; the higher the time frame, the more significant the S/R becomes. When we draw our S/R levels – we work on the daily time frame the majority of the time. I recommend using weekly and monthly charts to mark out the more significant or ‘major’ levels in play. These weekly and monthly levels are really good areas to watch out for strong candlestick reversal patterns, like the rejection candle reversal – especially if you’re going counter trend. Intra-day levels are generally not worth worrying about, price cuts through these like a hot knife through butter on a day-to-day basis and don’t offer much technical value. This is one of the reasons intra-day or ‘day trading’ is much more difficult and has a very low success rate. You’re definitely trading on a shaky foundation when you ‘hone in’, or tune your analysis on those lower time frames – it’s not worth it. Checkpoint Support and resistance are horizontal levels the market has used in the past as a turning point on the chart. They can be found on all time frames, but are best sourced from higher time frame charts, such as the daily and weekly. The higher you go up the time frames, the more data inside the candles – therefore the more significant the levels become, and are more likely to act as a turning point in the future. Working with Support & Resistance in Range-bound Markets Lets get a little bit more practical and move into some technical demonstrations. Support is an area on the chart where the market demonstrates strong buying action, easily identifiable by price ‘bottoming out’ caused by bearish price action movement being overrun by bullish pressure at a consistent price horizontal level on the charts. Support is often referred to as the ‘floor’ that price bounces off, or has trouble moving past to the downside. Resistance is the opposite of support – it’s where you see price ‘topping out’ as the bullish price action movement is consumed by bearish activity at consistent price levels on the charts. Resistance is known as the price ‘ceiling’ that the market tends to fall off, or has difficulty pushing through to the upside. Support and resistance is fairly simple to understand when you look at ranging markets – they make up the major containment lines of range-bound systems. When a market is range-bound, the only levels you really need to have marked out are the upper resistance ‘ceiling’, and the lower support ‘floor’ of the range. We recommend to only trade buy or sell signals from these main upper and lower boundaries. Short signals are valid at range resistance, and long signals are to be targeted at the range support. Checkpoint Ranging markets are really easy to ‘map out’ on your charts. You need to draw your levels so that you highlight the upper resistance and lower support containment levels. These are the major turning points for a range and deserve your attention. The best trading opportunities will form here. Stay away from the middle of the range, it’s a ‘no fly zone’ that spawns a lot of bad signals and rough price action. Trending Markets Trending markets are identified by using swing patterns that are broken down into classic sequences higher highs, higher lows, lower highs and lower lows (not in that order). These key technical high and low points are called ‘swing highs’ and ‘swing lows’, and it is the order which they appear on the chart is vital to identifying trends, especially if you want to catch them in their early stages of development. During a bullish trend, price will step upwards in a zig-zag type pattern – almost like price is walking up a flight of stairs. Price will gradually step its way higher forming that ‘staircase footprint’ on the chart. Higher highs (or swing highs) in bullish trends is where the market finds resistance, and generally starts off a correctional move. Higher lows (or swing lows) normally are formed after a counter trend correction is terminated, and the market finds its footing (support). Trend momentum kicks back in here and generally pushes price into the next higher high to complete the next phase of the trend. During a downward bearish trend, the opposite is true. Notice the ‘staircase’ upward motion – price is finding support and resistance at the swing highs & swing lows, as it moves in the general upward direction. In trending markets, the critical levels that we recommend to mark, and watch are the ‘Swing levels’ – which is one of the main principles of swing trading. Swing levels are ‘hot zones’ for price reversals and trend continuation – so they want to have your full attention. They form when old resistance turns into new support, or vice versa. Basically, the level reverses it’s role from old support to new resistance, or from old resistance to new support. A very important technical event on the chart. Or if I put it another way – swing levels are when a swing high acts as a new swing low, or an old swing low is used as a new swing high. Study the chart above and you will see each swing level lines up swing highs and lows on the horizontal plane. Price Action signals that generate off swing levels during trends have a high success rate, that’s why I call them the ‘hot spots’. There are two main reasons for this; Firstly, there is already trend momentum backing the trade, secondly a swing level – which we know is a key turning point in the trend, adds to the chances that the trade will move in your favor. Here is an example of a bearish trend and its related swing levels. In this downtrend we have marked out the swing levels (where old support levels have turned into new resistance). See how in a bearish trend, the staircase footprint price travels through is inverted to the bullish trend – just think of someone walking down the stairs this time. Checkpoint Trending markets rarely move in a straight line – instead they ‘walk’ up, or down the chart leaving a ‘staircase looking footprint’ as price swings from highs and lows, but still moving in an overall dominant direction. During trending markets it’s the swing levels that are most important to have mapped out on your chart, because they are the critical turning points in a trending environment, which I call the hot spots of a trend. The Weekly and Monthly Support & Resistance On a larger scale, strong weekly and monthly support and resistance levels should be marked on your chart when the current price is the vicinity, or approaching those levels. These weekly price levels that are dominant from these higher timescales are major turning points in the market, and want to be paid close attention to. Strong daily price action signals that occur at significant weekly or monthly S/R can be the catalyst for a strong reversal move – and create very profitable trades if you have the discipline to hold a trade open for a longer duration. In the GBPUSD chart above – you can see how this support level was acting as strong weekly support, and had been a key turning point in this market. Now because price has broken through this important level – the best course of action is to wait and see if the market will now respect this old weekly support as new resistance. We can confirm this if a bearish price action reversal signal forms when price retests the old support. It’s all about letting the price action tell you where it wants to go. Don’t assume something is going to play out the way you think, and take action too early – the market will teach you a harsh lesson for doing that. In the examples above, we’ve identified the key support and resistance levels on the chart without cluttering up the template with any indicators, trend lines or other chart tools. Only mark out the important levels that market is currently reacting with at the present time. I don’t think the market cares too much about levels from 10 years ago. Just concentrate what’s going on in the ‘now’, because support and resistance levels do change over time. Remember – the market is not static, it’s a dynamic environment. Support, resistance & swing levels will change as the market dynamics change. By sticking with the levels the current market is respecting, you can keep your hand on the ‘market pulse’, tuning you in to current conditions. Do this and logical, confident trading decisions will flow much easier, so long as you are basing your decisions on what a simple price chart template is communicating to you. Checkpoint Weekly levels are major reversal points in the market. Watch for any approaching weekly, or monthly support or resistance and mark them on your chart, so you can pay special attention to them and watch for any strong reversal signals. Very lucrative trading opportunities can develop from these levels if you’re willing to hold your trade. Support and Resistance Take Home Notes A few points to remember from today’s tutorial… - Mark upper resistance and lower support in range bound markets - When price breaks a support or resistance level – mark it on your chart and wait for a signal to confirm it as a new swing level - During trending conditions – mark higher highs and lower lows and wait for them to be confirmed as a swing level via a price action signal or a price bounce. - Mark the support and resistance levels on your chart that are dominant on the weekly and monthly chart, but only around the area where current price is located (no need to go back years and years ago). - Remember the higher the time frame, the higher the significance, the higher chances are of success. I truly hope today’s guide to identifying support and resistance levels has given you some new insight on how to structure your charts, and plan your trades more effectively. Don’t expect to nail it immediately just from one pass of this lesson. The ability to draw levels correctly is learned over time and with patience – so don’t give up, learn to avoid common mistakes when traders draw support and resistance. If you’ve stuck with crowed price charts that are overloaded with a horde of support and resistance levels (and indicators to boot) – then you’re going about it the wrong way. Scrub your chart clean, start again and use the methods discussed here today to keep trading nice and simple. Acquiring the skill of correctly marking out support and resistance is obviously very important for any Forex trader – but we’ve only scratched the surface here in today’s introduction. If you’re serious about learning how to read plain price charts to anticipate future price movements, and make high probability trade calls – you would greatly benefit from our war room membership for aspiring price action swing traders. The War Room is our private membership area where you will learn more about price action strategies, and gain access to advanced ‘war room’ only material – like our 1 hour video presentation on identifying and using support and resistance levels. There is also the Price Action Protocol course and the community aspect, like the chat room and forum where we are bouncing trade ideas off each other all the time. I hope to see you on the other side, cheers to your future trading!
Drawing key levels is a core part of technical analysis. The problem is the technique can be so confusing to newbies, because marking a them on a chart is very subjective! It is mainly due to the amount of conflicting information out there, traders get really frustrated with getting the process right. If you give two traders the same chart, and ask them to each plot a line – you will probably see two very different results. In this guide, I am going to show you my way of drawing a trend line, and give you a demonstration on how I use them. What Are Trend Lines Really Used For in Technical Analysis? These guys are going to pop up in all your ‘chart analysis 101’ text book material. Their basic function is to highlight linear support and resistance. Quite often when the market is on the move (making new swing highs and lows), price will tend to respect a linear level – which we identity as a trend line. Bullish markets will tend to create a rising linear support level… Notice how all the counter trend movements are terminating at this structure? When they appear, we can use these lines to anticipate the next reversal point in the market, and look for bullish reversal signals there. The opposite is true for a bearish scenario… So obviously the bearish situation is just a role reversal . Counter trend rallies terminate at clear line as it they as a linear resistance level. We can use it as an anticipate reversal point. Therefore this common type of technical analysis involves inperpreting these lines as linear support and resistance. When a line is broken, the market often can come back and re-test it as a new support or resistance level. Above: An example of one which once held as resistance is then respected as new support as the market pulls back down, and re-tests it. What I’ve shown so far is the basic functions, but we can do a lot more with them. In the rest of the article, we will walk you through other trend line events such as… - Counter-trend breaks (flags) - Classic breakouts - Example of reversal signals at linear structures - Consolidation structures created (good and bad) Checkpoint The basic text book definition is a collection of swing highs or lows, that create a linear support or resistance level. They have many traders uses, and many strategies are developed around them. How Do You Draw Trend Lines – The RIGHT Way? Firstly, we need to cover a consistent rule-set to encourage (what I believe), is the correct way of identifying quality levels. Most of the re hashed tutorials out there just instruct you to mark two swing highs or lows together… only two. This is really crude advice, and can leave you the trader very confused to where to draw the damn line. Tips such as these set traders on the path to extreme over analysis. Following the commonly preached text bool method (of only using two anchor points), opens up the door for hundreds of possibilities on one chart! You don’t want that, you need better quality control… other wise you may end up with charts like this… I know this is an extreme, and humorous example – but I think this guy has connected every two swing highs and lows together… A line with only two anchor points really just an ‘unconfirmed’ level on your charts. The example above shows a trend line marked with two swing lows as the anchor points. It is an aggressive, low quality way to go about it. It is only really a catalyst which may turn into proper level – but at this stage it is just a pending line. You can mark these pending lines if you think it is appropriate, and wait to see the line is respected again – but most of the time it is just going to clutter your charts, and skew your technical analysis. The ‘trick’ to drawing quality lines is to use *3* clear anchor points… then you’ve got something worth occupying the real estate of your chart! When I say anchor points, I mean swing lows or highs that line up in an obvious linear fashion. See in the chart above, we used 3 swing points. Using a minimum of 3 anchor points, we build a quality trend line that actually matters to technical analysis. When you just use two anchor points, your level is basically ‘unclear’, or only partially constructed. You never know if you have it marked in the correct place. The series of charts below will illustrate the frustration of someone who only uses 2 anchor points… Seems legit, until… All of a sudden the market doesn’t respond as expect… better ‘adjust it’, yeah? OK, now I think I’ve got it… The comic shows the trader ‘chasing the line’. Which is frustrating and unproductive analysis. Don’t waste your energy… use 3 anchor points. It’s much easier, and provides a confirmed trend line in the market. Don’t chase price, mark what you can clearly see! Above: Using 3 swing highs rule. No more chasing our tail, three data points line up – we’ve got what we need. Above: The more anchor points we have to build the line, the better – it just becomes more obvious and makes the trend line more significant! Checkpoint Most guides tell you to use two anchor points for plotting. This can leave you struggling with your charting, as you chase pairs of highs and lows looking for where a linear level is forming. To resolve this frustration, only mark the ones out clearly showing a line up of three clear anchor points. Don’t Let Fake Outs Throw You Off One thing that throws a lot of traders off, are false breakouts. We won’t always get the perfect text-book scenario for our charting, false breaks do occur often – making a mess of our picture perfect idea of a trend line. To ‘filter out’ the fake-outs, I use something which I call the common denominator approach. The goal is to line up the common data points that create some obvious consistency, and just ‘makes sense’. Let me show an example… Above: We’ve drawn the line that conforms well with the lows here in a consistent manner. We cut through the fake outs by basically ‘connecting the common dots’. We can see how the level holds as support here well – the fake out creates an inconvenience we need just to slice straight through. Let’s look at a bearish example… Lining up the common swing highs here for identification. The fake out becomes obvious when you work with the consistency of the market. Marking these out isn’t an exact science, you’re just looking to mark out the general structure so you know when price approaches this important technical level. Keep the process simple and obvious. If it isn’t obvious and you really struggle to line up the level – then it is probably not a structure level worth worrying about. Checkpoint When drawing and trading trend lines, fake outs may throw you off. Use the common denominator approach to connect swings highs or lows that line up in a linear fashion to plot the line. Just cut through any spikes and dismiss them as fake outs as shown in the examples. Trend Line Reversal Trade Opportunities Because we know they are anticipated to act as reversal points, we can target reversal trading signals here. We use candlestick reversal patterns a lot for our trade setups, so we heavily focus on those. Here is a bullish market example with some candlestick reversal signals… We had a clear obvious structure here, which was holding nicely as a linear support. It is only logical to target it for buying opportunities via bullish reversal patterns. This chart had a bullish outside candle, and a bullish rejection candle (both reversal signals), form off off the level, communicating to us that the the trend line once again was holding as support. Both trade setups worked out nicely Check out the chart below… Above is a nice bearish example, acting as resistance which did see a nice bearish reversal candlestick signal form off it. The bearish rejection candle signals it was still being respected as resistance, and that we should expect lower prices to follow. The setup produced a nice sell off! It is just really simple, logical thinking – just the way I like my trade ideas. You’ve got a linear line structure where you know price is expected to reverse. Simply combine that with a reversal signal to form your trade opportunity. Checkpoint Wait for bearish or bullish reversal signals to form off your level to signal that the market is going to respect it. Watch for bearish patterns on declining lines, and bullish patterns on rising lines. Trend Line Breakouts! We know so far these are key market structures with strong supportive and resistive properties. Whenever some form of market structure is broken, a violent breakout can occur. A common strategy is to catch breakouts in trend line trading. There are many ways to do this, but I prefer the ‘close confirmation’ method. I recommend you wait for for a candle to break through, and close on the other side of the line before reading the situation as a breakout. The reason for this is because price can often pierce through the line, but not close beyond it. These are known classically as ‘fake outs’, and are notorious around important structures. Many traders get cremated by fake out events, because they are too ‘trigger sensitive’ and slam the buy, or sell button at the first sign of any kind of sign the market is breaking out. So we can see price breaking through the line here. Many breakout traders would jump on board this, mostly fueled by greed to try catch the breakout early… but this can come at an expensive cost. The main point here is the candle hasn’t actually closed yet… In the chart above – when the candle does finally close, it closes back under – revealing a breakout trap! Those who were too quick to act have been ushered into a bad position. Now their money has been taken by the market, and flows into the pockets of more disciplined traders. It is very common for trend lines to be temporarily broken by price, even by just a few pips – only to turn around in the opposite direction. That’s why trading an ‘in the moment’ breakout is a risky strategy. When you focus on the candle close, your chances improve of catching a true breakout. We can see if the pic above, the candle actually closed above the level, indicating a breakout is underway… The market actually followed through with the breakout move! This is a good example of waiting for the candle closes gives a much better read on the situation. Trading candles ‘on the fly’ is simply a dangerous game. Checkpoint When trading trend line breakouts, I recommend making your decisions on the candle closes. Generally the 4 hour chart is good for catching earlier breakout candle closes. Channels Channels are best described as two linear levels that run in parallel to one another. They look like and sometime are referred to as ‘railway tracks’. You can get rising, and falling channels. A rising channel is made from linear higher highs, and higher lows. The two lines running in parallel create the support, and resistance of the channel structure. Like a ranging market, price bounces between these two lines and reversal signals can be picked off here. The downward channel is made from two parallel descending lines, which line up lower highs and lower lows. Reversal signals can be targeted at the channel boundaries. We can see in the pick above that there were some reversal signals at the channel resistance. They signaled continuation of the channel and were good trade opportunities. Checkpoint Channels are pretty easy, they are just line a ‘trend line sandwich’, created from price swings highs and lows. Target reversal signals at the boundaries. You can also target breakout trades when price moves outside the channel structure. Remember to wait for a close confirmation! Price Squeeze Consolidation Structures Linear levels can be used to highlight a consolidation pattern that I call a price squeeze. It is a scenario where you get lower highs, and higher lows converge in on one another… creating a ‘squeeze’ scenario. Notice how the higher lows and lower highs created two linear support and resistance levels that converge in on one another. This ‘compression’ of price is a strong catalyst for a breakout. Generally when the market breaks, and closes outside the squeeze pattern – you get very strong moves. The above shows the bullish and bearish pressure tightening price into a squeeze, then forcing a breakout. These patterns can breakout upwards, or downwards, so be prepared! Checkpoint Squeeze patterns are a catalyst for powerful breakouts in the market. They are basically created by two converging lines that force price into a compressed state, then… boom! Watch Out for the Megaphone Pattern! This pattern is the opposite of a squeeze pattern. The megaphone is an expansion pattern which can be identified by two diverging lines. Stock traders know this pattern as the ‘broadening top’, and it shows that the market is increasing in volatility – in an unstable kind of way. Megaphone patterns are usually created by a market phase called distribution – where big traders are dumping their positions, and violent up and down swings occur. You will see this pattern on your charts when the market creates higher highs AND lower lows. Notice how the swings keep becoming larger apart as more and more volatility stacks into the market. Checkpoint Megaphone patterns are known more by stock market traders as a expanding volatility pattern. They show an increase in volatility on each advancing swing, and signal a change is on the way. Flag Patterns (Counter Momentum Trend Lines) The flag pattern is created mainly in a trending environment. Flags appear when a counter-trend line forms against the prevailing trend momentum. The opposing trend line acts like a dam, holding back the main pressure… Above: See how the counter trend line backs up the trend pressure. It is the flag break you’re looking for here – a good trend continuation signal. Flags really work the best in a clear trending environment, and show up more regularly on time frames like the h4 – h8 charts. Above: Demonstrating the ‘dam wall’ effect here on a bullish market. The upward momentum encounters resistance in the form of a counter momentum line. Once the dam breaks, boom! Checkpoint Lines that form against the macro environment tend to create temporary ‘barriers’ in the core trend. Once the barrier is overcome by a breakout candle, the trend energy is release and the market continues. Alerts With My MT4 Battle Station The battle station is my an MT4 tool I made for those who are into price action trading, especially traders who use candlestick patterns, or Renko charts. I have a ‘trend line’ filter added into the program that will basically alert you to any reversal patterns that form off any levels that you’ve drawn on your chart. This can be useful if you’re waiting specially for a signal to form off technical points you’ve drawn on your chart… Above: I set the battle station to only be concern with reversal patterns it detects off levels I’ve drawn on the chart. Notice how it has highlights some reversal patterns at the levels by drawing the tan line through them (colors can be customized) The battle station can be extra useful here as it will also alert you when it finds these patterns off your t- line. The alerts come in 3 different ways so you don’t miss a trade: - Smart Phone Notification - Email Alerts - Metatrader Internal Program Pop-up Alerts More information on the Battle Station: trend line alerts. Checkpoint My Battle Station program for MT4 can help scan for trade opportunities with trend lines. It can pick up reversal opportunities by flagging down candlestick reversal patterns that only form off lines you’ve drawn Take Home Points From This Lesson - Trend line analysis can be very subjective – don’t fall into the over analysis trap - They act as linear support and resistance levels in the market - Use the 3 anchor points strategy to make sure you only draw quality lines - Use the common denominator method to ‘cut through’ fake outs when drawing trend lines - Price Action traders can target reversal candlestick patterns at well defined lines - Watch for when a candle closes beyond a clear line for breakout trade opportunities - Lines that run in parallel to each other create channel structures - Converging lines create price squeeze patterns – a potent breakout catalyst - Diverging lines create a high volatility pattern called the megaphone! - Trend lines that form against trend momentum can create the flag pattern (dam wall effect) - Watch for candles to close beyond the flag pattern as a trend continuation signal Hopefully you’ve enjoy this tutorial! In the comments below, please let me know what you thought, or if you would like me to expand on any of the topics discussed here. If you would like to learn more about trading with trend lines using candlestick reversal, and candlestick breakout patterns – check out the war room for price action traders. I wish you all the best on the charts! Don’t forget to leave your comment
For allowing a trader to determine the market movement direction the trend indicators were worked out. As a rule, they are not restricted by moving averages. They include such instruments as price models, support and resistance lines, trend lines. As a rule, each indicator has a mathematical formula by means of which it can be calculated. To the trend indicators the following can be related: Average Directional Movement Index — ADX Technical indicator (Average Directional Movement Index, ADX) helps to determine the price tendency presence. It was worked out and described in the book “New Concepts in Technical Trading Systems” by Welles Wilder. The simplest trading method on the basis of the directed movement system implies comparison of two indicators of 14-period directivity+DI and 14-period -DI. For this purpose the graph indicators are laid on each other or +DIis deducted from –DI and ticks down lower than -DI. These simple trading rules are filled up by W.Wilder with the “extreme points rule”. It serves for eliminating false signals and reducing the number of concluded deals. According to the extreme points principle, at the moment of crossing +DI and –DI the “extreme point” should be noticed. If +DI lifts higher than –DI this point is the maximal price for crossing. If +DI moves below –DI this point is the lowest crossing price. Further the extreme point is used as a market entry level. Thus, after the buy signal (+DI elevated above –DI) it is necessary to wait for the price to exceed the extreme point, and then buy. In case the price cannot overcome the extreme point level then the short position should be kept. Calculation: ADX = SUM ((+DI - (-DI)) / (+DI + (-DI)), N) / N Where:N — the number of periods used for calculation;SUM (..., N) — amount of N periods;+DI — the indicator value of positive price movement direction (positive directional index);-DI — the indicator value of positive price movement direction (negative directional index). Bollinger Bands — BB The Bollinger Bands are similar to Envelopes. The difference between them is in that the bounds of Envelopes are located above and below the moving average curve at a fixed percentage distance, while Bollinger Bands are formed at the distances equal to a certain number of standard deviations. As the value of a standard deviation depends on the volatility the bands regulate their width by themselves: it expands when the market is unstable and reduces in more stable periods. The Bollinger Bands are usually put on the price chart as well as on the indicator chart. As in the case of Envelopes, the Bollinger Bands interpretation is based on the price feature to stay within the upper and lower bands. A distinctive feature of Bollinger Bands is their variable area caused by the price volatility. In the periods of significant price changes (i.e. high volatility) the bounds are widening giving the prices a space. In sluggish periods (i.e. low volatility) the bounds are narrowing keeping the prices within the bounds. Among the indicator peculiarities the following can be distinguished: 1. Sharp price changes which usually occur after band narrowing equal to the volatility lowering. 2. If the prices come out of the bounds then it is needed to wait for the current tendency continuation. 3. If after the peaks and drops out of the bands come the peaks and drops within them the trend turnout is possible. 4. The price movement started from one of the band borders usually reaches the opposite one. The last inquiry is useful for forecasting the price reference points. Calculation The Bollinger Bands are formed by three lines. MIDDLE LINE, ML – is a simple moving average. ML = SUM (CLOSE, N) / N = SMA (CLOSE, N) TOP LINE, TL is the same middle line removed to the upside by certain number of standard deviations (D). TL = ML + (D * StdDev) BOTTOM LINE, BL is the same middle line removed to the downside by certain number of standard deviations. BL = ML — (D * StdDev) Where:SUM (..., N) — amount of N periods;CLOSE — closing price;N — the number of periods used for calculation;SMA — simple moving average;SQRT — square root;StdDev — standard deviation: StdDev = SQRT (SUM ((CLOSE - SMA (CLOSE, N))^2, N)/N) It is recommended to use 20-period simple moving average as a middle line and 2 simple deviations for calculating the band boundaries. Besides, the moving averages of less than 10 periods are low efficient. Moving Average – MA The technical indicator Moving Average, MA shows an average instrument price for some period of time. During the Moving Average calculation the mathematical averaging of the instrument price for this period is implemented. In proportion to the price changingits average value rises or falls. There are several types of moving averages (also called arithmetical), exponential, smoothed and weighted. Moving Average can be calculated for any sequential data set, including the opening and closing prices, maximal and minimal price, trading volume and other indicators values. Frequently, the moving averages of the moving averages are used. The only thing which distinguishes different types of Moving Average from each other – is various weight coefficients which are assigned to the last data. In case of Simple Moving Average all prices of the considered period have the same weight. Exponential Moving Average and Linear Weighted Moving Average make the last prices weightier. The most wide-spread interpretation method of the price moving average is its dynamics comparison with the price dynamics. When the instrument price moves above the Moving Average a buy signal emerges, and when the price is below the indicator line – sell signal. This trading system by means of Moving Average is not meant for providing the market entry strictly at its lowest point, and exit – strictly atop. It allows to act corresponding to the current trend: buy just after the prices reach the bottom and sell after the top shaping. The Moving Averages can be applied to the indicators as well. Amid this, an interpretation of the indicator moving averages is similar to the interpretation of the price moving averages: if the indicator moves above its Moving Average – it means that the upward indicator movement will go on: if the indicator moves below the Moving Average – the downtrend is to be fixed. Variety of Moving Averages: Simple Moving Average (SMA) Exponential Moving Average (EMA) Smoothed Moving Average (SMMA) Linear Weighted Moving Average (LWMA) Calculation Simple Moving Average, SMA Simple and arithmetical moving average is calculated by means of summing up the instrument closing price for a certain number of singular periods (for example 12 hours) with further amount division by the number of periods. SMA = SUM (CLOSE (i), N) / N Where:SUM — amount;CLOSE (i) — the closing price of the current period;N — the number of calculation periods. Parabolic SAR The technical indicator Parabolic System SAR was worked out for the trend markets analysis. The indicator is constructed on the price chart. In its own way this indicator is similar to the moving average with the only difference that Parabolic SAR is moving with big acceleration and it can change the position related to price. At the “bullish trend” (Up Trend) the indicator locates below the prices, at the “bearish” one (Down Trend) – above them. If the price crosses the lines of Parabolic SAR then the indicator turnout takes place, and its next values are placed on the other side from the price. With this indicator “turnout” the starting point will be the highest or lowest price for the previous period. The indicator turnout is a signal of the trend continuation (transit to a correction or flat) or its turnout. Parabolic SAR perfectly determines the points of market exit. Long positions should be closed when the price decreases below the line of the technical indicator and short – when the price moves above the Parabolic SAR line. Often this indicator is used as a trailing stop line. If long position is opened (i.e. the price is above the Parabolic SAR) then the indicator line will be moving regardless of the prices direction. The value of the Parabolic SAR line depends on the price movement value. Calculation For long positions: SAR (i) = ACCELERATION * (HIGH (i - 1) - SAR (i - 1)) + SAR (i - 1) For short positions:SAR (i) = ACCELERATION * (LOW (i - 1) - SAR (i - 1)) - SAR (i - 1) Where:SAR (i - 1) — value of the Parabolic SAR indicator at the previous bar;ACCELERATION — acceleration factor;HIGH (i - 1) — maximal price for the previous period;LOW (i - 1) – minimal price for the previous period. The indicator value is advancing if the current bar price is bigger than the preceding one on the bull market and inversely. And the acceleration factor will be doubling that will cause binding of the Parabolic SAR with the price. Standard Deviation The technical indicator (Standard Deviation, StdDev) measures the market volatility. This indicator characterizes the size of price fluctuations in relation to the moving average. Thus, if the indicator value is big then the market is volatile and the bar prices are rather scattered relatively the moving average. If the indicator value is not too big the market has low volatility and the bar prices are quite close to the moving average. Usually this indicator is used as a component of other indicators. Thus, at calculating the Bollinger Bands the value of a standard instrument deviation is added to its moving average. The market dynamics consists of interchange of quiet and violent activity periods that is why approach to this indicator is simple: If the indicator value is too small, i.e. the market is absolutely quiet then activity surge should be expected soon; To the contrary, if the indicator is extremely big then this activity is most likely to go downwards. Calculation StdDev (i) = SQRT (AMOUNT (j = i - N, i) / N) AMOUNT (j = i - N, i) = SUM ((ApPRICE (j) - MA (ApPRICE (i), N, i)) ^ 2) Where:StdDev (i) — Standard Deviation of the Current Bar;SQRT — square root;AMOUNT(j = i - N, i) — sum of squares from j = i - N to i;N — smoothing period;ApPRICE (j) — applied price of j-bar;MA (ApPRICE (i), N, i) — any moving average of the current bar for N periods;ApPRICE (i) — applied price of the current bar. These indicators are the most widespread. Others are based on them being their derivatives.
Average Directional Index (ADX) ADX staying below 20 level — there is no trend or the trend is weak. ADX moving above 20 level — trend is strong. ADX passing 40 level — trend is extreme. ADX value rising — trend is going stronger, falling — trend is weakening. +DI stays on top of -DI — uptrend is in place. -DI stays on top of +DI — downtrend is in place. Two DI cross — trend is changing. Average Directional Index (ADX) The Average Directional Index (ADX) depicts a presence or absence of a trend. ADX advices on the strength of the dominant forces that move market prices here and now. In other words, ADX advices on trend tendencies: whether the trend is going to continue and strengthen or it is about to lose its positions. The author of Average Directional Index J. Welles Wilder considers his ADX indicator as a primary achievement; and only because signals given by ADX are not an easy to take a grasp of from the first look, many Forex traders avoid using ADX in favor of more visually comprehensive indicators. How to interpret ADX ADX indicator has 2 lines: ADX itself (white), +DI (green) and -DI (red).Traders then need to draw a horizontal line at the level of 20.All readings of ADX which are below 20 suggest a weak and unclear trend, while readings above 20 indicate that a trend has picked up. That is, basically, the simplest explanation of the purpose of ADX. ADX allows Forex traders to determine whether the trend is strong or weak and thus choose and appropriate strategy to trade with: a trend following strategy or a strategy fit to consolidation market periods with no significant price changes. There is also additional line to be added to ADX indicator window - at 40 level. How to trade with ADX Trading with ADX looks as follows: If ADX is traded below 20 - there is no trend or the trend is weak, thus a non-trend-following strategies should be used, otherwise losses may occur as a result of false signals and whip-saws taking place. An example of non-trend-following method is channel trading. If ADX is traded above 20 but below 40, it is time to apply trend following methods. An example would be: Forex trading Moving averages or or trading with Parabolic SAR indicator. When ADX reaches 40 level, it suggests an overbought/oversold (depending on the trend) situation on the market and it is time to protect some profits of at least move Stop loss order to a break even. When ADX passes 40 level, it is a good time to begin collecting profits gradually scaling out of the trades on rallies and sell-offs and protecting remaining positions with trailing stops. ADX -/+ DI lines are used for spotting entry signals. All -/+ DI crossovers are disregarded while ADX remains below 20. Once ADX peaks above 20 a buy signal occur when +DI (green) crosses upwards and above -DI (red). A sell signal will be the opposite: +DI would cross -DI downwards.If after a newly created signal another opposite crossover happens within a short period of time, the original signal should be disregarded and position protected soon or closed. ADX indicator is never traded alone, but rather in combination with other indicators and tools. ADX indicator most of the time gives much later signals comparing to faster reacting moving averages crossover or Stochastic, for example, however, reliability of ADX indicator is much higher than for other indicators in traders' toolkit, which makes it a valuable tool for many Forex traders. And just one more idea to test out:When ADX rises above 20 for the first time and then goes flat for some time, there is believed to be a new trend being born and the reason for ADX being currently flat is because market reacts to this new trend formation by making first initial correction. During this correction it is a good time to initiate new orders.
Each trading day in Forex is a struggle of buyers (Bulls) and sellers (Bears). Bulls are interested in pricegrowth, Bears — in price decrease. The result of ending of the day depends on who has strongerpositions: buyers or sellers. But intraday fluctuations, the highest and lowest price in the day also showhow strong positions have members of the market. The main idea The assessment of the balance of Bulls and Bears forces has the great influence. Prerequisites of changesin this balance are one of the first signals that can lead to changing trends. Bulls Power and Bears Powerwere invented by Alexander Elder (the famous trader and financier). These indicators are perfect to usewith one of the trend indicators.Bulls Power and Bears Power are based on 13th Exponential Moving average and maximum or minimumprice. Bulls Power: definition and formula Bulls Power is the difference between the highest price and 13 - period exponential moving average.Accordingly, it is calculated using the formula:BULLS = HIGH - EMAWhere:BULLS - Bulls Power;HIGH - the highest price;EMA - Exponential Moving Average.When there is a rising trend in the market, the indicator is bigger than zero. When there is a decreasingtrend, Bulls Power indicator is less than zero. Bears Power: definition and formula Bears Power indicator is opposite than the Bulls Power indicator. It measures the strength of the bears inthe market. Accordingly, it is calculated as the difference between the minimum value of the price perday exponential moving average with period 13.It is calculated using the formula:BEARS = LOW - EMAWhere:BEARS - Bears force;LOW - the lowest price;EMA - Exponential Moving Average.Then the downward trend is weak, the indicator Bears Power will be less than zero. If prices rise, it willalso be above the zero line.As a rule, these two indicators are used in conjunction with trend indicators (moving averages, or other).In this case the slope of the last shows the direction of prices. This should be taken into account duringthe decision-making opening and closing positions.So, when the strength of the Bulls shows a value greater than zero, but is reduced at the same time, amoving average also goes down - it is a signal for the sales. In this case, the discrepancy can amplify thesignal peaks (divergence).Similarly used Bears Power indicator: when the moving average shows the upward trend in prices, andthe indicator is trading below zero, it is a signal to buy. Divergence also strengthens it. Signals for buy are: - Rising movement of the moving average- Growth indicator Bears Power at a value less than zero- Divergence (divergence of the maximum and minimum values of the indicator and the price chart)It is not necessary to trade with a downward motion (Bears Power index is less than zero). A good signalis a long-term decline after a turn-up (below the zero line). Signals for sale are: - Decrease movement of the moving average- Decrease indicator of Bulls Power which locates above zero- DivergenceWhen you open a position for sale, to limit losses, you can put a stop-loss at a level above the lastmaximum value for money.
Bollinger Bands: quick summary Created by John Bollinger, the Bollinger Bands indicator measures market volatility and provides a lot of useful information:- trend direction- trend continuation or pausing - periods of market consolidation- periods of upcoming large volatility breakouts- relative market tops and bottoms and price targets. Bollinger Bands interpretation Bollinger Bands indicator consists of three bands, which 85% of the time retain price within their boundaries:- Simple moving average (SMA) in the middle (with default value of 20) - Lower band - SMA minus 2 standard deviations- Upper band - SMA plus 2 standard deviationsThe default value for Bollinger Bands in Forex is (20,2) - the settings we'll be using for our screenshots. When the market becomes more volatile, the bands will correspond by widening and moving away form the middle line. When the market slows down and becomes less volatile, the bands will move closer together. How to trade with Bollinger Bands Price moves in upper bands channel – uptrend, lower - downtrend It is very simple to identify dominating price direction by simply answering the question: in what part of the Bollinger Bands the price is currently trading? If price stays above the middle line – in the upper channel – we’ve got a prevailing uptrend. If below the middle line – in the lower channel – we have a prevailing downtrend. And just in case you’ve missed the beginning of the trend, Bollinger Bands can help you get in the trend with good risk to reward ratio on a pullback.Simply look for dips towards the middle Bollinger Bands line and enter in the direction of the trend. Low volatility, followed by high volatility breakouts When Bollinger Bands start to narrow down to the point when they are visually forming a neat tight range (measured no other way than by eye), as shown on the screenshot below, the situation signals of an upcoming increase in volatility once market breaks outside the bands. It is similar to a quiet time before the storm. The more time passes while price is contained within the narrow Bollinger Bands range, the more aggressive and extensive breakout is expected. Price moves outside the bands – trend continuationWhen price moves and closes outside the Bollinger upper or lower bands, it implies a continuation of the trend. With it Bollinger Bands continue to widen as volatility rises. But it is not always straight forward: at some point closing outside Bollinger Bands will mean price exhaustion and upcoming trend reversal. Bollinger Bands alone are not able to identify continuation and reversal patterns and require support from other indicators, such as often RSI, ADX or MACD – in general all types indicators that highlight markets from a different than volatility and trend prospective (momentum, volume, market strength, divergence etc). Trend reversal patterns with Bollinger BandsAs a rule, a candle closing outside Bollinger Bands followed later by a candle closing inside the Bollinger Bands serves as an early signal of forming trend reversal. It is, however, not a 100% assurance of an immediate trend reversal. Since long aggressive trend develop not that often, there will be on general more reversals than continuation cases, still only filter signals form other indicators may help to spot true and false market tops and bottoms. Speaking of the last, Bollinger Bands are also capable of aiding double top and double bottom pattern recognition and trading. W and M patterns with Bollinger Bands A double top or M pattern is a sell setup. With Bollinger Bands it occurs when the following sequence take place:- price penetrates the lower band,- pulls back toward the middle line, - a new subsequent low is formed, and this low is above the lower band and never has touched it.- a setup is confirmed when price reaches and crosses the middle Bollinger line. In fact, a very conservative trading approach requires price to cross and close on the other side of Bollinger Bands middle line before the trend change is confirmed. As you have probably noticed, the middle Bollinger Bands line is simply a 20 SMA (default) line. This Simple Moving Average (SMA) is by itself a widely used stand alone indicator, which help Forex traders identify prevailing trends and confirm trading signals. Facts Bollinger Bands® is a registered trademark of Bollinger, John A.The trademark is registered for "Financial analysis and research services".
Trading with Parabolic SAR involves the following signals: PSAR dot is above the price - downtrend.PSAR dot is below the price - uptrend. Parabolic SAR Parabolic SAR indicator is a trend indicator, which tells Forex traders about price stop-and-reverse points as well as trend direction. Its concept of usage is easy to understand from the first look. Parabolic SAR appears as a set of dotted lines, where each dot represents certain time period. When price is above Parabolic SAR dots, Forex traders should be holding Long positions only. Once Parabolic SAR dots come on top of the price - it is time to change trading positions to Short. Parabolic Sar indicator literally allows being in trade all the time. How to trade with Parabolic SAR indicator However, trading with Parabolic SAR is not that simple; not all Parabolic SAR reversal signals can be traded profitably. Let's turn to advice given by the developer of Parabolic SAR indicator - J. Welles Wilder. He suggests using Parabolic SAR, first of all, for trailing stops and finding the best exits. The way Forex traders use Parabolic SAR is by simply setting a Stop loss order at the level of the most recent SAR dot appearing on the chart. Stop is then trailed along with each new Sar dot till trend remains intact. Once Parabolic SAR indicator changes its position - SAR dots appear on the opposite side of the price - the trade is closed. Welles Wilder doesn't recommend using Parabolic SAR as a stand alone indicator. The main reason for that is: Parabolic SAR can easily create whip-saws (false signals) during periods of market consolidation. The Parabolic SAR works best during strong trending periods, which Wilder himself estimates occur roughly 30% of the time. Thus Forex traders will need other Forex indicators to identify those strong trending periods. For himself, Welles Wilder developed ADX indicator - another trend indicator - which tells what kind of trend is dominant and how strong the trend is. Upon knowing the trend and its health Forex traders can pick appropriate signals from Parabolic SAR and disregard the rest. How do you determine the trend if you don't want to use ADX. Try 50 EMA. Price readings above it would suggest an uptrend, below - downtrend. Parabolic SAR settings So, Parabolic SAR is developed to keep stop loss level moving adjusting to new prices and thus locking profits on its way. The formula of Parabolic SAR includes an "acceleration factor", which allows to react to market changes fast as the trend starts to accelerate. At the beginning, new Parabolic SAR dots are placed close together and then accelerate as the trend advances. Parabolic SAR has two variables: a step and max step. Settings recommended by W.Wilder are: a step of 0.02 and the max step of 0.2. The step sets sensitivity of Parabolic SAR indicator. If the Step is too high, Parabolic SAR becomes more sensitive and will flip back and forth more often, with lower step Parabolic SAR will become smoother. Maximum step sets a cushion between price and Parabolic SAR. The higher the max step the closer the trailing stop will be to the price. Parabolic SAR - useful tips: Tip 1:When space between Parabolic SAR dots increases significantly, it indicates that acceleration formula for SAR is already working. Thus, if you have missed out on an entry, it might be better to avoid late entries at all and rather wait for an opportunity to re-enter the trade with a help of, for example, Stochastic indicator. Tip 2:Parabolic SAR is only a mathematical interpretation of the price. Even though it helps to identify initial place for a Stop, it may not be the final or best one sometimes. Forex traders who also look at support/resistance levels, round numbers, trend line etc may find even better place for Stops to be set. Parabolic SAR indicator Formula
InstallationTo make things easier I created an installer file, or you can download, and drag the files to the correct places.If you use the installer, follow Trade simulator these instructions; if you are going to do it manually skip down to manual installation below. Automatic Installation1. save the installer to your desktop and double click to get to this window, or you may beable to run it directly from the internet.2. Locate your version of MT4. It may not say 'ATC FX'. For example, if you are withFXDD it may say 'FXDD - MetaTrader 4'. Whichever broker you are with, look for theirname in the programs folder. This will be the correct folder. Just select that folder so it ishighlighted as below.5. Make sure the path is correct by visually inspecting the 'Destination folder' as below.The first part will be the same as below and the last part will be different depending onyour broker. The installer puts an extra backslash in the path below. It should not causeany problems but just in case, delete the extra backslash. Now click next.See PDF and files
Milestone is an EA written by the programmer and trader Trevone published in the community MQL4 code base. Milstone drew my attention to the excellent results published in the back test then replicated back from my test. The advice of the author of the forex robot Milestone is to try to use version 4.3 or 4.4 on many currency pairs and version 5.2 for only USD / EUR 5 min time frame. The author attaches files with directions on how to set up Milestone in testing. The Milestone EA forex robot is based on these indicators: ADX, Moving Average and ATR. In this Forex Robot is to revise the profit target is sometimes very small. Milestone EA: EUR/USD 5 min Milestone EA 1 year NZ/USD
EA Trailing Stop Forex money manager is an ea (expert advisor). This is a great support for every trader becouse just need to manually open the trade and forex money manager EA will do the rest. Informations: set take profit, set stop loss, moves breakeven, shows essential informations on the screen, change price for stop loss and take profit, stop and limit orders , directly from the chart. Forex Money manager ea (expert advisor):works on 4 and 5 digits Brokers;cuistomizable percent scaling out;account type (account micro, mini and standard);scaling out;trailing stop loss when pips profits is reached;set breakeven for locks profit,auto stop loss based on ATR calculations. This Forex Money Manager ea (expert advisor) is very simple and is a great friend for the trader.
To Install the Pattern Robot EA, Copy/Paste the Ex4 file ‘’Pattern Robot.ex4’’into your Metatrader/Experts folderPASTERestart Metatrader4 Platform and open EUR/USD 30M Chart.Click the Navigator Button in your Metatrader4 Toolbar, then clickon ‘’Expert Advisors’’ in the list that will appear in the left side of your screen. Pattern RobotThe recommended pair for this Pattern Robot EA is EUR/USD. The best time frames to use are 30 minutes or 15 minutes time frames.The EA doesn’t work with new NFA rules. It uses stop loss and limit orders. Please adjust the settings according to your account size, risk management plan before using it. Or just use the default settings.Always trade on demo before trading with real money. For any help or questions about the EA, please contact us anytime.Please allow 24-48 hours for us to reply, as we receive 1,000’s of queries per day and we always make sure we reply to each one of them as quickly as possible. Share your opinion, can help everyone to understand the forex strategy.
Expert Advisor Metatrader Bassic settingextern double Lots = 0.1;extern double TakeProfit = 50;extern double StopLoss = 50;extern int TrailingProfit=0;//|------------------trailing stop after profit reachedextern int TrailingStop=30;//|--------------------trailing stopextern int TrailingStep=0;//|--------------------trailing stepextern double MACDByeLevel = 0.0;extern double MACDSellLevel = 0.0;extern double RSILevel = 50;extern double FastMA = 5;extern double SlowMA = 10; Time Frame H1 or higher • 5 period WMA (Weighted Moving Average) • 10 period SMA (Simple Moving Average) • Slow Stochastic (5,3,3 (exponential)) • RSI (14)• MACD (12/26/9 (exponential)) BUY: MA1 > MA2, RSI > 50, MACD Fast > MACD Signal and Stochastic is signaling up (fast line above the slow line). SELL: MA1 < MA2, RSI < 50, MACD Fast < MACD Signal and Stochastic is signaling down (fast line below slow line). (Test without optmization)
The US dollar fell against most major currencies on Monday, as investors await a very busy week full of events. Chief among these events is the upcoming US presidential debate between the US President and Republican candidate Donald Trump versus his Democratic rival Joe Biden. The final reading of the US GDP for Q2 will also be released later this week, amid expectation that the US economy will continue shrinking due to the coronavirus crisis impact. The market is also anticipating the US monthly jobs report on Friday, which delivers key insight on the state of the US labor market and employment improvement from August. Several Federal Reserve members had recently expressed that the US economy recovery path from the coronavirus impact is continuing. The dollar index fell against a basket of currencies by 0.4% to 94.2 points as of 20:02 GMT, after it hit a high of 94.6 and a low of 94.1.
The British pound rose against most major currencies on Monday, as the US dollar continued to weaken and investors rushed to riskier currencies. Several members of the Bank of England, led by Andrew Bailey, had issued warnings about the coronavirus impact on the British economy. The BoE Governor Andrew Bailey warned of the coronavirus downside risks, adding that it is even a higher risk on the UK's economy than a no-deal Brexit scenario. The numbers of coronavirus infections continued to rise in the UK, while several other European countries are facing the second wave of the disease. The coronavirus infections rose to more than 33 million globally, with a death toll of more than 1 million victims. GBP/USD rose 0.7% to 1.2831 as of 21:41 GMT, after the pair hit a high of 1.2922 and a low of 1.2745.
The Australian dollar rose against most currencies on Monday, as investors shifted to stocks and risky currencies and eschewed the US dollar. This came amid anticipation of the upcoming US presidential debate between the US President and Republican candidate Donald Trump and his Democratic rival Joe Biden scheduled this week. The increased exchange of criticism between the two presidential candidates that will be reflected in the results of the debate is expected to impact the market movements in the coming period. Otherwise, the race by big pharma to develop an effective and safe Covid-19 vaccines is progressing. Companies such as Moderna, Johnson & Johnson and Pfizer are close to finishing their clinical trials of their promising vaccines, which will be available in the next few months. However, the World Health Organization has warned that the crisis is not under control yet, and expected the number of deaths from the deadly disease to rise to 2 million before an effective vaccine is out. As of 18:24 GMT, AUD/USD rose 0.6% to 0.7068, after the hit an intraday high of 0.7075 and a low of 0.7025.
The US dollar fell against a basket of major currencies Monday, on profit-taking from a 2-month high of 94.74 points hit on Friday, in addition to improved risk appetite amid hopes for a new stimulus package in the US. The dollar index fell 0.5% to 94.15 points, after opening at 94.58, and hit an intraday-high of 94.64. The index rose 0.3% on Friday, and hit its 2-month high of 94.74 points, on increased by buying momentum against a basket of major currencies. The US dollar gained 1.6% during the past week, posting its third weekly gain in a month and the largest since March. The biggest weekly gain in six months came after the greenback shined as the best alternative investment, due to concerns about the global economy after several governments tightened their lockdown restrictions to curb the spread of the coronavirus. Following these developments, most global stock markets were hit by a broad sell-off move, which has sparked concerns over a liquidity crunch. Hopes for a new fiscal stimulus in the US were renewed, after House Speaker Nancy Pelosi said on Sunday that a solution can be reached with the White House on another coronavirus stimulus plan, adding that she believes they can come to an agreement.
USD/JPY tilted lower in Asian trade off September 15 highs amid a lack of data from Japan and the US, while Federal Reserve Bank of Cleveland President Loretta Mester speaks later today. As of 06:56 GMT, USD/JPY fell 0.28% to 105.28, with an intraday low at 105.27. Federal Reserve Bank of Cleveland President Loretta Mester is due to speak about economic equality at a webinar hosted by the African American Chamber of Commerce of Western Pennsylvania. In a few days, US GDP data will show an astounding 31.7% contraction in the second quarter, the same as the initial reading. Also US private sector employment is expected to show an addition of 650 thousand new jobs in September, with the official report releasing on Friday.