Article Summary: Forex liquidity is confusing to the new trader. How can a market be seemingly volatile and liquid at the same time? This article will be a primer to understanding just that.As one gets started in forex trading, one of the first benefits they’re likely to hear is how much liquidity the FX Market offers over other markets. The latest figures are roughly $4 Trillion in daily volume as per the Bank of International Settlements. But what does that mean to you and your trading?Why Should You Care About Liquidity?Ask anyone during the 2008 credit crisis who was trying to sell their home what are the benefits of liquidity? Or maybe a stock trader who is on the wrong side of a trade when it’s been announced that the stock they’re shorting is rumored to be acquired by a much larger company at a premium in afterhours trading. These people were at a financial stronghold because they could not exit their trade when they wanted to and were subject to illiquid conditions in the market.Liquidity by definition is the ability of a valued item to be transferred into currency on demand. When you’re trading currencies or Foreign Exchange, you’re trading a market that is by itself, liquid. However, you are trading based on the available liquidity of financial institutions who get you in or out of the trade of your choosing.What are the Signs of Liquidity & Illiquidity?From a trader’s point of view, an illiquid market will have chaotic moves or gaps because the level of buying or selling volume at any one moment can vary greatly. A highly liquid market is also known as a deep market or a smooth market and price action is also smooth. Most traders need and should require a liquid market because it is very hard to manage risk if you’re on the wrong side of a big move in an illiquid market.Learn Forex: Illiquid Vs. Liquid MarketFTSE 100 Index - Equity Markets Are Prone to Gaps Forex Has Many Liquidity Providers Around The Clock A market that trades 24 hours a day like the forex market is considered more liquid because you can enter or exit a trade at your discretion. A market that only trades for a fraction of the day like the US Equity market or Futures Exchange would be condensed a thinner market because price can jump at the open if overnight news comes out against the crowd’s expectations.Are There Gaps When Trading Forex?Gaps in Forex vary compared to other markets. However, price gaps can occur in Forex if an interest rate announcement or other high impact news announcement comes out against expectations. Also, gaps can occur at the week’s opening on Sunday afternoon in the US if there is a news announcement over the weekend but overall, gaps in Forex are usually less than a %0.50 of a currency’s value and orders can be sent in for execution whenever the market is open and you’ll be filled as soon as the liquidity provider has a price for you.Different Times of Day Offer Varying Amounts of LiquidityIf you’re a short term trader or scalper, you should be aware of how liquidity in Forex varies through the trading day. There are less active hours like the Asian Session that is often range bound and easier to trade from a speculation point of view. The major moving market sessions such as the London session and US session are more prone to breakouts and larger percentile moves on the day.The time of day that you’re likely to see the biggest moves are the US Morning Session because it overlaps with the European / London Session which alone accounts for roughly 50 %+ of total daily global volume. The US session alone accounts for around 20% and in the US Afternoon, you will often see a sharp drop off in aggressive moves except for when the Federal Open Market Committee (FOMC) comes out with a surprise announcement which is but a few times a month.Closing ThoughtsIf you’re new to the forex market or maybe you’re coming over from a less liquid market, you’ll be pleasantly surprised by the liquidity. You’ll be able to trade around the clock and the liquidity that provides smooth price actions makes for good technical analysis. Whatever your back ground, building a trading plan in this market can conform to you and your availability much better than most markets.
Trading is difficult. The goal of this article is not to make trading seem less difficult; but rather to highlight the fact that many new traders can often-times become their own worst enemies, making trading even more difficult than it already is. To illustrate how this can happen, try to think back to the last time that you were very angry; the last time that you were really mad about something.Then think about what caused you to be mad.Then think about what you did, and how you felt after you first became mad.For many, when they became mad they lost control to some degree; as in – they weren’t able to draw upon their highest of mental faculties to ‘fix’ what was making them upset. This is a trait that can often hinder us from accomplishing our goals.For traders, this issue can be very problematic.Imagine you’ve just taken a trade ahead of Non-Farm Payrolls, with the expectation that if the reported number is higher than forecasts, you will see the price of the EURUSD increase very quickly; enabling you to make a hearty short-term profit.NFP comes, and just as you had hoped – the number beats forecasts. But for some reason, price goes down!You think back to all of the analysis you had performed, all the reasons that EURUSD should be going up – and the more you think, the further price falls.As you see the red stacking up on your losing position; emotions begin to take over. These are often the same emotions we feel if we had just been in a shocking accident, or a fight with another person.This is the Fight-or-flight instinct, and we have it for a reason.In psychology circles, the fight-or-flight instinct is often regarded as being a key part of the human psyche; built to protect us in times of stress.The theory states that when a person encounters stress, their brain quickly makes calculations (so quick that the person doesn’t even notice) to make a determination as to how that stress should be handle.In some situations, when the mind deems the situation as too stressful to attempt to manage – we run.In other situations, in which the mind feels as though we can make an impact with our actions – we fight.This is often why we do or say things we regret when we fight with each other; in some cases, it really is out of our control.This is the fight-or-flight instinct; always part of every one of us constantly seeking to protect us in times of stress.In trading, we can get quite a bit of stress. When a position begins to turn against us, that's when we begin to feel it. The red arrows on the chart accompany all the fears of failure that rush through our brains in nanoseconds.As the loss continues to stack against us, that stress becomes more and more profound; making the concept of taking action even more intimidating.And this is precisely how our fight-or-flight instinct can negatively affect us in trades, as we allow ourselves to make decisions in extremely stressful states that, often-times, don't do us any favors.The decisions we make in these situations are often called ‘knee-jerk reactions,’ or ‘on-the-fly decisions,’ depending on how they turn out. Bad trades are often reactions, while good trades are often decisions.Professional traders usually don’t want to take the chance that a rash decision will damage their account; or said another way – they want to make sure one knee-jerk reaction doesn’t ruin their entire career. They often go through much practice, and many trades in an attempt to soften this emotional reaction to the stress of an open trade. Below are some of the ways that can help traders do this.Plan your successOne of the things that professional traders do to ensure discipline during these trying times is to plan out their approach. The old adage ‘Failing to plan is planning to fail,’ can really hold true in financial markets.As traders, there isn’t just one way of being profitable. There are many strategies, and approaches that can help traders accomplish their goals. But whatever is going to work for that person is often going to be a defined and systematic approach; rather than one based on ‘hunches.’Planning each trade, and planning how you want to react in each situation that takes place in those trades can greatly help a new traders manage the emotions that come with speculation.In the DailyFX Education group, we get to work with many new traders. One of themes we’ve noticed with those new traders that are successful is the usage of a Trading Plan.The differences between new traders using a trading plan, and those not using a trading plan were shocking: So shocking that we wanted to produce resources so that any and every trader interested in writing a trading plan would have everything they need.I wrote an article outlining many of the areas of the trading plan that traders may want to pay focus to.Compiling a trading plan is the first step to attack the emotions of trading, but unfortunately the trading plan will not completely obviate the effects of these emotions. Below are a few ways that traders will often attempt to mitigate this damage.See how others handle the stressIn the DailyFX series, Traits of Successful traders – David Rodriguez, Tim Shea, and Jeremy Wagner set out to discover what separated those who were successful from those who had failed in the Forex market, and the research was shocking.In the Number One Mistake Forex Traders Make, David Rodriguez found that, shockingly, retail traders were right MORE often than they were wrong; meaning that they were actually on the right side of the trade more often than not.But what was even more shocking was the fact that, in many cases, traders were taking losses TWICE that of the gain that they were making IF they were right.The unsustainability of this type of plan should be obvious. If we’re losing 2 dollars for every time that we are wrong, and only making 1 dollar for every time that we are right, we must be right AT LEAST twice for every one time we are wrong.And that doesn’t even include spread, or slippage, or any other costs that may come about.If we utilize this style of money management, we often need to be right 3 times for every one time that we are wrong; a 75% success rate.Most professionals don’t want to expect themselves to be able to pick the right side of the trade for more than 3 out of 4 times.And keep in mind, for every one loser that cancels out two winners. So if a trader using the above scenario happens to get surprised – well, now they’ve taken a loss.Needless to say, this is a scenario that many traders have a difficult, if not impossible time digging themselves out of.The thesis of the Number One Mistake Forex Traders Make is:Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.Employ loss limitsThis may have special importance to scalpers and day traders, but the Loss Limit has been used for years in an effort to prevent a bad day becoming even worse.After losing trades, we often feel negativity. After many losing trades, this negativity can often build; reinforced by the thought that ‘its about time I finally win a trade.’I can not even begin to count the number of new traders that have come to me, regretfully, after blowing an account on one currency pair in a single trading session simply because they were chasing prices.What usually happens with these folks is that after placing a few losing trades, and getting nowhere really fast, they increase the trade size.While there is the chance that the trade might work out for you, the fact of the matter is that you are making quick, short-term decisions about future price movements.The DailyFX Education team places a heavy importance on Money Management, and as we’ve worked with so many new traders we realized the necessity of loss limits.In the DailyFX Education Course we offer a full module on Money Management, with a full profile and set of rules for new traders to use.One of the key elements of our Money Management curriculum is the 5% rule; meaning that on any one trade we will not risk more than 5% of our account.This rule is in place to ensure that one bad day doesn’t end (or cause irreparable damage to) our trading careers.Lower your leverageOne of the easiest ways to decrease the emotional affect of your trades is to lower your trade size.Don’t believe me? Remember how it felt the last time you placed a demo trade? It probably didn’t garner much of an emotional affect at all, as there was no financial risk on the trade.Increasing the trade size, or velocity, will often increase these stress levels as traders are allowing each individual trade to carry to great of an impact to their trading account.Let me explain.Imagine a trader opens an account with $10,000 dollars.Our trader first places a trade for a $10,000 lot on EURUSD.As the trade moves at $1 a pip, the trader sees moderate fluctuations in the account. Three hundred twenty dollars was put up for margin, and our trader watches their usable margin of $9680 fluctuate by ten cents-per-pip.Now imagine that same trader places a trade for $300,000 in the same currency pair.Now our trader has to put up $9600 for margin – leaving them with only $400 in usable margin.And now the trade is moving at $30 per pip.After the trade moves against our trader only 14 pips, the usable margin is exhausted, and the trade is closed automatically as a margin call.The trader is forced to take a loss; they don’t even have the chance of seeing price come back and pull the trade into profitable territory.In this case, the new trader has simply put themselves in a position in which the odds of success were simply not in their favor. Lowering the leverage can greatly help diminish the risk of such events happening in the future.
As with virtually any trading scenario, we must first determine the direction that we need to trade the pair for the greatest likelihood of success.By looking at the 4 hour chart of the GBPUSD below, there are several reasons we know that we want to go long (buy) the pair. Price action is above the 200 Simple Moving Average and is pulling away from it; the pair has been making higher highs and higher lows (green lines) which indicates an uptrend; and, at the time of this chart, the GBP was the strongest currency and the USD was one of the weaker currencies.All these point to a buying opportunity. But when do we enter the trade?Let’s take a look at the trendline… We can see that price action has come in contact with trendline support at several points...note the blue boxes. (Since price has tested and respected the trendline at more than three points we know that our trendline is valid.)Our entry strategy to buy this pair using trendline support will be to wait for price to trade down to the trendline…into the “Buy Zone”. If price trades into the Buy Zone and stalls and a candle does not close below trendline support, just as in our “blue box examples” , we can take a long position on the pair with our stop just below the trendline or just below the lowest wick that penetrates the trendline.The trader could exit the trade if price reaches resistance, the previous high, or by employing a simple 1:2 Risk Reward Ratio.Now let’s take a look at a 4 hour chart of the USDCHF for selling against Trendline Resistance in a downtrend… This trading scenario will be virtually the opposite of what we did in the previous buy example.We want to sell this pair as it has been making lower lows (red lines) and lower highs; price action is below the 200 SMA and pulling away from it; and, at the time of this chart, the USD was weak and the CHF was strong.Again, price action has tested our resistance line at several points (the blue boxes) so we know the trendline to be valid. In this example we would wait for price to trade up to trendline resistance in the Sell Zone. As long as a candle does not close above the trendline, we would sell the pair with a stop just above the trendline or just above the highest wick to penetrate the trendline.The trade could be closed should price reach the previous low or we could use a 1:2 Risk Reward Ratio to exit the trade.
First and foremost a trader should determine the direction that the market has been taking the pair over time…the longer term trend. Once that is determined, the trader can then look for entry signals in the direction of that trend as that will be the direction that offers the greater likelihood of success.As we look at our 4 hour chart of the EURJPY below, we can see that the pair is in an uptrend (has a bullish bias) as price is trading above the 200 Simple Moving Average and, at the time of this chart, the EUR was stronger than the JPY. So, if the pair is in an uptrend (bullish bias), we would want to look for candlesticks and candlestick patterns that demonstrate a potential for a bullish reversal. That would be a reversal by price action back in the direction of the trend.On the chart above we would be looking at the Hammer Candlesticks, Doji, Bullish Engulfing pattern and the Morning Star pattern for that bullish reversal signal. When we see these candlesticks and patterns forming at the end of a retracement, a support level, this is a “tip” the price action may very well reverse back in the direction of the overall trend. Again, nothing in trading is a certainty but these patterns can provide us with a trading edge, the tip that we are looking for.What if the pair is in a downtrend?On the chart above I have also included some of the patterns that we would look for that would indicate that price action may be reversing to the downside after a reversal (pullback) to a level of resistance. Those patterns would be the Shooting Star, Bearish Engulfing, Doji, Evening Star and the Spinning Top.While in most cases on this chart price action did reverse to the downside after these patterns showed up on the chart, the higher probability trade will still exist in the direction of the trend.While it is not necessary to discard your indicator of choice in favor of candlestick patterns, using these patterns in conjunction with your indicator, be it MACD, Stochastics, RSI, etc., can provide an additional tip when it comes to looking for a pair to reverse its direction.
Japanese candlesticks are a popular charting technique used by many traders. Today, we are looking at the shooting star reversal pattern which is a popular Japanese candlestick formation and how to apply it towards the FX market.What Does a Shooting Star Look Like? (the shooting star is the red candle at the high point above)A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the candle.Additionally, the closing price should be lower than the opening price creating a red candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.Trading the Shooting StarTrading this reversal pattern is fairly simple. First, the implication is for lower prices therefore we want to look for entries to short. Since the prices were previously rejected at the high of the shooting star, we will establish our stop loss about 10-20 pips above the high of the said candlestick.The entry can take place in a couple of manners. First, a trader could simply enter on the open of the next candle. Or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, we can trade a retest of the wick.Retests of the wick tend to occur when the wick is longer than normal. Oftentimes, prices will come back and retrace upward a portion of the long wick. A trader recognizing this might wait to enter around the middle of the wick rather than enter immediately after the shooting star candle forms. This means the trader is entering a short trade at a higher price and with a tighter stop loss reducing risk.Regardless of the entry mechanism, the stop loss will remain the same which is about 10-20 pips above the shooting star candle.Regarding profit targets, we teach in our courses to take profit at least twice the distance as your stop loss. So if your stop loss is about 90 pips, then look for at least 180 pips of profit potential. This means we are establishing a 1-to-2 risk-to-reward ratio which falls in line with the Traits of Successful Traders research.Trading the AUDJPY Shooting StarOn Friday, November 2, the AUDJPY produced a shooting star reversal pattern on the daily chart. What makes this set up appealing is that it forms near 2 other levels of horizontal resistance.1. Purple horizontal line which coincides with the previous high on August 20, 2012 and October 25, 2012. This resistance line is near 83.60.2. The 61.8% retracement level of the March 19, 2012 to June 1, 2012 down trend crosses near 83.23. (blue horizontal line)Therefore, a strong resistance zone is created. As prices approached this resistance zone, the buyers stopped buying and the sellers started selling which left a shooting star candle pattern in its wake. Since the AUDJPY has been trading in a range between 79.70 and 83.50, consider an entry to short near the top of the range near 83.15 with a stop loss just above the shooting star high near 84.05.We’ll look to take profits near the bottom of the range at 80.15. This means we are risking 90 pips for a potential reward of 300 pips. This yields a 1-to-3 risk to reward ratio.
Article Summary: Diagonal patterns are simple technical patterns that offer tight zones of entry and exit. Many times, the risk-to-reward ratio of the diagonal pattern will better than the 1-to-2 ratio that we suggest in our forex courses.Diagonal patterns are one of my favorite patterns to trade because the method to trade them is fairly straight forward and you can identify clear risk and reward parameters. This piece will outline what a bullish diagonal looks like and how you set your entry and exit parameters for the potential trade.The Anatomy of a Bullish Diagonal The ideal diagonal would consist of five waves. Each wave of the three waves to the downside would be smaller than the previous alternating wave. The alternating waves of the 5 wave move are waves 1, 3, and 5.For example, wave 5 would be smaller in length than wave 3. Wave 3 would be smaller in length than wave 1. So wave 3 would be smaller in length than wave 1.When you connect waves 2 and 4 with a trend line and connect waves 1 and 3 with a trend line, then you will notice a triangular type of drawing (see grey lines). This becomes the basis of the bullish diagonal pattern.This pattern tends to fool trend traders because it continues to produce lower highs and lower lows. Trend traders would see this as a bearish trend. However, there are a couple of clues that can tip us off that the trend is likely to correct or possibly reverse.1. Measure the waves – In the idealized pattern above, see how wave 5 is shorter than wave 3 while wave 3 is shorter than wave 1. This indicates the trend lower doesn’t have the strength it used to. Each subsequent push lower in price travels less distance than the previous leg. The trend has moved too far and too fast to the downside and is likely to correct upward.2. Look for simple indicator divergence – determine if divergence is showing up in the formation of wave 5. Divergence is another clue of a tiring trend and momentum is slowing to the downside. Absent a healthy correction to the upside, this pattern is losing momentum and at risk of a sharp move up.Another key point to consider is distinguishing the difference between an ending diagonal and a triangle. Triangles tend to move sideways as they consolidate a prior move. Diagonals tend to be directional.For example, see how both grey lines in the idealized chart above are both pointed down? This is what I mean by both lines are directional. You’ll see both trend lines point in the same direction in a diagonal. A triangle will see both trend lines pointed in different directions.Learn Forex: Ending Diagonal Trade Set Up As you can see in the above example, prices in the EURUSD were towards the end of an exhaustive move to the downside. Prices kept pushing lower and creating lower highs and lower lows. Trend traders may see that type of price action and jump into the trend to the downside. However, the length of wave 5 is less than the length of wave 3, and the length of wave 3 is smaller than wave 1 tipping us off that the trend is certainly slowing. Additionally, the RSI oscillator is flashing divergence as price reaches lower lows yet the oscillator fails to confirm lower lows.Trading the DiagonalAs wave 5 is taking shape or shortly after it is completed, we can begin setting up our trade.1. Draw a trend line connecting the top of wave 2 and the top of wave 42. Enter on a break above this trend line as a break indicates a high probability the low of wave 5 is in place3. Place your stop loss just below the swing low of wave 54. Place your limit to take profit at the beginning of wave 1Many times, because the pattern is losing momentum to the downside, when prices finally turn bullish, it can be a swift correction to the upside.As you can see from the chart above, the risk-to-reward ratio on this trade would have been about 1-to-3 which is many times better than the 1-to-2 risk-to-reward ratio we discuss in our DailyFX Education courses.Remember, this is simply a pattern to follow with buy and sell rules. Not all patterns and not all trades work out to be a winning trade. Therefore, it is important to be responsible to your account and use prudent risk management techniques such as trading in small sizes risking a small portion of your account. We suggest risking less than 5% of your account on ALL open trades.Good luck with your trading!
There has been much said about the psychology of trading and the necessity that we manage our emotions with every gain and loss. Emotions tend to rise to the surface during times of uncertainty as we are faced with an unexpected situation or crisis. How would we feel to win the state lottery worth over $100 million? It is easy to say, we would feel very surprised and in fact ecstatic. On the other hand, how would the average person feel to lose their life savings in an investment of some type? Most would assume he/she would feel pretty horrible. These emotions should not come into play as we trade our accounts. Speculating in the financial markets should be approached with the same planning, research, and discipline in its execution, as a small business owner spends each day making decisions in order to improve revenues, and reduce risk. It would be absurd for a business owner to fall into panic during the first or second slow day of sales. We would logically expect that entrepreneur to simply review the mission statement and ensure each one of his/her actions has this mission statement and long term business plan in mind. Let’s take a look at a current trade set up on the AUD/CAD daily chart below: The AUD/CAD is in a clear uptrend and we can see the clear break above the 1.0200 area which is represented by the horizontal line. Prices are now testing the previous resistance zone from the opposite side. We might look for the 1.0200 area to act as support as past resistance usually acts as future support. This has been confirmed with price action finding support near the 1.0200 area during the past few sessions. With prices currently at 1.0233 we might place an entry order at 1.0225 with a stop at 1.0175, risking 50 pips in the trade. We might place a limit at 1.0375, so we are risking 50 pips to make 150 pips for a 1:3 risk to reward ratio.This is a trade set up. That is all. This is one of several thousand trades that I am going to make during my trading career. The results of this one single trade do not matter at all. The trade may or may not work out, but that has absolutely nothing to do with my analysis. One of the most common mistakes I see in newer traders is that they put too much emphasis on the current trade. They live and breathe for that trade. Again, we have to treat trading like running a business. It is a numbers game. With a consistent approach and a respect for risk we should decrease the importance of the current trade and think of it in terms of the long haul. In other words, we should trade to trade tomorrow.
Talking Points:* Sentiment helps decipher traders feelings towards an asset* SSI shows net positioning on currency pairs* Changes in sentiment provide insight into trends, and market reversalsSSI (Speculative Sentiment Index) is a proprietary tool to display retail positioning in real-time to display retail-market sentiment. Once a trader understands how SSI works and how to read the sentiment data, it can then be worked in to any existing trading strategy.So today we will examine what sentiment is and how you can analyze sentiment through SSI data. Market SentimentMarket sentiment in its most basic definition, defines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude sentiment can become negative.While sentiment is not unique to the Forex market, it can be directly translated to currency pairs. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment. The graph above shows sentiment in action. Going back to November of last year sentiment has been negative on the GBPUSD, however prices have continued trending higher. Sentiment has recently become even more extreme as the majority of traders in this case are attempting to pick a top on the GBPUSD.Now that you are more familiar with sentiment, let’s look how we can analyze sentiment in the Forex market. SSISSI is a ratio that gives us a picture of trader sentiment. SSI reveals trader positioning by determining if there are more positions net long than short, and if so by how much. Above we can see the current SSI ratios posted on DailyFX.com.If clients are net short a currency pair SSI will be negative, and if clients are net long the number will be positive. As mentioned above, the more extreme the SSI reading becomes, the more credence the information should be given.Using our example again with the GBPUSD, the last reading on SSI was -8.15. This ratio means that trader’s positions are net short at a rate over 8 to 1 when compared to all open buying interest. This can be interpreted again as traders attempting to position themselves for a possible turn in the market. Contrarian investors knowing this can look to open new long GBPUSD positions back in the direction of the prevailing trend. Changes in SSILastly, traders should also be aware of changes in sentiment. Changes in sentiment can be used to decipher whether trends are set to continue, pause or even reverse. In the event that sentiment is at an extreme, a reduction in net open interest can signal that a trend is winding down. Likewise if a pair with neutral sentiment begins changing rapidly, in one specific direction, this can signal a potential change in market direction.
Traders combat a variety of emotions on a daily basis. Most emotions when trading are unavoidable simply due to the fact that we are human! If we fail to deal with these emotions effectively, it can lead to catastrophic results in our trading. Today we are going to specifically look at the impacts of greed and the frustrations of missing a trade and specific measures we can take to avoid this from happening.Missing out on a trade can be extremely frustrating and a position that most of us have experienced at one time or another. Primarily this frustration is based in greed as we busily consume ourselves with the pips we “would have made”. By giving into this emotion we often forget that our trading accounts are still intact and we have other market opportunities available. For most traders, if this feeling of greed goes unnoticed it may elicit a response of revenge, in order to “get even” with the market. More often than not this response results in disaster, as a trader may consider taking bad trades not in line with their trading plan or increasing their leverage to quickly makeup for a missed opportunity.Below we can see a daily graph of the AUDUSD daily chart. Let’s look at the two ways this scenario can be avoided, if price breaks above new highs at .7778 on the graph. Price AlertsThe first way to help overcome the fear of missing out on a trade is to use price alerts. This is a great tool when you want to see how prices react when they reach an important technical level, such as a support/resistance line, Fibonacci level, or Donchian Channel. Price alerts can be set as audio alerts, or messages through the trading platform or even email!Entry OrdersUsing Entry orders with a breakout strategy is another great way to avoid the feeling that you have missed out on a trade. Entry orders allow us to set a specific price in the market where we wish to execute a preset trading plan. This way, we get to enter into the market on our own terms when the price we select becomes available for trading. Creating an Entry order is an easy process. Select the pair, whether you want to sell or buy and that rate at which you want to do so. You can click the advanced tab to input stops and limits.Regardless of the method you choose, both price alerts and Entry orders can help traders avoid the fear of missing a trade. When a specific price is reached in the market we will either be notified or ready to execute a preset strategy through pending entry orders. Through this process, what was once seen as a roadblock to our trading success can now be effectively turned into an opportunity!
One of the toughest tasks given to traders is spotting price reversals. There are a variety of tools at the disposal of technical Forex traders for the job, but more often than not it is a candlestick pattern that provides the first clues to a market turn. Candlestick patterns are a great way to begin your trading analysis as they are a direct interpretation of price action. With this in mind, today we will focus on spotting and trading one of the markets most clear cut reversal signals using the bullish morning star pattern. What is a bullish morning star pattern?A bullishmorning star pattern is a candle pattern established at the end of an extended downtrend. The pattern itself is pictured above,and it should be noted that the bullish morning star is comprised of three different candles. The first candle should depict a continuation of the established down trend. The second candle will show the slowing of bearish momentum. Price will make one final attempt at lower lows here, with the candle closing near its open price. Dojis and hammer candles are often found in this position.The third candle in the bullish morning star pattern is the actual reversal signal. An extended blue candle should be seen in this position beginning a new swing in bullish momentum. Ideally this should be a bullish engulfing candle with its high extend well above the high of the previouscandle. This strong surge in price depicts fresh buying pressure on the pair with bearish traders exiting the market. The greater the advance of this secondary candle declines, the stronger the reversal signal is considered. Uses in TradingThe great thing about the bullish morning star pattern is the fact that once you can identify it, you can immediately apply it to your trading. In the graph above we can see the pattern in action on a GBPNZD daily chart. From April 13th through May 24th of this year the GBPNZD rallied as much as 1883 pips. This rally was preceded with a bullish morning star giving us our first opportunity to consider trading a reversal and establishing buying opportunities.Traders often select to trade a breakout strategy in reversing markets. In a breakout scenario the high of the first candle of the pattern can be used as an area of resistance. Entry orders to buy can be set at this point as the pair begins to trade to higher highs. Also it is not uncommon to see traders use this analysis in conjuncture with an oscillator. Market orders can be placed in the direction of the new trend when indicators such as RSI show momentum returning from oversold levels. Regardless of the method chosen, traders should consider placing a stop order under the second candle low. In the event that a reversal fails and a lower low is made traders will want to exit their buy positions.
“Greed has cost me more than anything else.”“How can I control greed??? That has been my number 1 problem.”The above two quotes came from emails sent to me from two different traders. I am sure many of us can identify with these sentiments. In the early days of my trading I know I could certainly identify with them! Human nature being what it is, feelings of this type have been felt by virtually all traders at some time or another.Indeed, the desire to make more and then even more yet is very compelling.Greed can influence us to enter trades that we never should have entered in the first place. It can make us stay in losing trades too long as well as make us stay in winning trades too long. Greed also plays a big part when we take on too large of a position on a trade in the hopes of reaping huge profits. All in all, it has a truly negative influence on traders.Here are some ideas that, if put into play, I believe you will find yourself better able to cope with greed.Have a Trading PlanBy having a clear trading plan that is written out, we know exactly what we are looking for in terms of an entry. Don’t compromise. Wait for the precise entry as laid out in the plan itself. Let the market come to you rather than you chasing the market in fear of missing a trade.The trading plan will also denote the size of the trade you will make along with how you will determine the placement of stops and limits.By knowing all of these aspects of the trade ahead of time, and sticking to them, you will be less likely to make decisions (oftentimes governed by greed) on the fly. Since we let the trade come to us initially, we start out on our terms. By knowing the size of the trade that we will make (money management) and how much we will risk (stop) and where we will exit the trade (limit), we will go into the trade with a greater level of confidence.Think of this plan as a blueprint for your trade. Just as a builder would never even consider building a house without a blueprint, as a trader we do not want to enter a trade without our “blueprint” in hand.Employ the Principles of Money Management on Every TradeWhen it comes to Money Management, or the lack thereof, this is an area where greed can really kick in. Traders are very often tempted to put larger amounts of their trading account at risk in the hope of reaping greater gains. They try to do too much (attain outsized profits) with too little (the size of their trading account). This is particularly true when they see a trade that to them looks like a “sure thing”.(Sidebar: There is no such thing as a sure thing.)As traders we never know when entering a trade if it is ultimately going to be a winner or a loser. As such, in order to protect our trading account, we have to treat each trade as though it is going to be a loser. Just like in driving, we never know if this is going to be the day that we are going to have an accident. Consequently, we must always be on guard.I am sure you have heard of the term “defensive driving”. Think of good money management as “defensive trading”.So we do not get swept away with greed when trading, we need to have an absolute, irrevocable ceiling on the amount of our account that we can place at risk of loss at any one time. The percentage of risk that we recommend is a maximum of 5%. This means that no matter how many positions we have open, if each of those positions were stopped out for a loss, the total loss would not exceed 5% of our trading account.The next component of Money Management is the Risk Reward Ratio. We recommend a RRR of at least 1:2. This means that if we risk losing 75 pips (our stop) on a trade, would we look to gain 150 pips (our limit) on the trade.By adhering to these parameters, the 5% rule and the setting of our stops and limits as described, greed can no longer influence our trade. We have put the trade guidelines in place and nothing, NOTHING can shake us from them.Leave the Trade AloneLastly, after the trade has executed with stops and limits in place, leave it alone!! Just let the trade play itself out according to the original parameters you put into place prior to being in the trade when emotions were non-existent.Think about it…Before you were in the trade, when you were looking at the charts, checking trends, support and resistance levels, fundamentals and the like, you were totally without emotion. The plans that were put together while in that state of mind were based on facts. Once the trade is entered, however, emotions (greed) can shift into high gear. Making changes to a fact-based, unemotional trading plan based on moment to moment emotional shifts is not a prudent way to trade.Managing and dealing with greed is not something that will be resolved over the next one or two trades. However, by being conscious of how greed can negatively influence your trading and implementing the above as part of your trading regimen, you will be taking positive steps toward the goal of “greed free” trading.
Many FX traders get confused about which fundamental news releases to focus on when making a trading decision. I suggest to these traders to follow news releases that potentially impact the currency’s interest rate. This article will explain why the interest rate movements are important to the value of the currency.Each currency carries with it an interest rate. This is almost like a barometer of that economy’s strength or weakness.As a nation’s economy strengthens over time, prices tend to rise as the consumers are able to spend more of their income. The more we make, the better our vacations can be, and the greater amount of goods and services we are able to consume. This creates a loop where more money chases roughly the same amount of goods which can lead to higher prices for those goods. The rise in prices is called inflation.If inflation is allowed to run rampant, our money will lose much of its buying power, and ordinary items such as a loaf of bread may one day rise to unbelievably high prices such as a hundred dollars per loaf. It sounds like an unlikely far-fetched scenario but this is exactly what occurs in nations with very high inflation rates, such as Zimbabwe. To stop this danger before it emerges the central bank steps in and raises interest rates in order to stem inflationary pressures before they get out of control.Higher interest rates make borrowed money more expensive, which in turn dissuades consumers from buying new homes, using credit cards, and taking on any additional debts. More expensive money also discourages corporations from expansion, as so much business is done on credit, from which interest is always charged.Eventually, higher rates will take their toll as economies slow down, until a point where the Central Bank will begin to lower interest rates. This time, the reduction in rates is to encourage economic growth and expansion. The Central Bank has a delicate balance of trying to foster growth while at the same time keeping inflation low.A side effect of high interest rates is that foreign investors desire to invest in that country. The logic is identical to that behind any investment. The investor seeks the highest returns possible.By increasing interest rates, the returns available to those who invest in that country increase. Consequently, there is an increased demand for that currency as investors invest where the interest rates are higher.Countries that offer the highest return on investment through high interest rates, economic growth, and growth in domestic financial markets tend to attract the most foreign capital. If a country's stock market is doing well and they offer a high interest rate, foreign investors are likely to send capital to that country. This increases the demand for the country’s currency, and causes the currency’s value to rise.As you can see, it is not just the rate itself that is important. The direction of the interest rate can act as a good proxy for demand for the currency. The direction of the interest rate is obtained through the central bank’s language in the statement that accompanying their target rate decision.The accompanying statement is analyzed word-for-word for any signs of what the central bank may do at the next meeting. Remember, the interest rate decision itself tends to be less important than the expectations for future interest rate moves.High and increasing rates at the beginning of an economic expansion can generate growth and value in a currency. On the other hand, low and lowering rates may represent a country experiencing difficult economic conditions which is reflective in a reduction of the currency value.The Widening Interest Rate DifferentialIn early 2009, the worldwide economy was bottoming out as the United States credit freeze began to thaw. The Fed kept U.S. interest rates at all-time lows while the Reserve Bank of Australia began their process of increasing their target benchmark rate. Since this was in the beginning of an economic expansion, foreign investors into Australian companies needed Australian Dollars to make their investment. Additionally, FX traders began buying the AUDUSD currency pair in anticipation of this demand for the Australian Dollar. Those traders were rewarded as the AUDUSD exchange rate began a 30 cent rise while earning an additional daily dividend from 2009 through 2011. One mini lot trade of 10,000 units of currency would have yielded over $3,000 plus interest.
Any trading strategy is incomplete without Forex Money Management. It is not only about knowing the ins and outs of which currencies to trade and identify the entry and exit signals, it is also about manage the resources and integrating money management into the trading plan. It is essential for a trader to meticulously position size, margin, recent profits and losses and any contingency plans before foraying into the market. Based on money management strategy, diversification, martingale and anti-martingale strategy and high return strategy, the various strategies for Forex Money Management are formulated for approaching money management. Most of them rely on the calculation of core equity which is the starting balance minus the money used in open positions. If the starting balance is $10,000 and you have $1000 in open positions, your core equity is $9000. It is imperative that as a trader you need to adjust the dollar amount of your risk, with the rise and fall of the core equity. If the core equity level falls, you can lower your risk amount, while you can also raise the risk level as your core equity rises. Just as on a profit of $8000, the core equity can rise to $18,000. Similarly, on limiting risk to $800, the core equity will fall to $8000. Experts opine that as you enter a position, it is advisable to try to limit risk to 1% to 3% of each trade. This reiterates the fact that, on trading a standard FOREX lot of $100,000, your risk should be limited between $1000 and $3000. Forex Money Management is all about calculated risks at the right time and protecting your assets. It is imperative to understand that when placing options, and buying them; it is wise to get plenty of time on your side. Although, traders are known to identify trade direction, however, most fail to stay with trades simply because they cannot implement their money management correctly. A few mistakes traders usually make and tips to overcome them and increase prosperity. - Most traders fail to understand the standard deviation of price, as it helps them to stay guard against it and its unpredictability. It further helps you to understand where to place stops in places for risk control, although you may gain nothing. - The leverage is essential as it is common to have stops outside of random unpredictability. However, the market also requires space to breathe, only possible with wider stops and lower leverage. - Risk control and an obvious stop are possible only if you trade valid breakouts, leading consequently to trade success. Moreover, you can also cut your trading frequency, by trading no more than once a month but make solid gains. - However, while enjoying profits, it is also important to bring the stop to close, to prevent losses by random unpredictability. These calculated risks will help you continue big trends and keep your stop well back. - It is always wise to have buy options open if you want to deal with unpredictability and get staying power.
If you lived in the United States before the year 2000, the thought of yellow and orange-jacketed traders screaming at the top of their lungs across a rainbow of other-colored jackets, slips of paper flying everywhere, is probably something you associate with markets and exchanges. These stressful environments were synonymous with the notion of markets. Emotions ran high, and depending on the exchange – one may even be risking their own personal safety by entering ‘the floor.’Times have changed quite a bit; many exchanges exist only in cyberspace, no longer seeing the need for physical manifestations of their trading activity. Even the New York Stock Exchange; have you seen it lately? If not, just turn on CNBC, it's not like it used to be (quite a bit more quiet these days).But one thing that hasn’t changed is the fact that people love fast markets. Only now they mostly exist through the Internet, and now they are available to anyone willing to risk their money – not only the select few that could afford or draw on family connections for a ‘seat on the floor.’ When a big news event happens; or even perhaps a news event driven by an economic catalyst, like the 2008 Financial Collapse, markets can attempt to price in the newest data so fast that prices move at breakneck speeds. For the poor investors that are in long positions in mutual funds, the hope of stemming the bleeding before market close doesn't exist. They have to wait and watch the devastation until the end of the trading day so that they redeem out of their mutual funds.But to the trader that can take a short position just as quickly as ‘hitting the bid,’ these ‘panic’ periods present quite a bit of opportunity. Prices are moving fast and pips can stack up quickly – if you are on the right side of the trade. The big question is if this is something that fits in your trading plan?What type of trader are you?By many accounts – fundamentals and news events create price changes, thereby – fundamentals dictate what prices will do. Technical analysis on the other hand, analyzes past price movements, showing us what prices have done. And sometimes, what price has done in the past can help us build a game plan for the future; looking to those fundamental catalysts to create big price movements (the hybrid fundamental-technical trader).The alternative approach is the trader that analyzes those same past events, looking to avoid those fundamental catalysts, hoping that the technical levels from the past hold true (the technical-range trader).That’s really all there is. A pure fundamentals trader wouldn’t be looking at charts at all, and a ‘technical-breakout/trend’ trader would really be, in many ways, looking to fundamentals to continue substantiation of those trending/breakout conditions, so they wouldn’t really be a ‘pure technical’ trader.Considering the fact that ‘panic’ markets can create rapid price movements in a short period of time, which can just as easily work against the trader as it can for them, it behooves one to know as much about their risk profile before wagering their hard-earned capital.So, if you consider yourself a ‘pure technical’ trader, and have no interest whatsoever in following or keeping up with the news – I advise you to attempt to avoid panic markets. This can often be done by setting stops at major levels of support (or resistance in the case of short positions) so that when we do get those big breakouts – they don’t work against you too heavily.For all those that dare to tread in fast markets – read on; and we will share with you some ways that experienced traders approach these volatile scenarios.How to Trade Fast MarketsThe same question was broached in the article ‘How to Trade Forex Majors Like the Euro during Active Hours,’ and the recommendation to trade breakout strategies could not be more on point.As David shows in the article, increased activity often means larger and potentially more erratic price movements. And because these movements can be more erratic, it can greatly affect the trader’s ability to forecast price changes. The chart below, taken from the aforementioned article, shows how widely price swings can magnify on EURUSD during the London and the London/US overlap session (often considered the most ‘active’ period in the FX market). Prepared by David Rodriguez, from Here is How to Trade Forex Majors Like Euro During Active HoursNow if we consider that panic markets often have an external stimuli; whether it be a natural disaster like what was seen in Japan in 2011, or a man-made disaster like what was seen at Bear Sterns and Lehman Brothers in 2008 – we have to know the market movements can be even more exaggerated, meaning price movements can become even more magnified, and forecasting can become even more difficult.Why trade breakouts to address panic?Because price movements can become greatly magnified while also becoming more erratic is the reason why trading breakouts is the best prescription for handling volatility. If we happen to be on the right side of the movement, price can trend for a continued period of time, giving us far greater potential profit targets if we are right. If we’re on the wrong side of the movement (which will probably happen more than half of the time), then we can cut our losses early before the pair continues against us in a move that could potentially drain our accounts.A critical aspect of trading breakouts is the necessity of strong risk-reward ratios, such as the trader risking 20 pips, but looking for 100 pips if correct. This could be expressed as a 1-to-5 risk-to-reward ratio (20 pips to the stop-loss order – 100 pips to the profit target = 1:5 risk-to-reward).This is what can allow rampant volatility to actually work in your favor.With a risk-reward ratio so aggressively on the trader’s side, one would need to be right only 2 out of 5 times to gleam a net profit. If a trader was right 40% of the time with a 1-to-5 risk-to-reward ratio, they could be looking at a handsome profit (2 winning trades at 100 pips each = 200 pips won, 3 losing trades at 20 pips each = 60 pips lost, net profit of 140 pips (200-60) not including commissions, slippage, etc).But what if the trader above was only right on one out of five trades? Well, they are still looking at a net profit (once again, not including spreads, slippage, etc). One winning trade at 100 pips only gives up 80 to 4 losers at 20 pips each, leaving a net profit of 20 pips; and that is with a winning ratio of 20%.How to Trade BreakoutsAn easy way of looking at breakout strategies is to simply think of ranges – and then reverse it.While range-traders look to buy support and sell resistance, breakout traders await breaks of resistance to buy (in anticipation of price continuing to rise now that resistance is broken) and looking to sell when support is breached (once again, looking for price to continue heading lower).There are numerous ways of identifying support and resistance levels to be used for breakout strategies. Some traders don’t even use indicators, electing, instead, to simply analyze and build their strategies off of price, and price action. Some traders rather use strategies based on indicators like Price Channels to point out these support and resistance levels. Many of the various Pivot Point offerings or Fibonacci studies can help in this same regard as well.Whatever the mechanism, it is important to realize that complete elimination of false breakouts is totally impossible. What often makes or breaks a breakout strategy is money, risk, and trade management.This is a hazard sport, as it can be a regular occurrence for price to break support (or resistance) briefly enough to trigger our, only to pop back into its prior range. This can be frustrating for breakout traders, and has even earned the title of the ‘false breakout.’This topic was explored in greater detail by Walker England in the article ‘Can False Breakouts be Prevented?’Not to spoil the article, which you should absolutely read, but the answer to the question is ‘No.’ False breakouts, unfortunately, cannot be prevented.To the trader looking to be more conservative, additional ‘wiggle room’ can be given to the entry in an effort to attempt to decrease the chances of caught by a false breakout.But preventing false breakouts is impossible due to the simple fact that no trader in the world knows what will happen next. So when trading panic markets, protect your trade, protect your account, and trade your plan.
Any doji candle signals market indecision and the potential for a change in direction. (Always bear in mind that the “potential” for a change in direction is not a guaranteed change in direction.)Doji’s are formed when the price of a currency pair opens and closes at virtually the same level within the timeframe of the chart on which the doji occurs. Even though there might have been quite a bit of price movement between the open and the close of the candle, the fact that the open and the close takes place at almost the exact same price is what indicates that the market has not been able to decide which way to take the pair…to the upside or the downside.Let’s take a look at the doji highlighted on this 4 hour chart of the AUDCAD below…Did You Know That There are Five Different Types of Doji Candlesticks?At the point where the doji occurs, we can see that price has retraced a bit after a fairly strong move to the downside. If the doji represents the top of the retracement (which we do not know at the time of its forming) a trader could then interpret the indecision and potential change of direction and short the pair at the open of the next candle after the doji. The stop would be placed just above the upper wick of the doji. In this case, that trade would have worked out nicely.Keeping in mind that the higher probability trades will be those that are taken in the direction of the longer term trends, when a doji occurs at the top of a retracement in a downtrend or the bottom of a retracement in an uptrend, the higher probability way to trade the doji is in the direction of the trend. In case of an uptrend the stop would go below the lower wick of the doji and in a downtrend the stop would go above the upper wick.Dojis are popular and widely used in trading as they are one of the easier candles to identify and their wicks provide excellent guidelines regarding where a trader can place their stop.Below is an example of a standard doji candle. The Long Legged Doji below simply has a greater extension of the vertical lines above and below the horizontal line. During the timeframe of the candle, price action dramatically moved up and down but closed at virtually the same level that it opened. This shows the indecision between the buyers and the sellers The Dragonfly Doji below can appear at either the top of an uptrend or the bottom of a downtrend and signals the potential for a change in direction. There is no line above the horizontal bar signifying that prices did not move above the opening price. A very extended lower wick on this doji at the bottom of a bearish move is a very bullish signal. The Gravestone Doji below is the exact opposite of the dragonfly. It appears when price action opens and closes at the lower end of the trading range. After the open the buyers were able to push the price up but by the close they were not able to sustain the bullish momentum. At the top of a move to the upside, this is a bearish signal. The 4 Price Doji below is simply a horizontal line with no vertical line above or below the horizontal. This would be the ultimate in indecision since the high, low, open and close (all four prices represented) by the candle were exactly the same. It is a very unique pattern signifying once again indecision or an extremely quiet market. The basic rules we learned about trading a doji at the beginning of this article would apply to each of these unique dojis as well.
Pivot PointsSupport and Resistance is one of the more pertinent areas of technical analysis that can offer traders a bevy of potential options. For example, traders can use support and resistance levels for risk management, or the placement of stops. Traders can also use these levels in an effort to catch large, market-moving changes in price; often called a ‘breakout,’ as price breaks support and/or resistance in the quest of making new highs or lows.There are numerous mannerisms of identifying support and resistance levels. Many traders will choose to gleam these levels directly on the chart. But charts weren’t always available for traders to assimilate these prices so alternative mechanisms were developed. Before computers became commonplace amongst floor traders, a more simplistic method of identifying potential support and resistance levels was needed.This is where Pivot Points come into play. Pivots come in many different types of and variations. The most common form of Pivots, the mechanism created and passed on by generations of traders on the floor of the World’s largest exchanges is known as the ‘Floor-Trader Pivot.’ This can also be called ‘Classical Pivots.’The name ‘Floor-Trader Pivot,’ came from the fact that Pivot points can be calculated quickly, on the fly using price data from the previous day as an input. Although time-frames of less than a day can be used, Pivots are commonly plotted on the Daily Chart; using price data from the previous day’s trading activity. Chart created by James Stanley Notice that the Pivot (signified with ‘P’ above) shows the Pivot value, with the Support and Resistance levels automatically plotted.The calculation for Classic Pivots begins with the calculation of the ‘mid-line,’ or the Pivot itself. This is an ‘average,’ price using the previous day’s high, low, and close. The trader can add these 3 levels together, and divide by 3 to find the ‘Pivot,’ for the current day.Pivot = (Previous day’s High + Previous day’s Low + Previous day’s Close)/3This Pivot isn’t generally looked as Support or Resistance, but rather a mid-point with which the various support and resistance levels can be calculated. Now that we have the Pivot calculated, we can move on to calculate some Support and Resistance Levels. Pivots will generally provide at least 2 levels of Support and Resistance (these levels are commonly referred to as R1 and R2, or S1 and S2).To calculate the first level of resistance, or R1, the trader can take the Pivot value we calculated previously, multiply by 2 and subtract the Low from yesterday to arrive at a price value.R1 = (Today’s Pivot Value X 2) – Low from YesterdayAfter the trader has calculated the first level of resistance, they can then move on to the first level of support, or S1. S1 is calculated in a very similar manner as R1. We can simply multiply the Pivot value from today times 2, and subtractyesterday’s high to calculate the value for S1.S1 = (Today’s Pivot Value X 2) – High from YesterdayAs you can see from the previous calculations, our pivot values will be greatly dependant on the price action that had taken place in the previous day. Oftentimes, traders will need an additional level of support and resistance if price action is particularly volatile. This is where the second level of support and resistance can come into play. Traders will often-times take pivots a step further by defining the S2 and R2 values.The second level of Resistance is going to be at a higher price than R1, and can be calculated by adding the difference between R1 and S1, and adding to the Pivot value we had calculated previously.R2 = Pivot from today + (R1 – S1)The calculation of S2, once again, is similar to the calculation of R2. We simply want to subtract that difference between R1 and S1 from our Pivot value.S2 = Pivot from today – (R1 – S1)Now that levels are calculated and applied, traders can look to employ these areas of support and/or resistance with the strategies and market approach that they are trading.
Have you ever heard of a stop placement strategy that trails stop based on previous ‘high’ points? It is called Chandelier exit as it hangs down from the high point or the ceiling of our trade, just as a chandelier hangs from a room ceiling. The distance, which is usually calculated from the high point to the trailing stop; could also be calculated in dollars or in contract based points. However, the value of this trailing stop moves upward very promptly as higher highs is reached. The Chandelier Exit, which has a trailing stop from either the highest high of the trade or the highest close of the trade, is best measured in units of Average True Range (ATR). One of the many factors leading to use ATR for measuring the distance from the high to our stop is that, it is pertinent across markets and is adaptive to changes in unpredictability. The essence of this calculative measure is that, even on expansion and contraction of trading ranges, our stop will automatically adjust and move to the apt level, thereby, constantly staying in tune with changing market conditions. Chandelier Exit is one of the most tried exit methodology used across a varied portfolio of futures markets to generate profitable test results. It is imperative that the changes in unpredictability can curtail or stretch the distance to the actual stop, since the highs used to hang the Chandelier move only upward. However, in order to witness less fluctuation in the stop distance, you can use a longer moving average to calculate Average True Range. In other ways, shorter moving average is required, in case you want the stop placement to be more adaptive to fluctuating market conditions. When short averages for the ATR is used; brief periods of small ranges can bring the stops too close, abnormally resulting in premature exit. To avoid this, you can have a short and highly adaptive ATR while calculating a short average and a longer average and using the average that produces the widest stop. Although Chandelier Exit differs from Channel Exit (which trails a stop based on previous ‘low’ points), the combination of both, where the trade is initialized by the trailing Channel Exit and then adding the Chandelier Exit, after the price has moved away from the entrance point, will help in making the open trade lucrative. Here the Channel Exit is fastened at a low point and does not move up as new profits are accomplished. At the same time, it is necessary to have the Chandelier Exit at the right position so that the exits are never too far away from the high point of the trade. The fundamentals behind combining the exit techniques, Channel and Chandelier exit is that, while Channel Exit as a suitable stop that very steadily rises at the commencement of the trade, switching over to Chandelier Exit is necessary to ensure better exit that protects more of our profit. This feature makes Chandelier Exit one of the most sought after rational exits from the profitable trades.
Developing a profit strategy and setting a protective stop is inevitable in every investment. Just as protection of capital or the money you invest is important, so also is necessary the protection of your profits for the money earned. In due analysis of the most effective exit systems, it is found that as the price of stock increases, you can move the stop loss higher. And in case of downtrend, the price will trigger the stop and a sell order will be executed. However, the basics of successful trading lies in the fact as to how close to the price the stop should be set. While setting the stop loss, care should be taken that stops are not set too close to the current price. Because, there remains a possibility that the variation that takes place in the market can set off a stop, even if not a real downtrend in price. While people do a lot of research on the kind of investments, they should make and do a lot of work and diligence on when and where to buy; it is exit strategies that most of them give a slip. However, it is one of the fundamentals of investment as it is impossible to plan future investments and trading unless you specifically know how you are going to take your profits and make an exit. Just as we all know that, stock prices always follow corporate earnings, resulting because of stock investing and buying by traders when companies are making money, thereby propelling stock prices higher. Similarly, in event of companies showing slower earnings growth, stocks fall. All you need to do for successful exits is to chalk out practical exit strategies for setting stop. A few of the most implemented strategies are defensive market timing, hedging bets and to think globally. While traders are more focused trying to make big profits, the larger issue is however to avert bigger losses. There are ways to undermine the best time to sell, from using technical analysis techniques like moving averages, etc. You can use defensive market timings by placing defensive stop losses. In this method, your broker can be instructed to sell shares on hitting a predetermined level. Considering the strategy of hedging bets, it is found difficult to hedge a collection, with a range of arrangements that balance each other out. However, there is always the alternative known as inverse funds, which are designed to rise in value even when the stock market goes down. And in cases even when the funds falls, on the occasion of stock market rise, they can tender security without compelling you to sell your existing positions. In the most adventurous trading, you can think globally for setting stop and target. In case, stock prices pursue earnings, the best way to defend your stock portfolio is to make sure to go along with companies, whose earnings are on the rise. Similarly, if U.S stocks are not doing well, traders can always look out for options in the Asian Markets and vice versa.
The primitive forces of capitalism rule markets like the laws of gravity. Buyers and sellers provoke a battle to find a happy medium agreement in every market on the face of the planet.As prices dance around on charts, traders are often looking to a number of reasons to explain price movements. And often-times, a number of reasons can be associated with these types of changes.But at its core – every single price movement is denominated by supply and demand. Positive news means increased demand and lessened supply – equating to higher prices. Negative news usually spells lower demand and increased supply.Supply and Demand Spelled OutSupply is simply the amount available, while demand is the amount that is wanted. Think of supply and demand in the most simple of terms, from the standpoint of any market where buyers and sellers exchange goods. Let’s, for a moment, imagine that you are selling oranges from your own farm at a local market. And you don’t necessarily have to sell all of your oranges, because, after all, you can eat them just as easily as anyone that buys them from you.But the higher price you can charge for your oranges, in general, the more willing you would be to part with them. If oranges are only fetching 1 dollar per bag, you might be willing to sell 4 or 5 bags. But as price goes up, you decide to make more available. All the way up to 10 dollars per bag, at which point you are more than willing to sell every last orange you have because you can easily take all the money you made and buy something else to eat.The graph below is called a ‘supply curve,’ and it expresses this relationship. The red line indicates supply, which increases as prices move higher (located on the horizontal axis). Supply curve, expressing the number of units available (vertical) at various prices (horizontal) And on the opposite end of the spectrum, we have demand. Now think of the buyer-seller relationship from the vantage point of the consumer. The lower the price, the higher demand will be – the exact opposite of our supply curve. If oranges were only 1 dollar per bag, we’ll we’d want to buy as many as we could because it would be an extreme value. As price increases, our demand weakens because, after all – if oranges are 10 dollars per bag – we can easily find replacement products to use instead of oranges. Demand curve, expressing the number of units desired (vertical) at various prices (horizontal) And these two competing forces meet in the marketplace to decide the prices that will be paid and the number of units that will change hands.This is how price is discovered in a free market environment, the same way that prices are set on trading platforms around the world and it can be expressed in the chart below: Supply and Demand curve, expressing the most efficient price at which buyers and sellers can meet Supply and Demand in the Forex MarketThe analogy of oranges at a farmer’s market is not all too dissimilar from that which takes place every day in the currency market. In some cases, these forces are moving at such high velocity that new traders can have difficulty understanding the granularity of the details; but rest assured - the forces of supply and demand run true to markets whether you’re looking at a tick chart or real estate prices.The FX market is one of the most voluminous on Earth, and the reason for that is the heavy demand behind the traded assets. Currencies are the basis for the world’s economy. Whenever one economy wants to trade with another economy (provided different currencies are used) an exchange will be required.Supply and Demand at WorkImagine that the Reserve Bank of Australia enacts an interest rate change. An entire chain reaction will be set in motion due to the forces of supply and demand. When rates increase, rollover payments also increase. This means that investors that are holding the trade open at 5pm Eastern Time will receive a higher rate of interest than they would have previously. Incentive has just increased.So naturally, more traders will want to buy; and fewer traders will want to sell as the opportunity cost of doing so (the rollover payment) has just gotten more expensive. An example of supply and demand in response to Interest Rate Increase Price aims to find a comfortable point, and will increase until there are no more buyers willing to pay that price. At this point, sellers outnumber buyers, and price will respond by moving down.The Forces of Supply and DemandAn example of supply and demand in response to Interest Rate IncreaseAfter price has moved down far enough (circled in blue), traders will come back into the picture, remembering in the increased interest rate and the additional rollover payment that can be had from holding a long AUDUSD position, and this lower price presents a ‘perceived value.’ As additional buyers enter the picture, price will move up to reflect this increased demand.And then price will, once again, move so high that traders no longer want to enter the picture at that price level, and price will respond by moving down.This is but one example of the Supply and Demand relationship; on one time frame… we can even see this relationship playing out in the tick chart of any currency pair.This is the process of price attempting to find its fair value… it takes place on many different time frames in every market in the world.In our next article, we’ll tie supply and demand in with support and resistance so that traders can look to use these principals to their advantage.
Think of a trading channel as a horizontal trading range being turned at an angle. Where the range is trading between relatively defined levels of support and resistance over time, the angular channel is either making higher highs (ascending channel) or lower lows (descending channel) as price action moves on the chart. By looking at both of these channels, one can readily see the similarities between a channel and a range that was mentioned earlier. Just as in range trading, the lower channel line is considered support and the upper channel line is considered resistance.Given that, as you might suspect, some of the same trading rules will apply.However, before we begin actual trading, we must be certain to validate the channel. To accomplish this we will use the “Three Touch Rule”.In other words, price action must come into contact with the lower channel three times before a long position can be taken. Also, before a short position can be taken, price action must come into contact with the upper channel line at least three times.The rationale behind the three touches is that any two points on a chart can be connected by a straight line. Those two touches may be the beginning of a valid line or they may turn out to be nothing. However, if three points on a chart can be connected by a straight line, now we know that that particular price level is providing support or resistance. It is not as random as a line created by only two points.Let’s take a look at the 4 hour chart of the GBPUSD descending channel for an example of this rule… In the case of the chart above, a trader could take a short position on this GBPUSD pair after price tests the upper channel line (resistance) for the third time. Since the channel is descending and the daily trend on this pair is to the downside, shorting the pair is the higher probability trading scenario.While some aggressive or impatient traders may take a trade after two touches, personally I prefer to wait for the greater confirmation that the third touch provides. (Keep in mind that greater confirmation is simply that: confirmation. It is not a guarantee that the trade is going to work out.)I also want to point out that on the chart above that there are several places along the channel lines at which several candles come into contact with the channel line at virtually the same point…the second touch on the upper channel line for example. In a case such as that, that would count as a single touch. We want to see a touch occur and then have price action pull away and then come back and test the same level again. That will provide the greater validity that we are seeking.Let’s use the 4 hour chart of the NZDUSD ascending trading channel for an example of how to enter a trade and place our stops and limits… So in the case of this ascending trading channel, a trader could go long after the third touch of the lower channel by price. Price is respecting the support presented by the lower channel line. We can see that the two candles within the red rectangle and just above the word Stop have “wicked below” the channel line but have not closed below it. That is a good indication that a long position can be taken with a stop placed just below those two wicks.The timing of our entry into this trade can be determined by the candlesticks that are forming along the lower channel line and/or an oscillating indicator such as Stochastics, MACD, RSI, etc.In channel trades such as the one above, I prefer to set my limit just below the upper channel line. This is denoted by the red line labeled Limit. I do this since oftentimes price will move in the direction of the trade but it can fall just short of the upper channel line…as it did here. In this case, I would have captured perhaps 80-90% of the move which is just fine with me.