Understanding the art of Currency Trading
Forex trading is not a business but it is an art. Many people do not know that art is not only abstract creations that we only feel like painting but they can also be realistic creations when we execute your trades perfectly. This may sound poetic but it is true in Forex. Many professional traders are trading for years and they have taken these trades in the form of art. If you focus on how they analyze, how they place the trades and plan their strategy, it is all an art. Very few have mastered this art of trading and we will tell you some tips that can help you to master your trading art in Forex. It may take you years and you may also need to change it but it will help you to perfect your strategy.
Keep your trading chart clean
The expert Singaporean traders can easily differentiate the novice traders just by looking at their charts. The new traders are always fascinated with different kinds of indicators. They are placing trades based on different readings of the indicators. They even spend a huge amount of money to ensure a consistent profit. But indicators can never help you to become a successful trader. It’s nothing but a helping tool. We are not saying to avoid indicators but it’s better to use only one or two. Never take any trade based on the indicators reading. Use the key support and resistance level to find the profitable trade setups.
You have to keep your trading charts clear. Instead of doing the lower time analysis, switch back to the daily time frame. Try to find the long-term market trend in your online trading platform and place a trade with managed risk. To maintain a high level of accuracy, you can learn price action trading. This system is based on the Japanese candlestick pattern which allows the traders to find the key reversal point of the market. But price action trading is not bulletproof. So make sure you are not risking too much as it will ruin your trading career. Learn from the expert traders if you want quick success in the trading profession.
Believe in yourself
The first phase of creating art believes in you. There will be times when people will tell you cannot make it happen but you have to believe in yourself. If you know you are doing the right thing, you will achieve your success in Forex. We are not saying you should not follow professionals’ advice and their tips but you should trade with your own decisions. You can take help from them but the end decisions will always be made by you. Legendary traders did not become the legend when they started their career. They had many ups and downs and people used to laugh at them. They believed in themselves and now they are successful.
Never look for perfection, try to make your strategy better.
You cannot perfect your strategy in Forex but you can only make it better. Traders cannot understand and they always try to develop the only strategy that will always win all the trades in Forex. This is not possible in your career and the professionals never looked for perfection. They only try to make their trade better than the last time. This search for perfection will make you analyze the market and you will place your trades with the better strategy.
Success is the baby of practice
Success does not come to yourself but you have to accomplish it. It is only practice in Forex that can make you successful. You are given demo accounts for reasons and use them for practicing. Let your mind open to new ideas and practice them in Forex. This market is always changing and you also need to change with the trend. Practice is the only way you can master the art of trading in Forex.
There is a saying in the trading world that if you are trading without a stop loss and without having a proper risk/reward ratio you are doomed to failure. From my point of view this holds true only to a certain extent as it depends very much of the type of trader one is: scalper (meaning going for short term profits, taking quick bites out of the market and having as many entries as possible during the trading day) or a medium term investor (there are traders that do trade currencies based on the higher time frames charts, from the daily up to the monthly charts). So the statement above would most likely address the second category of traders mentioned here, as scalping can be very successful without having to employ stop loss and risk reward strategies. On the other hand, a medium term investor is the one that resembles the professional trader, in the sense that his/her analyses are based on analyzing the market from both the technical and fundamental point of view. While the scalper will mainly look at fundamentals only to the extent of the moment of time the economic data/indicator is released, the investor looks to understand why a specific economic data came in the way it did, what it means for the currency, and how to trade that into his/her advantage. Identifying a possible new trend does not mean the medium term investor will jump and take the trade just like that, but will look most likely for the setups that provide the most attractive risk/reward ratio. A risk/reward ratio should be defined as the ratio between how much you are willing to risk for a specific outcome. For example, if a trader decides to go long eurusd at the 1.30 level and uses a stop loss of fifty pips, or 1.2950, and a take profit of 100 pips, or 1.31, the risk/reward ratio is 1:2, meaning for every pip risked, there are two pips of potential profit. The higher the ratio, the better, and traders strive to identify the proper setup to have this ratio as big as possible. A good risk/reward ratio (also called rr ratio) is considered to be the 1:3 ratio, and there are traders who are effectively refusing to take some trades if the rr ratio they are basing their trading is not there and such rules are part of the money management system each and every trader should have. The medium term investor will always look for those setup that provide the rr ratio they are looking for and because of that they already have a competitive advantage in front of scalpers as one successful trade with a 1:3 rr ratio should cover for three potential bad trades. And this is why the rr ratio should be incorporated in any money management system a trader uses. However, there are some negative points related to trading with a specific rr ratio as markets spend most of the time in consolidation and having a big rr ratio implies one should trade only when markets are trending/moving. This depends very much on the risk taking, as the same rr ratio can be traded even when markets are not moving that much, so taking a lower risk will definitely be a way to go. But currency markets are characterized by extreme volatility levels and frequent spikes and that makes it difficult, if not virtual impossible, to find entry levels that assure a nice rr ratio starting with the smallest risk possible. All in all, trading with rr ratio helps traders be more disciplined and trading is one area where discipline is needed if one wants to be successful.
The Forex market can be a formidable opponent. The daily transaction volume is approximately $5 trillion, and the Forex market is regarded as the most liquid market in the world. In most respects, undercapitalized retail traders appear to be outmatched as they take on global central banks, investment banks, hedge funds, market makers and everyone in between. The odds against becoming a profitable Forex trader are high, but many small investors still try to tame this beast. The experience can be Sisyphusean, as individual mental mistakes, greed, and market-conditional outliers send investors back to square one with emotional and financial scars as a parting gift.Investors and traders love it, hate it, don’t understand it, or fall somewhere in between. How many times have we heard the saying "Cut your losses quickly and let your profits run?" It may be the most abused cliché in the trading world, but it still rings true. Trading requires a considerable amount of perseverance and grit to overcome the statistically guaranteed adversity. This is especially true in the Forex markets, which handsomely rewards winners while ruthlessly exposes a trader's flaws and weaknesses.Forex for BeginnersSo is trading in forex markets really as simple as as cutting your losses off quickly and letting your profits run? Ask any profitable trader and the answer may surprise you. (See also: Can Forex Trading Make You Rich?)One portion of the proverb may hold true - cut your losses off quickly. But letting your profits run may be easier said than done, as it relies on the trader’s ability to make profitable moves in the first place. In my opinion, the right side of the chart may be the hardest section to predict with any precision. The fundamental and technical pundits battle for supremacy on what school of thought will win the trade, while actual traders are in the trenches grasping at profits or getting slaughtered as the next wave unfolds. Traders who are positioned correctly have the ability to manage profits, while traders who are fighting the flow are either pressing their eject buttons or experiencing margin calls. Letting your profits run requires a disciplined indifference to P/L fluctuation, and that is certainly an adjustment for the traders who are identifying opportunities to manage winning trades.The Forex market is a rather technically pure market with global transactions occurring around the clock. The market’s structure generates an intricate puzzle of support, resistance, trends, ranges, channels, patterns, highs and lows, and they are all interconnected and explanatory in real-time, and certainly in hindsight. If a trader ever asks why in the Forex market, there is most likely a headline, news announcement, or technical reason for the movement - making it great for after-the-fact explanations. But live trading perplexes and fakes out traders with nasty unanticipated volatility. This simply means that managing risk and trade size is important to reduce the noise and capitalize on the actual movement or direction the market has to offer. (See also: The Pros & Cons Of A Forex Trading Career.)Limit the DownsideA solid education can provide an application-based foundation. Aupport and encouragement are also necessary to stay positive as a trader. I am a big believer in having a support network to tap into when you find yourself struggling. Rather than throwing everything out and starting over, traders can keep the core principles (market structure, support, resistance, trends) and surgically remove the flaws that are costly to the P/L curve. Lean on a support network of traders who are performing well and adopt some survival skills during the tough times.It is very important to identify what is and has been repeatable in the market. There are a variety of ways to apply winning strategies and consistent trades to the market’s predictability and structure. Most successful traders are far more conscious of the downside than the upside. The upside where unexpected profits are acquired is often little more than the market being overly generous. The market is full of surprises, but unfortunately most of those surprises are to the detriment of the trader. Consider the upside as generosity, and keep the downside in the forefront in your strategies.The Bottom LineThe most important part is to remember to cut your losses quickly. Losing is the worst part of trading, but when the losses are manageable, small and seemingly insignificant relative to your total equity, you’ll be fine. If you find a way to let your profits run, congratulations on doing something that most traders don’t. But most importantly, find a way to cut your losses quickly and you have a chance to survive the chaos the market throws your way. Then, aim to take advantage when it’s behaving to your liking.
One of the most powerful technical indicators that you can use in any market is the MACD oscillator, invented by Gerald Appel in 1979. The MACD, which is short for moving average convergence divergence, is one of the most popular lagging indicators among traders as well. Many traders use this indicator to trade divergence between the indicator and price, which can be a powerful trading technique if done correctly. Are you trading MACD divergence correctly? In this article, I’m going to show you how to trade MACD divergence like the pros. Are You Trading MACD Divergence Correctly? For starters, you should determine whether or not you are using the best MACD indicator for the job. For instance, the default MACD indicator in MetaTrader 4 does not use the original MACD formula and is completely useless when it comes to trading traditional histogram divergence. I’ve also seen MACD indicators, in other trading platforms, that only display the histogram, leaving out the MACD and signal lines. In order to trade MACD divergence the way I’m going to teach you, you need to use a true, traditional MACD oscillator. The image above is an example of a traditional MACD oscillator. You can see the histogram (bar graph) in gray, the MACD line in blue, and the signal line in red. Of course, the colors can vary between platforms and indicators, or due to user settings. The MACD line is the fast line. The signal line is the slow line (average of the MACD line). The histogram shows divergence between the MACD line and signal line. What is MACD Divergence? The typical definition of MACD divergence is when price and the MACD indicator are going in separate directions. As a trading method, at least in our case, we’re not talking about the divergence between the MACD line and the signal line. MACD divergence is, for example, when price is making lower lows while the histogram or MACD line is making higher lows or double bottoms. The idea is that the slowing momentum displayed by the indicator could be an early sign of a reversal. In the example I mentioned, we would have bullish divergence. We would have bearish divergence if price were making higher highs while the histogram or MACD line was making lower highs or double tops. Similarly, price could make a double top while the histogram or MACD line made lower highs. In the image above, I marked the bullish divergence in green and the bearish divergence in red. Notice that I marked divergence when price was either down trending or up trending. I completely ignored the range bound period. There are a couple of shortcomings to trading MACD divergence, and trading from a ranging market is one of them. During a ranging market, the MACD and signal line will cross the zero line frequently. You should avoid trading divergence, and possibly trading altogether, during these periods. Note: It’s also important to trade MACD divergence from distinguishable higher highs or lower lows in price. For instance, the bearish divergence (red) in the image above barely qualifies, because there were such small retracements in price during that uptrend. Keys to Trading MACD Divergence Correctly When traders first realize how powerful trading MACD divergence can be, they often make the mistake of trying to trade the MACD on its own. I don’t recommend this because the MACD can give many false positives on its own. Instead, I recommend using MACD divergence strategies with other trading strategies – preferably ones that use leading indicators, like price action or support and resistance. The right combination of lagging and leading indicators can provide you with a real edge in the market. In the image below, I marked the bullish divergence (green), the bearish divergence (red), and an example of bad divergence (gray). I also marked some entry signals. For the purpose of this article, we will be using price action signals in conjunction with the different forms of MACD divergence. Starting from the left, you can see some traditional MACD histogram divergence. The histogram is making higher lows or double bottoms, while price is making lower lows. If we were using price action as our confirming entry signal, we would have skipped the first two examples of bullish divergence, because there were no bullish candlestick signals to confirm our entry. The next two examples show both histogram and MACD line divergence. They also both developed bullish engulfing signals which could be used to confirm entry at each of those divergence points (click the image for a better view). Note: Oddly enough, according to the way I trade candlestick patterns, I would have made a full take profit (2:1) after the first bullish engulfing pattern. I would have been stopped out at break even, if I had taken the second bullish engulfing pattern. At first glance, you would think it should be the other way around. Next, we have an example of bearish divergence. A strong candlestick signal, the bearish engulfing pattern, developed at this point as well, confirming its significance. During this period, the divergence occurred between price and the histogram. Divergence also occurred between price and the MACD line. You’ll notice that the MACD line only made a small kink (or micro divergence). Micro divergence can occur when price is making smaller retracements, or during periods of high volatility. Either way, micro divergence can be a very significant signal in the right situation. After that, I marked a bad example of divergence. The reason this doesn’t qualify as a good example of divergence is because the retracement that made the first low was so small that it’s barely noticeable. Remember what I said about distinguishable higher highs or lower lows in price being important? Price action through this area is too smooth. There was not enough up and down movement in price to establish any distinguishable lows. Compare this period to the downtrend on the left of the image. There you can see very distinguishable lower lows in price. The lows on the histogram were also very distinguishable, which is helpful but not critical. Next, we have another example of bullish histogram divergence. This bullish divergence also coincided with a possible bullish candlestick signal, a bullish engulfing pattern. However, the real bodies of the candlesticks are relatively small compared to the other candles in the area. For that reason, I would have skipped this trade, although it would have worked out. Finally, we have another example of bullish divergence that occurred between price and both the histogram and MACD line. In this case, there was no candlestick signal to confirm a trade, so we would have stayed out of the market. Hopefully, you can see from the examples that I’ve given that learning how to trade divergence between the MACD and price can be a very powerful tool in your arsenal. Trading MACD divergence in combination with almost any other type of trading strategy can increase that strategy’s profitability exponentially. Final Thoughts: Trading MACD divergence, if done correctly, can provide you with a real edge in the market. It can be a powerful early indicator of trend reversals when combined with another trading system – preferably a system based on leading indicators. MACD divergence isn’t foolproof. This technique does not work well in range bound markets, and on its own MACD divergence will often give you many false positives. This is especially true when the market is trending strongly in one direction for an extended period of time. It is important to only trade divergence signals that occur during periods of distinguishable higher highs or lower lows in price. Strong, parabolic moves in price, in one direction or another, with little to no retracement, do not make good divergence signals. Are you trading MACD divergence correctly? Hopefully, this article shed some light on any mistakes you might be making with this popular trading technique. Like anything else in trading, you can’t expect to be an expert divergence trader overnight. Be sure to do plenty of backtesting and demo trading before trying any new trading strategy in your live account.