Barry Thornton’s
Long Candle Forex Trading Course
April 2010
Long Candle Forex Trading technique INDEX TO THE LONG CANDLE COURSE
INTRODUCTION AND BACK GROUND 1. Introduction 1.1. 1.2. 1.3. 1.4.
Message from the author Competency assumptions and requirements Course structure and terminology Course overview
2. Stacking the odds in your favour 2.1 2.2.
Creating the right mind set Critical Trading Success ratios
3. Finding the ideal trade 3.1 3.2 3.3
Reverse engineering Confirming the trigger Ideal trade
TRADING TOOLS 4. Using volumes as an indicator 4.1 4.2 4.3
Daily Currency volumes Scalping trades Relative volatility
5. Indicators, Markets and currencies 5.1 5.2 5.3
Indicators Market types Relative strength of currencies
6. Momentum signals 7. Support and resistance 7.1. 7.2. 7.3. 7.4. 7.5. 7.6.
Horizontal Non Horizontal Fibonacci Channels Dominant angles
Moving Averages
8. Price formations 9. Candle formations
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Long Candle Forex Trading technique 10. Targets and Exits 10.1 10.2
Targets Exits
SPECIFIC TECHNIQUES 11 The straddle trade 11.1. Market consolidation 11.2. Announcements 11.3. Weekend Straddles 12 The breakout trading 13 Bounce trades 13.1 13.2 13.3
Support and resistance Channels Bounce checklist
COURSE OVERVIEW 14
Money management
15
Trading psychology
16
Trading Process 16.1 16.2 16.3
17
Money management and Trading psychology Weekly activities Daily activities
Closing Summary
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Long Candle Forex Trading technique
1.
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INTRODUCTION
1.1
MESSAGE FROM THE AUTHOR
Hi Everybody My name is Barry Thornton. I hope that you find this course fun, interesting and educational while doing it and very profitable when using the concepts in your Forex trading. It’s my job to make sure that you enjoy the course and become a better Forex trader for having done it. We have worked hard to make the contents easy to follow but please use the support facilities to make suggestions or get as much clarification as you need. Forex Trading has been good to me. It has allowed me to literally tour the world without worrying about a dip in my income. Wherever I can find an internet connection I can trade and participate in the Forex Market. This kind of freedom and independence is priceless. I have not been affected by local economies. My Freedom and independence has not however come easily. What you will see in this course are my practical experiences trading the Forex Market. How I made costly mistakes to reach a point where I am now, an independent trader trading my own account on a daily basis. No theoretical text book stuff. What you will be getting in this course are various techniques, tools and processes I use to catch the LONG CANDLE and to make sure I manage LONG CANDLE forex trading efficiently. There is not only one but a number of LONG CANDLE approaches. In order to work through the content and make it your own, you should follow 3 steps;
Read through all the course material on a particular concept. Find you own examples of the concept by looking at historic charts. Find your own examples in live (demo) trading.
Trading and analysis tools Relative strength of currencies Relative candle size of currencies Relative volatility (trading ranges) of currencies 24 hour Trading profiles of major currencies Dominant Angle analysis Market type analysis Money management 1% technique Double your money safely technique Maximum lot technique
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Trading strategies Consolidation Straddle trades Weekend straddle Announcement trades Market opening straddle Trendline breakout trades Trendline bounce trades Volume scalping trade Trending market trading Momentum trading Channel trading Price formation trades The 2 wave momentum technique. Psychological exercises Coin spinning exercise Daily loser mantra Trading processes Weekend Forex Activities Daily Forex Trading Activities Determining targets Using stops I stopped teaching Forex trading a number of years ago but have kept close contact with the folks at Expert4x who have tempted me out of my daily trading routines to contribute to helping Forex traders. I hope you gain a good perspective of ways of making money in the Forex market in this process. I have made previous contributions in an interview series published by Expert4x last year and have developed a good trusting relationship with Expert4x through this series. I would thoroughly encourage you to work through the Long Candle course in the most practical way possible by looking for your own examples of the many trading techniques given and doing all the practical exercises suggested in the course. Unfortunately the market has encouraged the “instant successful trader” concept using never fail automatic trading system without much effort. From personal experience with thousands of prospective Forex Traders I have found that successful traders are the ones that go the extra mile, invest in their trading career, apply and test techniques in the market, make those techniques their own and trade every day. What you will see in this course are some techniques that work very well. Take this opportunity to learn a lot about how the Forex Market works and how you can make a good income from it. To get a better idea of what you are about to read and learn, I would suggest that read the summary at the back of the book as an overview. I have tried to include as much as I can within the limitations of an ebook so you may find the information overwhelming – please re read the course until you are comfortable. I hope to be of further assistance to you when you contact the Expert4x support where Expert4x or I will assist with any questions you may have (
[email protected] ) To your future in Forex Trading Barry Thornton
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INTRODUCTION
1.2
COMPETENCY ASSUMPTIONS AND REQUIREMENTS TO DO THE LONG CANDLE COURSE
April 10
No special software is required. You will however need charting software and a trading demo account to do this course. A few demo accounts may not be a bad idea. These can be obtained from www.fxcm.com or www.metaquotes.net if you don’t already have charting software or a dealing station. You can learn how to use their software from their comprehensive user guides. The most assumed important skills are the ability to use trading charts and to place orders. This course can be completed by beginners to Forex trading. We do not provide formal introduction to Forex trading in the notes. If you are completely new to Forex trading you may have to reread the course a number of times. All the more reason for printing it out for constant reference.
Use this link to information on Fundamental and Technical analysis: - Fundamental and Technical Analysis. Click the picture on the right to obtain more information on Technical analysis and about most Technical indicators
As this course is called the long candle course I think it would be a good time to make sure that everybody understands the basis of Japanese candles. Japanese candles give a good visual summary of the path the price took during the single (one) time span of the chart. If we say that we are using a 1 hour chart this means that every candle on the chart represents the price movement the price took during that 1 hour. A 1 hour candle would therefore equal the movement of the 12 five minute candles that can be found on the 5 minute chart. The key information obtained from every candle is: - The price high, the price low, the opening price, the closing price and the direction of movement from its colour. The area between the opening and closing price is the body of the candle and represents the actual gains or losses made by the BEARS or the BULLS. If the price goes up (the BULLS have made gains) during the period of the candle the body is normally blue. When the price goes down (the BEARS have made gains) the colour is normally red. When the opening price is equal to the closing price there is no body. If the BULLS or the BEARS make BIG gains during the period of the candle you get a LONG Candle. In this course the objective is to catch the long candles where there are strong moves in the market.
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Long Candle Forex Trading technique 1. 1.3
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INTRODUCTION COURSE STRUCTURE and TERMINOLOGY
STRUCTURE We have structured the course to encourage the practical aspect of trading as I would in a live training and trading environment. I have tried to make the course fun and full of variety with the use of links, Practical and Trading exercises, tables, charts, additional reading, references to articles and videos etc. I am providing as wide a perspective on Forex Trading as I can. Below is the format used to present some of the information:LINKS Wherever I have used a trading concept that you may need additional information on I have created links. They are normally coloured in blue like this Moving average and underlined. These are links to topics in this course, information on the Expert4x website and general information on the internet. Just click on these links and you will be taken to the information. Try clicking on moving averages above. PRACTICAL EXERCISES We have also included a number of practical exercises which will help you with your trading. These exercises are shown in a green box and are referenced Exercise (number) Exercise (number):
Enter the following trade
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CHARTS We also have a number of charts with trading examples. CHART 5.6: The GBP likes trading in dominant angles
TABLES We often supply tables with useful information Table 12.1 This table shows how often there has been a 60 pip move on a 1 hour candle for some of the major currencies during 2009 (147 days up to the end of 2009), The 40 pip moves on a 30 minute candles are also shown.
Currency GBPJPY EURJPY GBPUSD EURUSD USDJPY USDCHF USDCAD
60 pips (1 hour) 1014 312 263 131 106 98 69
40 pips (30 min) 2383 775 608 342 237 231 181
SUPPORT This course is fully supported to make sure that you get the best value from this course. We use Emails for support enquiries. Before raising an enquiry please complete the whole course. Sometimes your question is clarified in a future chapter or example. Please send your enquiries to
[email protected] . When raising an enquiry about any comments, exercises, examples, tables etc please use the references so that we are clear about what you are querying. Also please reference the parts of the course clearly you need clarification on in your emails.
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BASIC TERMINOLOGY and TRADING CONCEPTS
The Price chart refers to the section where the price movement is shown and will normally be candle format. Some indicators can be overlaid on the price chart.
The indicator chart refers to the bottom part of the chart where only indicator information is displayed.
Bull traders want the market to go up. The bull participants use buy orders as they think the price is going up – they use sell orders as stops in areas where they think the price will go down.
Bear traders want the market to go down. The bear participants use sell orders as they think the price is going down – they use buy orders as stops in areas where they think the price will go up.
Non horizontal: I use the term non horizontal for lines or support and resistance areas that are not horizontal. It is a strange description but it covers all angles that are not 100% vertical or 100% horizontal. This will make more sense as the course progresses and we discuss trendlines and support and resistance areas in more detail.
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Long Candle Forex Trading technique
1. 1.4
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INTRODUCTION COURSE OVERVIEW
The course covers psychological techniques, technical analysis methods, fundamental analysis techniques, Forex trading strategies, money management techniques, trading processes, Trading tips etc all aimed at one thing. Increasing your odds of becoming a money making Forex trader. To be a money making Forex trader you will have to study and read ALL the material to get the full benefit of the course. PLEASE don’t do like I often do – Buy an Ebook course and immediately flip to the trading technique section. My other objectives with this course are
To convince you that your long term Forex trading mental and psychological attitude (especially your attitude to losing) is the biggest factor contributing to your Forex trading success To show you the importance of knowing the phase the market is in (trending, wavy or sideways) before trading. To show and convince you that a straight line is the best leading indicator and TRIGGER for successful Trades To show and convince you that trading volumes represented by Bull and Bear orders are important trading tools for finding long candles. To convince you that you need to be able to accept the use of a trading strategy which only relies on low (40% to 60%) success rate to make lots of money. If you get a better result it is a bonus. To convince you that fast momentum indicators are the best tools for pointing you in the right direction in sideways and soft wavy market conditions. To show and convince you that you only need a handful of confirmation signals to trade To show you some great bounce and breakout trading strategies. To convince you that money management and trading psychology are the most important contributors to a trader’s success, and to show you how 2 simple approaches can resolve money management and psychological problems experienced by many traders.
Please print this course out as soon as you start it. I have found the course has 500% more chance of being read and studied properly and applied if you print it out. The course is meant to be read through twice. The reason for this is that many trading concepts are used before they are fully explained later on in the course. When this happens links to the explanations made later on, are available. I have also included many links to many free external internet resources which expand or clarify many of the concepts. Please do not rush through the material looking for the juicy bits. The longer you take going through the course the better. I suggest that you do all the practical exercises before moving on to the next section. It is up to you whether you do these or not. You will get out of this course what you put into it. The ability to trade the Forex Market independently on a long term basis is
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a priceless skill. Like bicycle riding once you have it, it does not go away as long as you apply good money management and maintain a good trading psychology. This is a practical course. It is very important to read this course with your charts open and available to test concepts and back trade to find examples of trades. Understanding the concepts is 20% of the course. Applying them and making them yours is the other 80%. That part I can not do for you. You have to do it. Trading is a practical skill like golf or swimming. You only develop your skill if you spend a considerable amount of time in the water or on the practice tee and competing. If you are going to read through the course to get an idea of what concepts are used you are only going to get 15% of the potential advantages of the course. You need to apply the concepts or back test them. Depending on your level of experience some of the concepts may require further explanation. Where I have thought this maybe the case, I have added links to that information. The objective of Forex trading is to make money, so if I am using simple techniques to make money, I am happy. You do, however, have to use these simple techniques to make the money – not just give the concepts an intellectual evaluation (you have to get into the pool and swim). This is a course about hands on Forex trading. In the end you will be able to trade 20 minutes a day using the concepts of the course. It has become very practical to use automated trading packages and Expert Advisors for Forex trading. Although many of the concepts from this course may not be programmable what you will learn will enable you to better understand and evaluate automatic trading packages. Trading long candles is more of a process than a very specific technique. So if you are looking for one simple trading system (recipe) for successful forex trading, you may be disappointed. The objective is to give you a complete picture of what it takes to make and keep money when trading the Forex market. There used to be an old Forex joke that went around forex training organisations which went something like this: Do you want to know how to make One million dollars in the Forex market? …………start with Two million. My objective therefore is not only to show you how to make money in the Forex market but more importantly how to keep it. OK,
so let’s get started…………………………………………….
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Long Candle Forex Trading technique 2.
STACKING THE ODDS IN YOUR FAVOUR
2.1
CREATING THE RIGHT MINDSET
April 10
This course is about making money from the Forex market. I have learnt that trading success and making money in Forex trading is all about stacking the odds in your favour. When I say STACK THE ODDS IN YOUR FAVOUR traders immediately think of a trading technique. You need to stack the odds in your favour the 3 major areas – Trading psychology, money management and trading techniques. Forex trading success is not about being the best online Forex Trader achieving 100% success with every trade all the time. It’s about giving yourself an edge and maintaining that edge over the market in all the major forex trading areas. This course is about giving you that edge. You have probably bought this course to become a total winner. You want to trade the Forex market successfully and make lots of money. So you are now reading this course with lots of enthusiasm and positiveness. You are probably thinking about hundreds of positive deals using great new techniques. That’s what makes my first job the most difficult one. I need to teach you how to accept the fact that you are going to be a LOSER when trading the forex market.
A Forex trader’s ability to deal positively with losses is the biggest differentiating factor between making money and losing money in the Forex Market.
I budget and expect to lose between 30% and 60% of my trades in bad patches. But I also budget and expect to make money in spite of losing and that is what makes the difference. You need to accept and manage losing in a positive way. It is VERY important that you understand all the concepts of this section before moving onto the next section of the course. No system has a 100% success rate. The ones that do have a 100% success rate don’t cash in their losses or they trade once in a blue moon.
I started my Forex Career by learning and then lecturing Forex trading methods. This period was very constructive as I experienced Forex trading using different trading techniques and was exposed to many good traders over a short period of 2
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years. During this period I realised that ANY trading technique has a very good chance of being successful if applied appropriately. Some very unsuccessful techniques are successful if simply reversed anyway. The main difference between successful and unsuccessful traders is their temperament, attitude, patience and mental outlook rather than the technique used. I have also been looking for the Holy Grail ever since I was first introduced to Forex trading. Everybody dreams of a system that has 90% reliability and can be traded continuously through all phases of the markets – sideways and trending – year after year. The problem with this, is that this high expectation creates an extremely bad mindset for trading. I have been there. You feel as if the market is out to get you, that you are banging your head against a brick wall, the market always goes in exactly the opposite way you are trading, etc. It is a very DARK place to be in. If you have been there, you will know. You develop a love hate relationship with the market. You love forex trading but you hate the results. These feeling are caused by unrealistic expectations, impatience, a desperate need to succeed, inability to deal with adversity, the urgent need for money etc. These feelings will kill your trading career before you have even started. Unfortunately I know some very bright people that have ended up in the “Forex Morgue for unsuccessful traders” because of these factors and no other. People lose all perspective and they think that because they watch Tiger Woods sink a 10 foot putt to win a Major Tournament they can do it too. It is only once I accepted that the way to make money trading the Forex market was to be right more often than not and to make sure that I make more money on my winners than I lose on my losers. Coming to this simple realisation has taken me years and a few lost fortunes due to greed and the drive to be right all the time. I wanted to make a fortune right away and was too impatient to tolerate losers. Trading takes considerable patience and respect for the market. The Forex Market makes it very difficult to get out of the Holy Grail mentality. New systems are constantly being advertised as having very low or no losing records creating unrealistic expectations for new and eager Forex traders. I realised that one of the KEY SUCCESS factors to Forex trading was to change my trading mentality towards trading loses and develop a numbness towards losing trades. Both winning and losing trades used to excite me so much, that I would lose all objectivity for the next trades. I was influenced by Dr Alexander Elders great trading classic “Trading for a living” in which he spent most of the introduction on Psychology and money management. I initially found this very irritating but now I can understand why he did that. He had an interesting approach to trading and compared trading to alcoholism and suggested that every trader started the day saying: “Hallo, My name is Barry, I am a Forex trader and a loser. I have it in me to do serious and permanent financial damage to my trading account today.” I am not suggesting that the Long Candle approach will only give you a low success rate. In fact it will go a long way getting your success rate high with high probability trades. But, as with any trading system there will be losses and you need to be able to manage the impact of these losses. I have seen traders stop trading highly successful techniques because of one or 2 losses. Don’t let this happen to you OK….Lets learn how to become successful LOSERS………..
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Long Candle Forex Trading technique 2.
STACKING THE ODDS IN YOUR FAVOUR
2.2
CRITICAL TRADING SUCCESS RATIOS
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The way that I have learnt how to make money trading the Forex market is:First: Learn to make money with a 50% success rate. This will develop a healthy trading attitude to losing and make you competent at money management by staying calm in the face of adversity. Making money with a low success rate is a trading skill without which, you will not succeed. Second: Once you have mastered making money with a 50% success rate you can then fully concentrate of improving your success rate with more experience regarding various trading techniques. Competency at making money with a 50% success rate will create a mental safety net. 95% of traders bypass step one in their trading career. No wonder so many fail. So let’s look at how a Forex Trader can make money from losing and do a few exercises which will help you make losing part of your Forex trading mental attitude. By the way, if you follow these suggestions it will also resolve most of the psychological trading problems traders face at the same time. There are 3 areas you need to manage: Your trading capital. Having the right amount of trading capital is more of a psychological requirement than a financial requirement. Your trading SUCCESS RATE. Your trading success ratio is calculated by comparing how many successful deals you have had to the number of unsuccessful ones. Most traders concentrate so hard to try to get this high that they never achieve financial success. Many traders make money with success rates as low as 40% and lower. How much you make with “winners” and how much you lose with your “losers” (Your $ Win / Loss ratio). The trick is to lose less on your losing trades than you make on your winning trades. After seeing Forex success and failures early in my career I realised that Forex trading is about making the right but hard choices. Choices that give the freedom to sleep well in the evening, travel anywhere enjoy forex trading, have fun discussing Forex trading, enjoy a good life style, meeting interesting people. Success breeds success. The minute you start pushing the boundaries of the 3 areas mentioned above you are bringing in desperation and tenseness that have a good chance of destroying your Forex career. So let’s spend some time understanding the boundaries set by the 3 areas above. Trading Capital:The ideal trading capital I have available for trading is always equal to 100 times the amount that I normally risk on 1 forex trade. If my stop loss (the amount I risk on I trade) is $1000 then you need $100 000 in your trading account. That also means that I can not risk more than 1% of my trading capital on any 1 trade. Those are my personal rules which I have reached after years of risky trading. I also never have more than 2 deals active at any one time.
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What this gives me is the knowledge that a negative deal can not cause major financial harm to me. I can sleep well at night. As I said previously the amount of capital required is a psychological and mental requirement – not a financial one. OK – That’s me what about you? The quicker you can apply the 1% rule the better. Luckily these days mini ($1 per pip) and Micro (10c per pip) trading is being offered by brokers. This means that if you want to risk 100 pips ($10) in your next trade you only need an account of $1000 if you use a micro account. It is more important in the long run to start trading profitably than trying to make big gains using a small account. I will show you ways of making higher returns even if you use the conservative recommendations explained above, later on in the course. Trading success rate:This rate compares the number of successful deals with the number of unsuccessful deals or the total number of deals during a period. If you have had 50 successful deals out of a total of 100 deals during a month you would have a 50% success rate. A 50% success rate does not mean that you have broken even for the month. This depends on the amount you lost with your losers compared with the amount you made with your successful deals. You can therefore make money with a 40% success rate and lose money with an 80% success rate (which is very common). Your success rate is also related to the size of stop you use. The smaller the stops, the lower your success rate and the bigger the stops, the bigger your success rate. Again you can not relate this ratio to trading success without knowing the other ratio. This is a common mistake traders make. The amount you make on winners compared to the amount you make on losers( Your $ win / loss ratio ) :To get the average you make on winners, you can add up the amounts gained and divide that by the number of successful transactions. Similarly take the total of the losses and divide that by the number of negative deals. This is where Trading skill is required. You need to find deals where you can make much more than you risk. Catching a long candle improves your odds dramatically.
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Combining your success rate with the amounts you win and loss. Table 2.1 below shows the success rate required to breakeven based on the your $ win / loss ratio Success Rate required to break even given the different $ Win / Loss ratios Win % (Winners as a % of total deals)
$ Win / Loss ratio (Money made for every $1:00 risked)
20.0%
$2.50
30.0%
$1.67
40.0%
$1.25
50.0%
$1.00
60.0%
$0.83
70.0%
$0.71
80.0%
$0.63
90.0%
$0.56
The table above (for instance) shows that if you make on average $1.25 for every $1.00 you will still breakeven even if you’re your success rate is 40%. All forex traders want to reduce risk by having a high success rate but there are other ways of making money in the forex market other than having a high success rate. An ideal balance would be to have a reasonably high success rate (say 70%) and a reasonable %win ratio (say $1.50). Below are some real-life of 3 active Forex traders I know. The first is a daily scalper who traders the Forex for a financial institution. He trades over 100 deals a day. He achieves a 56% success rate and his risk return ratio is 1:1. (He makes as much as he loses). For every $1 he trades he makes $ 1.03. He is happy with return as he trades big numbers. For every $1 million he trades in a day he earns $ 30 000 for his employer. Everybody is happy. The other trader is a long term swing trader that goes for 150 to 250 pip targets trading his own account. His aim is to catch a trend at its start and stay with the deal until completed. He likes using small stops because of his large targets. Using small stops reduces his success rate tremendously. In fact he only has a 35% success rate but he actually achieves a 4:1 risk return ratio (135 pips for winners and 35 pips for losing trades). He makes 35% x $4 on winning trades = $1.40 and loses 75% x $1 = .75c on losing trades. He is happy with this return as in the long run he is almost doubling the money lost with winning trades. He does about 6 trades a week. If he risks $ 20000 in a month (20 trades risking $1000 a trade) he makes $ 15 000 a month and he is happy. Then there is a daily trader who trades about 20 trades a week. She actually achieves success ratio of 63% and has a favourable risk return ratio (% success
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ratio) of $2.00: $1.50 (For every $1.50 risked she makes $2.00). Her wins therefore become 63% x $2:00 = $1.26 is therefore made on winning trades and $1.50 x 37% = $ 0.56 on losing trades. Almost the same as the long term swing trading trader. On her 80 trades a month risking only $200 a trade she makes over $11 000. Not bad for working from home. TRAINING EXERCISE TO TURN YOU INTO A LOSER The exercise below should result in you losing +/- 50% of the time. It will however show you how you can make money losing 50% of the time and having fun and enjoying the losing experience. This is very similar to the attitude I am trying to instil in you for your Forex Trading activities. You need to develop a numbness towards loses. This numbness comes from the fact that you are not risking your house or future on the each trade but only 1% of your trading capital. After you have done the course you will also have a trading edge which will make sure that you have a reasonable success rate and an appropriate risk/return ratio. This will give you the mental, psychological and trading edge you need over the market. EXERCISE 2.1: The coin flipping exercise
Imagine that you have $100 to trade with. You can therefore risk $1 per trade. Now find the biggest coin used by your local currency. You need to spin this coin 100 times. Pay yourself $1.50 for every head you get and deduct $1.00c for every Tail you get. Start spinning and calculating your account balance. The first 10 to 20 spins you will notice that you are quite tense about the outcome of every spin and very interested in the outcome (emotional). After a while you realise that the odds are stacked so favourable in your favour that loses do no hurt at all. They become an opportunity for a fresh spin. PLEASE DO THIS EXERCISE (It is more important than you will ever realise) – Trading is a practical activity like golf or swimming. You achieve nothing by understanding a concept. You only achieve something by using a concept in your trading and making it yours. I still force myself to do the 100 spin exercise after I feel that the Holy Gail way of thinking is trying to affect me or if I start experiencing too much pain or emotion after seeing my stop loss being hit. I regard it as so important that I have never stopped doing it – and so should you. You should make +/- $25 profit (25% Return on your money). (50% x -$100= -$50) + (50% x +$1.50 = $ 75 ) = $25
This exercise is not too dissimilar to Forex Trading and that is why it is so important. I have run and marketed a few really good alert services. I have found that people can’t take the pain of losing. They can’t develop the numbness towards Forex trading loses require. They stop the alert service the minute there are 2 loses in a row. There is also a rush to join the service after it has had a good run. So you have this SAD human pain avoidance behaviour occurring. People join a service when it’s due for a few negative trades and leave the service when it is due to have
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a few positive trades. If they just stay with the service and ride the waves of success and failure (like the coin exercise) they would be better off. One of the SADDEST experiences that I have as a trainer is to share a really good trading technique with students and get them going on it. 3 months later I would contact them (after I have traded the same technique and have made money) only to find that they dropped the technique as it had 3 losses in a row. YOU NEED TO DEVELOP THE ABILITY TO MENTALLY MANAGE LOSSES – Please do the Coin exercise again to see how you make money with many, many losses. If you ever expect a Forex trading technique to give you 100% successes please do the 100 spin exercise immediately! Most trading techniques can be traded profitably. Yes, MOST TRADING TECHNIQUES CAN BE TRADED PROFITABLY. I have seen too many successful traders using too many varied trading techniques to believe otherwise. Why these traders are successful is that they trade their technique consistently year after year through all the good and bad phases. They know that they have an edge over the market if they stick to their technique consistently and apply sound money and risk management. This course will teach you how to make most techniques more profitable by using filters to filter out unprofitable transactions.
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NOW – LET’S MAKE SOME MONEY After all of that talk of patience I am now going to show you a way of doubling your trading capital using reduced risk. We are going to redo the coin flipping exercise with a small change that will double our trading capital with reduced risk. EXERCISE 2.2: Double your money safely
Imagine that you have $100 to trade with. You can therefore risk $1 per trade. Now find the biggest coin used by your local currency. You need to spin this coin. Pay yourself $1.50 for every head you get and deduct $1.00c for every Tail you get. Start spinning and calculating your account balance. Once your account balance reaches $ 110 increase your bets. Pay yourself $3.00 for a head and deduct $ 2.00 for a loss). In other words double your lots. If your account goes back to $100 return to the normal bets. Once your account reaches $ 130 increase your bets. Pay yourself $4.50 for a head and deduct $3.00 for a loss (add another lot). If you account goes back to $110 apply the bets as at that level If your account goes back to $100 return to the normal bets. Once your account reaches $ 160 increase your bets. Pay yourself $6.00 for a head and deduct $4.00 for a loss (add another lot). If you account goes back to $130 apply the bets as at that level If you account goes back to $110 apply the bets as at that level If your account goes back to $100 return to the normal bets. The likely = $10.00 The likely 60.00) The likely 90.00) The likely 120.00)
outcome after 20 spins is (20 x -$1.00 = - $20.00) + ( 20 x $1.50 = $ 30.00) outcome after the next 20 spins is (20 x -$2.00 = - $40.00) + ( 20 x $3.00 = $ = $20.00 outcome after the next 20 spins is (20 x -$3.00 = - $60.00) + ( 20 x $4.50 = $ = $30.00 outcome after the next 20 spins is (20 x -$4.00 = - $80.00) + ( 20 x $6.00 = $ = $40.00
TOTAL = $ 100.00 You have doubled your money in +/- 80 spins. PLEASE DO THIS EXERCISE
Your bottom end risk is +/- breakeven as you only become aggressive when you have built a buffer of retained gains. Risk can even be reduced more by increasing the levels where bet increase happen to say $120, $160, $240 etc. After doubling your capital you would revert back to the 1% rule (this time starting with $200 in trading capital) and start again increasing your bets when it is safe to do so. I use this technique for the portion of my trading capital that I want to trade more aggressively but don’t want to incur much risk. I also only use this technique for the more reliable trading processes. So now you have a conservative method of
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trading – always 1% of capital – and a more aggressive method of trading – increasing lots – to choose from. TRADING SUCCESS AND THE RISK RETURN RATIO From doing the Coin flipping exercises it must have become very clear that the financial success of your Forex Trading is dependent of the major assumption we made when flipping the coin. You make $1.00 losses and you make $ 1.50 on gains. The rest of the course will be based on finding ways that will give you 2 edges: 1. A better than 50% success rate 2. A better than 1: 1.5 risk return ratio. If we can achieve the above we are home and dry. So let’s do a trading exercise to get a feel of the possibility of achieving the above goals. EXERCISE 2.3 Using your demo account please place simultaneous a buy and a sell market orders (immediate) in both the GBPUSD and the EURJPY (4 transactions) with a 30 pip stop loss and a 45 pip target for all transactions. Do this for the next 5 days – 5 x 4 transactions. Try to do the transaction at the start of the UK (9:00 am GMT) or US (9:00am US) sessions if possible. We are not guaranteed of a 50% success rate or a 1: 1.5 risk return ratio. Lets see how close you come. This exercise will also teach you a lot about currency volatility, trading volumes and how annoying spreads can be sometimes. AGAIN YOU CAN THEORISE ABOUT THIS OR DO THE EXERCISE – I SUGGEST YOU DO THE TRADES.
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Long Candle Forex Trading technique 3
FINDING THE IDEAL TRADE
3.1
Reverse engineering
April 10
This trading technique has been developed in a unique way. I firstly identified what kind of market movement I wanted to trade: - a Long candle (A quick move in the market). So, rather than looking for a particular technique I took a reverse engineering approach. I firstly looked at the trading charts and identified all the 60 pip 1 hour candles that occurred over a period of 6 months for 3 currencies (GBPUSD, EURUSD and USDJPY). When you have a number of students to help, this exercise becomes a little easier. We then gathered key information about each candle such as the exact time of the day they occurred, noted any economic announcements that may have occurred and exact size and strength of the trend etc. This supplied fantastic information regarding the time and events that made these candles occur. This alone was worth the effort. We then took it a little further. We looked at all the trading signals that occurred just before the Long candle trend. We looked at the support and resistance levels that were in place to determine why the candle started where it did and stopped where it did. More importantly we looked at the trading triggers (as opposed to signals) that would activate a trade into the candle trend. Although predictable to some degree, the information was incredible. We found that 1 leading indicator gave a trading trigger in 90% of the time! Furthermore there was only a handful of trading signals supporting these moves. Trading signals give evidence of a likely transaction and supports the likelihood of the transaction being successful. A momentum divergence is an example of a very strong trading signal.
The trigger is the event that will activate the transaction. It could be something like the price reaching a certain price level or an event like a trendline violation or bounce.
In most cases you would have a number of trading signals providing overwhelming evidence for you to pull the trigger.
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Our findings were: The Trigger A simple straight line proved to be the most consistent indicator of a transaction entry point. This straight line can be a non horizontal trendline or a horizontal support and/or resistance line. Straight line signals and triggers can be found on both the price chart and on the indicator chart. The 6 Supporting trading signals:1 2 3 4 5 6
Momentum indicator signals – wave counts, divergences, trendline violations Non Horizontal support and resistance – trendlines, channels, dominant angle lines Horizontal support and resistance – historic support and resistance, Fibonancci levels Candle formations – Continuation and reversal formations. Price pattern formations - Continuation and reversal formations Time of day factors – Major Market Volumes, Announcements
So rather than complicating the process we found a simplified approach using 6 conventional trading signals and found ONE simplified trading trigger that applied to 90% of long candle trades.
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Long Candle Forex Trading technique 3
FINDING THE IDEAL TRADE
3.2
CONFIRMINING THE TRIGGER
April 10
Another way we stumbled on the power of a trendline was when doing strategy or indicator optimisation. The best way of improving the results of an indicator or trading strategy is by introducing a filter to reduce negative transactions. A strategy or transaction filter is an additional condition you would place on the decision making process before a transaction is entered into. An example: One of the most basic trading strategies is the moving average crossover strategy which has the following simple rules. When the fast moving average crosses over the slow moving average from above and the price closes below the slow moving average, enter a SELL. Enter into a BUY transaction when the fast moving average crosses over the slow moving average from below and the price closes above the slow moving average. This strategy can be optimised to find the best settings and the most profitable time span historically by doing programmed back testing. After the optimisation the next step we would add filters to try to avoid the unprofitable trades. Sometimes a simple filter such as: - “Ignore signals that occur between 21:00 and 5:00 GMT”. Trading during quite markets generally results in false signals. In General we have found the filter: - “Only enter into signals that occur at the same time or just after a trendline violation” reduces negative transaction considerably for all breakout indicator or trading systems tested. Other general filters include:1. Ignore trading signals which occur at low volume times outside of the high volume active major market times (this is one of the main principles of this course) 2. Do not use trending indicators (Moving average etc) in sideways markets. 3. Do not use momentum type (MACD / RSI) indicators in trending markets. The importance of the use of trendlines violations (crossovers) and bounces was again confirmed in 2 totally separate ways. A Trendline is a line that connects the major turning points on a chart. By connecting the turning points you are effectively creating a barrier between the area where the Bulls are in charge and the area where the Bears are in charge. By drawing trendlines you are projecting future bounce and breakout points (Bull and Bear battles) where the price will move quite quickly. Long Candles occur when the price bounces or breaks through the trendlines.
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Trendlines provide great opportunities to catch long candles when they are violated or cause price to bounce.
Click here for a typical trendline violation trade: Trendline violation GBPJPY +125Pips Please go to the Expert4x blog for a number of trendline violation trades. Enter “trendline” in the search facility.
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FINDING THE IDEAL TRADE
3.3
The Ideal trade
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Most traders would like their trades to be quick, definite moves that go straight to their target giving them the least amount of anxiety. This kind of move is represented as a long candle on the charts – hence the name of this course. Quick moves are also sometimes represented by a spike candle which has a long tail and a small body. Long Candles: There are basically 3 types of long candles.
Long candles that are made when the price breaks through (violates) strong support or resistance – I call these breakout trades
Long candles that are created when support or resistance is so strong that the price bounces back from where it came from. Many times this move is so fast that a long candle does not form. What you see is a spike shaped candle. I regard these as long candles too and I call these bounce trades.
Then there are those long candles that are part of a fast moving trend. These are more difficult to enter as you don’t have many supporting signals except the trend itself.
To get a better understanding of long candles lets looks at when they likely to occur: 1. At market openings
Although the Forex market is a 24 hour market the participants are all human beings who sleep and go to the office. The markets are quieter when the trading hours of major markets are not active. Certain currencies market openings.
react
differently
to
The GBPUSD tend to be very volatile at the opening of the European market and there is a particular trade I call the Big Ben Trade that takes advantage of this volatility. Some successful alert services take advantage of this volatility and would merely straddle the European market opening every day.
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The USDCAD is also very volatile at the opening of the US market as that is the main market in which the CAD (the Looney) is traded.
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Market openings can produce very interesting results. The US market opening starting at 8:30 EST can be very volatile as it is the preferred time for economic data releases in the US.
EXERCISE 3.1:- Price behaviour at market openings Choose your 3 favourite currencies. Use the GBPUSD, EURUSD and JPYUSD if you don’t have any favourites. Use the 15 minute charts. Mark the last 10 European market openings (6:00 GMT) and US market openings (13:30 GMT/8:30 EST) each currency chart. Now study the price behaviour for each currency during the first 3 hours of these 2 market openings with the object of trying to find an element of consistent behaviour that one can trade.
Do you notice consistent increased volumes? Do you notice consistent whipsaws? Do you notice consistent breakouts? Do fast (period settings of 4 to 5), 5 to 15 minute, momentum indicators give a clue of possible market direction?
Increased volumes could add to the strength of market moves, pushing the price into a short term (1 to 3 hour) trend. Whipsaws indicate a washout activity in the market where the market gets rid of buy and sell orders before choosing a direction. This could indicate that one should stay out of the market for the first hour or so. Consistent breakouts show that one could possibly use a straddle trading approach to market openings. Momentum indicators can be used as direction indicator trading signals supporting trendline violation triggers
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The exercise below will help you develop strategies for trading the market openings. Many Forex Alert services use these techniques to generate consistent trading results. Why pay an alert service if you can do it yourself? EXERCISE 3.2:- Market opening Trading exercise Your findings in the above exercise could point to the use of the following strategies. If you find the market is making more breakouts than any other price movement trade the following strategy for the next 5 days: Draw 2 sets of trendlines over the most recent high and lows. Place a buy order 8 pips above the upper trendline and 5 pips below the lower trendline. Use the lower entry as a stop for the buy and the upper entry level as a stop for the sell. Target 60 pips with a 30 pip (pip by pip) following stop. Set and forget at the 6:00 GMT and 13:30 GMT every day for a week. An alternative to using trendlines is: Place a buy 23 pips above the current price and 20 below the current price at 6:00 GMT and 13:00 GMT.
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2. After announcements
Major economic announcements and political and economic speeches supply new information to the market. When the information differs from what is expected it could result in tremendous moves in the market. The most common way to trade these announcements is to straddle the trading range before the announcement and let the volatility of the move activate the transaction. Looks easy, doesn’t it? You would have to exit by watching the price action, when you have made enough, using a target or a following stop.
There are however a few traps to this trade. You have to enter the trade in the last minute before the announcement. Some Brokers don’t like this and increase the spreads before an announcement. Some broker systems can’t handle the volatility of the move and the dealing system may hang or freeze which restricts your management of the transaction. In reality the price often gets lost and even the broker can’t locate it. The other dangers are whipsaws where the price goes the wrong way before breaking in the intended direction. Occasionally the price does very little when the announcement outcome is exactly what was expected. These trades are regarded as high risk trades but can be fun as your risk return ratio can be very good. Sometimes you can risk 15 pips and make 90. One of the reasons why some traders continue trading this trade as they only need 1 in 6 to work to break even. When you are in an active deal just prior to an announcement I would suggest that you close the deal or if you trust the brokers trading system move your stop very close to the existing price. This will prevent your transaction from creating big losses. You could at the same time increase your target before the announcement if you are fortunate enough to be going in the right direction.
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3. After the price breaks through strong support or resistance.
In this example the bulls have been defending a specific non horizontal support area a number of times. The strength it takes for the BEARS to break through the strong support invariably results in a long candle. This trade is normally activated by placing a sell order just below the support line. When the price violates or breaks through the support line it would activate the order which would act as the trigger for this transaction. Trading signals include the momentum divergence, the momentum trendline violation.
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4. After the price bounces off strong support and resistance The price will normally bounce back from strong support and resistance. The example below shows 4 support lines occurring at the same place creating very strong support. A strong bearish candle is quickly bounced off this combined support creating a long upward candle. The support is created by: A channel lower support line (this line could also be a trendline in its own right) A horizontal support and resistance line A non horizontal support and resistance line And a 61.8% Fibonacci retracement line These support and resistance concepts will be explained later in the course – click on the blue words to link to the more detailed discussions
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5. During strong trends During strong trends the price is moving with considerable speed and long candles tend to develop at all stages of a trend. Even during trending periods, trendline violations will still get you into most trends and help you catch the long candle. We will learn about some of the signals later in the course but the head and shoulder formation at the end of a trend is a great reversal formation. The violation of the Head and Shoulders neckline would have helped us activate a sell transaction.
The violation of the bull trendline would have helped us catch a second long candle. The violation of a “with the trend” non horizontal support and resistance line would have helped us catch another long candle
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6. During strong market corrections Sometimes when a trend develops (especially when the trading volumes are low) and the price reaches a level where major players feel uncomfortable they would enter the market with large orders. These orders would be large enough to not only stop the direction of the current trend but to reverse the direction completely. A few years ago the Japanese Government had a habit of making large market interventions in an effort to control the price levels of the Yen. These activities are noticeable on daily charts as well as 5 minute charts. The evidence is normally reflected on charts as large candle spikes or railway track formations. Below are examples of BIG bulls protecting the price of the USDJPY from going any lower. The bull order eventually reversed the trend.
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7. Breakouts out of market consolidations Market consolidations occur when all the participants agree on the current price levels. These participants are the bulls, bears, long term traders, short term traders and scalpers. These times of consolidation can be the start of huge trends as the smallest amount of new information can start a big move (Long candle with volatility). The chart below shows how multiple moving averages using the Fibonacci numbers to 233 helped me visualise the market consolidation that led to an over 1000 pip move on the daily chart of the EUR. The moving averages moved into a funnel which was easy to straddle. A volatility break out with lots of long candles was inevitable.
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Times when not to trade Don’t trade in Low volatility Long candles require trading volumes and participation by the Bull and Bears. That is why it is a good idea not to trade during quite times like Public Holidays - Xmas / New Year / Easter / Thanks giving / Independence Day etc. Although the market does have some movement some brokers increase their spreads to discourage trading over these times. Link to a public holiday trade
Don’t trade in High and uncertain volatility
Sometimes political speeches and economic announcement can create considerable uncertainty or over reactions in the market. This would be a case of too much volatility and generally it is better not to trade. Take a break.
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TRADING TOOLS 4. 4.1
USING VOLUMES AS AN INDICATOR Daily Currency Volumes
Long candles happen as result of a number of market situations that develop during any trading period. We will be looking at these in more detail later on. Long candles are generally a result of a big push coming from many BULL or BEAR orders entering the market. These orders normally enter the market when high volatility and activity develops as they need liquidity in the market. It therefore makes sense to study the currencies to see when their the biggest trading activity occurs. This trading activity is what drives the price movement. Most charting systems show volumes. Below is an example of how volumes are shown by the MetaTrader4 platform (The green bars below).
You see that most long candles occur on high or increasing volume and that is why you need to know when high volumes normally occur. I regard volume as a leading indicator because of this. High volumes naturally occur at the start and while the major markets are open. The 3 major markets impact currencies different ways. Have a look at the graphs on the next page. These graphs show the % that a currency is traded over a 24 hour period. This information was obtained by analysing the 2008 trading volumes on the hourly charts of the above currencies. The horizontal axis reflects the time in GMT and shows the impact of the Australian, Asian, European and US market opening on the volumes traded in each particular currency.
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For the latest profiles and volatility of all currencies please click on this link. VOLATILITY CHARTS
Currency 24 hour trading profiles
Observations one can make from the above:
The CAD has the most concentrated level of trading when the US morning market is open with an initial jump when the European market opens. One would therefore expect the longest candles to occur just before or during these times. The EUR has peaks at the opening of a 3 major markets and is more balanced The GBP has its biggest peak at the start of the European market. This creates some great BIG BEN type trades in this currency In general the biggest jump occurs at the opening of the European market.
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A look at the CAD charts confirms that those are the hours when long candle can best be traded using when trading the CAD.
As seen before, the USDJPY gives good examples of BIG bulls protecting the price of going any lower. The bull orders eventually reversed the trend. These interventions can happen at any time. The increase volumes are definite clues but a study of support and resistance will also give signals about possible bounce opportunities. These activities also obviously impact the prices of the EURJPY and GBPJPY adding to the volatility of these already volatile crosses.
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Long Candle Forex Trading technique
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6 Currencies together: % Traded every hour by each currency 50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
CHF
AUD
CAD
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GBP
EUR
JPY
Long Candle Forex Trading technique
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Volume as a transaction confirmation signal
This chart is a bit busy and illustrates a number of areas we will cover in this course. The MAIN POINT of this chart is to show you the importance of volume for successful and quick transactions. The actual transactions are shown on the indicator below the chart. The GREEN transactions were the ones that were entered into on good volume and a price trend break. These resulted in a long candle with a short time. Bear in mind that this is a 30 minute chart. The RED ones are transactions entered into using good trading signals but because there was no volume pushing these transactions they either took a very long time to move or were unsuccessful. The volume levels are the green bars at the bottom of the price chart.
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TRADING TOOLS 4.
USING VOLUMES AS AN INDICATOR
4.2
Using volumes as a scalping tool
I never used to pay any attention to volume signals when trading the forex. This was mainly due to fact that very few charting systems have good volume information. I also regard volume as a lagging indicator or information when used on any other chart other than the 1 minute chart. In my travels I was lucky enough to spend some time with a number of corporate traders. One trader stood out as being unusual. As we discussed trading I was quite surprised to hear that he did not use charts to place his deals. Most of his trading revolved around reading the price action. He was lucky enough to have high level information regarding the order flow into the market. His technique was very simple. He watched for a slow low volume trend to start. He knew that there were large players in the market watching exactly the same information. He knew that large players could impact the market with the size of their orders. He would wait until he saw a big increase in against the trend orders. He would then climb in by placing orders against the trend and invariably the prices would make a correction and he will be in and out of the market in a flash scalping a good number of pips in the process. This trade illustrates the concept of using increased volume as a SIGNAL that a bounce can be expected. This trade is an example of some to the concepts we will cover later on in the course. A trendline violation triggered the entry. Supporting signals:- Increased volume, Momentum divergence, Momentum trendline violation – entry and exit. If you add the bottom 5 candles together you get a spike which is a powerful reversal formation. Momentum making 2 or more waves made a good entry and exit signal.
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There are 3 opportunities that online traders could benefit by using basic volume information. ONE: The one was to use the increased volume as a trading trigger to do quickly against the trend trades. TWO: The other was to use the increased volume as a reversal confirmation signal giving weight to bounce transactions which we will look at later on in the course. THREE: In general indicators and even straight line violations will not produce the same results when the signals are traded, as when there are low volumes in the market. That is why it is important to get to know when each currency is most volatile and will produce the most reliable trading signals.
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Long Candle Forex Trading technique 4.3
RELATIVE VOLATILITY OF CURRENCIES
The Table below shows the size of the average candle for various currencies. This also will give you an idea of the relative volatility of the currencies. Please bear in mind these are averages and the values can change depending on current market conditions. Currency
1 min
5 min
15 min
30m
1hour
4 hour
Daily
Weekly
Monthly
EURUSD
3
6
13
18
25
39
104
248
530
GBPUSD
3
8
18
24
34
53
134
316
716
USDJPY
3
6
13
17
24
38
103
270
696
USDCHF
3
6
12
17
22
37
105
301
801
GBPJPY
6
10
22
33
52
76
191
521
1193
EURJPY 3 8 17 23 33 51 125 316 715 The charts below show the ranges achieved by various currencies since 2000. Although this is not the ideal measurement this also gives more information regarding the volatility of currencies. Relative volatility of currencies as viewed as the range trades since 2000
Learning Points:
Enter the market when the volumes are high and trading signals are more reliable. The morning sessions of the European and US market are times where long candles occur The more volatile currencies produce the biggest long candles When the market is already trending increased volumes can signal a reversal of trend
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TRADING TOOLS 5
INDICATORS, MARKETS and CURRENCIES
5.1
Indicators
Traders like using Technical indicators to give them a different perspective of the price movement. The price movement is the most reliable information you will find about the Forex market as it is reality and because of this I always trade what I see on the charts chart. In general I don’t pay much attention to market talk as that is mostly speculation. The price chart is current and historic reality. There are 2 sets of distinctions that you need to make about any indicator. The first distinction is that you need to determine if the indicator is best used in a trending market or in a sideways trading market. The best example of this is the moving average crossover system that normally gives many whipsaws (false signals) in a sideways market resulting in a loss, but is excellent in a trending market as an exit indicator. The moving averages keep you in the trend. Momentum indicators give good and reliable signals in sideways markets but will cause you to trade against the trend in a trending market.
The second distinction is to tell the difference between lagging indicators and leading indicators. Lagging indicators:- Lagging indicators give the trader an alternative perspective of the actual price movement as it has happened. Moving averages are examples of lagging indicators where the calculation of the moving average is based on the historic movement of the price.
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Leading indicators: - Leading indicators use the historic movement of the price to project likely price behaviour in the future. Examples of these which you will see in charts used in the course are:
My most used leading indicator is a straight line. By joining the last major points of support or resistance a simple straight line can project future bounce points of the price (or alternatively breakout points). Momentum indicators provide leading signals through their divergences and trendline violations. Fibonacci levels provide future expected support and resistance levels and can be classified as leading indicators Pivot points are also regarded as leading indicators as they project support and resistance levels. These are not discussed much in the course as I do not use pivot points much.
A divergence between the price chart trendline and the momentum indicator lower trendline gives an early (leading signal) warning of a trend reversal. Then the momentum gives a trendline violation signal 1 candle before it occurs on the price chart. Another early warning or leading signal.
Trendlines are very efficient at predicting breakout points through non horizontal support and resistance. This makes them the best leading indicators to catch long candles and big moves in the market
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TRADING TOOLS 5
INDICATORS, MARKETS and CURRENCIES
5.2
Market types
MEGA TRENDS, STRONG TRENDS, SOFT WAVY TRENDS and SIDEWAYS TRENDING MARKETS One of the most important skills a Forex trader can have is to tell the difference between trending and sideways trading markets. When one looks at historic charts trends appear to be so obvious and sideways markets appear so obvious BUT when you are trading in a live environment, the transition between the market types often happens so subtly that you don’t notice that it is happening until it is too late. Why you need to identify the different market types, is that there are technical analysis techniques and trading techniques that work in one market that will not work in other markets. We are going to look at ways to tell when the various markets will happen. These market types are best identified on the longer term charts such as the monthly, weekly and daily charts. I am going to ignore the shorter term charts although the same principles will apply. A 60 pip run could go relatively unnoticed on a daily chart but can be a strong trend on a 5 or 1 minute chart.
Let’s get an idea what these types of markets look like and how they should be traded:-
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THE MEGA (STRONG) TREND IDENTIFYING THE MEGA OR STRONG TREND The Mega or strong trends:This is where the trend is so strong that there are only minor retracements as the price continues trending in a specific direction. What causes these types of trends is continuous good news in the one currency and bad news in the other at the same time.
This happened in the GBPUSD cross where the British economy was giving very poor economic announcements whereas at the same time the US economy was seen to be stronger due to its ability to manage certain economic events.
From a technical analysis perspective the trend is identified by candles making lower lows and lower highs (or higher highs and higher lows) continuously. If the trend is a retracement trend it will continuously just slice through historic support and resistance without a much of a fight. If the trend is breaking new ground it will continuously make new highs (or new lows).
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ANTICIPATING TRENDS Consolidations
Before a strong or mega trend there is many times a consolidation into a narrow trading range. Any new information entering the market could shatter this balance and cause the start of a trend.
Big and Strong reversal price patterns.
The double top, double bottom, Head and Shoulders and reverse Head and shoulder have played major roles in the start of Mega and strong trends. This chart shows a few examples of these patterns.
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Economic Announcements A series of economic announcements confirming the weakness or strength of a currency compared with other currencies is enough to start a trend. This trend can become stronger if other currencies are bringing out economic information increasing the relative strength between the currencies and their underlying economies Important support or resistance violations The foregoing charts are examples of how the violation of a major horizontal support line signalled the start of a trend and a major, non horizontal, support trendline signalled the start of a major trend. Important support or resistance bounces Channel lines provide good bounce opportunities. The previous chart gives an example of a mega trend starting with a channel bounce Strong trading signals continuously failing When you see good, strong trading signals (in one direction) failing in succession it often means that there is going to be a breakout in the opposite direction. That is why it is so important to analyse your losing and winning transactions. HOW TO TRADE MEGA OR STRONG TRENDS Get in and hold on. That’s about it. No matter where you enter during a strong trend you are going to make money. So there are 4 approaches. 1
2 3
4
Get in at the start of a market opening with a good stop and hang on. Very basic but works in strong trending markets. I prefer the next 3 methods though:My favourite is to draw a trendline which will activate a transaction in the direction of the trend as the price continues in the direction of the trend. The other way is to wait for a small retracement on the short term charts and then to enter once the retracement gives a signal in the direction of the trend. I have however found that I miss more entries in a fast trend by trying to be too clever with my entry. The safest is to enter on a new high or low which is moving in the direction of the trend.
The trick with trend trading is to increase the number of lots you have active on a continuous basis. Never use momentum indicators in a strongly trending market. They are great for pointing you in the direction of the trend at the beginning of a trend (before you activate an entry) but after that you will not be able to use their signals. Indicators that I find most useful in trending markets are moving averages. I use only one! I trade the angle of the moving average.
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While the moving average is pointing in the direction of the trend I just continue trading in that direction. When the moving average starts becoming horizontal or changes direction it is time to reassess the trend strength.
THE SOFT WAVY TREND IDENTIFYING THE SOFTWAVY TREND A soft wavy is so subtle that you sometime don’t know the trend is happening. The clue sometimes is that momentum signals work well in the direction of the trend only. The momentum indicator spends most of its time above the mid line on the momentum chart. The price often trades in an upward or downward sloping channel in a soft wavy trend
ANTICIPATING THE SOFT WAVY TREND These markets are difficult to anticipate as they go through small trending phases and then long sideways and minor retracement phases. Using long term and short term charts can help to identify the current status of the market. HOW TO TRADE THE SOFT WAVY TREND In general, trendline violations work well to refine entries in this type of market. If I were trading the daily chart I would use trendline violations on the 4hr or even the 1 hour chart to refine my entries. Momentum indicators are very good at pointing you in the right direction in these markets. Channel trading works well too. It is accepted that the market trends only 15% to 20% of the time in these market so if you are a retracement trader the odds are in your favour. So what if the market starts
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trending unexpectedly 20% of the time. Make sure that you make money in the other 80% of the time.
THE SIDEWAY MARKET IDENTIFYING THE SIDEWAYS TRADING MARKET Sideways trading markets consist of many small strong trends and soft and wavy trends that go nowhere in particular. The chart below show how the EUR price stayed at the 1.4700 level for over 2 weeks. When the market trades sideways like in the chart below most momentum trading signals work quite well and can be seen by applying the basic Momentum Trendline violation signal and the Price trendline violation signal / trigger.
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ANTICIPATING THE SIDEWAYS MARKET It is difficult to specifically anticipate this kind of market. It normally happens at the end of a trend when the market consolidates. It also happens while the market is waiting for important news or information – US elections etc.
HOW TO TRADE THE SIDEWAYS TRADING MARKET In general the momentum indicators are great for pointing traders in the best direction for a trade. Momentum signals work well in a sideways market. Major Trendline violations often result in good trades when supported by Momentum signals and moving average direction. More information on Trending and sideways trading markets
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TRADING TOOLS 5
INDICATORS, MARKETS and CURRENCIES
5.3
The current relative strength of currencies
The model on the next page is a good tool to use to get a good feel of the relative strength of the currencies when compared to each other. This comparison can be done in various time spans right down to the 5 minute chart for scalpers. The idea is to trade the strongest currency against the weakest currency at the time. This is another way of putting and keeping you in the direction of the trend. The same tool can be used for correlating a currency against other markets such as OIL, Gold, Silver, S&P, DAX, CAC, Russel, NK etc. Currencies are quotes in the following format: Base currency / Quote currency. So in the EURUSD the EUR would be the base currency and the USD the quote currency. So if 2 EUR = 3 USD the EURUSD rate would be 3/2 = 1.5. It takes 3 USD to buy 2 EUR. So if the USD strengthened so that 2 USD buy 2 EUR the rate would be 2/2 = 1. Or the EUR weakened so that 2 EUR could only by 2 USD the rate would also be = 1 It is possible for the rate to stay the same if they both weakened or strengthened at the same rate!! So the trick is to find currencies where The Base currency is strengthening (compared to all currencies) and the quote currency is weakening (compared to all currencies) at the same time. Or the other way round: the Base currency is weakening (compared to all currencies) and the quote currency strengthening (compared to all currencies) at the same time You then have a strong trend as happened when the GBP weakened and the USD strengthen at the same time. The GBPUSD Dropped 6000 pips in about 6 months starting in August 2008! By continuously trading the strongest currency against the weakest currency you will always be trading with the trend and have the edge that all traders look for. Please study this model very carefully. It could be worth its weight in GOLD. There are also free models available on the internet. Please try the link below. I cannot guarantee that these links will always work as they are to external service providers. If the stop please just Google “Relative strength Currencies” and you will get a list of models and information. RELATIVE STRENGTH
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TRADING TOOLS 6
MOMENTUM SIGNALS
Momentum signals are the strongest trading signals that I use. In fact they are a trading system all on their own. I could make a good living just trading momentum signals and using straight line (Of Course) Momentum signals, however, have very big dangers and I remember losing one of my trading accounts to the incorrect use of momentum signals. Danger rule number 1 is: NEVER, NEVER use momentum signals in a trending market. The 2nd Danger is that they can give different readings for different time scales. For example: The 1 hour can give a buy signal and the 4 hour a sell signal. The trick is to align these signals in the various timescales. The chart below shows how the momentum signals are reasonably good in a slowly downward trend, sideways but when the market starts trending the signals disappear and actual gives the wrong signals. Chart 12
We discuss trending and trading markets elsewhere in the course so it is vitally important for you to be able to know when these markets are occurring and not use momentum signals in a trending market. One of the main characteristics of a trending market is that it makes new higher highs or new lower lows.
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Why I like momentum signals is that they actually give the underlying strength of the market as represented by the battle between the bulls and the bears. Often you would look at the price chart and think the bulls are in control but when you look at the momentum indicator it might show that they are in fact losing power. Momentum refers to the velocity and underlying strength of market moves. One of the strengths and weaknesses of momentum indicators is that they measure the momentum according to the particular time span you are looking at. You could therefore get completely different readings, depending which time span you are looking at. I like this because I regard the different readings as warnings that the market is not in sync. The biggest advantage of momentum indicators is that they are leading indicators. The signals I use provide me with projected transaction opportunities. You will see many examples of this in the chart used by this course. There are a number of trading signals which traders use when using momentum indicators. Some of them are: Overbought and oversold readings – This is where the indicator reaches very high or low readings (reading only achieved 5% of times). This generally says that the market has moved so far in one direction that it is due for a correction. It also signals the start of a strong trend so I don’t use this signal at all. Moving Average crossovers – Certain momentum indicators use moving averages that generate buy and sell signals when the moving average crosses over or under the momentum line. The stochastic indicators do this. I never use this signal but sometimes they are good signals. Crossing the middle line – Each momentum indicator has a middle line. Some are 0 and others 50. Crossing the line upwards tells me that the control is moving from the BEARS to the BULLS. Although I do watch this signal I would not trade it on its own. It is a confirmation of the shift of power. Momentum divergence signals – When the price makes higher highs or lower lows and the momentum indicator does not, it is a sign that the move is running out of steam. These are particularly strong signals and I do use these as a warning of a potential strong reversal. Please click on this link for a good description momentum divergences > Divergences
Please go to the Expert4x blog for a number of divergence examples. Enter “divergence” in the search facility. Eventually my 2 money making momentum signals: WAVE COUNTS: This is not a very common signal and I have not seen it being used that often. I find it my most important reversal indicator. In my research of the Forex market I have found that in general the upward and downward
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movement of the market occurs in waves. There are generally 2 large waves before a meaningful reversal. Momentum indicators show these waves very well. I will be very hesitant to enter into a reversal deal unless I have clearly identified 2 waves on the momentum indicator. I will think twice about exiting a deal I am in unless the price has gone through its 2 wave cycle. This also explains why in my earlier days of trading I would catch a nice movement in the market only to see it retrace. I would then close my deal at a small gain and then watch as it goes in the intended direction again. These days I need to see 2 waves completed before I expect a retracement. In a nice wavy market the 2 wave count system (combined with a trendline violation) can be traded continuously as the signals move from buy signals to sell signals.
The first wave should start in an overbought or oversold (+70 /-30) area and the second wave should have touched the oversold or bought (-30 /+70) area on the other side. This makes sure that there is strength behind these waves. I HAVE MADE MORE MONEY USING THIS CONCEPT (combined with a trendline violation) THAN ANY OTHER FOREX TRADING CONCEPT. I will strongly encourage you to master the 2 wave trading technique.
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MOMENTUM STRAIGHT LINE VIOLATION (TREND LINE VIOLATION) :- As we have seen the momentum indicator shows the momentum waves. When you can draw a trendline over the peaks or troughs of these waves it provides you with what I regard as the best leading indicator in Forex trading. When the momentum indicator violates this line it provides one of the strongest trading signals I know of. FILTER: The closer the trendline violation is to the middle line the stronger the signal. I seldom trade signals that are outside the middle 40% of the indicator chart (30% to 70% levels). Most of the trading examples given in this course show the application of this technique. Now as I mentioned previously you will find that you get different trading signals at the same time using momentum indicators on different time spans. You could have good buy and sell signals all at the same time!! I use the technique of looking at the monthly, weekly, daily and 4 hour charts to get a good feel of the dominant direction of the price and momentum. If there is an alignment in the same direction, I wait for a trading signal on the shortest timeframe which is in the direction of the higher time frame charts. See the example below. Although the 4 hour chart is showing a great buy signal – 2 waves, strong divergence and trendline violation – I would not trade the buy as it is against the general dominant downward trend. I would rather wait until I get a good sell signal on the 4 hour before entering into a transaction. The other charts are also reflecting a strongly trending market – the rule is never trade the momentum signals in a trending market.
In general, the trendline violation on the indicator is not the trigger (sometimes I do use it). To be perfectly sure, you should wait to see the trendline violation on the price chart. In the example above the price chart has not given a trendline
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violation. This is very common as the momentum indicator is a leading indicator which gives you prior warning. You will see many examples of momentum trades in this course.
Please go to the Expert4x blog for a number of momentum trade examples. Enter “momentum” in the search facility. MOMENTUM INDICATOR I use the RSI indicator set a 4 periods for all my charts. That is the only indicator I use, other than a straight line. It supplies me with the divergences and trendline violation signals that I need. Please go to RSI for more details on the indicator. The MACD set on 5 slow, 3 fast and 3 for the signal also does the job but I prefer the RSI. Please go to MACD for more information on this indicator.
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TRADING TOOLS 7
SUPPORT AND RESISTANCE
All competent and experienced Forex Traders I know use Support and Resistance concepts to trade, so this is a very important area. I have a particular favourite trading tool I use every day and that is non horizontal support and resistance often found using trendlines
Resistance refers to the upper barrier that gets created by the BEARS defending the price from going higher
Support refers to the lower barrier that gets created by the BULLS defending the price from going lower
Non horizontal Support refers to the lower barrier that gets created by the BULLS who are slowly winning the battle and pushing the price higher.
Non horizontal Resistance refers to the upper barrier that gets created by the BEARS are slowly winning the battle and pushing the price lower.
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What happens in reality is that the BEARS and BULLS determine borders that they are willing to fight and die for every day. Therefore the charts become a bull and bears battle ground map. What some traders find tricky is that these borders can be both horizontal and non horizontal, as we in fact experience in between countries in reality. As with countries that have drawn borderlines, these border lines become ingrained in the memory of the market participants. They remember the wars that were fought. They remember the casualties and victories. Even after many generations. So expect some emotion when the price reaches these areas. Expect a fight. Our job is to determine who has the biggest army and the biggest guns. They are the ones that will win the battle and when they do, there will be a definite victory as evidenced by a big candle. When the bulls win and move past the border, the bears often muster up the ability to fight back and chase them back to the breakout border. The original historic border will again be the place of a massive fight. That is why there is an old trading expression that “support becomes resistance” or “resistance becomes support”. Now, these battlefields and borders are well marked on the trading maps to those who know how to find them and identify them. Especially those who think like the BULLS and the BEARS and remember to honour past battles. To those who do not honour history, it will look like just another desert on the map. Those who know the history of the past battles will know that the land is sacred and worth fighting for. Your job is to become an expert at history so that you can predict the place where the battle will take place. Once you have done that you need to read the signs that tell you which group will win the battle? When the battle is won there will be a long candle in most cases (not always).
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Horizontal Support and Resistance
Horizontal Support and resistance refers to horizontal areas projected into the future from areas that have acted as support or resistance in the past. Evidence of these areas in the past is normally turning points or long candles where it has taken considerable force to break through the support and / or resistance. What we are trying to determine is where the BULLS and the BEARS have drawn their horizontal battle lines in the past as that is likely to determine where the border dispute will happen again. Most probably the easiest support and resistance concepts to illustrate are horizontal support and resistance levels where a straight line can be used to identify them. Generally the market is assumed to have a memory at price levels where there were important turning points. I like using a visual approach to find these levels. I also like drawing my lines through candles to show how a horizontal support and resistance line or area acted as both resistance and support in the past where appropriate. Most charting packages have a horizontal line facility. I would experiment until I find a best fit horizontal support and resistance area. My rule is that if the support or resistance is not that obvious it might not be that strong anyway. Have a look at horizontal support and resistance lines that may appear on charts in the course to get the feel of how they are drawn. The 1 hour chart below shows how certain horizontal price levels continuously act as support and / or resistance areas. The blue arrows on the chart are references that establish the possible support and resistance areas. The pink arrows are the predictable support or resistance areas that can be projected as result of these reference areas. The red crosses are areas where the price has broken through support or resistance rather than bounced. These areas are normally long candles due to the force required to break through. Because of this ability to predict the future, horizontal support and resistance lines can be regarded as true leading indicators. The important skill to develop therefore is the ability to spot horizontal support and resistance price levels and the 2 nd (most importantly) is to be able to tell whether the price will bounce or break through these support and resistance areas.
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TRADING EXERCISE Choose the Hourly chart of your favourite currency. Condense the chart to the level of the chart above. Using the horizontal line tool move the horizontal lines on the chart until you can identify areas where the price has consistently bounced due to support and / or resistance. Once you have found one, look for more. Once you have identified a number move the chart backwards into history. Do you find that the lines you have identified act as support and resistance weeks or months back. The good ones will. This again is a sign of how good the support and resistance lines are as leading indicators. Now repeat the same exercise for the same currency using a 5 minute, 4 hour, daily and weekly chart Don’t be too strict by trying to get the lines “to the pip” these areas are sometimes 10 to 20 pips thick. Below is an example how using different time span charts can help identify support and resistance areas. The area around 108.36 appears to be a strong support and resistance area identified independently on all 4 the charts used. The area around 108.83 also is on both the 4 hour and 5 minute charts. This is not an exact science but seeing the same support and resistance on many time span charts adds to the credibility of that area of support and resistance.
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Non horizontal support and resistance
Non horizontal support and resistance work on the same principles as the horizontal ones. I always think of this type of support and resistance as taking your chart and turning it at an angle and using the same approach to finding these levels. These are mainly defined as trendlines as they are not horizontal. I prefer to call them non horizontal support and resistance
Non horizontal channels are often easy to spot as are dominant trading angles. This chart show how non horizontal lines can act as: Support Resistance And support and resistance
An example of non horizontal support and resistance lines which go downwards. This time they have been drawn differently to differentiate between the more important ones and the less important ones
You have to turn your head sideways to get a better perspective of these lines.
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7.3
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Fibonacci levels
There have been many, many books written on the Fibonacci retracement and extension percentages. I do not use Fibonacci levels much in my trading but they are used by many other competent traders so one has to respect the principles and the support and resistance that occurs as result of the Fibonacci levels. Why I don’t follow Fibonacci levels is that I have found the levels of support and resistance created by Fibonacci ratios are way too inconsistent for my type of trading. I only pay particular attention when I hear (by reading) about numerous trading organisations talking about a particular level. By talking about the level openly they are creating a self-fulfilling prophecy which turns that level into a support and resistance level.
There are particular Fibonacci levels that I watch out for and take seriously. This is when 2 separately calculated Fibonacci levels occur at the same level. This makes the level doubly as strong as a support or resistance level. I am going to give you what I call the Readers Digest (highly summarised) version of Fibonacci trading. The Fibonacci number sequence is created by adding the previous 2 numbers in a series to get the third number. So you start with 1. 1 + 0 = 1 (the second number in the series). 1 + 1 = 2 which gives you the third number. 1 + 2 = 3, 2 + 3 = 5, 3 + 5 = 8, 5+ 8 = 13 etc. So a series of number are obtained 0, 1 ,1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc. Now the next step is to divide any number by the next e.g. 34 by 55 = 61.82% to give a ratio. Alternatively the second last number by the next e.g. 21 by 55 = 38.18%. These ratios are constant no matter how far up or down you go in the number series. These ratios are termed the Fibonacci retracement ratios. By dividing the next number by the previous number e.g. 55 by 34 = 161.76% you get the Fibonacci extension ratios which are also constant no matter how far up or down you go in the number series. So when the market is trending (or if you can identify a clear reference leg in a market move) and starts retracing the 38.18% and 61.82% levels will become
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support or resistance levels from were the price is likely to move to 161.76% of the reference leg as in this example.
On the left is an example of Fibonacci working on a monthly chart of the GBP. Fibonacci can be traded on short and long term charts and creates a continuous trading model as new reference legs are created on an ongoing basis. To repeat I don’t particularly embrace this methodology but I do respect it as a method used by some very competent traders. I have personally found a good reconciliation between channel trading and Fibonacci trading. I find channel trading a much more consistent market model.
Please use the references provided to expand your knowledge of Fibonacci trading. I certainly have not given it the justice it deserves, but it is not a big factor in catching big candles which is one of our major objectives.
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Channels
Channels are my favourite trading method due to their reliability. Due to my confidence in straight lines, I use straight line channels. Some traders use channels (envelops) by moving averages but I have not found them to be as reliable. This is a simple but very effective trading technique and I will describe it the way I use it. As with Fibonacci you look for a trend. As they always do, the trends will come to an end and a clear turning point will develop. I give this turning point number 1. There will be a retracement with another turning point. This will normally be +/- 33% to 62% of the trend ala Mr Fibonacci. I give this turning point a number 2. Creating leg 2 (points 1- 2). The price will then retrace and then form another turning point which I give a number 3. Leg 3 is normally the same length or height of leg 2 (1 – 2). Once you have points 1, 2 and 3 indentified you can project points 4, 5, 6 and onwards by drawing an extended trend line through 1 and 3 and then drawing a parallel line at point 2. Points 1, 2 and 3 therefore create your channel. You can also go backward to determine a point 0 when the price was still trending. I use point 0 to give me a feel of what kind of channel I can expect. If point 0 is in the middle of the original trend there is a good chance of a sideways (horizontal) channel. Like trends, channels eventually stop and you then start again. They stop by the price breaking through the channel lines and going at least twice the distance of the most recent leg. That is why I like trading this system using a stop equal to the size of the most recent leg.
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Like most techniques there are false signals and legs that don’t reach their targets. I have found using 2 initial lots for legs 3 and 4 to be a good policy and I would invariably cash my 1st lot after it has reached a third of the objective. Below is a comprehensive example showing both shorter term and longer term channels and how they can be traded. The projected turning points are in RED.
Channels appear a lot more than most traders like to admit to. I have made it one of my trading priorities to find channels on charts. Most trading charts have channel drawing facilities. Channels are also fantastic leading indicators. A signal that the channel may breakout is a failed channel swing as shown below
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Dominant angles
Now that we have covered non horizontal support and resistance levels and channels I am going to take it even further by saying certain angles on the downward and upward lines tend to repeat themselves over and over again (For years and years). This adds considerable weight to the use of a simple trendline. What if that trendline is also a channel line? What if that line is also a dominant angle line? All these factors add to the importance of a simple trendline. The existence of these dominant angle lines is a major reason why I also find the use on non horizontal trendlines much more reliable and consistent compared with other trading methods. You will also find that long candles tend to bounce off or break through these dominant angle lines. They make great bounce trade tools. Chart 7.5 : The GBP likes trading in dominant angles
Finding these dominant angles is a case of trial and error starting with the daily chart of a currency. Start by drawing obvious support and resistance lines. As many as you can. After a while you will notice that many support and resistance lines are parallel to each other. This is the start of finding dominant angles. To get more information of Dominant Angles please click the following links:DOMINANT ANGLES
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7.6
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Moving Averages
I don’t use moving average support and resistance but I have included some examples of them acting as support and resistance The 100 and 200 exponential daily moving averages are said to create strong support and resistance areas averages.
More examples of shorter term Moving Averages acting as Support & Resistance
Support and resistance There are many support and resistance concepts not covered as I don’t use them. Pivot point support and resistance areas are also widely used. To me, the price movement represents reality and I tend to trade what I can physically see on the charts. I have found trendline violations and channel bounces very reliable trading approaches. I have used Fibonacci and Pivot points and have found them to be far less consistent as leading indicators. In term of stacking the odds in my favour I am perfectly happy that what I am using is giving me the edge I need over the market.
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TRADING TOOLS 8
PRICE FORMATIONS
Certain support and resistance price movements have repeated themselves so often that their identification and behaviour has become standardised. There are so many price formations but I have found that there are only 3 that I use as confirmation signals over and over again. Click here for a view of the major price patterns:- Price Patterns These are the Double top (or double bottom) and Head and shoulders (or reversed head and shoulders) formations at the end of a trend and the triangle consolidation formation. The breakout from these price formations through their necklines normally results in a Long Candle. Using the straight line non horizontal support and resistance concepts also enables me to get into the formation early before the neckline violation. You will see many examples of this in the trading charts which are presented in this course.
The double top (or double bottom) at the end of a trend. The price makes one more go at breaking through upper resistance and then the trend is reversed
An alternative way to trade the double top above
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An example of a head and shoulders reversal formation
Sometimes they are not that easy to see
When you battle to see a price pattern set the chart to the line chart and you could see the price pattern a little easier.
An example of a reversed head and shoulders.
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Another price formation that I like trading is the Triangle. The triangle represents the Bulls and the Bears narrowing their battle ground continuously until there is a breakout and one of them wins. This formation is also a good one to straddle trade when you don’t know the direction of the breakout. We will look at this technique later on in the course.
Please go to the Expert4x blog for a number of price pattern examples and much more discussion. Enter “Head and Shoulders”, “Double top”, “Triangle” in the search facility.
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TRADING TOOLS 9
CANDLE FORMATIONS
My charts are setup as candle charts. Candles give so much information at a glance. How a candle is structured has already been discussed in the introduction. For a revision please click here: Candle. Trends are easy to see due to the BULL and BEAR coloured candles. They give a good representation of the battle between the bulls and the bears during every period of the chart. Historic breakout points and bounce points are easy to see and are normally represented by Long candles. As with Price formation certain price movements as reflected by candle profiles, have repeated themselves so often that their identification and behaviour has become standardised. The most important skill I have developed is the ability to identify reversal formations. The most important reversal candle formations to me are spikes (thin long candle wick) and railway tracks (2 candles going in opposite directions at the end on a trend) Bearish spikes show that the bulls where nicely in charge and suddenly powerful bear orders not only stopped their progress but reversed the trend completely. One of the strongest market intervention moves you can find. The opposite applies to bullish spikes and railway tracks.
Bearish Spike
Bearish spike
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Bearish Railway tracks
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Bullish spike
Bullish Spike
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Bullish Railway tracks
That’s great to know but how do we make money from spikes and railway tracks. There are 2 ways. 1
You can anticipate the area at which the spike will happen, by finding very strong support or resistance in its way and placing a pending order that will anticipate the bounce. These are one of the most exciting trades as they tend to go very positive within seconds or minutes of being activated. Traders call the this catching the falling knife because it can be dangerous
Bounce trade
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The other way is to use the spike or railway track signal as a confirmation signal when the trendline is violated.
As you will see there are many books written on candle trading but I basically use the above candle formations in most of my trades. For more candle formations follow this link:- Candle Formations Please go to the Expert4x blog for a number of price pattern examples and much more discussion. Enter “candle” in the search facility.
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TRADING TOOLS 10
TARGETS AND EXITS
10.1
Targets
One of the biggest challenges in Forex trading is once you have followed your setup signals and your Trigger has been activated, when to exit your trade. This remains an uncertainty to even the most experienced traders. My best rule of thumb has been that the width or height of the price formation before the trigger was activated should equal the distance that the price will travel in the opposite direction. It is mirror image approach. This means that should the price break through a trendline I would expect the same height or width of movement on the breakout side as there was on the side the breakout occurred from. Channels provide great target objective for this reason for both bounce and breakout trades. The chart below shows how the price formed a double top formation within a channel before breaking out of the channel. The height of the channel therefore becomes the target for this breakout. Another interesting aspect shown on this chart is the fact that a perfectly good buy signal failed soon after the channel breakout. A strong trading signal in a particular direction that fails is a sign that the trend is developing in the other direction. Another observation here is that the previous support became resistance. Although there were a number of attempts to break through this resistance the price was not successful.
The principle of using the size of the price movement above a breakout trendline as a guide to the expected target, is a good one and supports 90% of the calculated expectation when using price patterns and especially my favourite, channels.
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Price patterns targets are not always that obvious. They are also not always horizontal. The next chart is another example of finding the target. This time using non horizontal principles. The Head and shoulders is an important reversal formation at the end of a trend I have however found that likely targets can be established quite accurately using support and resistance as determined by non horizontal and horizon support and resistance lines. So the way we determine the entry can also be used to determine the exit. The same rule applied to bounces. Assume that the price will travel back the same distance as the height of the formation before the bounce. See channel trading for more details. When I can determine a trend I generally half my targets for against the trend trades and increase my targets for with the trend trades. Other Target or exit methods o
If you are is a Sell think like a buyer. Where would you put a buy order if you were a buyer? Find that price level and put your target there. And the other way round for a Buy transaction o Horizontal and non horizontal support and resistance levels make good exit points. o If you have caught a good trending breakout the 3 and 5 moving average crossover will signal a good exit on a lower timescale than you are currently trading. If you have (for instance) entered on the 1 hour chart use the 30 minute chart to exit. o Some traders do not use targets but merely follow the price with a following stop o When you get a strong trading signal or even a trigger type event signalling a trade in the opposite direction. This often happens when you are using momentum trading signals.
The expert4x blog contains a number of live trade examples of exit methods. Visit the site using the link:- EXITS and type the word “exit” , “target” or “targets” in the website search facility. Link to a trading example of establishing a target
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TRADING TOOLS 10
TARGETS AND EXITS
10.2
Safety Stops
Safety stops are part of the cost of Forex Trading and protect you from losing portions of your trading capital. There are a few personal rules I have about stops:
Never trade without one Don’t put your stop in the traffic where it can be hit Never increase your stop Use a following stop to lock in gains
Never Trade without a stop The Forex market has a tendency either to come up with some unexpected price moves or to trend and trend and trend. When these happen, stops are a blessing. I have personally experienced big losses trying to fight a strong trend and it is not worth it. There are a few techniques that use a no stop approach such as the hedged Grid system but that approach is again very dangerous should the market trend very strongly. Again I can not emphasise the importance of being able to psychologically deal with losses as a Forex Trader. If you don’t realise that being a success at Forex Trading means you have to be a controlled loser you will not enjoy forex trading and you will fight every loss until you develop permanent psychological scars. Please do the coin spinning exercise below now to convince yourself that it is better to take a series of losses than to take one big one. Your total focus should be about getting the best balance between winners and losers in relation to the amount you make and lose from your trading activity. The rest will take care of itself. EXERCISE 1 Imagine that you have $100 to trade with. You can therefore risk $1 per trade. Now find the biggest coin used by your local currency. You need to spin this coin 100 times. Pay yourself $1.50 for every head you get and deduct $1.00c for every Tail you get. Start spinning and calculating your account balance. The first 10 to 20 spins you will notice that you are quite tense about the outcome of every spin and very interested in the outcome (emotional). After a while you realise that the odds are stacked so favourable in your favour that loses do no hurt at all. They become an opportunity for a fresh spin. PLEASE DO THIS EXERCISE (It is more important than you will ever realise) –I still force myself to do the 100 spin exercise after I feel that the Holy Gail way of thinking is trying to effect me or I start feeling pain when my stop is hit. I regard it as so important that I have never stopped doing it – and so should you. You should make +/- $25 profit (25% return on your money). (50% x -$100= -$50) +( 50% x +$1.50 = $ 75 ) = $25
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Don’t put your stops in the Traffic The market generally has a lot of noise when you are trading. By noise I mean that the price will vibrate by a certain number of pips most of the times. This vibration is best illustrated by the natural average range of trading candles. The price trades like a fat snake which changes its thickness and direction regularly. Below is a chart of the 30 min GBPUSD Chart showing the thickness of the snake (the range of the 30 minute candles). This is basically the healthy little battles that the BULLS and BEARS fight on an ongoing basis. Scalpers play a good role when they enter deals for small gains as they help to keep the market active minute by minute.
The table below shows the natural noise or vibration experienced in 2008 (up to the end of August) by the average candle in a particular timescale. The average thickness of the snake. This an average, so as a rule of thumb:- multiply the amounts by 2 if you are trading near market openings and divide by 2 when you are trading in quite periods (does not apply to Daily candles and upwards) Average pip movement (range) per candle.
Currency
1 min
5 min
15 min
30m
1hour
4 hour
Daily
Weekly
Monthly
EURUSD GBPUSD USDJPY USDCHF GBPJPY EURJPY
3 3 3 3 6 3
6 8 6 6 10 8
13 18 13 12 22 17
18 24 17 17 33 23
25 34 24 22 52 33
39 53 38 37 76 51
104 134 103 105 191 125
248 316 270 301 521 316
530 716 696 801 1193 715
Now why is this relevant when planning your stops? I have an expression that says that you have to keep your stops on the pavements and out of the traffic. They are
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more likely to be hit it they are in the traffic. The averages above give you a guideline as to how wide the road is. So if the average hourly candle is 30 pips and you expect your deal to take say 3 hours it is very cheeky to use a 20 pip stop because that would put it in the road and it could be hit by the natural vibration of the market. A stop of 35 may be more appropriate as that could place your stop on the pavement. If you are very skilful with support and resistance it is possible to put your stops in the traffic but then it must be part of your conscious decision and trading strategy. I will never forget my first live forex trade. I used a 12 pip stop for a non Long Candle type of trade. I was out of the deal faster than I entered it. I had put my stop slap bang in the middle of the oncoming traffic. Never increase your stops This is another important psychological part of trading. I like to do my market analysis with lots of time in hand and with a relaxed and comfortable feeling. Maybe with a cup of tea and some soft music in the background? This environment stimulates creativity, intuition and clear thinking. I can identify good entry points, targets and areas for my stops this way. I normally find 4 to 5 good trades and then select the best 2 from these. All this happens while I am in a relaxed frame of mind. 90% of my trades are set and forget. I then calmly enter my deals. Because they are set and forget they have a stop, entry, target and sometimes a following stop in place. So there is no need for me to interfere with the transaction. The minute a transaction activates I assume that I am no longer in a sane frame of mind. I assume that I will become an emotional Forex Trading lunatic that wants to watch the trading screen for every tick of the price. Someone who’s whole future depends on the success of the next trade. Now this is not far from the reality of my early day of Forex Trading and maybe you can relate to this. This mental state (compared to the one I was in when I made my decisions) is not a good one for making trading decisions. Therefore after I have entered my deals I find other things to do other than Forex trading. I might periodically review the progress of my deals in order to apply a manual following stop to lock in gains made. So never increase your stops. You may as well not trade with stops in the first place if you are going to consistently revise your trading decisions. Now, that said, there are times when it is good to interfere and these should be part of your strategy. When you are in an active deal and an important announcement is going to take place it is good to reduce your stops (Never increase them). When you are in an active deal and the market is about to close for the weekend it is good to review your stops and either tighten them (Make them smaller) or exit the transaction. Weekend can cause trading Gaps. In this respect you should always find out how your broker deals with weekend and announcement gaps. The price can jump over your stop during a weekend and some brokers will treat the opening price on Monday as your stop rather than the actual stop value. The price could also jump over your stop in high volatility economic announcements too.
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Use a following stop to lock in gains Because I swing trade I sometimes have transactions which have targets of up to 150 pips. Now it has been known for the price to go within 2 or 3 pips of the target and then reverse all the way to the stop. A bird in the hand is worth 2 in the bush. I very rarely trade without a following stop of +/- 30% of the target. I use a pip by pip following stop that follows any positive moves in the direction of the target and does not react to negative moves on a pip by pip basis. This means that profits get locked in and losses reduced as the price goes positive and moves in my favour. There are so many types of following stops used by the brokers that you will have to check your own brokers following stop strategy. You can normally do this by looking at the user manual which is available for most dealing stations. The areas that you should be most concerned about are:Where the following stop loss facility resides – on your computer or on the brokers system. If it resides on your system it will only work if you keep your computer on and linked to the internet. Whether the following stop uses gaps or operates on a pip by pip basis. On a pip by pip basis if the stop loss is 30 pips and your transaction goes to +31 pips your stoploss will move to +1. When gaps are used and the stop loss is 30 if your transaction moves to 31 pips nothing will happen. Your stop loss will have moved to 0 when the +30 level was reached. It will only move next when the transaction goes +60 in which case it will move to +30. When the stop loss starts – does it only operate when the price goes positive by +1 or by the amount of the following stop or any other point? Your mental attitude regarding stops As mentioned before you need to develop a positive attitude or numbness towards stops to become a good Forex trader. If your average win ratio is 60% it means that in bad times your win ratio can be as low as 40% and in good times it can move to +80%. Either way you need to accept the fact that you are a loser. Some good traders develop a numbness towards losses. Others treat them as learning experiences and part of the cost of trading. It is good to look at a chart to find reasons for the loss or for your stop to be hit. Did you ignore an announcement, was it an unexpected reaction to a market opening, unexpected news entering the market, you not interpreting the trading signals correctly etc. The most important of them all is – Have you lost your objectivity? In general the bigger your stops the higher your success rate, so it is often a case of getting this balance right. Also please bear in mind there is a recommended minimum stop due to the natural vibration of the market.
Please go to the Expert4x blog for a number of stop placement examples. Enter “stops” in the search facility.
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SPECIFIC TECHNIQUES 11
STRADDLE TRADES
11.1
The Market consolidation straddle
When you are not sure of which way a market consolidation will breakout it good idea to straddle the price by putting a buy order above the current price, sell order below the current price. You need to position these orders so that can take advantage of the breakout no matter which way the breakout occurs. would do this by drawing upper resistance lines which could be horizontal or horizontal. You would use the same approach for the lower support lines.
is a and you You non
I have found the use of multiple moving averages a great way to see or confirm a market consolidation. When the market consolidates it is saying I am not sure which way the price should move and therefore I will just trade sideways for a while and wait for new information to enter the market, which should then cause it to move with a lot of volatility. Consolidation breakouts also occur out of narrow channels and triangles
Below are links to examples of consolidation breakout techniques and how they are traded Moving average consolidation trade EURJPY +66 pips Straddle Trade example using a triangle breakout
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Announcement straddles
Major announcements can cause the biggest big candles in the market. Many times the breakout direction is not clear and that’s when a straddle strategy is a good strategy to follow.
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More examples: Volatile economic announcement trades 11.3
Weekend GAP straddles
The week end straddle is a specialised version of a straddle making use of the fact that Forex market trades 7 days a week 24 hours a day. Brokers however like closing their trading facilities over week ends. News worthy events such a G7 meetings and political speeches can cause the Forex market to move and gap on the Broker dealing station. Some brokers allow this type of trade. Below are the type if gaps that can develop over a volatile weekend. Note the GBPJPY gap of 138 pips compared to the gap of the GBP 57 pips and the JPY of 41 pips. One would think that the GBP + JPY = GBPJPY???
Follow this link for an example of such a trade and the methodology to use Weekend Straddle AUD +15 pips
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SPECIFIC TECHNIQUES 12
BREAKOUT TRADING
Breakout trading refers to the price violating or breaking through a perceived support and resistance level. This breakout requires considerable force in most cases and therefore a long candle forms after the breakout. There are many examples of trendline violation trades in the charts used in the course. Some breakouts are mainly supported by momentum confirmations and other by price pattern conformations.
Please go to the Expert4x blog for a number of trendline violation trade examples. Enter words like “trendlines”, “price formations”, “Breakout” and “violations” in the search facility. Breakout checklist
Wave count on momentum indicators
Momentum indicators are leading indicators and measure the true underlying force behind a market move. Signals that I look for 1 st are potential or actual momentum trendline violations which have 2 well formed waves. This gives me confidence the price is reversing and that I can enter a transaction as soon as there is an actual trendline violation on the price charts.
Candle formations
Candle reversal formation near a potential trendline violation are great confirmation signals. The main ones I watch out for are spikes or railway tracks.
Momentum signals – divergences
Momentum divergences are warning and confirmation signals. They are not strong enough to be taken as a confirmation on their own. When I see them I look for at least one more confirmation signal before placing a trendline violation trade.
Trendline strength
The stronger a trendline is the bigger the breakout will be when it is violative. Factors that determine a trendlines strength is its length (in time), the number of times it has acted as support and resistance, its angle( The more horizontal the stronger the trendline), whether it is also a channel line or a dominant angle line and the size of the price movement above or below the line. This applies to all trendlines even the horizontal support and resistance lines.
Time of day and time of day
The best trendline violations happen when the major European and US market are open because the trades need volatility and volumes to breakout.
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Nature of the current market
If the market is trending only look for trendline violations that take the price in the direction of the trend. If the market is trading sideways or slowly trending, trendline violation trades are best confirmed by momentum type confirmation signals. Remember the best trendline violations need good volume and volatility. Make sure the market is reasonably ready for a high volatility breakout
Channel crossover (swing) failures
Channel trading is very reliable. However when there is a failure for the price to reach the other side of the channel it is a sign of a change in direction of the market. A channel breakout trade is normally quite reliable.
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SPECIFIC TECHNIQUES 13
BOUNCE TRADES
I regard bounce trades as trades where you trade when the price changes direction completely. For instance the price maybe trending downwards and you would enter a buy transaction with the view that the price will suddenly start trading upwards. These trades sound like against the trend trades but these bounce trade techniques are often used to enter trades with the trend. 13.1
Using Support and resistance
As we have seen, there are many ways of establishing support and resistance areas. I personally, have found a combination of non horizontal and horizontal support and resistance as most effective. When a number of methods result in the same support or resistance, this is called a confluence (coming together) area which gives more weight to the support and resistance areas. When the price approaches this area it is more likely to bounce. The chart below shows an alert service trade which is a good example of this. One would merely place a pending order within 10 pips of the anticipated bounce. The bounce happens too fast for a market order and will go positive almost immediately.
A bounce determined by a confluence of support and resistance lines.
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Channels
In many cases the price likes channelling up and down in a particular direction. The price of the GBP in particular is known to move in channels and is a good currency to trade this way.
In this example you can also see that channel trading provides better entry levels than the 2 wave momentum trading method. These optimised entry levels allow traders to catch up to 95% of a price move.
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SPECIFIC TECHNIQUES 13.3
Bounce checklist
Are the multi time span views showing any possible reversal signals or bounce signals? When looking for bounce trade opportunities, look at as many time span views as you can. Many times a major support and resistance area that one can only be seen on a long term chart goes unnoticed. Confirming the same support and resistance using many time spans also adds to the strength of a support and resistance area.
Are there strong Horizontal support and resistance levels present? In the absence of any other support and resistance evidence strong horizontal support and resistance is the most tradeable bounce technique. You would simply assume that the price will bounce at a strong support or resistance level certain level after the price has trended for a reason distance. These trades give the best risk return ratios as you can trade with a relatively small stop compared to your target. You should aim for a 1 to 3 stop to target ratio. 30 pip stop for a 90 pip target. This means you only need to get 1 out of 4 trades right and you will still break even.
Is there strong Non horizontal support and resistance present? The same comments apply as those for horizontal support and resistance except that the non horizontal levels are slightly less reliable and would involve a trending market. Only bounce trade in the direction of the trend would be recommended.
Are there Confluence levels for support and resistance? As we have seen previously a confluence of different types of support and resistance can add considerable value to the chance that the price will bounce
Price patterns – reversal formations on the quicker time spans? With slower bounce trades it is good to view the trade on the 5 minute or 15 minute chart as these charts are more likely to show reversal confirmations such as double tops and head and shoulder formations
Reversal Candlestick formations and volume? As we have seen in the section on volume trading, volumes can be a confirmation for bounce trades. Bounce trades tend to happen very fast and pending orders are recommended. Volumes are lagging indicators so are of less value than support and resistance when bounce trading.
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Is the market currently consolidating or trending? Bounce trading is not as reliable in a trending market than a sideways or slowly trending market due to support and resistance being too dynamic.
Has the currency trended at least 100 pips? Currencies travel in beats. The more volatile the currency, the bigger the beat. The beat refers to the move / retract / move / retract tendency of the currency. Fast currencies like the GBPJPY have a +/- 240 pip beat, The EUR +/- 130 pip beat and the GBP +/- 170 pip. There is no formal calculation but experience with grid trading, channel trading and bounce trading add to the evidence of these beats. Therefore when bounce (retracement) trading I feel more comfortable if the currency has moved more or less the length of a beat before I would consider a bounce trade.
Bounce Trading There is no doubt in my mind that the best traders I know are retracement (bounce traders) traders. They have developed the skill of catching the falling knife in the safest way possible. By using support and resistance and channel trading your can stack the odds in your favour in this area Please go to the Expert4x blog for a number of bounce trade examples. Enter “bounce” in the search facility
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COURSE OVERVIEW 14
MONEY MANAGEMENT
The purpose of money management is to allow you, firstly, to keep on trading no matter how bad your losing streak, and secondly, to allow you to earn a reasonable return on positive deals. Anybody can double their money by betting all their money on black at the roulette table. However this approach is not sustainable. Keep Your Money Management tidy
The approach I use is to risk the same percentage (1%) of my trading capital on every deal as discussed in the introduction of this course. The size of the deal is determined by the total dollar amount risked. If my stop loss for a particular deal is 100 pips and I am trading a mini account 5 lots (1 pip = $10) I am risking $500 in that deal. The margin requirement is not risk as you get that back.
Risking no more than 1% of your capital on a single deal, means that if your trading capital is $10 000 and your next deal has a risk of 100 pips or $100 that you would be able to trade 1 mini lot ($100/$10000 = 1%). I also never have more than 2 deals active at the same time which restricts my daily loss to 2% of my capital at the most. Now that may seem very conservative, but what that does, is it allows me to sleep very well every evening knowing that 1 deal can never cause so much harm that I will start panicking. Psychologically this approach also keeps me calm and unemotional when deciding of deals. Sure this reduces the amount of benefit I get from gains but again I have made peace with the fact that I would rather make small consistent gains, without putting my trading career at risk. I also like the Maximum lot approach as the downside risk is more or less the same as for the method above, but the maximum lot approach has very good upsides. I use this technique on a weekly basis, for my most reliable currencies and when the market is trading favourably. To do the free maximum lot course click this link: MAXIMUM LOT COURSE
Messy Money Management
Now, I know this is different when you start out. You are normally undercapitalised and sometimes your trading is not that consistent. By deviating from the 1% rule you are not merely exposing yourself to higher risk, but also to higher return. This makes trading more emotional and the odds start being stacked against the trader.
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Luckily these days many brokers offer micro lots where 1 pip can be as low as 10c. There should not be a reason why you can not use the 1% rule. If you risk 100 pips per trade ($10.00) and you use the 1% rule it means that you only need $ 1000 as trading capital. On the same basis you would risk 1 lot trading a $10,000 mini account, or 1 lot trading a $100,000 main account. There is an alternative and more aggressive money management approach given in Exercise 2 of the course. This approach allows you the potential of doubling your money without touching your starting capital. The biggest aspect of money management is discipline. Make your mind up about your money management approach and stick to it in both the good and bad times. Don’t make exceptions. If necessary use 2 accounts to prevent yourself from using more of your trading capital than your money management allows. Make money management mechanical so that you don’t have to revisit your decisions over and over again in the future. To repeat from the second section:- I was influenced by Dr Alexander Elders great trading classic “Trading for a living” in which he spent most of the introduction on Psychology and money management. I initially found this very irritating and boring but now I can understand why he did that. He had an interesting approach to trading and compared trading to alcoholism and suggested that every trader started the day saying: “Hallo, My name is Barry, I am a Forex trader and a loser. I have it in me to do serious and permanent financial damage to my trading account today.” I have been “Forex sober” for a number of years now. I hope you are always “Forex sober”. If you have lost big amounts of money due to poor money and risk management you will appreciate the above approach very much. As much as I do.
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COURSE OVERVIEW 15
TRADING PSYCOLOGY (How you feel about your Forex trading)
Your mental attitude towards Forex trading is what will make, or break, you as a forex Trader. If you are in it for the “quick buck”, the law of averages will catch you out in the long run. You should ideally have a calm and lucid mind to trade successfully. This state of mind, however, comes for lots of trading experience. Let’s look at some of the psychological challenges facing Forex traders: The fear of losing (avoiding pain/desperation/urgency/impatience): As you know this is my most important Forex trader, key success factor. My message earlier in the course is: You have to manage your loses from a psychological and emotional perspective to succeed at forex trading. You have to be able to see your stops being hit, time after time, for between 30% and 70% of trades and still have a positive outlook on the future. The big challenge is to learn to deal with the pain of losses and your stops being hit. My best solution has been the coin flipping exercise. Please do this exercise over and over again until you find the fear of losing disappearing, or the emotion of having your stop hit again diminishing, or your need to find the Holy Grail going away. Not only will the pain start going away but your success rate will improve considerably. You can’t control the market – forget it. The market will do what the market will do. Concentrate on what you can control by stacking the odds in your favour. Impatience, urgency, desperation, unrealistic expectations If you are desperate, impatient, in a hurry to make money, need to feed the kids from your gains, have a huge need to be right, have unrealistic expectations etc. DON’T TRADE WITH MONEY. SCARED OR DESPERATE MONEY, IS QUICKLY LOST. It is better not to trade at all !! Rather demo trade. The time it takes to be successful at Forex trading is a lot longer than people realise (than I realised). It is like a career or a very serious hobby you follow for years. I have had good years and bad years, I have had good months and bad months, I have had good weeks and bad weeks and I have had good days and bad days. Forex trading is about stacking the odds in your favour by using clever money management (Max lot approach), having a sound and disciplined mental attitude towards trading and a technique that on average wins more than it loses in the long run. It’s about slowly increasing the number of lots you can trade according to your money management approach. It does not happen over night. If you need cash quickly, rather find another source of income (a job?) that will supply you with excess capital to trade with. This will also clear your mind of some pressures. Once you are reasonably successful at demo trading start trading money using the money management principles of this course. It is important that you have a calm and lucid mind to trade. One without financial and other pressures. The Long Candle trading technique may not be a trading style that suits you, but sooner or later you will find a technique that you like.
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Making emotional decisions (desperation) In the discussion on stops I described my mental state and trading environment when making trading decisions. The broker facilities such a pending orders, targets, stops, following stops etc make it easy to mechanise trading. Try to mechanise your trading as much as possible once your trading decision is made – this takes emotion out of trading and gets rid of over 50% of trading psychological problems. Not following your trading and money management system (desperation) Demo trade until you have found a reasonable (not perfect) trading technique and money management technique. Stick to them. Make only minor changes. Not accepting the market for what it is (need to be right). The coin spinning exercise helps with this too as you accept that the 100% predicable and that is why you have to make peace with the are a Forex Loser that makes money. I repeat: - You can’t control forget it. The market will do what the market will do. Concentrate on control by stacking the odds in your favour.
market is not fact that you the market – what you can
Losing objectivity (need to be right) It is easy to lose objectivity about the market in many ways. Sometimes Forex traders do not see the wood for the trees. The market starts trending and they wish it would stop. The market consolidates and they wish it would trend. Trade the market signals as you see them and exactly how the market is giving them to you. The trading charts are the best representation of reality you will ever find. They show exactly what has happened and is currently happening. Have objectivity with no bias. I often start my daily analysis with a Bear perspective. I then analyse the charts only looking for sell signals only. I then change my approach to a BULL perspective. I then do an analysis of all the buy signals on the charts. Before I finalise my trades for the day I use my secret objectivity weapon. I have some software which will allow me to turn my trading charts upside down. Amazingly they look like normal charts only an upside down mirror image of the actual charts. It is the same view you would see on a USDEUR chart of the EURUSD cross. I then look to see if I have missed any support or resistance areas or trading signals using this approach. This different perspective gives me yet another way of looking at the market and makes sure that I have not missed the obvious. I often find signals that I have missed. In fact, before finding the software I used to use a mirror for this exercise (Please don’t tell too many people about this). Only once I have seen the market from all perspectives do I then make a decision about possible trades.
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Objectivity is so important to me that I do these additional (crazy) activities. I used to go through phases where I only saw sell deals or only buy deals for weeks on end. It is easy to be caught by some Forex Trading traps.
Over trading Over trading can happen in successful and unsuccessful runs and that is why it is such a threat. Again I have found a mechanical way of controlling this aspect of my trading. I have come to peace with the fact that I will only do a maximum of 2 trades a day, risking a maximum of 1% on each trade. In my early days I could not control this very well and I had to use 2 broker accounts. One non trading account and one trading account. I left 10% of my trading capital in my trading account and 90% in my non trading account. The 10% represented 1 weeks trading so if that ran out that was the end of my weeks trading – that certainly went a long way to slow my over trading down. I still have 2 accounts these days, but for different reasons. The best approach to over trading is managed very well by the Maximum lot approach, which also uses 2 accounts. It has the further benefit that lots are decreased in losing streaks making your capital last longer. Lots are increased during winning phases and transferred to the 2 nd account when the trading account is doubled. It thus caters for both successful and unsuccessful over trading. Click here to do the free maximum lot course>
Maximum lot course
Bias for action This may be a strange topic in the trading psychology section but good traders have become successful because of a bias for action. Simply put: - the more you trade and are in the market, the more you will learn. I am not encouraging you to over trade here. What I am encouraging you to do is put into practice what you think may have potential to help your trading career. Long distance runners have an obstacle which they call “hitting the wall”. This is a psychological barrier they reach, during a run, where they just can not carry on. The energy is at its lowest and the temptation to stop running is very, very big. Experienced runners know that if they push through “the wall” they come out with more energy and motivation on the other side of the wall. They dig deep and push on and succeed. I have found that most amateur Forex traders are a bunch of sissy’s. They just stop trading a technique or alert service after the 1 st or 2nd loss. Or better still, they (what I call) “couch trade” a technique in their head. They try to logically or intellectually work out if a technique will work while sitting on a couch. I have a personal rule: You must test a technique with 20 live trades and do some actual back trading in order to make a judgement about it.
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A good example of this is the Maximum Lot course. I have taught this money management approach to literally thousands of students but I can count on my one hand the number of students that have done 20 trades testing this technique in practice. Unfortunately it is their loss. I have literally saved, and made, a fortune using this risk reduction money management technique. When testing a new technique or trading method give it at least 20 trades to prove itself. Don’t stop at the 1st loss. Practice as much as you can. Good golfers spend hours on the practice range. They also warm up before a championship round. Why not open a few demo accounts and practice some trading techniques at the same time as trading live. If you are swing trader do a few 1 minute or 5 minute chart scalping trades in a demo account. If you are a scalper activate a few 150 pip swing trades in your demo account. Try a few money management techniques. Remember the 20 trade rule. You have not proven anything unless you have done 20 trades in your demo account.
Closing Remarks Please do not take trading psychology, trading discipline and money management lightly. I did this in my earlier years as I thought finding the 100% success trading technique was my objective. By following the “Holy Grail” path I inflicted a lot of mental and financial damage on myself. Hopefully you will avoid this. I hope that I have left you with the belief that the most important component in your ability (as a Forex trader) to accumulate money over time is having a personal belief in your own consistency in the major areas of money management, the psychology of trading and your trading technique.
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COURSE OVERVIEW 16
THE TRADING PROCESS
In order to describe how to incorporate all of the preceding trading tools and techniques into your daily trading process I am going to describe the weekly and daily processes that I follow. Initially if you were to follow them it would take you 4 times the normal amount of time. As I have been doing this for years I sail through the processes very quickly. For an overview of the forex trading process please choose the link below:The Forex Trading process
16.1
Money management and trading psychology
I have lost enough money in my earlier years by breaking my own Money management rules for the potential pain to be too big for me to ever break my 1% risk per trade, and not more than 2 deals active at the same time rules. So, money management is now easy for me. I stick to my rules through all market conditions. That resolves the money management aspect of my trading and is also a check against over trading. I have also adopted set and forget approaches to my trades which resolves most psychological trading challenges. I do the coin spinning exercise when I become insecure about losing streaks. This neutralises most psychological trading challenges Forex traders face. I can therefore concentrate all my efforts at stacking the odds in my favour during my trades. I don’t have any pressure and I know I will sleep well in the evenings. I will enjoy my Forex trading. This peace of mind is important.
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COURSE OVERVIEW 16.2
Weekend Forex trading activities
I like using the weekend to prepare for the next week’s trading as well as analyse the previous week’s trading. If I have had losses I have a good look at why my trading signals may have failed or why I may have misread the market. I try to make my losses learning experiences. Often unexplainable market behaviour caused by over reactions to an announcement or random price spike causes negative trades. The market will always do what the market will do – so I am not too hard on myself. I just have to consistently maintain my trading edge to come out at the top. I also like to anticipate the week’s announcements and read Forex market commentary out of interest. I find www.dailyfx.com a good source of market commentary and trading information. In this respect I must warn you – I read the market commentary, but I trade what I see on the charts. The charts show reality – talk and commentary is cheap. I read the commentary out of interest and to see if there is something new to be learnt. I have not changed my simple trading approach for years now. I also use the weekend to look at the longer term charts and clean my trading charts up by removing old information and adding the new support and resistance areas. I have a 2 dimensional view of my trading charts. I look at 10 chart setups daily so the week end is a good time the clean these charts up and prepare for the next weeks trading. I have setups containing the monthly, weekly, daily, 4 hour, multiple average and clean charts of the 6 currencies main currencies I trade. EUR, GBP, CHF, JPY, EURJPY and the GBPJPY (6 setups).
I only use 1 indicator:- The RSI set at 4 periods. The only other “indicator” I use is a straight line The multiple moving average chart uses Fibonacci numbers for its moving average settings The clean chart is to view the candles and chart formations more clearly.
See the example of the EURJPY below.
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The EURJPY appears to have strong sell momentum on the long term charts with a retracement buy occurring on the short term charts. This is where one would then have a closer look at the EUR and the JPY charts individually for more clues. On the next page is the view of all the currencies in the weekly time frame which may give us more information about the EURJPY. I am a swing trader using Monthly, Weekly, Daily and 4 hour charts to make my trading decisions. There is however no reason why the same concepts can not be applied to the 1 hour, 30 minute, 15 minute and 5 minute charts for faster deals
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Then I have one setup for the monthly, another for the weekly, another for the daily and another for the 4 hour of all 6 currencies (4 setup). See the example below.
This perspective is quite interesting as it shows the EUR in a sell trendline breakout and the JPY in a momentum and trendline sell signal. The odds in favour of a EURJPY sell have increased. The other activity I would do is to check the relative strength of the currencies when compared to each other. The method I use could be seen as crude but it has served me well over the years. See section 5.4 for the method I use to determine the relative strength of a currency. I looking for trading signals where I am trading the strongest currency against the weakest currency.
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COURSE OVERVIEW 16.3
My daily Forex trading activities
I can do the full days analysis and enter the deals in 5 to 15 minutes as my eye is trained to see the signals. Some days the deals just jump out and smack me in the face they are so obvious. Other days I can not see a deal for looking. The market is like that and don’t trade if you don’t feel comfortable about what you see. I make most of my decisions prior to the European market opening at +/6h00 GMT. If I am uncomfortable about the market I wait for 3 hours and then look at the market again. Alternatively I look for the best straddle opportunities. Big Ben type trades. Because I only use 1 indicator and straight lines to show support and resistance my charts are quite simple and easy to analyse. As described in my weekly activities I scan and update my 10 chart setups. I spend most of my time looking at the 4 hour charts and then referring to the daily, weekly and monthly charts for confirmation. I am primarily looking for trendline bounce (Channel) and trendline breakout opportunities. I used to formally write down and tick this process. These days I do this process mentally. My aim is to:1. Classify the currencies as strongly trending, trending in a slow wavy manner or trading sideways as discussed in section 12 of the course. 2. Establish the currency trend and the general market trend compared to the USD. 3. Establish the major horizontal support and resistance 4. Establish the major non horizontal support and resistance 5. Establish the phase the momentum indicators are in 6. Look for Channel trading opportunities 7. Look for price patterns 8. Look at candle formations Particular setups I scan for are:1. Momentum signals where 2 well formed waves are present and the momentum has just or is about to break through a trendline. 2. Potential Trendline breaks that are supported by good trading signals. 3. Potential Channel bounce opportunities. 4. Potential Horizontal support and resistance breakout or bounce trades. I can normally find 2 to 4 trades after this process and I then narrow the trades down to 2 high probability trades. My job is now to stack the odds in my favour so that the one or 2 deals I will enter will have the highest chance of success. I will also confirm any strong trading signals with longer term or even shorter term charts to make sure that these charts confirm the trade. So I tend to go with the deals that give me the lowest risk, return on risk ratio. It takes a minute or two to enter the deals and then my work is done until the same time on the next day.
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COURSE OVERVIEW 17
CLOSING SUMMARY.
I hope you have found this course educational and that you will apply the trading psychology, money management and trading techniques profitably in the future. Below is a summary of the major parts of the course content. The topics have been linked into the sections in the course so please click on the topic and you will be taken to the relevant section of the course. In order to work through the content and make it your own, you should follow 3 steps;
Read through all the course material on a particular concept. Find you own examples of the concept by looking at historic charts. Find your own examples in live (demo) trading.
Trading and analysis tools Relative strength of currencies Relative candle size of currencies Relative volatility (trading ranges) of currencies 24 hour Trading profiles of major currencies Dominant Angle analysis Market type analysis Money management 1% technique Double your money safely technique Maximum lot technique Trading strategies Consolidation Straddle trades Weekend straddle Announcement trades Market opening straddle Trendline breakout trades Trendline bounce trades Volume scalping trade Trending market trading Momentum trading Channel trading Price formation trades The 2 wave momentum technique. Psychological exercises Coin spinning exercise Daily loser mantra
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Trading processes Weekend Forex Activities Daily Forex Trading Activities Determining targets Using stops
PLEASE HELP US MAKE THIS COURSE EVEN BETTER I need you help and assistance. An Ebook of this size it is difficult to do justice to years of trading experience. I may not have covered some parts of the course in enough detail to make the concepts clear. Please contact me through the support facility (
[email protected] ) if there is any aspect of this course you need more detail on. Your questions will not only benefit yourself, but will be published on our support site and may result in changes to the next version of the course. Thank you, and good and consistent trading in the future Barry Thornton
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