How to Use Charts, Indicators, and Signals to Maximize Your Profits in Foreign Currency Trading By Ian Wyatt, Editor-in-Chief
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The Fascinating Forex Market - The Biggest, Hottest Financial Market on the Planet - and 7 Key Trading Strategies for Highest Profits
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C O N T E N T S
Introduction to Forex
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The 1-2-3 System
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Fibonacci Retracement Strategies
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Parabolic SAR
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Sidus Method
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5/13/62
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Automated Trading
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Elliott Wave Theory
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executed on the Internet by someone sitting at a computer with a high-speed connection.
Dear Fellow Investor:
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f you’re a reader of financial news or a viewer of the business news channels, you’re undoubtedly familiar with the term “Forex” – an acronym for Foreign Exchange, or FX for short.
Because the Forex market does not have a physical location or a central exchange, it is able to operate on a 24-hour basis – leapfrogging from one time zone to another across the major financial centers of the world. The Forex market actually follows the sun around the globe, and as one region is closing down for the day, another one is opening. The market is ready for business 24 hours a day, six days a week, from 5:00 p.m. ET Sunday to 4:00 p.m. ET Friday.
The Forex market is concerned with the buying and selling of the currencies of just about every country on earth. Needless to say, this market is HUGE! And, until just recently, only the Big Boys could play in the gargantuan Forex sandbox. Guys like huge corporations, hedge funds, large commodity trading advisors and other institutional investors.
This 24-hour access – combined with its HUGE trading volume – makes Forex The Most Liquid Market On Earth! Plus the Forex market has no gaps between prices – and your stop-loss orders are g u a r a n t e e d . The stock and futures markets cannot offer you this guarantee because the limited trading hours create frequent gap opens. Nearly all Forex brokers make sure their hours of operation coincide with the hours of operation of the global Forex market.
However, with the advent and popularity of online trading, many firms have opened up the “cash” currency market to individual traders, providing leveraged trading as well as full-feature execution platforms, charts and real-time news. The popularity of foreign exchange trading has truly exploded on the investing and trading scene. The reasons? Let’s take a quick look at these Fascinating Forex Facts to see why this type of trading has taken the world by storm…
No one can “corner the market.” The Forex market is so huge and has so many global players that no single individual or entity... not even a central bank... can control the market for any significant period of time.
Fascinating Forex Facts The Forex market has an average daily volume of almost two TRILLION dollars per day! Let’s put that into perspective. The New York Stock Exchange has an average daily volume of approximately $25 billion. That means the Forex market is 2 0 0 t i m e s l a rg e r than the Big Board! In fact, the daily volume of the Forex market is t r i p l e the size of all other investment markets combined!
There is no “insider trading.” Because of the vast size of the global Forex market and its non-centralized nature, there is n o c h a n c e w h a t s o e v e r for disruptions caused by insider trading. There is less chance for fraud in the Forex market than in any other investment market. There are no commissions. No exchange fees, no closing fees, no government fees, no brokerage fees. This all adds up to a very low retail transaction cost. If you select your broker properly, your round-trip transaction cost could be as low as 0.07%.
Despite its size, the Forex market does not have a physical location or a central exchange. It operates through an electronic network of people, banks and companies that specialize in trading one currency for another. So almost all Forex trades are
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As I stated before, the pros watch only six major currency pairs. Here they are:
A very desirable byproduct of extremely high liquidity is almost instantaneous transactions executed with blinding speed.
The U.S. dollar vs. the Japanese yen The U.S. dollar vs. the Swiss franc The U.S. dollar vs. the Canadian dollar The euro vs. the U.S. dollar The British pound vs. the U.S. dollar The Australian dollar vs. the U.S. dollar
You can leverage your trades by a factor of 50 to 1, 100 to 1 and even 200 to 1. You can trade with a very low margin with relative safety compared to the disastrous potential of margin trading found in other financial markets.
The order in which the currency pairs are quoted is not interchangeable – they are fixed. These six pairs are called the “majors.” This is because the majors make up almost 90% of the daily Forex trading activity.
Finally, and this is the true bottom line for the Forex market’s popularity - if you get really good at currency trading, your potential financial reward is so big it can make your head swim! How big? Well, George Soros recently guessed right on the British pound tanking and made over one billion dollars in a single day!
When you are trading, you should think of the base currency as the main unit of your buy or sell. For example, if you were to buy the EUR/USD, you would simultaneously be buying the euro (the base currency in this pair) and selling the U.S. dollar (the second currency). So if you buy that pair, you are betting that the euro will increase in value vs. the U.S. dollar.
Taking all these aspects of Forex trading into consideration, is there now any doubt as to why this has become the biggest, hottest, most popular trading game in town? Yes, Forex trading is perhaps the world’s cleanest, simplest way to actually create wealth – virtually from scratch – with the right trading strategies. In contrast with the stock market, there are not over 40,000 choices to pick from – where you have to outguess or outwit thousands of other investors and traders to choose the select few that are about to go up in value. And you don’t have to master a boatload of complicated options strategies where you have to learn to figure out exactly the right one to use in a particular situation.
Turning that scenario around, you could also sell the EUR/USD, which would mean just the opposite scenario of the above – you would be thinking that the U.S. dollar will increase in value vs. the euro. OK, that’s the concept of trading currency pairs. Before we move on, there is one more concept I need to define. In Forex trading, you will hear the term “pip” quite often. A pip – or price interest point (also known in some circles as “Point in Percentage”) – is like a “tick” in the stock or futures market. It is the smallest increment of point movement. In the Forex market, it’s usually equivalent to 0.0001. So the fourth decimal place will represent the pip. This is true for most of the majors, except for the USD/JPY (U.S. dollar vs. Japanese yen) where only two decimal places are calculated. In that case, the second decimal place is the pip.
Nope. In fact, most of the pros use just a handful of the available Forex currency trading pair setups. Six, to be exact. You see, most pros use only the trade setups that play the U.S. dollar against a few of the other major currencies of the world. Let me explain how this works. First of all, Forex quotes are always presented in currency pairs. For example, the USD/CAD quote is the U.S. dollar vs. the Canadian dollar. In this example, the U.S. dollar is the first currency quoted in the pair and is known as the base currency. The base currency always has a value of 1. In other words, 1 USD is equal to x CAD.
So – with some of the basics of Forex trading out of the way – what are some of the trading strategies used by the most successful, wealthiest Forex traders in the world?
So if the current quote for the USD/CAD is 1.3910, this means that one U.S. dollar is worth 1.3910 Canadian dollars. This is a common example of the exchange rate. So by trading a Forex currency pair, you are basically trading the exchange rate between the two currencies.
Here’s a list of the most powerful Forex trading techniques on the planet:
That’s what the rest of this report is all about.
Fibonacci Retracement Strategies Forward Testing Parabolic SAR Sidus Method 5/13/62 Elliott Wave Theory Automated Trading
OK, let’s move on.
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The 1-2-3 System
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establish your entry point slightly before the trend reaches the predefined entry point; this puts you slightly ahead of other investors and you will be able to buy or sell before at a better price than the others.
hile there are many different trading strategies available, most of them present the investor with complex algorithms and formulas that can be very confusing. There is one that is as easy as 1-2-3; in fact, that is the name of the strategy. The 1-2-3 System is a frequently occurring pattern that helps investors identify the beginnings and endings of trends. Once the 12-3 signal has appeared, an investor can move to enter his or her trade, knowing that a change in trend direction has occurred.
Where to get out – the exit point This is probably where most fortunes are made and lost. While many investors spend a great deal of time and energy to determine when to enter a position, most do not have a method for determining when to get out. Once a “ride it out” method of thinking sets in, the danger is exposing oneself to heavy losses. This is a key part of a money management strategy that should be part of the 1-2-3 System or any other: stay in long enough to earn your profits and get out soon enough to protect them.
Identifying a 1-2-3 System pattern Basically the signal in a 1-2-3 System consists of different day’s high and low prices. The most simple explanation on how you could draw this sigThe 1-2-3 System nal on paper yourself is the following: from the top-left corner draw a diagonal to the center of the page to locate point number 1. Next from point number 1, draw a diagonal line towards topright corner, only end it halfway to the corner for point number 2. From point number 2, draw a line that is parallel to the first line but much shorter; the end of this line is point number 3.
A good rule of thumb is to set a trailing stop of 10% on any given position. This is an easy maneuver and eliminates any second-guessing. There is no need for calculators and no attempting to rationalize other possible approaches. By allowing a 10% cushion, a trader both eliminates emotions from his or her exit decisions and leaves room for the market to make adjustments with-
Once you have drawn your pattern, draw a horizontal line from point 2 and once the same price has been achieved on the line rising from point number 3, wait until it goes just a bit higher and then buy. If you take the same diagram and invert it, it will give you the same pattern for a sell signal.
out exiting a position too early.
Conclusion
In addition, the more bars you can see between the signal points, the more dramatic of a move you can expect. The 1-2-3 System works with any type of chart, whether you are using 5-minute tick charts, yearly charts, bar charts or candlestick charts.
Many systems look for such complex formulas that they miss the key points of Forex investing: identify the trend and its direction, and locate entry and exit points and determine a way to protect against loss. The 1-2-3 System does these things in a clear, concise manner. This system gives investors an unemotional means of deciding the best times to buy and sell a given currency as well as providing simple rules for increasing profits and limiting losses. When combined with a solid money management plan, the 1-2-3 System can help an investor increase profits.
The entry trick This is a technique within the 1-2-3 System that helps a trader to find additional profits by staying a step ahead of other investors. When looking at 1-2-3 formations you will identify the three points on a given chart and draw your horizontal line from point 2 to identify the buy or sell point leading away from point 3. The entry trick is to
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Fibonacci Retracement Trading Strategies
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ibonacci, an Italian mathematician born in the 12th century, discovered a mathematical sequence that is now known as the Fibonacci numbers. It is said this sequence is based upon observations of the Great Pyramid of Gizeh in Egypt. Fibonacci Numbers are a sequence of numbers where each successive number is the sum of the two previous numbers.
not on the key numbers in the sequence, but on the ratios that exist between the numbers. Fibonacci retracement is constructed by taking points such as a major peak and trough on a price chart and dividing the vertical distance by important Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%, with the Fibonacci ratio of 61.8% being referred to as the “golden ratio” or the “golden mean.” When these intermediate points are identified, horizontal lines are used to identify possible points for support and resistance.
First Rise / First Failure
The Fibonacci sequence The Fibonacci sequence starts as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on, where each number after the original 0 and 1 is simply the sum of the two numbers that proceed it. There is an interesting characteristic in this sequence that each number is approximately 1.618 times greater that the number before it. This common ratio is the basis for the relationship that is used in so-called retracement studies.
In addition to the standard Fibonacci ratios, many traders also choose to use 50% and 78.6% levels as well. The 50% retracement is not really a Fibonacci ratio, but many choose to use it because strong tendency for an asset to continue moving in its direction once it completes a 50% retracement.
Parabola Hunt
Fibonacci strategies
Fibonacci ratios
While Fibonacci Numbers are a simple sequence, the results can be used to help traders with their Forex trading. There are a number of investment strate-
The most important aspect of Fibonacci’s famous work was based
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gies utilizing Fibonacci ratios. (Note: While the chart examples are from the stock market world, they apply virtually as well to the Forex market, except for the gap plays. Many thanks to Alan Farley for the strategies and charts). Here are a few of them: First Rise/First Failure – First Rise/First Failure signifies the initial 100% retracement of a trend within the period of time you are reviewing. This retracement provides an early reversal warning after a new high or low. The 100% retracement breaks the major price direction and finishes the trend it corrects. Once at this level, the old trend can be established again if it breaks through the old 38.2% ratio. Many times traders will use that level to enter low-risk positions against the old trend.
Continuation Gap Extensions
offers a great tool for finding the big moves when looking for trades. It is important to look for volatility to occur at the 38.2% or 61.8% levels. At this time, you can use a simple breakout or breakdown strategy when the price moves past it. The resulting reversal can be drastic and quite profitable, with the price quickly returning to an old high or low. The key to this strategy is finding these levels in advance. Continuation Gap Extensions – Many times you can identify the exact price where a rally or selloff will end by using the continuation gap as a Fibonacci extension tool. You can identify the gap by its location directly in the middle of a vertical price wave. At this time you can start a Fibonacci grid at the start of the trend and extend it so the gap sits under the 50% retracement level. The grid extension points to the terminating price for the rally or sell-off.
Overnight Grids
Parabola Hunt – Movement in a parabolic pattern tends to occur between the 0%-to38.2% and 61.8%-to100% Fibonacci levels in all trends. This tendency
Overnight Grids – If you find a volatile currency and start a grid from either the high or low of a session’s final hour, this point can then be trans-
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ferred to the opposite end of the high or low for the next morning. This technique identifies a specific price wave that can be used to uncover intraday reversals, breakouts and breakdowns. The overnight grid also provides a method to trade morning gaps. The gap will often stretch across a key retracement level and target low-risk entry on a pullback.
Second High/Low
Second High/Low – Sometimes it can be difficult to figure out where to start a Fibonacci grid; this is a technique for placing it where it will be the most successful. Keep in mind that the absolute high or low in a price wave isn’t the best starting point for a grid most of the time. Instead of picking the extremes, look for a small double bottom or double top within the congestion where the trend began. This helps to identify a specific Elliott Wave that coincides with a specific trend you’re trying to trade.
Conclusion Many investors trade with confidence based on their use of Fibonacci ratios. Using the techniques outlined here can help you to identify trends in Forex trading and help you to make many more profitable trades.
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Parabolic SAR Strategy
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he Parabolic SAR strategy, which is also known as the Parabolic Stop and Reverse strategy, is a technique that is used for trending markets and is based on the fact of holding a position in the market. Because it is a reversal system, the Parabolic SAR allows a Forex investor to chart an upward or downward trend of a currency until it peaks, then project the opposite movement using the points from the original trend.
How to interpret a Parabolic SAR The original entry point on the buy side is noted when the current high price has been passed; it is at that time when the SAR will switch to under the most recent low price, indicating a reversal. When the price rises, the tracking dots on a chart will rise as well—first lagging behind and then speeding up as they follow the trend. This phenomenon is known as the acceleration factor. The SAR level will move faster as the trend develops and the dots will quickly catch up to the price action.
Referred to as parabolic because it has a curved shape like a parabola, the Parabolic SAR is typically used to locate stop points and to determine when to reverse a position. It is generally accepted that with this strategy one should establish the trend and then use the technique to determine the key locations for buying or selling.
In the event of an upward trend, the dots will be below the price of the currency. As time passes, the distance between the price and the SAR level will decrease until the market pulls back and touches the SAR level. Once this occurs, the SAR level will rise above the price, indicating the change in direction that is occurring.
A brief explanation A basic explanation of the Parabolic SAR is as follows.
Best use of the Parabolic SAR
If the trend is rising: When the currency is trending upward, buy when the SAR passes the stop level below the current price. This number will move every day until it is activated, or falls to the stop level.
The Parabolic SAR is best used with an additional filter, such as a MACD (Moving Average Convergence / Divergence, one of the simplest and most reliable indicators available). Because the strategy is intended for following currencies that are trending, in a horizontal or extremely volatile market (one having “whipsaws”) the presence of a filter can help keep the strategy more effective.
If the trend is down: For a currency that is trending downward, sell it when the SAR moves above the stop level above the current price. This number will move every day until it is activated, or rises to the stop level.
If holding a long position then only long signals would be followed and the short signals would be ignored, providing that the filter remains in a buy signal. If a short signal is triggered but the filter stays in buy, it is wise to close the position and wait for the next long signal. The reverse of this is true if you are holding a short position.
Parabolic SAR Strategy
Another good use of the Parabolic SAR is for setting a stop loss. This is a crucial part of an investment strategy but it can be difficult to find the right location for it. With the SAR indicator it is possible to determine the right place for a stop. Because it is accelerating every day, the SAR indicator can help to locate the closest possible point for a stop loss. Because of the cyclic nature of the strategy, it allows for market corrections without taking an investor out of a position. Since there is always a certain level of volatility, this strategy helps to differentiate between changes in the trend and simple corrections in the market.
As you may be able to surmise from the chart, the nice thing about the Parabolic SAR is it’s just really simple to use. Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal. The indicator assumes that the price is either going up or down, so it’s probably the easiest indicator to interpret. With that said, this tool is best used in trending markets, with long rallies and downturns. You should NEVER use this tool in a choppy market where the price movement is sideways.
Conclusion The Parabolic SAR is an excellent strategy for currencies in a trend. As these trends occur, the SAR indicator can show an investor where the changes in direction lay and to identify the correct entry and exit points. For someone with a long position, the Parabolic SAR is a very good strategy for daily review of the position and reassessing stop loss points. 8
The Sidus Method
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n important aspect of any Forex trading strategy is the successful combination of analysis and money management. One technique that can help an investor make this combination excel is the Sidus Method. This method combines four moving averages and candlestick or bar charts. When joined with a solid money management plan, the Sidus Method can help an investor create a profitable trading strategy in Forex.
top and the 5 WMA line drops below the 8 WMA line it is a signal to close the position. Conversely, a short position should be closed when the price reaches the bottom and the 5 WMA line goes above the 8 WMA line. Additionally, it is crucial with this method to monitor the spacing between the two red EMA lines. When these two lines cross or are so close that they almost create one line, it is time to close the position and open a new one in the opposite direction. The intersection of the tunnel with the WMA lines can indicate directional changes as well. If the red tunnel formed by the EMA lines isn’t extremely close or crossed, it is ok to stay in a position, but it is wise to monitor this situation because even if the red pair doesn’t cross, a change of direction may happen soon.
Necessary components In order to chart the Sidus Method, it is best to establish a candlestick chart in four-hour intervals. Other periods can be used, The Sidus Method but any interval of one hour or less will create a tremendous amount of whipsaws, or periods of indistinguishable volatility. In addition to the candlestick symbols, the chart should also include these lines:
Money Management As with any investment strategy, money management is critical for the Sidus Method. Any method that does not encourage the investor to protect the gains that he or she has made is flawed. Money management is a preconceived plan to help an investor determine the best methods for making money as well as strategies for minimizing losses.
18 Exponential Moving Average (in red) 28 Exponential Moving Average (in red) 5 Weighted Moving Average (in blue)
A money management plan should be a well-defined, unemotional approach to trading, outlining the strategies an investor will use. By defining the parameters before trading, a trader can be less influenced by the fear and greed that can neg-
8 Weighted Moving Average (in yellow)
The Exponential Moving Average (EMA) lines will Basic Rule of “The Sidus Method” form a tunnel on your chart; these will indicate the start and end points of a trend. Trades should atively influence an investor’s judgment. only be entered when the EMA tunnel is very narrow or even crossed. The Weighted Moving Average (WMA) lines also indicate when to enter In addition, a money management strategy should include stop loss princithe trade and suggest the strength of the trends. ples to help keep previous gains. The Sidus Method recommends a stop loss of approximately 10 to 15 “pips” (pip stands for “percentage in point,” Finding entry signals with the Sidus Method which is the smallest increment of a trade in Forex). This amount allows for market corrections and normal periods of volatility without jeopardizing The time to open a long position is when the two WMA lines cross the tun- the investment. nel on the upward trend; if the 5 WMA crosses the 8 WMA line as well then this represents an even stronger signal. Conversely, the time to open a short Conclusion position is when the two WMA lines cross the tunnel on the downward trend; if the 8 WMA line is also crossed by the 5 WMA line then the signal The Sidus Method allows investors a relatively new method for following movements in a currency and determining entry and exit is extra strong. points. By incorporating a money management plan, an investor can Finding exit signals with the Sidus Method use this strategy to improve his or her results in Forex trading. Similar to identifying entry signals, the exit signals are a combination of movements by the lines on the chart. When the price of a long position reaches the 9
The 5/13/62 Strategy
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hey’re called PIPs, which is short for “price interest points” or “percentage in points” but for Forex traders, they could be gold or silver. PIPs are what Forex traders spend all of their time chasing and are the things that indicate success.
The 5/13/62 Strategy
PIPs are not, however, the best things for individual investors to follow as they can leave investors in an emotional state that can affect their judgment and make them forget to follow their money management plan. A different approach is needed, and the 5/13/62 Strategy is an excellent technique to follow. Once an investor stops chasing PIPs and starts following an investment strategy, the emotion is eliminated and the investor is able to trade with a clear mind. The 5/13/62 Strategy gives the ability to spot movements in the Forex market and follow two basic ideas about currency trading: entering a position as soon as a signal is found, and exiting a position as soon as the appropriate signal appears.
The attitude of trading The biggest key to successful trading is the investor’s attitude, or discipline. Once an investor takes a determined approach, the focus is on finding the proper entry and exit points, not chasing PIPs. The 5/13/62 Strategy perfect for an investor with this kind of attitude because it will show him or her the places where entry and exit points in trades exist.
When not to trade
The importance of EMAs
When the 5 and the 13 are locked into a sort of spiral where there is little or no range of movement, it is best not to trade; gains and losses are too difficult to project at this time. In addition, it is best to avoid trading on holidays and late in the day on Fridays. These times frequently are volatile and the signals are typically unreliable.
Exponential Moving Averages (EMAs) are the core of this strategy. An EMA is the average value of the price of a currency pair over a certain period of time. This number should be consistent, but it can be the opening price, the closing price or any other time in between. The emphasis of EMAs is more on recent prices and less on older prices.
Stop loss strategies
The 5/13/62 Strategy focuses on three EMAs: 5 period, 13 period and 62 period. As long as these periods are consistent with each other, they can be daily, hourly or in 15-minute intervals. The chart should consist of candlestick symbols, the 5 period EMA in red, the 13 period EMA in yellow and the 62 period EMA in blue.
In order to help protect profits, three conditions should be set: Establish a 20 PIP stop loss beyond the 62 period EMA. Set a 20 PIP trailing stop on any trade.
There are two simple conclusions from this chart. Those determinations are:
Set a profit target at a recent high or low so that it creates a double top or double bottom.
When the 5 crosses below the 13 and both of them cross below the 62, this is a likely sell signal.
Following through
When the 5 crosses above the 13 and both of them cross above the 62, this is a likely buy signal.
Because a solid stop loss strategy is in place, it is possible to then let the investment run, monitoring the trade for a possible exit point. The 20 PIP trailing stop will prevent a catastrophic drop and still allow any volatility to subside without triggering a sell.
Following the numbers The key indicator is the relationship between the 5 and the 13; you should be prepared to buy any time the 5 crosses above the 13 and be prepared to sell any time the 5 crosses below the 13, regardless of the 62. This condition should not be an absolute buy or sell signal, but it should indicate that a potential trade is coming.
Conclusion The 5/13/62 Strategy is based on the EMAs of these time periods. Because of the scalability of the averages, it is possible to use this with both long-term and short-term time frames with equal results. By following the strategy rules and watching for crosses, the 5/13/62 Strategy can lead a trader to profitable results without chasing the PIPs.
The next step is watching the relationship between the 13 and the 62. Once the 5 and 13 have crossed, look for the 13 to cross the 62; this becomes a strong indication of a buy or sell signal. 10
Automated Trading Execution Systems
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t is a hard reality for many people to accept: most investors are not cut out for Forex trading by themselves. There are many people who love it; Forex trading is bigger than all other forms of investing combined. The truth is that currency trading can be complex and separate a lot of investors from their money. That is where automated trading comes in. For those investors who want to be trading foreign curencies but haven’t mastered the strategy, automated trading systems can be the solution. Automated trading gives most traders their best chance for success in Forex, but it’s not the only element of a successful trading system. Investors must know how to apply automated trading techniques and be willing to manually manipulate trades when possible. By combining these two methods, mechanization and discretion, an investor can find a new road to profitable trading. Automated trading execution systems allow Forex traders to implement their favorite trading strategy directly with their Forex broker. Traders are now able to program their desired trade setups into commercially-available trading software platforms such as TradeStation, MetaTrader, MetaStock, eSignal, Oanda, WealthBuilder, and even custom-designed software applications. The automated trading systems then take these trade setup signals and transmit them to the Forex broker’s API (Application Program Interface), which then executes the actual trades. The automated trading execution systems are specialized for each set of trading software platforms and Forex broker API connections, and are known by such names as FXTradeStream, HyperOrder, Neoticker, NinjaTrader, SnapDragon, ThinkingStuff, Trade Bolt, TradeBullet, TradeCompanion and TradeItself. The software is inexpensive, ranging from free to about $700 a year. Automated trading execution systems allow for the total elimination of emotions getting in the way of the trade and affecting its outcome. Once the Forex trader is comfortable with his or her strategy, the rest can now be automated.
The many uses of automated trading The first thing that usually comes to the mind of most traders concerning automated trading is that it creates a robotic system that takes over and makes all of the trading decisions and then executes them. A more accurate vision has the trader creating a strategy and handing over the implementation of the actual execution, the part that requires the physical presence, to the automation platform. Many automated trading systems operate in this manner. In addition there are systems that are more advanced as well as discretion-driven systems. Systems like these require that the investor be involved at some point. Many traders believe that the art of trading is the most important factor and since a machine cannot display the level of nuance a human can, they ignore the possibility that automated trading is even possible. There is, however, something in automation for all traders, beginning with the basic trading techniques of automated platforms. 11
The secret recipe Maybe people search for the secret recipe for success in Forex trading and it does exist: it is called hard work. Taking the time for research and technical analysis, reviewing current positions and testing new techniques all require that the investor put in the effort to be successful. Anyone who looks at automated trading systems as the easy way out simply doesn’t understand the process. Automated trading is not an end in itself, but a tool that immeasurably helps traders cope with the unique demands of the Forex market.
Differences in automated trading systems Not all automated systems are the same. Each has varying levels of investor involvement; some examples of these systems include: Event-based systems. World events don’t get scheduled on the calendar; manual entry is required for these systems but an automated system is still able to help event traders by providing complete control after entry has occurred, up to and including the exit of the trade. Non-Quantitative Systems. Though technically driven systems have become more popular, many traders rely upon fundamental indicators that do not readily lend themselves to automation. In cases like these, there are systems that can offer automated entry or exit, as well as extremely precise control of trades. Highly Discretionary Systems. For those investors who depend on instincts, it is not as easy to automate their trading. However, there still are systems that can offer some level of automation that will give these traders an advantage they did not previously have.
Which is the right system? For an investor looking to start automated trading, what is the best system? That depends on the user. Because there are so many types of systems available, it is important that an investor understand his or her abilities and needs before purchasing anything. Most companies allow for demo testing, which can help determine if a system is the right one. After purchase, it is wise to use a practice account to get a feel for the capabilities of the system and the parameters that need to be defined.
Conclusion Forex trading can be a tricky endeavor. Much of the technical aspect of trading gets missed by many investors. By incorporating an automated trading strategy, an investor is able to take advantage of the power and precision of their computer to help make better trades.
The Elliott Wave Theory
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t has been shown time and time again that human nature does not change. We act and react in fairly predictable patterns, and have done so since the beginning of time.
What better mechanism to measure human nature than the stock market? After all, the “stock market” is simply made up of human beings, each with their individual human characteristics of fear and greed – at least as they relate to the loss and gain of money in the market. These predictable patterns of human nature led to a remarkable discovery in the early 20th century. In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in predictable patterns. He noticed that the patterns are repetitive in form, but not necessarily in time or amplitude. Elliott isolated five such patterns, or “waves,” that recur in market price data. After naming, defining and illustrating these patterns and their variations, he called the whole phenomenon “The Wave Principle.” In later years, the system became known as the Elliott Wave Theory.
Elliott Wave Basic Pattern
Impulse wave forms There are three major types of a wave form for impulse waves. Extended wave – Among waves 1, 3 and 5, only one should unfold into the extended wave. The term “extension” means the wave is elongated and the lesser waves are quite pronounced in relation to the extended wave.
And recently, astute Forex traders started applying Elliott Wave Theory to their favorite trading market, with equally impressive results. The Elliott Wave Theory views market actions as the product of recurrent price structures. Simply put, this theory is based on the idea that market cycles are composed of two major types of waves: impulse waves and corrective waves. Every impulse wave can be divided into five wave structures, while corrective waves can be divided into three wave structures. This theory states that patterns are repetitive and therefore can be found throughout the Forex market. In addition, the Elliott Wave Theory contains an important feature – the waves are fractal in nature, meaning that the market structure is similar no matter what scale you are considering. Because of this principle, you can evaluate a yearly market chart the same way that you would an hourly market chart. This feature of scale gives the Elliott Wave Theory an extra level of credibility.
Wave count rules
Extended Wave Patterns Diagonal triangle at wave 5 – Sometimes the momentum at wave five is so weak that the second and fourth sub waves overlap with each other and evolve into a diagonal triangle.
Following the market pattern, it is possible to identify location within the wave count. In order to do this, there are several rules for valid counts. Wave two should not break below the beginning of wave 1. Wave three should not be the shortest among waves 1, 3 and 5. Wave four should not overlap with wave 1, except for wave 1, 5, a or c of a higher degree. Rule of Alternation: Wave 2 and 4 should unfold in two different wave forms.
Fifth wave failure – On occasion, wave 5 is so weak that it cannot surpass the top of wave 3, causing a double top at the end of the trend.
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Diagonal Triangle and Wave 5 Failure
Corrective wave forms Corrective wave forms are more complex but they fall into six major forms. Zig-Zag – An abc pattern composed of a 5-3-5 sub-wave structure. Flat – An abc pattern composed of a 3-3-5 sub-wave structure where b equals a. Irregular – An abc pattern composed of a 3-3-5 sub-wave structure where b is longer than a.
The Six Corrective Wave Forms
Conclusion For those who find a fascination in the world of the complex, the Elliott Wave Theory will offer a tantalizing strategy for Forex investing. By using the wave forms outlined in the theory, an investor will be able to predict new movements in the Forex market and improve his or her chances for success.
Horizontal triangle – A 5 wave triangular pattern composed of 3-3-3-33 sub-wave structure. Double three – An abc x abc pattern composed of any two from above, linked by an x wave. Triple three – An abc x abc x abc pattern composed of any three of the above patterns and linked by two x waves. The effectiveness of the Elliott Wave Theory is that the three impulse wave forms and the six corrective wave forms are conclusive. The key is to identify which wave form is going to unfold in order to predict future market actions. This is done in conjunction with historical wave patterns, and experience in wave count is critical.
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