Forex Strategies

Talking Points:

• Fundamental events and data prints often shape future price movements in the FX market
• Technical analysis can do a great job of explaining what has happened in the past
• Traders can integrate the two systems of analysis with risk management to find the cleanest setups

A common question posed to newer traders is as follows: ‘Are you a Technical trader, or a Fundamentals trader?’ This implies that a speculator should, at some point, choose one or the other and develop that skill-set, while eschewing the other form of analysis in the interest of saving time and resources.

Analysis is analysis…. That’s it. Analysis is simply a way to find trade setups, or to get ideas for potential trade setups… Your analysis does not define your role as a trader.
And further – why in the world would you want to ignore an entire permutation of analysis that could impact your trades, your positions, and your strategies?

Even if you have a bias that technical, or fundamental analysis may work better – it is often the best advice to look to incorporate BOTH schools of analysis into your trading approach. In this article, we’ll teach you a way to do just that.

Defining Chaos
What creates price movements?

The simplest explanation is that buyers and sellers move prices. If there are more buyers, prices move up; more sellers and prices move down. But what creates these additional buyers or sellers in the first place?

There could be a few different answers to this question, but one of the most common motivations for price movements comes from data prints and announcements, i.e. fundamental events.

As data comes into the market traders, portfolio managers, and investment banks rush to incorporate this new information into prices.

One of the main ‘motivators’ of price movements comes from fundamental data announcements



The DailyFX Economic Calendar showing High Importance Events

For example, usually on the first Friday of every month the US Department of Labor releases the Non-Farm Payrolls report (sometimes on the second Friday of the month such as the upcoming release on November 8th, 2013). This is the number of new jobs added in the largest single economy in the world, and this is often the first look investors get at the most recently completed month.

This number is purposefully released a full-hour before US equity markets open because the volatility that can come from the event can be enormous. And while stock traders have to wait on the sidelines for a full hour to trade on this data, often seeing markets gap massively higher or lower to incorporate the newly-released information; currency traders can see this getting priced into pairs instantaneously.

As an example, let’s take a look at the NFP release from September the 6th below:




But maybe even more important than the short-term volatility – look at what happened to the intermediate-term trend!

Data prints can create strong reversals and/or price movements in markets



As you can see in the chart above, NFP on September the 6th provided a complete change of direction the EURUSD. Over the next two months, the EURUSD moved up over 600 pips, and NFP was the catalyst for the move.

So, if fundamental data prints can evoke so much interest, volatility, and pervasive price movements – why not trade on fundamentals alone?

Well, that NFP release on September the 6th was unpredictable. Nobody knew how that would come out; and further – even if we did know what the NFP number was going to be – there is no way to predict what prices would do in response.

So, if fundamental analysis helps shape price movements – but these data prints are unpredictable, how can we use these in our trading approach?

Well this goes right back to why you don’t want to focus on just fundamentals, or just technical analysis; and instead take an honest, unbiased look at the market using as much information as you can get.

Price Action can show you what HAS been important

In the realm of technical analysis, there are a lot of different ways of deciding what to trade or how to analyze markets. Price Action is often a favorite because, in many ways, this is the most pure form of Technical Analysis.

While technical indicators can give you an idea for what prices have done in the past, price action focuses solely on the price movements themselves; stripping away any inefficiencies that may come from using extraneous indications. We introduced the concept of price action in the article, Four Simple Ways to Become a Better Price Action Trader.

With price action, traders can grade trends and identify support and resistance – and this can be pivotal; particularly when looking at situations such as that reversal in EURUSD that we investigated a moment ago.

Price Action can show help traders find risk-efficient entries




Below we can see what ended up happening with that EURUSD trend…

Traders can be patient when looking for a reversal to try to get the probabilities on their side



The trend continued… and the trader doesn’t even have to take the risk of taking a position during Non-Farm Payrolls…

How to Combine Fundamentals and Price Action

Look at fundamental data announcements as a double-barreled shotgun of risk; not only do you not know what the print will be, but even if you did – you have no clue how traders will price it. So, stop guessing, and put away your crystal balls. Focus on the few things that you KNOW for a fact.

• Data announcements bring volatility
• Prices can move higher, or they can move lower
• The only tool we have control of, as traders, is when we buy and when we sell (risk-reward)

Traders can look at data announcements as ‘surprises.’ And surprises can be good or bad. In markets, surprises can hurt you or they can help you. So, if trading around data – be sure to put yourself in situations in which surprises can help you more than they might hurt you (by looking for favorable risk-reward ratios).

Traders can then look to utilize price action to trade in the direction of the general trend, and this does a few things.

If a fundamental theme is taking place, such as increasing optimism in Europe – how do you think that will show up on the chart?

Price Action will show an up-trend, with higher-highs, and higher-lows printed by the currency pair. So, in the above chart of the EURUSD, much of the movement that took place after that September 6th NFP print wasn’t even in direct relation to the release of non-farm payrolls. Rather, it was the market changing course, and NFP was simply that catalyst.
Going into NFP, traders were selling the EURUSD; then NFP happened, and more buyers came in than sellers. This provided a stimulus to prices that eventually evoked a 600+ pip uptrend.
But it’s not enough to simply buy in an up-trend, or sell in a down-trend; rather – we need to do so efficiently and price action can be a great assistant.

As we saw in The Forex Trader’s Guide to Price Action, traders can look to trade up-trends buy buying the ‘higher-low’ or shortly after one is printed in the market. The example below is a zoomed-in view on the EURUSD trend that we’ve been discussing:




After this up-trend has set in the market, the trader can simply wait with the objective of initiating the long position as cheaply as possible. After a ‘higher-low’ has established itself in the up-trend, the trader can look to trigger with a stop just below the low.

If that ‘higher-low’ doesn’t hold, you might not want to be in that long position anymore anyways, because the up-trend you were looking to trade in was violated, and we could then be seeing a reversal.

So, this strategy allows you to enter the position cheaply with a stop below the ‘higher-low,’ and then you can look for a big move if the trend continues.

Price Action Primer via Brainshark

Image taken from Price

-- Written by James Stanley


More...

Talking Points

• Traders can track key statistics using the reporting feature.
• Track your average profits to avoid the trader’s number one mistake.
• Review trades by currency pair to identify the best times to trade.

Every trader should check in and review their past trading history from time to time. Businesses track their profit margins and bestselling products. So it’s only reasonable for traders to calculate their average profits and most profitable currency pairs.

One of the ways traders, can organize their trades is through the use of a trading report. By consistently running a report and keeping just a few key statistics along the way, traders can identify what is working and what isn’t in their trading. Let’s get started by looking at how to run a trading report!



Running A Report

When a trader wants to review their trading, it is important to know how to run a report. To begin, traders using the FXCM Trading Station should find the report tab located at the top of their trading platform as depicted above. From here, a new pop up will prompt you with a few parameters necessary for completing your report.

Reports can go back as far as the inception of your trading account (since open), so it is important to specify the “From” field. This will allow you to select the date your report will begin. The last parameter to select is the format menu. This selection allows you to choose how your report will be displayed on. The FXCM Trading Station allows you to run reports in HTML (web), XLS (Spreadsheet), or PDF (document) formats depending on your preference. Once all of your settings are set to your liking, click the “Run report” button on the bottom of the menu.

Now just give your report a few seconds to compute, and you can begin analyzing your trade data!


Tracking your Trading

Now that you have your report up, you can begin to track your trading. This process can be made easier through the use of a spreadsheet, but you can track this information by hand as well. First, it is extremely important to check for your average profit relative to your average loss. This way you can ensure you are avoiding the trader’s number one mistake through the use of positive risk reward ratios. If you notice your average loss is great than your average profit, it may be time to reconsider your current trading plan.
Another recommendation is to track the times and pairs you tend to trade the most. If you find you are trading mainly USD pairs, during the London and US trading sessions it may benefit you to trade a trending based strategy. Conversely, if you mostly trade the overnight Asia session and your trades are not working out, it may be time to consider a range based strategy.

The reference material above is just a sliver of the information you may discover by running a trading report. The key is you have to run a report to find out where adjustments can be made.
---Written by Walker England, Trading Instructor

More...

Talking Points:

• Getting great exits is crucial for a successful trading strategy
• Understanding money management
• Learning how to setup exits in 3 different ways: traditional stop/limit, moving average trailing stop, and volatility based stop/limit.

Through emails, phone calls, and tweets many traders I work with on a daily basis are quick to point out why they are entering a trade and are able to describe each setup in great detail. But something I see much less of are traders talking about their exit plans.

Most prudent traders will setup a stop and a limit to go along with their trade, but I’d venture to guess most traders are spending a lion’s share of their time on worrying about getting good entries. This would mean they setup their exit strategy as an afterthought which as a trading instructor, concerns me.

Our exits should be just as well thought out as our entries and we need to have clear reasons on where we exit our trades and under what conditions. Without an exit strategy, we are taking on a lot more risk than we should be. I recommend taking our FREE Money Management course to learn how to manage your risk properly.(30 minutes)

After the course, you can then follow this article through 3 basic (yet effective) ways to exit your positions.

Exit Strategy #1 – Traditional Stop/Limit (Using Support & Resistance)

The traditional stop/limit method is one that I use constantly during my simple trading strategy webinars. I like it because it is both versatile and effective. The goal is setting our stop and limit so that they have a positive risk to reward ratio and are set around support and resistance levels. Let's take a look at an example of a short Euro trade against the USD that occurred a couple weeks back on a daily RSI chart.

Learn Forex: Traditional Stop/Limit Based on Support & Resistance




When selling a pair, we want to look back at the previous bars and look for an obvious swing high. That swing high could potentially act as a resistance level in the future, so we would like to set our stop loss several pips above that level. This way, the only way we are taken out of the trade is if the pair has enough strength to make a new high. This is fine because if a pair is showing that much strength, it's not a pair that we want to be selling anymore anyway.

Next, the limit order we place will be 100% dependent on our stop loss’ distance. Using the ruler tool on our chart, we should figure out how far our stop loss is set in pips. In this example, our stop is 100 pips from our entry price.We should set our limit twice as far as our stop. That is 200 pips in this example. This is will give us a 1:2 risk to reward ratio (and if you took the free course that I posted at the beginning of the article, you should understand the importance of this ratio).

The next exit strategy is an interesting one for many, because it includes trading automation.

Exit Strategy #2 – Moving Average Trailing Stop

It has long been known that a moving average can be an effective tool to filter what direction a currency pair has trended. The basic idea is that we only look for buying opportunities when the price is above a moving average and we only look for selling opportunities when the price is below a moving average. But some traders have found that it can be effective to use a moving average as a stop loss.
The idea is that if a MA is crossed from one side to the other, then the trend is shifting. If we were trend traders, we would want to close out our positions once this shift has occurred. So this is why setting your stop loss based on a moving average could be effective.

In the example below, we are looking at a M15 chart of the USDJPY which is currently in an uptrend based on the 100 period exponential moving average. At the time when I opened this long position, I placed our stop loss directly at the 100 EMA level. This put our stop loss about 80 pips away. Wanting to stay true to our 1:2 risk to reward ratio rule, I set my limit at 160 pips.

Learn Forex: Stop Loss Based on 100-Period Moving Average



As the trade develops, the exponential moving average is going to change with each new candle that is created every 15 minutes. As the EMA moves, we will update our stop loss to match the 100 EMA. You can see that from the time I opened the trade until now, the 100 EMA has risen 30 pips, raising our stop loss 30 pips alongside it. This means almost 40% of the risk we were taking on our trade originally is now gone. But you will notice, our limit stays fixed at the amount of pips it was originally set to. This means our risk to reward ratio improves throughout the life of the trade.

Obviously I know many of the Forex traders reading this do not have the time to manually change their stop loss every time their chart prints a new candle, so I am including free download links to automated strategies that will automatically adjust your stop loss in real time to match the MA of your choosing. As long as your platform remains open and connected to FXCM’s trade servers, your stop will continue to move until the trade is closed.

Exit Strategy #3 – Volatility Based Stop & Limit

I’ve saved the easiest exit strategy for last. This final technique uses the ATR (Average True Range). The ATR is designed to measure market volatility. By taking the average range between High-Low prices for the last 14 candles, it tells you how erratic the market is behaving and this can be used to set your stop and your limit for each trade.

The greater the ATR is on a given pair, the wider your stop should be. This makes sense because a tight stop on a volatile pair could get stopped out too early. Also, if we set our stop too wide for a slow moving pair, we might be taking on a larger risk than we really ought to.
In the chart below we used FXCMApps.com’s ATR Pips indicator. This is a free tool that makes ATR extremely simple to read.

I recommend setting your stop loss at least 100% of ATR. In the example below, we set our stop loss at 43 pips. Following our 1:2 risk to reward ratio, we set our limit twice as far, 86 pips.

Learn Forex: Stop Loss & Limit Based on Volatility (ATR)



The ATR Pips indicator will adapt to any time frame you throw at it, so it is completely universal. Simply set your stop at 100% ATR, and set your limit twice that amount. Once the stop and limit is set, it will stay at those levels throughout the life of the trade. You are not required to move your stop and limit as ATR changes.
Ending With a Bang

Remember that forex trading is more than just getting good entries; your exits should be just as important. You should always have a game plan before you open any position and I hope the 3 exit strategies in this article will help you develop a winning system or help improve upon an existing system. Good trading!

---Written by Rob Pasche

More...

Talking Points:
-Losing is an inevitable part of trading
-One loss can wipe away numerous gains of many winners
-Traders need to learn to lose properly in order to find consistent profitability

The only thing that a trader can ever really be assured of is the fact that they are going to take losses. It’s an inevitable part of the game.

Most new traders try to avoid this, and they try to manage their losing positions in the hope that the trade might come back to break-even – if only so that they don’t have to see a loss.

But eventually, it almost always works out the same. One of the losing positions that the trader is trying to manage gets away from them… and the loss becomes much more than they can bear.

This loss can more than wipe away any gains that the trader may have seen, and eat deeply into their equity, and perhaps even put them out of trading altogether.

I have seen traders allow just one bad trade to literally eat away almost every dollar of equity in their account. It doesn’t matter how great of a strategy this trader had, and no matter how well-heeled his plan may have been; if you can’t manage your risk your hope of consistent long-term profitability is limited, at best.

In trading, you have to learn to lose before you can ever truly win. In this article, we teach you how to lose properly.

Why is losing necessary?

Point blank – you don’t know the future. Neither does any other person on the planet Earth.
This doesn’t mean that you can’t forecast price movements; millions of people do this every day through banks, hedge funds, and as retail traders. But rather, you have to see each trade as an idea, or an opportunity; and like many opportunities in life, this idea simply may not work and you have to be able to do the correct thing when you get to that point.

And the only correct thing to do when you realize you are wrong is to cease being wrong and start being right! The way to be right is to close the position.

I know this can be difficult to close a trade that's already eaten into you; after all – if you liked the idea at your entry price, and it moves against you – the idea might look even better at a cheaper price!

This is the most dangerous logic in the field of trading. Remember hearing the stories about ‘The London Whale?’
He built up such a large position trading at one of the ‘Too Big to Fail’ banks, and as the position moved against him, he couldn’t come to grips with realizing the loss… so he bought more…. And then even more.

And the same thing that happens to most retail traders happened to one of the largest banks in the world. Losses in the BILLIONS were eventually taken, the bank was fined IN THE BILLIONS, and those traders may even be facing criminal charges in the not-too-distant future.

All because one trader couldn’t pull his fragile ego up to the point of admitting that he was wrong on one, simple idea.

This is The Number One Mistake Forex Traders Make. DailyFX looked at over 12 million trades placed by live traders on FXCM platforms, and found that in most currency pairs traders were winning well over 50% of the time. For example, in the below bar graph of winning percentages, notice that traders in GBPJPY were profitable a whopping 66% of the time! That's nearly 2 out of every 3 trades being closed out properly!

Winning Percentage isn’t everything



Taken from The Number One Mistake Forex Traders Make, highlighting GBPJPY

But, that nice winning percentage didn’t matter. Traders still lose money in GBPJPY. The bar graph below shows the average win (in blue) versus the average loss (in red).

Small wins and big losses rarely works out well



Taken from The Number One Mistake Forex Traders Make, highlighting GBPJPY

Notice that traders in GBPJPY lost well over 2 times (average loss of 122 pips) when they were wrong than they made when they were right (average of only 52 pips). This is not losing properly, and this type of management doesn’t allow the trader a very good chance of obtaining profitability.

How to Lose Properly

Losing properly may sound somewhat oxymoronic to the new trader; but I assure you, it is a necessary trait that WILL be learned by anyone that will eventually find trading success.
Otherwise, the potential to hit a land mine with that one idea that just doesn’t work out is always there; and eventually the trader will hit that land mine and blow up multiple small winning trades with just one big loser… just like we saw in The Number One Mistake FX Traders Make.

Always Use a Stop

The thesis of the number one mistake traders make is also the first step in losing properly. Always set a stop.
Anytime you open a position, setting the stop should take place directly after that. This should become automatic. Open a position – set the stop.
This means that you don’t have to scramble to decide where to cut the bleeding when you’ve realized your idea is wrong, which is never really a fun, positive experience.
This also allows you to set your risk at the outset of the trade. You can draw your proverbial ‘line in the sand,’ so that if your idea is proven wrong, you can cut it before the loss becomes unbearable.
This means that when entering the position, you can specify the maximum amount you would like to risk on this one idea. You can use a percentage of your equity, such as saying ‘I’m willing to risk 1% of my equity on this trade.’
You can then multiple your equity by ‘.01’ and that gives you a ‘stop amount.’ You can then take the stop amount, and divide this by your pip cost – and this gives you a stop based in number of pips from your entry.
We went over a couple of different ways of setting stops in the article, An Easy and Advanced Way to Set Stops, and any of these methods (including the % risk example above) can be used to draw that line-in-the-sand.

Average True Range can help in setting stops based on market activity




Never throw good money after bad

After you’ve set your stop on the trade, you’ve defined the maximum that you are willing to lose on this idea.
After doing this, the trader’s job is to hold the line. That means that if prices move towards your stop, you DO NOT move it further against yourself, hoping that miraculously the extra stop distance you’re giving the position makes the difference between winning and losing.

If you move your stop deeper against you (giving the trade more ‘room’ to work), you’re essentially throwing more good money after an idea that has already shown you unfavorable results.
Why would you do this? You can easily employ that capital that you’re risking on the wider stop into an entirely new trade idea that has not yet shown you failure.

I see this time and again from new trader, simply unwilling to admit that they were wrong and it rarely works out favorably. Even if it does work out favorably once, or twice, the same thing in our initial example will eventually happen: The position will move against the trader until, eventually, the trader’s capital is exhausted on ONE BAD TRADE.

A further point to this is adding to positions. Many traders will add another position to an already losing position under the presumption that they are ‘scaling in.’

This is not scaling in. This is throwing good money after bad.

Scaling in is planned beforehand; and is strategic. In most cases, many professional traders are ONLY scaling into winning positions. I covered this type of logic in How to Scale in to Positions. This is position trading, and in my and many other trader’s opinions – this is the only way to properly build a position.

Traders want to look to scale in to winning positions




If you add to a losing position, well the same catastrophe mentioned earlier will eventually erode your account. You might make it out of one or two trades successfully, but eventually you’ll hit that one that just doesn’t work – and as you’re increasing your trade size the position continues to bleed against you and erode your equity.

One simple trade idea eats a monstrous chunk of your trading account. This is catastrophe.
When you set your stop, do not move it against you. Do not add to a losing position.

Utilize Break-Even Stops

So, even after you learn how to lose – it is still going to stink. But eventually you become numb to the feeling. It always stinks, but after you gain some experience you begin to realize that it’s inevitable and just a cost of doing business.

One way that losing can be mitigated is through trade management.
A primary reason that so many traders would take such small gains and such large losses in The Number One Mistake Forex Traders Make is default human nature. Human beings are, for the most part, scared to lose.
Just think about the last time you were in a trade. If the position moved against you, many people think ‘well, I’ll let this one work to see if it can come back to my entry price. I’ll hang on for just a little bit longer, and if it gets to even a 5 pip gain I’ll close it out quickly.’
This is greed – when in fact the trader should be fearful (the position has, up to that point, been a failure).
On the other hand, think of opening your platform in the morning and realizing you have a small gain that didn’t quite hit your profit target. Most people will look at that and say ‘well, I’ll close it out just so this thing doesn’t move against me, and becomes a loser.’
This is fear – when, in fact, the trader should be greedy. This position has shown you success! You’ve been proven right! These are the situations where you want to let the trade work with the goal of taking more profits out of the market.

If you’ve felt this way, well – that's pretty normal. This ‘greed when you should be fearful,’ or this ‘fear when you should be greedy,’ is really just default human nature.

One way to begin to control this misaligned human nature is to use the break-even stop.
When you see that position that is in the money, and you are afraid to let the position work for fear of this winner coming back and becoming a loser – rather than just close out the position – you can move your stop to break-even.

Traders can remove the risk of loss while looking for bigger gains




This way, if the trade moves against you, you can be taken out for no gain, and no loss. This can save you the amount you had initially put up to risk on the position.
Further, this can allow the trade to work while you carry a clean conscious that, at the very least, your initial equity is no longer exposed on the position.

-- Written by James Stanley

More...

Talking Points
-Triangle price patterns can be used in Forex trading to identify potential breakout setups
- Descending triangles form when a rising trend line and a horizontal support line converge
- Traders can look for the breakout from the descending triangle to signal the continuation of the AUDJPY down move.

Learn Forex: Descending Triangle



What is a Descending Triangle pattern?

A descending triangle pattern is consolidation price pattern composed of lower swing highs pushed lower by an established downtrend line converging with a horizontal support made up of a series of swing lows located in roughly the same area. Another name for the descending triangle is the right triangle pattern due to its similarity to the geometric shape of the same name. The height of the triangle meets the horizontal support at a 90 degree angle.

Usually, descending triangles form as profit taking by sellers is met with bargain hunting buyers. However, the buying pressure is mutted as higher lows are not made. A news release or economic announcement could be the catalyst required to push price out of this coil tilting the balance strongly in the seller's favor. Unlike its cousins, the symmetrical triangle and ascending triangle, the descending lacks significant bullish participation indicated by that lack of higher lows.

Learn Forex: AUDJPY Descending Triangle




Taking a look at the current AUDJPY 4-hour chart, you can clearly see price action bound between a descending trend line that connects the 11/6 swing high of 94.15 to 11/12 swing high of 93.05. This swing high is a lower swing high than the 11/10 93.19 swing high showing the building strength in the downtrend. Current price action within the triangle is below the 200 simple moving average (SMA), a key indicator that traders use to determine bullishness or bearishness.

Traders will watch price action for a 4-hour candle close below support to confirm that there is follow through in a potential breakout. Stops can be placed near the middle of the triangle just above the 93.00 and 200 SMA. The height of the triangle is a little over 170 pips. By extending this height from the support level of a potential breakout zone, look for a possible target of 91.14. The profit target coincides with the lows seen back on October 2nd.

In summary, descending triangles can be an excellent way to rejoin a downtrend that clearly illustrates risk and reward. Price has a tendency to break form the descending triangle in a downward direction.

---Written by Gregory McLeod Trading Instructor

More...

Talking Points:

• The trader’s psychology plays a huge role in success in markets
• Traders have to first learn to lose properly before they can focus on winning
• A positive outlook can be the difference between failure and success in markets

Learning to trade is like anything else in life where experience is often the best educator. It takes time to get where you want to be as a trader.

Making matters more difficult is the fact that failure is pretty much a guaranteed thing, at least some of the time. Just as we saw in How to Lose Properly, traders have to face the fact that they will, at least some of the time, be wrong. And if those losses are left unchecked, they can more than eat up the gains of numerous winners.

This is The Number One Mistake Forex Traders Make; and this is something that we can all fix by adopting the right mindset, and sticking to our plans.


You have to read between the lines
In most things we do in life, if you want to denote success you look at the number of times that you’re right versus the number of times that you’re wrong. And in general, a marker of 50% is that ‘line-in-the-sand’ between failure and success.

Why 50%? Well, likely it’s because of simplicity. It means you won more often than you lost; which could be a very, very rudimentary manner of grading success.

In trading, this couldn't be more misleading. This is just like we saw in The Number One Mistake: In many cases, traders won well over half the time… like in GBPJPY, traders won 66% of the time.


Taken from The Number One Mistake Forex Traders Make, highlighting GBPJPY

So, if we take a 66% winning percentage in GBPJPY and apply the rudimentary logic in which 50% success rate was the determinant between success and failure; we’d be misled pretty badly.

Because these traders in GBPJPY, despite winning nearly two out of every three trades, still lost money…
It’s because they were SO wrong in their losses, and not ‘very right’ in their wins.

The biggest winning percentages can be made worthless with large losses



But if you think about it, this is really just default human nature. Think about the last time you woke up in the morning, opened your platform, and saw an overnight loss of 200 pips staring you in the face.
First, you probably felt a small punch to the stomach; this is natural.

Then, you probably started trying to rationalize with yourself. “Well, it can come back. Maybe I’ll just give it a little more room to work.”

Later, after this didn’t work you, you begin bargaining: “Well, if this comes back to my entry price I’ll close it out… and I’ll never trade without a stop again!”

This is an example of being greedy, when you should probably have been afraid. This trade showed you a loss; and the analysis that put you into the position in the first place is obviously no longer valid.

So, just because you opened the position 200 pips ago, you have to make those pips back in that single trade?
This one may come back. And the next one might even come back to your entry price, too. But eventually, one of those trades is going to get away from you.

And just like that, one trade obliterates your account.

Let’s look at the other side of the coin. Let’s say that you wake up in the morning, and you see your trade placed last night is up 50 pips. This is one of those little ‘oh ya!’ moments that you get in the morning in which you’re probably too tired to do anything; but it still feels good none-the-less.

But, as you think about it – you don’t like the idea of giving up this 50 pip profit. After all, markets can be chaotic, and these 50 pips can go away just as easily as they collected. ‘What the heck, nobody ever went broke taking profits, right?’

This is fear. This is fear when you should be, in fact, greedy. This trade has shown you that you’re right, why would you want to cut the gain short?

Certainly, there is the chance that the position can come back to haunt you, but once again – we’re playing probabilities here, and this is one of those situations that you’re winning! This is when you want to be greedy.



The Importance of Positivity

Trading involves forecasting future price movements in an effort to make money off those predictions. You can use something like the strategy we outlined in The Potent Combination of Fundamentals and Price Action to get the probabilities on your side as much as possible... but the risk of failure is going to be part of every trade you take.

There is just one problem: No human being can tell the future.

The sooner you come to grips with that, the sooner you can start actually learning to trade. Coming to grips with this fact also allows you to take a positive mental approach to markets.

Why beat yourself up just because you were wrong on a single forecast? Further, if you beat yourself up over getting one trade wrong, how do you think that will impact future trades?

Likely, that negativity will persist. And if future trades end up failing, the negativity grows and gets worse. Eventually, trading isn’t fun anymore and you no longer want to do it.

Don’t worry, this happens to everybody. This is usually the make-or-break moment in a trader’s career that determines whether or not they’re going to continue striving for profitability or whether they’ll look for greener pastures elsewhere.

All because someone beats themselves up for not being able to tell the future!

If trading profitably isn’t based around Prediction, then what?

If you look at matters rationally, you have to admit that you will never be able to tell the future; which means that any individual trade can work against you and cost you money.

Deductive logic then dictates that trading profitably is a numbers game; just like many other ventures in life in which probabilities dictate results.

This is just like sales, or sports, or weather forecasting; anything in which ‘chance’ or probability plays a role. And just like any of those other areas of life, if you allow just one or two failures to ruin your frame-of-mind, you’re not going to be very good on subsequent attempts.

So, you can’t allow yourself to get bogged down from the inevitable negativity that comes with losing. You have to adopt a more proactive way to look at markets.

An easy way to look at the ‘sunny-side up’
Each time you enter a trade, assume that you are going to lose.
I know that this sounds funny; maybe even stupid or self-defeating. But after you’ve done this long enough, you can see the value in preparing yourself for the worst case scenario, and here’s why: Because you are going to see the worst case scenario. And if you aren’t expecting it, it’s like that shot of negativity that we mentioned above.

Instead, if you assume the worst-case scenario right up front, this allows you to be pleasantly surprised a good amount of the time. And when you are pleasantly surprised, now you can do your job of actually trading the position by managing it.

This does something else that's pretty important: It ensures that any loss you take in a position will be minimal. Because if you are looking at each trade as an expenditure of capital for a chance (and only a chance) to make more, you’ll likely be more conservative with that capital.

When you enter a position, look at the amount you have risked as a sunk cost that is being paid for the opportunity to make money on that trade. The trade may work it, or it may not – but the amount you put up to risk is a cost of doing business in search of opportunities.

The Small Business Owner Example
The following analogy that many may be familiar with can be easily adapted to trading:
You own a small clothing store and you’re looking to make a profit. Well, the first thing you’ve got to do is get some inventory, because you can’t sell ‘nothing,’ right?

So, you have to spend some money to make some money, and you buy some inventory to sell at your store.
Likely, some items will remain unsold, so some of what you bought will end up being unprofitable. But the garments that do sell are what allow you to pay your overhead, put some money in your pocket, and put food on the table; while allowing enough to re-invest in the business so you can move through the cycle all over again.

Just like a small business owner, it is your job to find profitable opportunities. Some of those opportunities won’t work, and some will. But if you allow the ones that don’t work to affect you, you aren’t going to want to spend much time doing this.

But looking at each trade as a simple opportunity, and assuming that each time you enter a trade that you are paying a ‘sunk cost’ for that opportunity, it can allows you to get much more enjoyment out of markets by being pleasantly surprised when you win, and shrugging off losses as just another opportunity that didn’t work out this time.

This is business… and it’s just a numbers game.

-- Written by James Stanley

More...

Talking Points:

• Every trader should have a method of identifying potential Forex trades.
• Identify Swing highs and lows to find the trend.
• RSI overbought and oversold levels can be used for market entries.

Every trader needs a plan of action when approaching the Forex market. However, with so many strategy choices it can be difficult for a beginner to identify and then execute a proper trading strategy. Today we are going to review the basics of a simple RSI strategy, based on finding the trend then utilizing an oscillating indicator for timing market execution.
So let’s get started!

Identify the Trend

The first step to trading any successful trend based strategy is to find the trend! One of easiest ways to find the trend is through identifying a charts swing highs and swing lows. Traders can work from left to right on their graph and identify the outliers in price. If you see the peaks and valleys of price declining consistently, you are looking at a downtrend. If highs and lows are advancing, traders would consider a currency pair to be trending upward.

Given this information, traders should look to sell the AUDNZD as long as price continues to decline towards lower lows. If the trend continues, expectations are that price will decline allowing traders to look for new areas to sell the market.

Learn Forex – AUDNZD Trend




RSI for Entry

Once a strong trend is established, traders will look to join that trend with a technical market trigger. Oscillators are a family of indicators that are designed specifically to determine if momentum is returning to an existing trend. Below we can again see the AUDNZD 8 Hour chart, but this time the RSI (Relative Strength Index) indicator has been added. Since we have identified the AUDNZD as being in a downtrend, traders will look to sell the pair when the RSI indicator crosses back below a value of 70 (overbought). This will signal momentum returning lower after the creation of a new swing high.

Below you will find several previous examples of RSI entries signaled on the AUDNZD. Remember since the trend is down, only new sell positions should be initiated. At no point should a buy position be considered as price declines.

Learn Forex – AUDNZD & RSI




Manage Risk

Every good strategy needs a risk management component. When trading strong trends such as the AUDNZD, it is important to realize that they will eventually come to an end! Traders have a variety of choices when it comes to stop placement, but one of the easiest methods is to use a previous swing high on the chart. In the event that price breaks towards higher highs, traders will wish to exit any existing sell biased positions and look for new opportunities elsewhere.

Wether you are trading live money or just practicing on a demo it is also recomended to review your trades. This way you can track your progress while making sure you adhere to the strategy rules!

---Written by Walker England, Trading Instructor

More...

Talking Points

• FX trading is similar to training for competition
• Wait for the signal to generate, then enter/exit the trade
• Keep a forex trading journal or test any variable changes prior to implementing them those changes

When growing up, I spent my younger years playing sports including team sports such as basketball and baseball. As we would practice, one element of training which was quite challenging was the suicide sprint. To help get the team in shape, they would place us at one end of the field, and then we would sprint to another line, turnaround and sprint back to the original line, turnaround and sprint out to a line farther away, turnaround and sprint back.

The exercise was grueling because you are stopping and starting multiple times rather than catching a groove in a straight out sprint. This exercise would be run several times in practice to get the team in shape.

As you can imagine, the coach was not able to be everywhere all of the time. Therefore, some members of the team would cut corners by pivoting, or turning before the designed line. Perhaps these members would rationalize the shortcoming by thinking nobody will notice or that extra yard simply wasn’t important.

Aside from the physical endurance you incrementally pick up by going the extra yard to ‘touch the line’, I believe there are additional mental benefits. For example, even if you were the last one to finish the exercise, you alone know whether you touched the line. Therefore, you feel good in knowing that you did it right as it prepares you for the longer term objective of getting into shape.

Painful, yes. You remember the pain and overcome.
FX and Line Touching
I think there are similarities with trading financial markets and being a ‘line toucher’.
Too often, I see traders get emotionally charged in their open trades or the potential trading opportunity to the point they throw their trading plan out the window.

Forex Education: Waiting for a Touch on the Line



Their trading plan might be to open a short position when the price reaches the support line when the trend is down. The chart above illustrates a situation where prices approached support and appeared poised to break lower. After all, the technician is seeing a longer term down trend and the pair just putting in lower highs.
However, poised doesn’t mean that the pairwill turn lower. Therefore, we need to wait for the actual signal of the price breaking below the support line before entering the trade.

Is entering the trade ahead of the actual signal better or worse for your account? After all, the price appears poised to turn lower and by entering early, your catching a better entry price and tighter stop loss…those are good things right?
Well, presumably, you’ve tested the plan prior to trading it. Based on your testing, you’ve decided to wait for a break. So instead of breaking the support line, you are now breaking your trading plan. What do you think has the longer term negative implications?

Consistently breaking your trading plan creates inconsistent trading results.

If you wish to go back to the drawing board and re-test your strategy by changing a variable or two that would be wise. You can also manage changes if you keep a forex trading journal. But changing your strategy because prices appear poised to go in a certain direction opens your emotions to the trade and you are no longer trading methodically.
Be patient and wait for the signal just like a sail boat waits for the wind.
Stay true to your trading plan and be a ‘line toucher.’

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

More...

Talking Points:

• Fear and greed are two drives that have big impacts in our lives
• These impacts carry over to trading, but may be detrimental
• Traders can use logic to reverse these drives by looking at the big picture

The statement can be made that these two emotions will denominate many of the decisions that you will face you in your life…

But this is a trading article, we’ll leave the grandiose psychological questions to brighter minds. However, for our purposes as a speculator it can help to at the very least know how these two drives might impact your decision-making processes.

Fear and Greed Defined

There are numerous traces of the origins of these two drives, but if analyzed logically they derive to the innate human ability to survive. This is somewhat related to the fight-or-flight instinct that exists in each and every one of us.
Fear is what we feel when we recognize a threat, like if we were foraging for berries in the forest and we happened across a black bear. In this situation, you should be scared; fear is a natural instinct that could help keep you alive. Greed could get you killed. If you just kept on your merry way, picking berries to your heart’s content; the black bear might find a ‘more filling’ meal.

Threats (like losing trades) should invoke fear, fear keeps you alive




Greed, on the other hand, also helps you survive. If we go to the same analogy as earlier, but this time you happened across a grasshopper and decided to let fear rule the day, you wouldn’t find that many berries now would you? Likely, you’d end up starving to death. When you see a grasshopper, you shouldn’t be afraid; and in this situation you should be greedy so that you can accumulate some berries.

Greed and fear are really just survival instincts. And in trading, we’ve got to do a lot more than just ‘survive.’
How in the World does this relate to trading?

Fear and greed impact many of the decisions you make on a chart, but the big question is as to whether or not they actually help you.

Think about the last few trades that you’ve placed.

Imagine that you wake up in the morning; you saunter over to your computer with a fresh shot of espresso in hand, and you look at your trades from the day before.
Imagine that you notice that Euro trade that you took last night just hit the skids, and you’re down 200 pips. What do you do?

Most people will begin rationalizing: ‘This was because of that bad German inflation report, this thing will come back.’
Others will just get greedy: ‘If I double down, this thing will be at break-even when it gets to my original entry price!’
And yet others will begin the bargaining process: ‘if this gets back to break-even, I’ll close it out and never do this again.’
Each of these responses are greed speaking. It’s almost as if you tapped the black bear on the shoulder as you tried to pick berries in a nearby bushel.

This is when you want to be scared… the position has already shown you a 200 pip loss; the black bear is standing just around the corner ready to eat you! The greedier you get, the nastier it will be.
Let’s go back to the morning. You wake up; you stroll to your computer with a macchiato ready for consumption and you see that the Euro trade you placed last night is up 50 pips.
A small delight!

It’s only 25% to your profit target, but your brain is already racing….

‘What if this comes back against me? Remember that trade from x days ago, when I had 300 pips up and it all came right back? What if that happens here?’

Most human beings begin ascribing all kinds of emotional conflict to this situation; and a lot of it is surely baggage from other areas of life that we all go through.

Primarily – this is the fear of failure; and we all have it.

Most human beings in this situation will be scared. Scared that the Euro will come right back against them, and take out their stop. Scared that they had success in the palms of their hands, and they let it get away… they failed and it’s all their fault!

This type couldn’t be more wrong…
Just as you can’t predict the next price on the chart when you place the trade, your powers of prediction get no greater because of the newly acquired 50 pip profit. It simply means that you have a position in which your analysis has proven correct.

This is prime time to err on the greedy side, ladies and gentlemen. The position has shown you a profit; and this confirms that your initial analysis was correct. Most people get scared here, but this is where you want to be greedy.

When you win, that is the time to be greedy




My advice to them: Chill out. It’s just one of a thousand insignificant trades that you’ll ever place.
Plan your trades ahead of time.
Set your stop, and only risk an amount that you can afford to lose. If the trade moves against you, take the stop and look for greener pastures elsewhere.

-- Written by James Stanley


More...

Talking Points:

• Traders should have a plan of action, when Forex trends end.
• Identify trading ranges by pinpointing swing highs and lows.
• Oscillators such as RSI can use overbought and oversold levels for market entries.

One rule that should be followed by every trader is to find a trading plan and stick with it. However, any experienced trader knows that they must remain flexible because the market isn’t always trending and moving in a singular direction! So what is a trader to do when some of the Forex markets most frequently traded pairs don’t have an established trend?

The answer itself is quite simple. When the market gives you a range, trade ranges! When markets are moving sideways, it can be easy to adapt one of your trending market strategies to present conditions. Often trending market traders will look to use indicators such as CCI, RSI, or MACD in conjuncture with support and resistance lines to trade market swings. The same philosophy can be used while range trading if you know what to look for.

Learn Forex – EURCHF Daily Range




Above we can see the EURCHF currency pair which has been locked in a trading range since the month of June. The range itself can be identified by moving from left to right on your chart and marking a series swing highs and swing lows. If price appears to be moving in a horizontal line you have probably identified a trading range. Any easy litmus test for a range is to determine if prices are heading higher or lower on your chart. If you find yourself debating if a chart is trending up or down, odds are your graph is trading in a range!

Now that a range has been identified, let’s look at a plan for trading the market.

Learn Forex – EURCHF RSI Signals




Above, we can now see an 8Hour EURCHF chart in conjuncture with the RSI (Relative Strength Index) indicator. When trading a range, traders can look to use RSI's overbought and oversold levels to determine where to enter the market. Unlike trend traders, range traders do have the ability to trade both sides of the market. This means range traders will look for both buying and selling opportunities.

To sell range traders can trigger orders when price moves off resistance and RSI crosses back below a reading of 70. As momentum returns price lower, traders can focus their targets near the support zone. Price moving towards support will also allow traders to initiate new buy positions. Traders will look to buy in a range as price bounces off support and RSI moves back over an RSI reading of 30. Pricing targets for buy orders will then focus on levels near resistance.
While the EURCHF is not currently trading at support or resistance, traders will wait patiently for the next decline or advance before entering into the market.

Managing Risk

Every strategy needs to have a plan for managing risk. Just like trends, ranges can abruptly come to an end and traders need to be prepared for that scenario. When trading ranges, stops should be kept out of the identified levels of support and resistance. If the event that price breaks above resistance or declines bellow support, the range should be considered invalidated. At that point, range traders should exit any existing positions and look for other trading options.

---Written by Walker England, Trading Instructor

More...