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How to Build and Trade Strategies

This is a discussion on How to Build and Trade Strategies within the Trading Systems forums, part of the Trading Forum category; Talking Points: Traders should look to utilize time frames based on their desired holding times and overall approach. New(er) traders ...

  1. #21
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    What is the ’Best’ Time Frame to Trade?

    Talking Points:

    • Traders should look to utilize time frames based on their desired holding times and overall approach.
    • New(er) traders should begin with a longer-term approach, and longer-term charts.
    • Traders can look to move to shorter-term charts as experience, and success allows.

    One of the most important aspects of a trader’s success is the approach being utilized to speculate in markets. Sometimes, certain approaches just don’t work for certain traders. Maybe its personality or risk characteristics; or perhaps the approach is just un-workable to begin with.

    In this article, we’re going to look at the three most common approaches to speculate in markets, along with tips for which time frames and tools can best serve traders utilizing those approaches. In each of these approaches, we’re going to suggest two time frames for traders to utilize based around the concept of
    Multiple Time Frame Analysis.

    When using multiple time frame analysis, traders will look to use a longer-term chart to grade trends and investigate the general nature of the current technical setup; while utilizing a shorter-term chart to ‘trigger’ or enter positions in consideration of that longer-term setup. We looked at one of the more common entry triggers in the article, MACD as an Entry Trigger; but many others can be used since the longer-term chart is doing the bulk of the ‘big picture’ analysis.

    The Long-Term Approach
    Optimal Time Frames: Weekly, and Daily Chart

    For some reason, many new traders do everything they can to avoid this approach. This is likely because new, uninformed traders think that a longer-term approach means it takes a lot longer to find profitability.
    In most cases, this couldn’t be further from the truth.

    By many accounts, trading with a shorter-term approach is quite a bit more difficult to do profitably, and it often takes traders considerably longer to develop their strategy to actually find profitability.

    There are quite a few reasons for this, but the shorter the term, the less information that goes into each and every candlestick. Variability increases the shorter our outlooks get because we’re adding the limiting factor of time.

    There aren’t many successful scalpers that don’t know what to do on the longer-term charts; and in many cases, day-traders are using the longer-term charts to plot their shorter-term strategies.

    All new traders should begin with a long-term approach; only getting shorter-term as they see success with a longer-term strategy. This way, as the margin of error increases with shorter-term charts and more volatile information, the trader can dynamically make adjustments to risk and trade management.

    Traders utilizing a longer-term approach can look to use the weekly chart to grade trends, and the daily chart to enter into positions.

    Longer-Term approaches can look to the weekly chart for grading trends, and the daily chart for entries

    After the trend has been determined on the weekly chart, traders can look to enter positions on the daily chart in a variety of ways. Many traders look to utilize price action for determining trends and/or entering positions, but indicators can absolutely be utilized here as well. As mentioned earlier, MACD is a common ‘trigger’ in these types of strategies and can certainly be utilized; with the trader looking for signals only taking place in the direction of the trend as determined on the weekly chart.

    The ‘Swing-Trader’ Approach
    Optimal Time Frames: Daily, and Four-Hour Charts

    After a trader has gained comfort on the longer-term chart they can then look to move slightly shorter in their approach and desired holding times. This can introduce more variability into the trader’s approach, so risk and money management should absolutely be addressed before moving down to shorter time frames.
    The Swing-Trader’s approach is a happy medium between a longer-term approach, and a shorter-term, scalping-like approach. One of the large benefits of swing-trading is that traders can get the benefits of both styles without necessarily taking on all of the down-sides.

    Swing-Traders will often look at the chart throughout the day in an effort to take advantage of ‘big’ moves in the marketplace; and this affords them the benefit of not having to watch markets continuously while they’re trading. Once they find an opportunity or a setup that matches their criteria for triggering a position, they place the trade with a stop attached; and they then check back later to see the progress of the trade.
    In between trades (or checking the chart), these traders can go about living their lives.

    A large benefit of this approach is that the trader is still looking at charts often enough to seize opportunities as they exist; and this eliminates one of the down-sides of longer-term trading in which entries are generally placed on the daily chart.

    For this approach, the daily chart is often used for determining trends or general market direction; and the four-hour chart is used for entering trades and placing positions.

    The Swing-Trader can look at the daily chart for grading trends, and the four-hour chart for entries

    But indicators can absolutely be used to trigger positions on the four-hour chart as well. MACD, Stochastics, and CCI are all popular options for this purpose.

    The Short-Term Approach (Scalping or Day-Trading)
    Optimal Time Frames: Hourly, 15 minutes, and 5 minutes

    I saved the most difficult approach for last.
    I’m not sure of exactly why, but when many traders come to markets – they think or feel like they have to ‘day-trade’ to do so profitably.

    As mentioned earlier, this is probably the most difficult way of finding profitability; and for the new trader, so many factors of complexity are introduced that finding success as a scalper or day-trader can be daunting.
    The scalper or day-trader is in the unenviable position of needing the move(s) with which they are speculating to take place very quickly; and trying to ‘force’ a market to make a move isn’t usually going to work out that well. The shorter-term approach also affords a smaller margin of error. Since less profit potential is generally available, tighter stops need to be utilized; meaning failure will generally happen quite a bit more often, or else the trader is opening themselves up to The Number One Mistake that Forex Traders Make.

    To trade with a very short-term approach, it’s advisable for a trader to first get comfortable with a longer-term, and swing-trading approach before moving down to the very fast time frames. But, once a trader is comfortable there, it’s time to start building out the strategy.

    Scalpers or day-traders can look to grade or evaluate trends on the hourly chart; and can then look for entry opportunities on the 5, or 15 minute time frames. The one minute time frame is also an option, but extreme caution should be used as the variability on the one-minute chart can be very random and difficult to work with. Once again, traders can use a variety of triggers to initiate positions once the trend has been determined, and we showed how to do this with MACD in the article, Scalping with MACD.

    Scalpers can look to the hourly chart to grade trends, and the 5 or 15 minute charts for entries

    ---Written by James Stanley


  2. #22
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    The 3 Step EMA and Renko Strategy for Trading Trends

    Talking Points:

    • Many Forex traders use weighted moving averages, called EMA’s, to trade currency pairs that are trending.
    • Determine the direction of the dominant trend direction with a 200 period EMA.
    • Use price crossing a 13 period MA as both an entry trigger and manual trailing stop

    Developed in the 18th century in Japan to trade rice, Renko charting is a trend following technique. It is excellent for filtering out price “noise” so traders can catch a major part a given Forex trend. It was believed that the name “Renko” originated from the Japanese word ‘renga’ meaning ‘brick’.
    Similar to Kagi and Point and Figure charting, Renko ignores the element of time used on candlesticks, bar charts, and line charts. Instead, Renko focuses on sustained price movement of a preset amount of pips.

    For example, a trader can set the bricks for as little as 5 pips or as many as 100 or more. A new brick will not be formed until price has moved 100 pips. It could take 24 hours for a new brick to form or it could take just a few hours. However, no bricks will form until the preset limit is achieved.

    Learn Forex – NZD/USD 4-Hour Renko Trend & 200EMA

    As you can see in the NZDUSD Renko chart above, each brick represents 10 pips of price movement. A 4-hour chart is used to actually load enough price data to be able to identify the direction of the trend.

    Green colored bricks are bullish, while red-colored bricks are bearish. Remember that the size of the brick can be setup when you first go through the steps of creating Renko chart. Swing traders may use 50 or 100 pip bricks to represent some fraction of the average daily trading range. While scalpers and day traders may look at 20, 10 or 5 pip bricks.

    Find the Trend Direction

    Renko charts can incorporate many of the usual technical indicators like stochastics, MACD, and moving averages. Today’s strategy will marry up Forex Renko charts with a 200 Exponential Moving Average (EMA) to find trend direction. Very simply, if price is trading above its 200 EMA, then the trend is up. If price is trading below its 200 EMA, then the trend is down.

    This filter will give us a directional bias much like a compass or GPS. We will look to only take long trades when the Renko bricks are trending above the 200 EMA. On the other hand, in a downtrend, if the Renko bricks are trending below the 200 EMA, then the trend down. Forex traders will only look to short the market. One of the biggest mistakes swing traders make is entering trades that go counter to the dominant trend.

    Learn Forex – NZDUSD two-Brick Renko crossover entry signal

    When to Get In

    After the dominant trend direction is determined, traders can use the simplicity of Renko charts with a single 13 period EMA as a ‘trigger’ to signal an entry in the direction of the major trend. First, wait for at least two green bricks to appear above the 13 EMA. Then enter long on the appearance of the second green brick above the 13 EMA.

    Exiting for Profit and for Loss

    Once a trader is “triggered” into the trade, a protective stop can be set one-brick size below the 13 EMA. As long as the bricks remain above the 13 EMA, we look to stay with the trend. Just as the 13 EMA can get you in a new trade, the same EMA can be used to stop out a winning trade locking in profits.

    Traders will need to manually move the stop one brick-size below 13 EMA and the current price brick. You can see in the example above how the combination of Renko and the 13 EMA helps traders stay with the trend a longer time.

    ---Written by Gregory McLeod Trading Instructor


  3. #23
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    How to Trade a Triangle after a False Breakout

    Talking Points:

    • GBPJPY broke out of a 967 pip symmetrical triangle that had a target over 180.00
    • The advance from the breakout point of 171.13 was halted at 173.56 and price turned down
    • A new triangle can be drawn taking into account the new swing points created by the false breakout

    Forex symmetrical triangles are important price patterns relied on by traders to identify periods of consolidation ahead of an anticipated large breakout. Traders like using triangle price patterns because they have risk to reward parameters which are easy to determine from the pattern itself.

    Not only can the stop be placed just outside the pattern, but a limit can be determined by measuring the height of the pattern and projecting this distance in pips from the breakout point. This is called a measurement objective.

    Thomas Bulkowski in his book, Encyclopedia of Chart Patterns stated that symmetrical triangles meet their upside targets 66% of the time. However, the recent GBPJPY triangle that was posted in my March 4th 2014 article was part of the 33% of triangle breakout failures.

    Learn Forex – GBPJPY Symmetrical Triangle False Breakout

    As you can see in the chart above of the GBPJPY symmetrical triangle, a breakout happened at 171.13. Initially, wide ranging candlesticks breaking above the top of the symmetrical triangle may have led traders to believe the up move had more to go. However, the doji candlestick pattern was joined by a bearish candlestick forming a Japanese candlestick evening star pattern at 173.56 capped this rally.

    From this point, we can see an acceleration in bearish price action as a series or red candlesticks form Bullish breakout traders are now caught in what is called a “bull trap” in the 167.60 area. Stops are triggered and longs are shaken out. Today, we see a strong surge in yen weakness and GBPJPY rebounds. The question now is, “Should traders give GBPJPY another chance?”

    Learn Forex – GBPJPY Daily Chart Revised Symmetrical Triangle

    A New Triangle Emerges

    If the fundamental and technical reasons that existed when the trade was made still exist after a stop out, then we would consider re-entering the trade. However, forex triangle traders may make modifications to the initial triangle in order to take into account the new swing highs and swing lows.
    First of all, the new swing high which was created by the false breakout is connected to a higher previous high. Next, the new swing low which was created by breakout below support is connected by an upward sloping trend line from the previous swing low. The result is a new symmetrical triangle with new buy and sell parameters. New limits are set as well.

    How to Trade this New Triangle

    The breakout method for trading a symmetrical triangle has not changed. However, the triangle has become bigger. Despite the big GBPJPY big 350-pip run-up today to 171.05, GBPJPY is another 250 pips from making a confirmed triangle breakout. Triangle resistance is at 172.70 area making a long GBPJPY trade too early of a proposition now.

    If and when GBPJPY trades above 173.56, a stop can be placed beneath the last swing low of the triangle at around 167.40 with an upside target of 183.91. On the other hand, a close below 167.40 would trigger a sell signal for a bears to trade the triangle south with a target of 156.75.
    After the last false breakout, traders may ask GBPJPY to “show them the pips” with a confirmed triangle breakout before going long GBPJPY a second time

    ---Written by Gregory McLeod Trading Instructor


  4. #24
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    How to Trade the EURJPY Double Top

    Talking Points:

    • The Double Top is bearish price pattern that consists of two peaks with a trough in between forming an M-shape.
    • The double top’s height in pips is used to project the distance of a bearish breakout.
    • EURJPY has formed a double top price pattern on the daily time frame chart.

    Chart patterns, like the forex double top are warning signs that the current trend is about to reverse. In the double top, a bullish surge forms the first peak. Next there is a profit taking decline that ends at a level of support. As price rebounds from this level, bargain hunters and other buyers jump back into the market anticipating a move to new highs.

    However, as price returns to the general area of the last peak, buying momentum starts to evaporate. Price struggles with the old high and traders start dumping their positions. Price’s failure to make a new high sparks bearish sellers to come en masse to drive prices lower.

    Learn Forex – Double Top Diagram

    As we can see in the Forex Double Top diagram, the signature M-formation illustrates bears taking control of price action. However, the goal for the sellers is to drive price below the neckline. This would confirm that this pattern is, in fact, a double top. It is at that red circle that Forex traders will look to enter short.

    Remember those bargain hunters that got long earlier? Well now those stops are located below this neckline. Stops that protect long positions become sell orders at market when price touches them. This push through neckline creates the acceleration that the sellers are looking for. Usually, the height of the forex double top can be projected from the neckline to determine a price objective.

    Learn Forex – EURJPY Daily Chart Double Top

    A Real Time Example: EURJPY Daily Chart

    Now that you have seen a textbook double top chart, let’s look at current trade setup. In the EURJPY daily chart we see a strong 660-pip rally that ended on 3/7 at 143.77. Next, a 50% profit-taking decline took price to the 139.93 level before bargain hunters jumped on board for a ride to new highs. However, the EURJPY advance stalled on 4/2 just shy of the old high. Price began falling back to the neckline found in the 140.00 region. Though not a textbook double top, some leeway can be granted when comparing the peaks.

    EURJPY is holding a trendline in the 140.00 area. Round numbers can be formidable areas of support. In this case, we would want to see price break and close below the 140.00 area and the neckline. It may pay to wait for the price action to confirm the double top pattern. If our price is not hit, then we will need to look for another trade as our entry criteria was not hit.

    Sometimes, after a breakout, price returns to retest the breakout point. This would be a favorable entry as the stop could be placed above the last swing high. Again the key is not to jump in early but wait for convincing confirmation.

    Taking Profit

    The height of this EURJPY Double top pattern is approximately 382-pips. From this we can project a target of 135.81. However, there is a bit of support circled on the chart at 136.20 that could be strong enough to turn prices upward. In sum, the forex double top should be viewed with much suspicion until confirmation is shown. Once price closes below support, the move down can be a rewarding one.

    ---Written by Gregory McLeod Trading Instructor


  5. #25
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    The 3 Step No-Hassle Breakout Strategy

    Talking Points:

    • Volatility breeds breakout trading opportunities.
    • 24-period Donchian Channel on an Hourly chart can give us medium term trade entries.
    • Stops can be set opposite of the channel break using 1:2 risk and reward ratio.

    While trend trading makes up the bread and butter of my personal trading account, I also employ a breakout strategy that has yielded positive results. It’s true that breakout strategies require more time and energy than longer term trend strategies, but breakouts are easy to trade when you have set rules to follow.

    The ideal breakout trade is on a currency pair that has exhibited a high level of volatility and then breaks a key support or resistance level. Pairing this type of opportunity with a sound money management plan can result in a trading edge. Today, we are going to lay out this simple, no-hassle breakout strategy in 3 steps.

    Step 1: Look for Volatility

    Not all market conditions are ripe for breakout trading. We need to first find the pairs that have shown the most volatility.

    Learn Forex: DailyFX Technical Analysis - Volatility

    The image above shows volatility highlighted in red. A 0% reading means a pair has shown almost no volatility while a reading of 100% means the pair has shown an extreme level of volatility. For the purposes of breakout trading, we recommend a reading of 75% or greater. So we need to make note of each pair with volatility above 75% before we move on to our charts.

    Step 2: Find Trade Entries Using Donchian (Price) Channels

    Support and resistance levels are subjective and can vary from trader to trader. So to more clearly define our entry levels, we use Donchian Channels or Price Channels.

    Once installed, you will find the Donchian Channel on your indicator list. The following are what settings we will use for spotting entries on an Hourly (H1) chart.

    Learn Forex: Donchian Channel Settings

    Once applied, we will see two blue lines on our chart, one above the price and one below. These lines will act as our trigger for placing a trade. If an hourly candle closes above the top blue line, we initiate a buy trade at market. If an hourly candle closes below the bottom line, we initiate a sell trade at market. Nice and simple.

    Step 3: Easy Exits Using Stops and Limits

    No strategy is complete without an exit strategy. Fortunately, the Donchian Channel can assist in setting one up. We first want to focus on our stop. I recommend setting our stop loss beyond the other side of the channel. So if the price broke below the bottom line and created a sell trade, we would set our stop a few pips above the top line. If price broke above the top line and created a buy trade, we would set our stop a few pips below the bottom line. The image below shows an example of a recent sell signal on the GBPUSD with a stop loss set above the top line.

    Learn Forex: GBPUSD Breakout Trade

    After we have set our stop above the upper channel line, we want to set our limit twice as far as our stop. So if our stop was 55 pips away from our entry, we would set our limit 110 pips away. The goal is to give us a 1:2 risk reward ratio which is an important piece of a winning strategy.

    Give Me a Break
    Trading breakouts doesn’t have to be hard. Once we know what rules to follow, everything falls into place. We want to find a volatile currency pair, witness a break of the 24-hour Donchian channel, and set a stop loss beyond the channel with a limit set twice as far. Feel free to email me with any questions you have.

    Good trading!
    ---Written by Rob Pasche


  6. #26
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    How Oscillators Can Show You If You

    Talking Points:

    • The Value of Oscillators
    • The Pain of Trading Against The Trend
    • How Price Action & Oscillators Behave Counter-Trend

    “Most trend pullbacks follow just enough of a climax to make traders wonder if the trend has ended and trap traders out of entering on the pullback. Also the trend reversals are just good enough to attract and trap Countertrend traders. If you trade Countertrend, you are gambling, and although you will often win and have fun, the math is against you, and you will slowly but surely go broke. Countertrend setups in strong trends almost always fail and become great With Trend setups..."
    -Al Brooks, Reading Price Charts Bar by Bar

    Oscillators can be one of the most valuable tools in a trader’s arsenal. A big reason for its value is that very few tools can help you see a great risk: reward set-up when a price action correction is coming to an end. Put in other words, an oscillator helps you see the exhaustion of a move so that you can enter near the exhaustion point of a prior trend.
    However, it would be a disservice to you if you were led to believe that a stretched oscillator was a great entry.

    Unfortunately, after many new traders learn about the benefits of oscillators, they believe they’ve received the golden key to trading profits and start buying low and selling high. A few steps back from the chart though and you’ll quickly see that only side of the trade is worth taking based on how price action reacts to an unwinding oscillator.

    Learn Forex: Trading With the Trend Is Always Preferable

    The Pain of Trading Against the Trend

    The problem with trading against the trend is that it works every now and then. However, as a trader, it’s easy to agree with the words of John Maynard Keynes who said, “Markets can stay irrational longer than you can say solvent.” This sounds like someone who thought they had sold the top only to find they entered against a very strong trend that has no intention in stopping soon.

    From talking to thousands of trader’s over the years, I’ve recognized a handful of reasons for trading against the trend. While this is not a definitive list, I’ve seen these three play out over and over again:

    • The excitement of being right while everyone else is wrong
    • The thought that the trend is overbought and due for a deep set-back
    • The feeling that the biggest money will be made on the big turn

    It’s not wrong to feel this way. However, for most, it’s not profitable to trade this way and they’re falling prey to mental biases as opposed to good analysis. The reason that countertrend trading can be unprofitable for many to trade is because if you enter emotionally, you often exit emotionally. Exiting emotionally is a nice way of saying that you exit after a lot of your capital has been eaten up on a bad trade from the start.

    How Price Action & Oscillators Behave Counter-Trend

    As you can see from the chart above, the oscillator often moved from extreme high to extreme low. Extreme lows are usually anything below 20 and extreme highs are usually anything over 80. Extreme highs are deemed to be overbought markets ready for a turn lower and extreme lows are deemed to be oversold and due for a bounce higher.

    Learn Forex: Find Out if Price Rises Proportionally To the Oscillator

    This chart brings a little more detail but the idea is clear. When you’re trading with an oscillator and you realize that price action is correcting disproportionally to the oscillator you’re trading against the trend. If you hold onto this type of trade then you could get steam-rolled when the oscillator unrolls back in the direction of the overall trend. Given the recent 500+ pip move in AUDUSD higher, if price unwinds disproportionally to the oscillator, then it may be best to get out of a short trade or consider rejoining the AUDUSD trend higher while managing your risk.

    Happy Trading!
    ---Written by Tyler Yell, Trading Instructor


  7. #27
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    How to Combine Fibonacci and RSI for Trading Ideas

    Talking Points:

    • Use Fibonacci to identify levels of support and resistance
    • Use the Relative Strength Index (RSI) to confirm when a turn may be taking place
    • Enter the trade with at least a 1:2 risk-to-reward ratio

    Fibonacci retracement ratios have been used by traders for many years. The ratios can identify hidden levels of support and resistance as it identifies areas where a partial retracement may reverse. For those unfamiliar with Fibonacci, the common retracement ratios are 38.2%, 50%, 61.8%.
    As traders are learning about the Fibonacci ratios for the first time, the next logical question the students ask is “how do I know which ratio to focus on?”
    It is a good question and the market’s price action will provide a clue if a particular Fibonacci retracement ratio is likely to be respected creating a market turn.
    Said another way, rather than blindly entering into a trade because it hit a particular retracement ratio, how about if we let the market provide us confirmation signals that it is likely to turn?

    We can use the Relative Strength Index (RSI) to help us confirm if a Fibonacci ratio is repelling prices.

    Learn Forex: RSI Confirmation of a Fibonacci Retracement Level

    As we can see above, the USD/JPY has the three Fibonacci retracement levels added to the chart (horizontal blue lines). The first level, the 38.2% level, barely resisted prices.
    However, we can now see that the 50% level is providing some resistance. Additionally, the RSI is showing divergence which is a bearish signal as well.
    Divergence is where the price makes higher highs, but the oscillator makes lower highs. Divergence means that momentum is slowing. Slowing momentum into a resistance level is a good recipe for a trading opportunity.

    When prices fell below the black support trend line, which is further confirmation that the temporary uptrend is losing momentum. A trader would enter on a break of the black trend line, then place the stop loss just above the recent swing high.

    Look to take profits at a distance at least twice the size of the distance to your stop loss. This will give you a 1:2 risk to reward ratio.
    Let the trade evolve until it reaches your stop loss or take profit level.

    Risk a small portion of your account balance, less than 5%, on all open trades.

    Good luck and happy trading!
    ---Written by Jeremy Wagner, Head Trading Instructor, DailyFX


  8. #28
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    Overbought vs. Oversold and What This Means for Traders

    Talking Points:

    • Overbought means an extended price move to the upside; oversold to the downside.
    • When price reaches these extreme levels, a reversal is possible.
    • The Relative Strength Index (RSI) can be used to confirm a reversal.

    Like many professions, trading involves a lot of jargon that is difficult to follow by someone new to the industry. It’s our job as instructors to fill in as many knowledge gaps as possible to make the education process as simple as possible. Today, we will take a look at what it means for a currency pair to be overbought or oversold, and most importantly, what trading opportunities arise from these situations.

    Overbought vs. Oversold

    These two terms actually describe themselves pretty well. Overbought describes a period of time where there has been a significant and consistent upward move in price over a period of time without much pullback. This is clearly defined by a chart showing price movement from the “lower-left to upper-right” like the chart shown below.

    Learn Forex: USDJPY Hourly Chart – Overbought

    The term Oversold describes a period of time where there has been a significant and consistent downward move in price over a period of time without much pullback. Basically a move from the “upper-left to the lower-right.”

    Learn Forex: USDCHF Hourly Chart – Oversold

    Because price cannot move in one direction forever, price will turn around at some point. Currency pairs that are overbought or oversold sometimes have a greater chance of reversing direction, but could remain overbought or oversold for a very long time. So we need to use an oscillator to help us determine when a reversal is actually occurring.

    Reading the RSI

    There is a quick tool you can use to gauge overbought and oversold levels, the Relative Strength Index. For a full explanation for how to use the RSI, click here for a FREE video course. The premise is simple, however. When RSI moves above 70, it is overbought and could lead to a downward move. When RSI moves below 30, it is oversold and could lead to an upward move.

    Learn Forex: Relative Strength Index, Overbought and Oversold Levels

    But, we must be patient before we enter our trades, because sometimes the RSI can stay overbought or oversold for quite awhile. The worst thing we can do is try to pick a top or a bottom of a strong move that continues to move into further overbought or oversold territory. So we must wait until the RSI crosses back under 70 or crosses back above 30.

    Learn Forex: Relative Strength Index, Overbought and Oversold Levels

    The image above shows the RSI clearly breaking above the 70 level resulting in an overbought reading, but we do not want to immediately sell because we do not know how far price could continue to rally. We want to wait until the RSI falls back below 70 and then place our sell trade. This gives us a better entry and a higher probability trade.

    When the RSI falls below 30, same rules apply. We want to wait until the RSI crosses back above 30 before we place a buy trade.
    Putting RSI to Work

    Good trading!
    ---Written by Rob Pasche

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  9. #29
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    Why Traders Lose Money

    Talking Points:

    • There is a large chasm between trading and analysis.
    • Analysis can assist with winning percentages, but this doesn’t always equate to profitability.
    • Traders need to learn to manage risk if they ever hope to be consistently profitable.

    While the title of this article can have broad implications with numerous explanations, we’re going to do our best to reduce the answer to this query to the most logical and basic explanation.

    When a trader first gets started, it might be hard to imagine how getting control of losses can seem an impossible task. It may even feel like the cards are stacked against you… situations in which you’re right in your analysis, yet you still lose on the trade and watch capital disappear from your trading account.

    So, a natural question is why some traders consistently make money while others lose, even when they’re right. That is what we will be investigating in this article.

    The Difference between Trading and Analysis

    Many new traders come to the market with a bias or point-of-view. Perhaps this is built from a background in economics, or finance, or maybe just a keen interest in politics. But one of the biggest mistakes a trader can make is harboring the expectation that ‘the market is wrong and prices have to come back.’

    But let’s face it: Markets are unpredictable, and it doesn’t matter what type of analysis you use. As new information comes into the market, traders and market makers price it accordingly; because these folks don’t want to lose money just as much as you don’t want to lose money.

    Is this to say that analysis is worthless? Absolutely not: It merely means that analysis is only a part of the equation of being a successful trader. Analysis is a way to potentially get the probabilities on the trader’s side, even if just a by a little bit; a way to maybe get a 51% or 52% chance of success as opposed to a straight-up coin flip.

    Good analysis, whether it be fundamentally-driven or technically-driven, can be right a majority of the time. But no form of analysis will ever be right all of the time. And this is the reason that there is such a large chasm between analysis and trading.

    In analysis, it doesn’t matter how wrong you are when you aren’t right. In trading, this matters quite a bit. Because even if you’re winning on 70% of your trades, if you’re losing $3 for every trade in which you’re wrong but only making $1 every time that you’re right, you’re still losing. It might feel good, because 70% of the time you’re walking away from your positions with the feeling of success; and as human beings this is something we generally strive for (to feel good).

    The example below shows how bad risk management can destroy even a strong winning percentage of 70% success.

    But logically, it doesn’t make sense to embark on this type of endeavor because the goal of trading is to make money; not necessarily to just ‘be right’ more than 50% of the time.

    How to actually trade analysis

    First thing first, traders need to crystallize what their actual goal is in trading in markets; and point-blank, that goal should be to make money.

    After that, traders need to expect that they will, at times, be wrong.

    So given these two facts, the next logical assumption is that without being able to control the damage from those instances in which we’re wrong, the prospect of profitability is a distant one.

    So risk management isn’t just a preference or a style of trading: It’s a necessity for long-term profitability. Because even if you’re winning 90% of the time, the losses on the other 10% can far outstrip the gains that are made on the 90%.
    I fully realize this isn’t necessarily exciting information. When I teach risk management, rarely do a see a student-trader ready to burst out of their seats to go and manage some risk. Most people want to hear about entry strategies, and analytical methods to try to get those odds of success tilted even higher in their favors.

    But until a trader learns to manage their risk, much of this additional work is a moot point. Because as long as the risk exists that one bad position can and will wipe away the gain from many other ‘good’ positions; that trader is going to struggle to find profitability.
    So, to properly trade analysis one needs to first observe proper risk management. Because trading isn’t just ‘guessing’ and ‘hoping’ that we get it right. Profitable trading is implementing analysis while properly managing risk factors; implementing a defensive approach so that when one is wrong, the losses can be mitigated and when one is right, profits can be maximized.

    How can one begin to use ‘proper’ risk management?

    We’ve already encountered one of the biggest mistakes of risk management, and that’s controlling the size of the losses relative to the size of the gains.

    The solution is simple; implementing it not as much. As human beings, we often follow our gut instincts or our ‘feelings.’ But in trading, we have to keep the bigger picture in mind. When we place a trade, we often try to win on that one trade. This can keep traders holding on to losers for far too long, and closing out winners way too quickly.

    Traders can adjust strategies to focus on lower-risk, higher reward types of setups

    The way to fix the Top Trading Mistake is to simply look to make more when you’re right than you lose when you’re wrong. That’s it. This can be done by setting stops and limits on every trade that is placed to reinforce that minimum 1-to-1 risk-to-reward ratio.
    Unfortunately, risk management isn’t as simple as just setting a stop and setting a limit. After all, if a trader takes on a position that’s way too large relative to the size of their account, even if using a 1-to-2 or 1-to-3 risk to reward ratio; that one trade could completely wipe them out.

    This is similar to the advice of ‘not putting all of your eggs in one basket.’ And while this concept is simple for equity investors that have seen stock prices fall off-of-a-cliff, highlighting the fact that investing in just one stock can be so dangerous, traders should look at the art of speculation in a similar light.

    --- Written by James Stanley


  10. #30
    Senior Member ForeCastle's Avatar
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    Apr 2013
    Blog Entries

    Learn Forex: Finding Trends in Trendless Markets (Part 2)

    Talking Points:

    • Elliott Wave Principle can guide us on where we are in a trend
    • EUR/CAD is displaying three different patterns rooted in Elliott Wave that suggests this down trend has just started
    • Price may bounce temporarily into resistance, look to sell the bounce

    This is the second part of this article series. The first part was regarding the strong trend the Chinese Yuan, which is now available to trade.

    The objective of this series is to find tradable trends when the market appears to be stagnating. Trend following is one of the most popular strategies used by new and experienced traders. When market volatility dies down, the old trends tend to move sideways creating frustration for the trader. There are strong trends out there and this series will help shine a light on those trends presenting tradable opportunities.

    Today’s opportunity is with the EUR/CAD. There are three patterns appearing at different time frames suggesting a meaningful top is in place and that more downside potential remains.

    Learn Forex: EURCAD Trend Shifts Down

    From a 4 hour price chart, it appears the EUR/CAD has carved out an ending diagonal. In this case it is a bearish pattern that suggests prices will likely fall towards the origination of the pattern at 1.4900. Keep this level in mind as we zone in on smaller time frames to fine tune our entry and exit plan.

    Learn Forex: 2 Different Time Frames Forming 5 Waves Down

    From the high on March 20, 2014, prices clearly fell in five waves in impulsive fashion to a low of 1.5003. So far prices have only partially retraced the high from March.

    The Elliott Wave Principle illustrates that trends move in a five wave impulsive fashion and corrects in three waves (the blue labels above and the corrective waves labeled as A-B-C). Therefore, with a five wave move lower, this suggests that the trend may be shifting from up to down with a minimum target of 1.4900 which was the origination of the ending diagonal pattern (first chart).
    Upon closer inspection, we can see how the price action over the past two days has yielded clue of a bearish trend. Zooming into the tan boxed area, we can see another smaller degree five wave move lower (green labels). All of these patterns suggest the EUR/CAD pair has likely put in a top with an initial target of 1.4900.

    The Trade Set Up

    Therefore, our trading opportunity is to short the EURCAD in the 1.5200 to 1.5230 zone. Our stop loss will be just above the April 27 high at 1.5320. Look to take profits near 1.4900.

    Therefore, if we risk 90 pips with an opportunity to make over 300 pips, this provides us with better than a 1-to-3 risk-to-reward ratio.

    If you need help on determining a trade size appropriate for your account size, register to take this free Money Management course. Towards the end of the course, you will be given an opportunity to download a free app that will help you determine what trade size to make based on your account size.

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


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