Learn the basics of Forex
trading. It's amazing how many people simply don't know what they're doing. In
order to compete at the highest level in the trading business and be one of the
few truly successful participants you must be well-educated about what you are
doing. This does not mean having a degree from a well-respected university -
the market doesn't care where you were educated.
Forex trading is a zero sum
game. For every long there is also a short. If 80% of the traders are on the
long side, then the remaining 20% are on the short side. This means further
that the shorts must be well capitalized and are considered to be strong hands.
The 80%, who are holding much smaller positions per trader, are considered to
be weaker hands who will be forced to liquidate those longs on any sudden turn
in prices.
Nobody is bigger than the
market.
The challenge is not to be the
market, but to read the market. Riding the wave is much more rewarding than
being hit by it.
Trade with the trends, rather
than trying to pick tops and bottoms.
Trying to pick tops and
bottoms is another common fx trading mistake. If you're going to trade tops and
bottoms, at least wait until the price action actually confirms that a top or a
bottom has been formed before you take a position in the market. Trying to
pin-point tops and bottoms in the foreign exchange market is very risky, but
exercising a little patience and waiting for a proven top or bottom to form can
increase your odds of profiting and somewhat reduce your risk.
There are at least three types
of markets: up trending, range bound, and down. Have different trading
strategies for each.
Standing aside is a position.
In uptrends, buy the dips; in
downtrends, sell bounces.
In a Bull market, never sell a
dull market, in Bear market, never buy a dull market.
Up market and down market
patterns are ALWAYS present, merely one is more dominant. In an up market, for
example, it is very easy to take sell signal after sell signal, only to be
stopped out time and again. Select trades with the trend.
A buy signal that fails is a
sell signal. A sell signal that fails is a buy signal.
Let profits run, cut losses
short.
Let your profits run, but
don't let greed get in the way. Once you've already made a nice profit on a
trade, consider taking either some or all of the money off the table and move
on to the next trade. It's natural to hope that one trade will end up as your
"winning lottery ticket" and make you rich, but that is simply not
realistic. Don't hold the position too long and end up giving all your well-deserved
profits back to the market.
Use protective stops to limit
losses.
Use appropriate stop-loss
orders at all times to cut your losses and never, ever sit back and let your
losses run. Almost every trader at some point makes the mistake of letting his
or her losses run in hopes that the market will eventually turn around in his
or her favor but, more often than not, it simply leads to an even greater loss.
You win some, you lose some. Simply learn to cut your losses, take your
occasional lumps and move on to the next trade. And if you made a mistake,
learn from it and don't do it again. To avoid letting your losses run, get into
the habit of determining an acceptable profit target as well as an acceptable
risk tolerance level for each and every Forex trade before entering the market.
Then simply place a stop-loss order at the appropriate price - but not so tight
(close to the market) that the stop could quickly take you out of the position
before the market has a chance to move in your favor. Using a stop is always
the smart move.
Avoid placing protective stops
at obvious round numbers. Protective stops on long positions should be placed
below round numbers (10, 20, 25, 50,75, 100) and on short positions, above such
numbers.
Placing stop loss is an art.
The trader must combine technical factors on the price chart with money
management considerations.
Analyze your losses. Learn
from your losses. They're expensive lessons; you paid for them. Most traders
don't learn from their mistakes because they don't like to think about them.
Stay out of trouble, your
first loss is your smallest loss.
Survive! In Forex trading, the
ones who stay around long enough to be there when those "big moves"
come along are often successful.
If you are a new trader, be a
small trader (mini account) for at least a year, then analyze your good trades
and your bad ones. You can really learn more from your bad ones.
Don't trade unless you're well
financed... so that market action, not financial condition, dictates your entry
and exit from the market. If you don't start with enough money, you may not be
able to hang in there if the market temporarily turns against you.
Be more objective and less
emotional.
Use money management
principles.
Money management increases the
odds that the trader will survive to reach the long run.
Diversify, but don't overdo
it.
Employ at least a 3 to 1
reward-to-risk ratio.
Calculate the risk/reward
ratio before putting a trade on, then guard against holding it too long.
Don't trade impulsively; have
a plan.
Have specific goals and
objectives.
Five steps to build a trading
system:
Start with a concept
Turn it into a set of
objective rules
Visually check it out on the
charts
Formally test it with a demo
Evaluate the results
Plan your work and work your
plan.
Trade with a plan - not with
hope, greed, or fear. Plan where you will get in the market, how much you will
risk on the trade, and where you will take your profits.
Follow your plan. Once a
position is established and stops are selected, do not get out unless the stop
is reached or the fundamental reason for taking the position changes.
Any successful trading system
must take into account three important factors: price forecasting, timing, and
money management. Price forecasting indicates which way a market is expected to
trend. Timing determines specific entry and exit points. Money management
determines how much to commit to the trade.
Don't cherry-pick your
system's set-ups. Trade every signal.
Trading systems that work in
an up market may not work in a down market.
Establish your trading plans
before the market opening to eliminate emotional reactions. Decide on entry
points, exit points, and objectives. Subject your decisions to only minor
changes during the session. Profits are for those who act, not react.Don't change
during the session unless you have a very good reason.
Double-check everything.
Always think in terms of
probabilities. Trading is all about thinking in probabilities NOT certainties.
You can make all the "right" decisions and the trade still goes against
you. This does not make it a "wrong" trade, just one of the many
trades you will take which, through probability, are on the "loosing"
side of your trading plan. Don't expect not to have negative trades - they are
a necessary part of the plan and cannot be avoided.
The place to start your market
analysis is always by determining the general trend of the market.
Trade only with a strategy
that you've proven to yourself.
When pyramiding (adding
positions), follow these guidelines:
Each successive layer should
be smaller than before.
Add only to winning positions.
Never add to a losing
position. One of the few trade management rules that we can state we never
break is 'Never add to a losing trade'. Trades are split into winners and
losers, and if a trade is a loser, the chances of it turning right around and
becoming a winner are too small to risk more money on. If indeed it is a winner
disguised as a loser, why not wait until it shows it's true colors (and becomes
a winner)before you add to it. If you do this you will notice that nearly
always the trade ends up hitting your stop loss and does not look back.
Sometimes the trade turns around before it hits your stop and becomes a winner
and you can count yourself very fortunate. Sometimes the trade hits your stop
loss and then turns around and becomes a winner and you can count yourself
unlucky.
Whatever the result, it is
never worth adding to a loser, hoping that it will become a winner. The odds of
success are just too low to risk more capital in addition to the initial risk.
Adjust protective stops to the
breakeven point.
Risk Control
Never risk more than 3-4
percent of your capital on any trade
Predetermine your exit point
before you get into a trade
If you lose a certain
predetermined amount of your starting capital, stop trading, analyze what went
wrong, and wait until you feel confident before you begin trading
Don't trade scared money. No
one ever made any money trading when they had to do it to pay the mortgage at
the end of the month. Having a requirement to make X dollars per month or you
will be financially in trouble is the best way I know to completely mess up all
trading discipline, rules, objectives, and leads quickly to disaster. Trading
is about taking a reasonable risk in order to achieve a good reward. The
markets and how and when they give up their profits is not under your control.
Do not trade if you need the money to pay bills. Do not trade if your business
and personal expenses are not covered by another income stream or cash reserve.
This will only lead to additional unmanageable stress and be very detrimental
to your trading performance.
Know why you are in the
markets. To relieve boredom? To hit it big? When you can honestly answer this
question, you may be on your way to successful Forex trading
Never meet a margin call;
don't throw good money after bad.
Close out losing positions
before the winning ones.
Except for very short term
trading, make decisions away from the market, preferably when the markets are
closed.
Work from the long term to the
short term.
Use intraday charts to
fine-tune entry and exit.
Master interday trading before
trying intraday trading.
Don't trade the time frame.
Trade the pattern. Reversal patterns, hesitation patterns and breakout patterns
appear often. Learn to look for the pattern in any time frame.
Try to ignore conventional
wisdom; don't take anything said in the financial media too seriously.
Always do your homework and
stay current on global events. You never know what's going to set off a
particular currency on any given day.
Learn to be comfortable being
in the minority. If you are right on the market, most people will disagree with
you. (90% losers,10% winners).
Technical analysis is a skill
that improves with experience and study. Always be a student and keep learning.
Beware of all tips and inside
information. Wait for the market's action to tell you if the information you've
obtained is accurate, then take a position with the developing trend.
Buy the rumor, sell the news.
K.I.S.S - Keep It Simple Stupid,
more complicated isn't always better.
Timing is especially crucial
in Forex trading.
Timing is everything in Forex
trading. Determining the correct direction of the market only solves a portion
of the trading problem. If the timing of the entry point is off by a day, or
sometimes even minutes, it can mean the difference between a winner or a loser.
A "buy and hold"
strategy doesn't apply in Forex trading.
When you open an account with
a broker, don't just decide on the amount of money, decide on the length of
time you should trade. This approach helps you conserve your equity, and helps
avoid the Las Vegas
Carry a notebook with you, and
jot down interesting market information. Write down the market openings, price
ranges, your fills, stop orders, and your own personal observations. Re-read
your notes from time to time; use them to help analyze your performance.
Don't count profits in your
first 20 trades. Keep track of the percentage of wins. Once you know you can
pick direction, profits can be increased with multi-plot trading and variations
in using your stops. In other words, now is the time to get serious about money
management.
"Rome
Do not overtrade.
Have two accounts. One real
account and the other a demo account. Learning doesn't stop when trading real
dollars begins. Keep the demo account and use it to test alternative trades,
alternative stops, etc.
Patience is important not only
in waiting for the right trades,but also in staying with trades that are
working.
You are superstitious; don't
trade if something bothers you.
Technical analysis is the
study of market action through the use of charts, for the purpose of
forecasting future price trends.
The charts reflect the bullish
or bearish psychology of the marketplace.
The whole purpose of charting
the price action of a market is to identify trends in early stages of their
development for the purpose of trading in the direction of those trends.
The fundamentalist studies the
cause of market movement, while the technician studies the effect.
Rising commodity prices
generally hint at a stronger economy and rising inflationary pressure. Falling
commodity prices usually warn that the economy is slowing along with inflation.
The longer the period of time
that priced trade in a support or resistance area,the more significant that
area becomes.
There are three decisions
confronting the trader -whether- to go long, go short or do nothing. When a
market is rising, the best strategy is preferable. When the market is falling,
the second approach would be correct. However, when the market is moving
sideways, the third choise - to stay out of the market - is usually the wisest.
Channel lines have measuring
implications. Once a breakout occurs from an existing price channel, prices
usually travel a distance equal to the width of the channel. Therefore, the
trader has to simply measure the width of the channel and then project that
amount from the point at which either trendline is broken.
The larger the Pattern, the
Great the potential. When we use the term "larger", we are referring
to the the height and the width of the price pattern. The height measures the
volatility of the pattern. The width is the amount of time required to build
and complete the pattern. The greater the size of the pattern-that is, the
wider the price swings within the pattern (the volatility ) and the longer it
takes to build - the more important the pattern becomes and the greater the
potential for the ensuing price move.
The breaking of important
trendlines. The first sign of an impending trend reversal is often the breaking
of an important trendline. Remember however, that the violation of a major
trendline does not necessarily signal a trend reversal.The breaking of a major
up trendline might signal the beginning of a sideways price pattern, which
later would be intedified as either the reversal or consolidation
type.Sometimes the breaking of the major trendline coincides with the
completion of the price pattern.
The minimum requirement for a
triangle is four reversal points. Remember that it always takes two points to
draw a trendline.
The moving average is a
follower, not a leader. It never anticipates; it only reacts. The moving
average follows a market and tells us that a trend has begun, but only after
the fact.
Shorter term averages are more
sensitive to the price action, whereas longer range averages are less
sensitive.In certain types of markets, it is more advantageous to use a shorter
average and, at other times, a longer and less sensitive average proves more
useful.
When the closing price moves
above the moving average, a buy signal is generated. A sell signal is given
when prices move below the moving average.
A buying signal on a
two-moving average combination occurs when the shorter term of two consecutive
averages intersects the longer one upward. A selling signal occurs when the
reverse happens, and the longer of two consecutive averages intersects the
shorter one downward.
Shorter average generates more
false signals, it has the advantage of giving trend signals earlier in the
move. The trick is to find the average that is sensitive enough to generate
early signals, but insensitive enough to avoid most of the random
"noise".
Cutting losses is painful for
every trader. The ability to cut one's losses in time is the sign of a seasoned
trader.
A channel breakout suggests a
target for the currency price equal to the width of the channel.
Long term charts provide
important information regarding long-terms or cycles. The trader can get a
correct perspective regarding the real direction of the market in the long run,
the strength or direction of the current trend occurring within that trend, or
the possibility of a breakout from the long-term trend.
Common Points All Of Reversal
Patterms
The first signal of an
impending trend reversal is often the breaking of an important trendline
The larger the pattern,the
greater the subsequent move
Topping patterns are usually
shorter in duration and more volatile than bottoms
Bottoms usually have smaller
price ranges and take longer to build
The head-and-shoulders
formation is confirmed only when the completion of the three rallies and their
reversals is followed by a breach of the neckline. The failure of the price to
break through the neckline on closing prices basis puts on hold or negates the
validity of the formation.
The double-top formation is
confirmed only when the full completion of the two rallies and their respective
reversals is followed by a breach of the neckline (the closing price is outside
the neckline). The failure of the price to break through the neckline puts on
hold or negates the validity of the formation.
The flag formation is a
reliable chart pattern that provides two vital signals: direction and price
objective. This formation consists of a brief consolidation period within a
solid and steep upward trend or downward trend. The consolidation itself tends
to be sloped in the opposite direction from the slope of the original trend, or
simply flat.
A Breakaway gap provides the
direction of the market.
The runaway or measurement gap
provides the direction of the market. This gap confirms the health and velocity
of the trend.
The runaway or measurement gap
is the only type of gap that provides a price objective. The price objective is
the previous length of the trend, measured from the runaway gap, in the same
direction as the original trend.
The exhaustion gap provides
the direction of the market.
Near the beginning of
important moves, oscillator analysis isn't that helpful and can be misleading.
Toward the end of market moves, however, oscillators become extremely valuable.
When the oscillator reaches an
extreme value in either the upper or lower end of the band, this suggest that
the current price move have gone too far too fast and is due for a correction
of some type.
The oscillator is most useful
when its value reaches an extreme reading near the upper or lower end of its
boundaries. The market is said to be overbought when it is near the upper
extreme and oversold when it is near the lower extreme. This warns that the
price trend is overextended and vulnerable.
A divergence between the
oscillator and the price action when the oscillator is in an extreme position
is usually an important warning.
Oscillator - the crossing of
the zero line can give important trading signals in the direction of the price
trend.
Because of the way it is
constructed, the momentum line is always a step ahead of the price movement. It
leads the advance or decline in prices, then levels off while the current price
trend is still in effect. It then begins to move in the opposite direction as
prices begin to level off.
RSI is plotted on a vertical
scale of 0 to 100. Movements above 70 are considered overbought, while an
oversold condition would be a move under 30. Because of shifting that takes
place in bull and bear markets, the 80 level usually becomes the overbought
level in bull markets and the 20 level the oversold level in bear markets.
The first move of RSI into the
overbought or oversold region is usually just a warning. The signal to pay
close attention to is the second move by the oscillator into the danger zone.
If the second move fails to confirm the price move into new highs or new lows,
a possible divergence exists. At that point, some defensive action can be taken
to protect existing positions. If the oscillator moves in the opposite
direction, breaking a previous high or low, then a divergence or failure swing
is confirmed.
Stochastics simply measures,
on a percentage basis of 0 to 100, where the closing price is in relation to
the total price range for a selected time period. A very high reading (over 80)
would put the closing price near the top of the range, while a low reading
(under 20) near the bottom of the range.
One way to combine daily and
weekly stochastics is to use weekly signals to determine market direction and
daily signals for timing(it depends from the type of the trader). It's also a
good idea to combine stochastics with RSI.
Most oscillator buy signals
work best in uptrends and oscillator sell signals are most profitables in
downtrends. The place to start your market analysis is always by determining
the general trend of the market. Oscillators can then be used to help time
market entry.
Give less attention to the
oscillators in the early stages of an important move, but pay close attention
to its signals as the move reaches maturity.
The best way to combine
technical indicators is use weekly signals to determine market direction and
the daily signals to fine-tune entry and exit points. A daily signal is
followed only when it agrees with the weekly signal (daily-weekly, 4
hour-daily, 4 hour-1 hour).
The failure of prices to react
to bullish news in an overbought area is a clear warning that a turn may be
near. The failure of prices in an oversold area to react to bearish news can be
taken as a warning that all the bad news has been fully discounted in the
current low price. Any bullish news will push prices higher.
-Elliot Wave Theory- A
complete bull market cycle is made up of eight waves, five up waves followed by
three down waves.
-Elliot Wave Theory- A trend
divides into five waves in the direction of the longer trend.
-Elliot Wave Theory-
Corrections always take place in three waves.
-Elliot Wave Theory- Waves can
be expanded into longer waves and subdivided into shorter waves.
-Elliot Wave Theory- Sometimes
one of the impulse waves extends. The other two should then be equal in time
and magnitude.
-Elliot Wave Theory- The
Finobacci sequence is the mathematical basis of the Elliot Wave Theory.
-Elliot Wave Theory- The
number of waves follows the Finobacci sequence.
-Elliot Wave Theory- Finobacci
ratios and retracements are used to determine price objectives. The most common
retracements are 62%, 50% and 38%.
-Elliot Wave Theory- Bear
markets should not fall below the bottom of the previous fourth wave.
-Elliot Wave Theory- Wave 4
should not overlap wave 1.
Support and resistance are the
most effective chart tools to use for entry and exit points. For purposes of
placing stop loss, support and resistance levels are most valuable.
One of the commodities most effected
by the dollar is the gold market. The prices of gold and the U.S. dollar
usually trend in opposite directions.
The Yen is sensitive to
changes in the price or structure of the raw material markets.
The commodity-producing
countries (Canada , Australia , N. Zealand ) are more dependent on Japan
The Yen is sensitive to the
fortunes of the Nikkei index, the Japanese stock market and the real estate
market.
The majority of the pound
transactions take place in London with a volume decreasing significantly in the
U.S. market, and slowing down to a trickle in Asia. Therefore, in the New York
Swiss Franc has a very close
economic relationship with Germany
The major markets are London , with 32 percent of the market,New
York with 18 percent and Tokyo Singapore
follows with 7 percent, Germany
has 5 percent and Switzerland ,
France and Hong
Kong have 4 percent each.
Don't use the markets to feed
your need for excitement.
Don't be too greedy or too
cautious.
