Finance markets trading movie - Floored: Into The Pit

Markets are always looking forward and improving, old floor traders have great respect in the finance markets industry. However today technology has reached a level where traders are choosing online trading option, and old traders that made money on a floor struggle to continue making money online.

This is one of the greatest movies about the traders. What makes this film interesting is the fact that stories tell different aspects about trading starting from successful and unsuccessful traders trips in this industry. Really cool movie and worth every minute to see it!

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Closing the Trade - Trading with Strategy part 4

Sometimes traders do not really know when to close a transaction, and they keep on staying into a trade indefinitely until when they lose all their accumulated earnings. In order that this does not happen anymore, traders have to give themselves some rules, also because closing a trade is probably much more difficult than opening it. There are two schools of thought: some say that the targets can be forecasted or at least it is possible to have an idea about them, while others say that no one can know where prices are going and therefore it is virtually impossible to identify a target. Personally, we agree with the first theory, but I am going to try and analyze both them, as the management of the two approaches is very different.

There are established methods to estimate where prices will converge, methods based on the principles of the technical analysis. Here are some examples that can help in the estimation of these targets. Fibonacci extensions, Elliott waves and the price action are some examples.

For example, when you see a price break from an horizontal range, the projection of the amplitude of the same range might be a good target. The following graph shows us a concrete example. USDZAR between June and October 2012 has remained within a range of 8.06-8.48 (closing prices). At the time of the upward break, the bullish target has become 8.48+0.42=8.90, reached on October 8th.

USDZAR Trading Example

Another classic example is represented by the projection of a price movement generated by the formalization of a head and shoulder or a double top or bottom. Even in this case, a graph can be of help in order to fix our exit of the trade target. AudChf has formalized a short signal on February 22nd with the bearish break of the head and shoulder neck line. Our target will be represented by the range between the top of the head (0.9942) and the neck line (0.9711). The 231 pips are measured from the break point, so 0.9785. On February 24th the target of 0.9554 has been reached at the same point where the trade will have to be closed.

AUDCHF Trading Example

However, in all cases, the central point is that we open a trade with a possible target in mind and, theoretically, when prices reach that target, we should take the profit and then look for another opportunity.

Instead, when traders come to this point, they often begin to believe to be part of a wider trade and do not close the operation. It is precisely here that the most common mistakes occur. These mistakes can be avoided only by using built-in methods such as the manual adjustment of the stop loss and the use of the trailing stop. The following graph shows a typical case of manual adjustment of the 20 weeks moving average stop loss.

EURGBP Trading Example

Some traders are more confident to delegate the decision-making process of closing the trade to the computer instead of making it discretionary and therefore they rely on the trailing stop. The following image shows us the various possibilities that a typical broker (in this case Oanda) offers the trader to manage and close a trade.

Market Order Trailing Stop

The concept of the trailing stop is quite simple: when the price moves in the desired direction of "x" pips, the stop loss moves "y" pips. The parameters are customizable so we can establish that the stop loss of 10 pips moves automatically every time the prices rise up to 50 pips.

The trailing stops are used when we do not want to close a position at a definite target but we still hope in a continuous movement of prices in one direction. The trailing stop will move accordingly protecting our profits. The problem with this approach is that very often we are likely to be blocked by the volatile nature of the Forex market.

This is a valid strategy if combined to the previous discretionary one. The technique is known as "scale out" that is a mix between the two strategies, especially useful if, psychologically, we cannot bear to see the prices keep on running after the trade closure. After reaching the target, we close a part of the position and with the other one we can adapt the stop manually or with the trailing stop.

For example a classic method is to close the 50% of a profit position and leave the other part open with a trailing stop.

The graph shows the long trade currently in progress on AUDJPY where, after the closure of half the position, we have combined a trailing stop that increases our stop loss (coincident with the 20 days moving average ) of 21 pips daily.

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Trend power trading method

Trend is your friend, you probably heard that before and it’s true! Trend simply means price direction. And it’s not only safe and profitable to trade with the trend, but it’s also very logical.

Trading with the trend, means to buy when prices are going higher, and sell when price are falling. Sounds great, but it’s easier said than done. There are many reasons for that, here are few to keep in mind:

1 – Price moves in bullish-bearish waves, and sometimes it’s hard to tell if the current movement is only temporary impulse/correction move or it’s an actual trend.

2 – With all pairs available, and the global economical connection, sometimes the move for specific pair is just a reaction to a strong movement that happened in a different market or currency pair. This correlation between pairs could create sudden movements that doesn’t reflect the actual trend of the pair, and even go against it.

3 – Using poorly developed strategies could cause a lot of damage, not only to your money, but also to how you understand or translate price movement. And later on, when you start trading by yourself, you could still use wrong/false concepts.

4 – Relying 100% on indicators ( most of them are lagging indicators ) would train your mind not to accept the obvious and wait until you get a signal from indicators, even it’s totally wrong or false signal.

5 – Negative emotions could force you to believe what you want to believe and ignore what’s actually happening in the market. For example, trading to get-back the money you just lost in a bad trade, could cause force you to follow weak signs of trending movement, instead of waiting for further confirmations.

6 – It’s also very common with trend following, to enter the market exactly at the worst possible time, usually when price is high, to find out that right after this price started to reverse and once you see this reversal you would close the trade or your stop loss would close it for you. Unfortunately, while the trade is already closed, price will soon reverse back and move on like nothing happened. Entry point is the most important thing if you wish to follow the trend. you must completely understand when to start following that trend and when to wait.

Trend power strategy, is designed for trend following. And it’s developed in a special way that will keep you out of unnecessary risk and enjoy emotion-free trading, as possible.

Here are the tools/indicators that you’ll need:
1 – A.O indicator
2 – A.C indicator
3 – Alligator indicator ( settings : Jaw period = 200, shift = 8 Teeth period = 100, shift = 5 Lips period = 50 , shift = 3 ) apply to : Median Price HL/2. Here is how your chart should look like with all indicators attached on Metatrader 4 platform:

Trend power trading strategy

You don’t have to use Metatrader platform if it’s not supported by your broker. It can be used with any time frame and any currency pair. I personally suggest and recommend that you use it with 1 hour chart and higher time frames, and with major pairs only. And additionally, you can also use this strategy with any market. It’s specially designed for Forex trading, but it will work very successfully with any other market. Like stocks for example.

How it works?

The alligator indicator is there to visually show you the direction of major trend. It’s only valid when all lines are displayed correctly not mixed. Up Trend = 200 > 100 > 50 lines, Down trend = 50 > 100 > 200 lines. If the lines are mixed that means trend is weak and you shouldn’t trade this pair at this time.

A.O and A.C indicators are used to catch the right time for entry and exists. When both indicators show the same bar color ( above or below 0 line ) that means we have a valid entry signal. Please keep in mind that we’re following the trend. That means we only look for entry signals that goes with current trend’s direction as suggested by alligator indicator.

And we close the trend when we get any sign of reversal from A.O or A.C indicators or both at the same time. Example...

Trend power trading strategy

Strategy confirmations

The strategy as explained above, is complete and works perfectly. But it’s always a good idea to add any additional confirmation signals/tools/rules that you prefer. Here I will suggest some of the most powerful confirmation rules that you can easily copy.

1 – For Entry signals, you can use pin bars and inside bars. This will allow you to add price action analysis to the strategy and only open trades when the market reflects what the indicators are recommending. Pin bars and inside bars are what I suggest and personally use. But please free to add any other candlesticks formations/patterns that you prefer.

2 – Check multiple time frames. Trading multiple time frames is a very effective technique when it comes to trading any market, especially Forex market. And it doesn’t have to be as difficult as many would believe. Simply use the same strategy and check the signals provided by those different time frames. Trade only when you get the same signal – buy/sell – from all used time frames. Personally I trade with 2 time frames only. My main time frame is 4 hours and I use daily chart for confirmation.

3 – Check correlated pairs. For example, EUR/USD and USD/CHF usually move in opposite directions. If you’re trading EUR/USD, you can only open a trade when your strategy – used with USD/CHF, same time frame – is suggesting an opposite signal.

4 – Use major support and resistance levels as best entry and exist points and wait for confirmation from A.O and A.C indicators. Please note that this strategy is designed based on pure technical analysis methods. I don’t recommend that you use it for trading news. In fact, I recommend that you check your economical news calendar before you start trading to avoid any unnecessary risks.

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Probability Trading Secrets - guidance on rules

Besides charts, trend lines, indicators and price patterns, trading could be a numbers game. Not only that, but it could also be a game of simple probability. And understanding and managing this probability, successfully, is what determines the profitability of any strategy.

Let’s take this concept one step at a time, so we can perfectly understand it. In the first step, we should imagine the situation where we’re going to "guess" price direction and open a trade based on that guess and that guess only. No analysis of any kind. Let’s say we will even flip a coin for it! ... The chances here are 50/50. You may win or lose. Nothing that you know, can determine the expected outcome.

Now let’s take that a step further, and add a simple indicator, like ... let’s say MACD indicator. And only trade when MACD confirms your trades. In this case, you have a slightly better chance of winning, more than you lose. Let’s say your chances now are 55% winning and 45% losing.

Third step, let’s add new trading rule and keep things as simple as we can. So let’s just add MACD divergence to the formula. Now you’ll have a better chance of winning, let’s say 60%. Against 40% of losing. At the same time, you will get less trades opportunity because you’re limited by the trading rules you have. You’re only allowed to trade when all rules are activated.

Fourth step, let’s add price action rule. Let’s say that you will only open a trade when you get a confirmation from price patterns. For example, we’ll use candlesticks pattern called "engulfing pattern" and add this pattern to our original rules: MACD signal + MACD divergence. Now you’ll notice that your winning rate becomes higher, maybe 65 or even 70%, and you’re getting fewer trades because you’re only going to open a trade when all rules are met.

Step five, last step is when we’ll add more rules and only trade during specific time in the day. Let’s say when all markets are closed. Now you’ll have less trades per day/week but you may also have higher winning rate, maybe %80+. Can you see a pattern here? I hope that you do.

When we add new or additional rules to any trading strategy, based on what we learned from market analysis techniques, we are also playing against probability. The more rules and conditions we have, the less trade or opportunities we’ll get, and the higher our winning rate would be.

The higher one probability is, the less opportunities you will have. Why this is important to understand? It’s important to understand because everyone wants to make more money and trade everyday, every second, 24/5. And that’s simply impossible unless you can accept the 50/50 deal.

And it’s also important because it explains to you that you can easily change your losing strategy to a successful one by simply adding more rules and conditions, but you’ll have to accept the less trades/opportunity agreement!

It will also allow you to understand how "trading price action patterns" works. Price patterns – like pin bars or inside bars or double tops/bottoms or Elliot waves ...etc – they all provide higher winning rate but at the same time less opportunity. The less you can see a pattern, the more profitable it is.

It doesn’t matter which pattern it is! For example, let’s examine two different patterns. One is MACD divergence and the other is double tops/bottoms. MACD divergence occurs way more often than double tops/bottoms pattern. And if you’ll check the winning rate for both, after 100 trades, you will find that double tops/bottoms provide mush higher winning rate. But, you would get those 100 trades over longer period of time.

Now that we know how it works, we can simply join both patterns into one strategy and get even higher winning probability. Simply trade divergence pattern, we a double top or double bottoms pattern is formed at the same time to confirm your divergence signal. At this point, you have a clear idea of how to create your own strategy. All that you need to do, is to pick a new condition, or trading rule, and keep adding new ones until you get the winning rate that you’re comfortable with.

Let me just start a new strategy right now. First, I want to add "something" to show me when the trend is strong enough to trade or not. Let’s add a couple of EMA indicators. 200 EMA and 50 EMA.

Now I have a better chance of winning than the original/default 50/50 chance. Let’s add a new element...let’s say I want to filter that trend even more. So let’s add Parabolic Sar ( 0.002 – 0.02 ) for settings. Now the trend is clearer and most EMA’s false signals are filtered.

Notice that while the signal or trend’s direction is clearer, the trading opportunities are less than before. Now I have to wait longer to have a clear trend signal. And wait during weak signals. Less trades, but higher winning rate.

At this point I still need an entry/exit rule. Let’s say I will add A.O indicator. And only trade when the A.O indicator is moving the direction of the trend. Now I have less trades, but still the winning rate became much higher!

The only thing that you need to keep in mind, is that all your rules and conditions must work in harmony. What does that mean? It simply means not to use a trading rule that doesn’t add anything to your original rules. And only add rules and conditions that makes your signal provides better results, naturally.

For example, when I used the EMA indicator as trend detector, I added wide Parabolic Sar to it. Because that would filter the EMA signal. Adding an indicator like stochastic wouldn’t help, because it’s not designed for trend following, it’s better to be used for entry/exit rules or wave analysis. But not trend following.

That’s how trading works. It’s not only about indicators and analysis, it’s also about trading against chances, probability, odds and numbers. Focus on both sides of the coin, and you’ll have better results than ever. Don’t waste your time trying to “predict” price movement, and simply build a strategy that provides you with high winning rate and less risk. Then set back, relax, and watch the market moving anywhere it wants. It doesn’t matter!

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Pure Price Action Trading - theory

In this article we will talk about a very interesting subject; price patterns. We will also explain how price patterns could be used for indicators-free trading. Choosing the right trading method is maybe the most important thing that new traders think about once they decide to start trading forex market. And when they do they would find out that the industry if full of trading methods and trading systems of all kinds and shapes for all trading goals and plans.

Sounds great? Yes it is, but for beginners, it could really be very confusing when they start trading price patterns. To get you to understand how forex trading works let’s try to say that it’s all about one thing : following market patterns. It doesn’t matter what that pattern is, and how you’re planning to see it or trade it. If there is a pattern, there is money to be made. It’s really that simple!

This idea is based on the old saying that "history tends to repeat itself". Once you choose a pattern and study it then master it, you can follow it and wait for it and use it and even build a whole system around it.

However, you should be very careful because you need to really work hard on the study part! And I mean that you have to search and track this pattern over historical data for as long as you can and understand the effect or market reactions to it.

But you don’t have to worry, this is already done for you. And if you will look in trading course and books you will find tons of profitable patterns to follow. Or even better, you can add two patterns or more to your trading system as confirmation signal. For example, let’s say that you are using a trend following strategy. You can simply add to that pin bar pattern or inside bar pattern for entry signals confirmation.

Another example, if you’re using a trend reversal strategy you can add a pattern like double top or double bottom to confirm your entry signal. The only thing you need to take care of is that you have to practice and test and test and practice for as long as takes! .. You must make sure that the pattern you choose works perfectly with your system. it doesn’t matter if it’s price action pattern, candle stick pattern or something different or new. The main concept is still the same, it must work in perfect harmony with all other elements of your strategy.

Price patterns could be used with almost all trading strategies and trading systems. From trend following to trading reversals to breakouts and even with trading the news…and the best part is that they are already tested and all details about them are available for you to use.

Let’s take an example of trading price patterns, or indicators-free trading; price channels. The trick here is to recognize and pick major support and resistance levels and draw 2 opposite trend lines. When the trend lines form a channel, wait for a breakout. This strategy requires no indicators and if done right, could be very profitable and allows you to trade any market, any pair, any time frame.

What you need to look for is simply a consolidation period, where price moves in sideways long enough to form a channel of opposite trends. One trend made by connecting support levels, and the other trend is created from connecting resistance levels.

Pure Price Action Trading

See the example chart above. When that happens, all you need to do is to wait for price to break any trend – up/down – and open a trade in the direction of that breakout.

Best Stop loss is the last support/resistance before the breakout, best target is next support/resistance after the breakout. You can also use Fibonacci levels if you know how to trade fibo levels.

Strength : It’s very easy and can be used any anyone anytime for any pair. no indicators and no complicated technical analysis skills required. Weakness: False entry signals or false breakouts could happen when the market is not stable enough – for example, news releases – and if the entry or breakout is not confirmed price could reverse back into the channel and hit stop loss or cause large drawdown.

Look for strong reversal signs before the breakout or entry point to confirm the signal. You don’t have to use any indicators but it’s still an option. For example : MACD divergence. Another option that you can also use is candle sticks patterns. For example, pin bars and inside bars. If you find a strong reversal pattern before the breakout – divergence , pin bar, inside bar – then take that trade. if not, then pass and wait for a confirmed signal.

Practice makes perfect, so if you like this strategy please use it on demo for a while until you master it. and after that you can use it on a real money account if you wish. Remember, it can be used with any market, not only forex market. That means you can use it with stocks and metals, like silver or gold. The sky is the limit here. Try different markets, pairs, time frames and stick to the one that produces best stable results for you.

Trading price action or indicators-free trading, requires that you take your time to build the necessary skills and learn from your experience. it’s not exactly the same as copying a specific set of indicators and follow the rules. Sometimes, with many patterns you will find that you personal interpretation and understanding affects your results more than the pattern itself.

Patterns and price formations that I recommend: Double tops and double bottoms, Triangles, Pin Bars, Inside Bars, Wolf wave, Divergence, Breakout candles, and Engulfing candlestick pattern.

There are many other patterns out there that you should definitely learn and understand, even if you don’t plan to use them. They will help you in your analysis efforts and improve your trading skills, and of course, will allow you to make more and more profits with less risk.

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Monitoring The Trades - Trading with Strategy part 3

When we open a trade, we get all the results of the preparatory work of analysis. However, this decision opens a new phase of management of the trade itself, a step that requires very strict rules and must allow the trader to maximize the profit by gradually decreasing the risk.

Every decision must follow precise rules to be observed faithfully. First of all, we need to be aware of what strategy we want to follow. In fact, there are many attitudes when we have to monitor the trade: some traders are trend-followers, others are countertrend.

The following chart shows us the same exchange rate (EURJPY), but from two different points of view. The first one favors an open trade in the direction of the primary trend, while the second one is countertrend. This different approach creates many differences in setting the stop loss and / or the take profit.

EURJPY Currency Chart

Another element to remember is the one concerning the stiffness in the decisions. The most important thing is not to be firm in our positions, but rather adjust continuously the stop loss and / or the take profit to the changing of the market. Often, news from macroeconomic data or central bank decisions alter the volatility of the exchange rate and for this reason it is necessary to monitor the daily economic calendar.

In the chart below we can see the importance of adapting the stop loss levels daily in order to prevent the surprise of a negative news that might eliminate our earnings. For example, in the chart below, the Riksbank's decision to cut the Swedish interest rates on December 17th, has brought EurSek back below the entry point very quickly. A non-adjustment of the stop loss to the breakeven point would have resulted in high losses.

EURSEK Currency Chart

The same strategy of money management should be followed clearly, by fixing the levels of output, both in loss or in profit, but also the percentage of capital that we want to keep within the trade despite the achievement of objectives.

Another important element is the stage of further increase in positions mediating upward or downward from the initial entry price.

Let’s now put together all these concepts and try to understand how to manage the trade, talking about how to manage the closure of the trade itself.

The following graph shows a long trade opened on EURSEK at a time when the trend is clearly in favor of the cross. The decision to enter has matured after the formalization of a bullish head and shoulder figure generated by the breaking of the neck line of 8.6600.

At this point we can fix a priori a minimum take profit (the objective of the figure, so 2000 pips from the break point) and a stop loss (the bottom of the right shoulder 8.5590). Obviously, the situation would have been different if we had opened a short trade, a countertrend The stop loss should have been stricter and most of all, the target should have been more restrained.

EURSEK Currency Chart

Let’s follow now the operation. After the break of 8.66, EurSek took the desired bullish direction. In order to avoid losses, it is important to immediately adjust the stop loss to the entry point and maybe this can be done by setting a personalized rule. Adapting the stop to the entry level as soon as possible might be a chance, but in this case we might run into volatile market movements with frequent activation of the stop loss and poor profitability of the trade.

A more balanced approach is the one that provides the adjustment of the stop loss to the entry level when the price has already reached half of the potential profit. In this case, starting from the potential of 2000 pips, it would have been wiser to adjust the entry stop level when EurSek touched at least 8.7600 (8.6600 + 1000 pips).

EURSEK Currency Chart

A trader can obviously be more or less aggressive in defining the stop loss. Let’s see, for example, the recent case of AUDUSD. AUDUSD has reached a top of 1.0586 on December 12th, exactly on the long term bearish down trend line. All we had to wait for was a bearish pattern, duly arrived the next day with a bearish engulfing pattern. On December 13th, the short springs up below the opening of December 12th (1.0525) with the same day's high stop loss (1.0585). That strategy has clearly won and now the trader can afford to adjust the stop to the input level.

Executing Trades - Trading with Strategy part 2

When we place an order with a Forex broker, we have to know how to place it. Orders must be placed depending on what you are trading and always taking into account the points of entry and exit from the market. An error in placing the order can bust the entry and exit points, and then our strategy. Let's see closely the types of orders that can be placed on a common Forex platform.

Market orders

This is the most common type of order. A market order is used when we want to place an order immediately at the market price. In case of the Forex, the price is expressed as bid (sell) or ask (buy) on the platform. This order is then used to jump immediately into a buying or selling position, or to exit a position.

Currencies List

Limit Orders

A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. The trader specifies the price at which he wants to buy / sell a certain currency pair and also specifies the duration for which the order should remain active.

GTC (Good till canceled). A GTC order remains active in the market until the trader decides to cancel it. The operator will not cancel the order, therefore it is the customer’s responsibility to keep in mind that he owns that order.

GFD (Good for the day) A GFD order remains active in the market until the end of the trading day. As the market of the foreign exchange is an ongoing market, we must identify an hour that can be considered as "the end of the day."

Stop orders

The stop order is an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. The main difference between a limit order and a stop order is that stop orders are usually used to limit potential losses in a transaction whilst limit orders are used to enter on the market, join to an already existing position and make a profit. The same variations are used to specify the duration as in limit orders (GTC and GFD). Here's an example:

Market Order in Trading Platform

Example: The trader buys 100,000 EUR / USD at 1.2885 expecting an upward movement but he wants to protect himself in case he has overestimated the potential strength of the Euro. He knows that 1.2830 is a strong level of participation in the market, so he executes a "stop loss" order to sell 10 pips below that level. The trader has limited his risk on this particular trade to 60 pips.

Buying Order in Market

Another usage of a stop order is when the trader is expecting a "blowout" of the price and he wants to grab the opportunity to 'ride it’. In this case, the trader will place an order to buy or sell 'on stop’. In order to illustrate what really happens beyond these operations, we can see the following scenario:

Example: The trader realizes that the EUR / USD ratio might rise above the resistance level 1.2420 where the neck line of the potential head and shoulder is placed. He believes that if this happens, the price of EUR / USD could reach 1.3120, the theoretical target of the figure above. At this point, the market is at 1.2420 so the trader has to enter a buy order for 500.000 at 1.2420 'on stop'.

EURUSD Buy Order

OCO

An OCO order (order cancels other) is a mixture of two limit and / or stop orders . Two orders with variables price and duration are placed above and below the current price. When one of the two orders is executed, then the other one is cancelled. In order to illustrate how an OCO works, we can see the following:

Example: The price of EUR / USD is 1.3150. The trader wants to buy above the trend line that joins the three downward tops, therefore 1.3290, otherwise, he wants to start a selling position if the price breaks the support that connects the three tops, therefore in case it falls below 1.3000 . So, if the trend falls below 1.300 (therefore the sales level entered just below the support, i.e. at 1.2990, will be hit) then he will sell 500.000 and the order at 1.3290 will be automatically erased at 1.3290.

Candlesticks Trading System - Inside Bar

In this article will be talking about trading with candlesticks formations and patterns. Candlesticks formations are one of the best trading signals that you can have. Using candlesticks can be very profitable and would allow you trade with less risk, more confidence, and they can be used as additional confirmation tools with almost all strategies.

Candlesticks formations are not all equal. There are powerful patterns, weak patterns and ones that you should completely ignore. And just like any technical analysis method, they’re best to be used with high time frames. For example, 1 hour time frame and higher charts.

When candlesticks formations and candlesticks patterns are used with smaller time frames, they will eventually and produce too many false signals. And that would make them less effective and even risky.

Inside bars, are one of the most effective candlesticks formations. Also known as the daily bars. This candlestick pattern happens when a candle is formed within the previous candle. In other words, the previous candle completely covers the last/new candle. Here is an example...

Candlesticks Trading - Inside Bar

Open your chart right now, and start looking for inside bars. I’m sure you’ll find many. Doesn’t matter which time frame or currency pair you’re trading. It’s everywhere! That means if you’re trading this pattern, you won’t have any problem regarding how often it’s formed. And that’s a huge problem for many traders, especially beginners who can’t wait for a specific pattern to be formed. And the problem gets worse when you remember that you should only use candlesticks patterns with higher – slower – time frames.

With inside bars, this is not an issue. On the other hand, being found so often means that it can’t or shouldn’t be used all the time. Because the more signals you get, the more chances of false signals you would also receive.

Another important thing to keep in mind is that inside bars are reversal signals. That means if price is currently moving in down trend/wave, an inside bar would suggest that a reversal in direction is about to occur and price may start moving in up trend very soon.

This pattern is correct about 65% of the time only. It’s not enough to use it on higher time frames, it must be used as confirmation rule/signal within a complete strategy. The strategy explained here is a clear example of how you can trade this wonderful pattern.

We’re going to use support and resistance levels with A.C indicator for the main strategy, and we’re going to use inside bars to confirm our entry points. This strategy works best on daily chart. So you can use it as your main trading strategy or as early reversal-alert system with your own intraday/swing trading strategy.

How it works?

First step is to "scan" the charts of major pairs, and look for recent inside bars. When you find one, we move to step two and check A.C indicator. In step two, we should wait until we get a confirmation signal from A.C indicator. A bullish bar above 0 line, or bearish bar below 0 line. Here is an example...

Candlesticks Trading - Inside Bar

Third step and last step, is to wait until breaks last support or resistance. In the above example, we would wait until price breaks last resistance. When that happens, we can safely open a trade. Example...

Candlesticks Trading

Support and resistance levels should also be used for stop loss and targets with strategy. For example : Fibonacci levels and pivot levels. If you prefer, you can even replace the inside bar and use pin bars! Both would work perfectly well and produce profitable results for short term and long term trading goals.

The most important thing here is to remember that trading is not all about charts, patterns and indicators. Trading is also a numbers game. If you don’t calculate your numbers correctly, then you may lose money even if you have the most powerful strategy in the world. And if you’re calculating your numbers correctly, you may get positive results even if you’re trading with a basic strategy.

One of the most important – if not THE most important – numbers that you should calculate are the ones that determines your risk management. Risk management simply means to calculate and understand how much you can risk per trade Vs. how much risk the existing trade can provide. And only trade when the risk is within your red lines.

For example, if you can or only willing to risk 5% of your account, then that’s your red line. All your numbers – especially your maximum stop loss level – should reflect this limit.

Another thing is, to make sure that your profits are always more than what you’re risking. In other words, your profit targets must always be higher in value, than your stop loss. and that would lead us to another important rule… Cut your losses short, and let your profits run!

That means your stop loss level should be static – fixed number – or specific level. While your profits should be dynamic, even with maximum values. For example, when I start the trade I can set my stop loss level to 75 pips and my maximum profit to 150 pips. But When I see that price is going to pass my maximum profit lines I can always change it to 250 pips for example, and add trailing stop to lock my profits. Or even start with no target and just add a trailing stop.

Demo trading would allow you to test and try as many strategies and plans as you want, and only keep the ones that provide best results. That’s why I highly suggest and recommend that you open a demo account – if you don’t have one already – and start testing this strategy with different money management plans until you get the results that you feel more comfortable with. Trading is personal, your results could be completely different than any other trader, even if all are using the same strategy. So trust your own results and no one else’s.

Design your trading system

Without a profitable trading system, all trading knowledge in the world wouldn’t be effective enough when it comes to actual trading. To be able to trade successfully, you need a successful and profitable trading strategy and a complete trading system.

What’s the difference between a trading strategy and a trading system?

Usually most people wouldn’t find any difference, but in my opinion there is a big difference between the two concepts. A trading strategy is a method that would allow you to trade the market directly by following specific rules, guidelines and suggestions. While a trading system is way beyond that. A trading system is a complete trading plan that includes a profitable and successful trading strategy.

For example, you may find within any strategy instructions of how to read charts and best entry and exit points, plus few additional information about how the strategy works and when is the best time to use it, and when not to use it. In addition, it may also include the indicators or trading tools that you need to be able to use that strategy. On the other hand, the trading system must include every trading activity that you make and explains what you should and shouldn’t do in each possible situation. That includes: your strategy – your money management plan and your account management plan.

How To Design Your Own Professional Trading System?

First you need a strategy, and money management plan for it. To have a strategy, you can design it yourself, copy a free strategy from a friend or public forums, or purchase any commercially available strategy. The most important thing here is that you must test it long enough until you’re completely comfortable with the results.

Any strategy must:

1 – Have a clear idea or trading method that you can understand. For example: trend following – trading breakouts – trading news – trading trend reversals…etc Avoid using black-box strategies with no clear idea or without any fully explained method. That’s usually happens with commercial – push button – software that promises to take away all guessing and trading work away and only provide you with buy/sell signals. That’s a bad idea! If you can’t understand how it works – at least the basic method behind it – then you better stay away from it.

2 – The strategy must include specific trading rules. You must understand what to trade, when and why to trade, and when and why not to trade or wait for confirmation.

3 – The strategy should be back-tested and forward tested long enough until it proves that it’s a successful and profitable strategy. Backtest means to test the strategy on history data, to check how it performed during past market conditions. This should include – at least – past 12 months. You can easily do that by using history data provided to you by most trading platforms. For example, with Metatrader platform, you can use the strategy tester. Yes, the strategy tester can be used to test manual strategies as well as auto trading strategies. Simply use any auto trading robot and set the dates you want for your test, then make sure that you use visual mode, and when the test starts, upload your strategy’s template and watch how it performed during that test period.

Forward test is testing the strategy in current market conditions by opening a demo account and demo trade the strategy for few months. I wouldn’t suggest that you start doing that before you check how the strategy worked in the past. If the strategy failed in the past – especially during the last 12 months – then save your time and efforts and simple delete it.

When your results are positive, after backtesting and forward testing. You can now move to small live – real money – trading account and perform the most important test : live trading!

During demo trading, you must test and understand the best money management plant that you should use with this strategy. Most beginners don’t do that, and simply test the trading rules. That’s why they get mixed results and sometimes negative results even if the strategy itself is profitable. Money management is a key that you must have if you want to trade any market successfully by using any strategy.

You must clearly and fully understand : what kind of trading strategy is it, does it trade long term, scalping or daily? From that you should know the best stops and targets to be used with it and also if it’s best to be used with large or small accounts. For example, swing/weekly trading strategies should be used with large accounts, while daily and scalping strategies can be used with small accounts.

Next, is to start to create your account management plan. Your account management plan is the one that takes care of your short term and long term financial goals. How much profits you want to make per month/week? And what the long term goal, how much is your targeted return, 10% or 50% or 100% of your account per year?

After creating the account management plan, you need to go back and adjust your money management plan/rules to be able to achieve those goals safely. IF you find that your goals would need to much risk, then you would have to add more money to your trading capital or you need to set different goals.

Now you should have a complete trading system! all that you need to do is to open an account with a broker, use your strategy, follow both money management and account management plans until all your goals are achieved.

Please keep in mind that your broker plays a huge effect on your results. Your broker could be your trading best friend, the most valuable partner… or your worst enemy! Make sure that before you start trading on your main investing capital, that you open small real money accounts with the best brokers you found. Trade with them, and only open your main trading account with the one that you get best results from.

This a critical step that you must follow in order to start trading profitably and successfully.

2012 Latest Figures

ISM still under 50 points?

The first data of 2013 will be very interesting in order to understand how the U.S. economy will enter the new year. There will be many data starting from today till January 6th and EurUsd could confirm the important bullish break of 1.317 that is setting now an ambitious bullish target for the cross.

The first data will be concerning the houses prices planned for December 26th, followed by December 27th the homes sale and the consumer confidence, and, at the end of 2012 the Chicago PMI on December 28th. But the most expected date on the macroeconomic front will be January 2nd; in fact on that date we will be able to realize what the direction of the ISM manufacturing (that fell below 50 in December) is.

How the German Locomotive is Closing 2012

In Europe, the most important data to be followed will be most of all the German ones. On December 30th the retail sales, on January 2nd the PMI manufacturing and on January 3rd the unemployment rate.

Bank of Japan, New Year And New QE

Japan is desperately trying to devalue the yen to survive a deadly mix of debt and insurmountable trade deficit added to a deflation and recession scenery. On December 28th we will be able to understand where the economy is going, together with unemployment, industrial production, retail sales and inflation. Meanwhile, the Bank of Japan has confirmed the expectations that let the yen depreciate considerably. The buyback of financial assets will increase by 10% breaking the barrier of 100 trillion yen; then the inflation target will be set. The UsdJpy negative reaction is quite interesting, and, in case it will close the year below 83.35 then the bullish break up signal of last week should have to be considered as “false”.

BRIC

Little to report in the emerging countries.
China will release the HSBC manufacturing PMI on December 31st while the services one will be released on January 4th.

Gold: a great opportunity to buy?

The downward trend of gold has begun after the Fed's FOMC. The market has not appreciated the fixed target of inflation and unemployment, and now there is a chance to put a time limit to the Fed's quantitative measures. The bullish break of the resistance has happened exactly at 1.660 and now we are back to the same point. From the technical point of view the 200-days moving average has increased from 1.660, but most of all the oscillators are converging towards an interesting combination. When the 13 days RSI falls below 30 and the 100 days Roc is negative, then the result is the one expressed by the green icons or an assured rebound.

What is really missing is a Rsi under 30 (we're 31), but we're really close to it and so the best thing is to add a long to the existing position at 1.700$. Just to confirm our view, we can also quote the current behavior of gold, very similar to the one that preceded the increase in the debt ceiling in 2011.

Trade: add long XAUUSD at 1650

Trade: Long XAUUSD

Gold in 2012 and 2011

Turkey: Rates Cut, But What About the Inflation?

A cut of the rates by the Turkish central bank from 5.75% to 5.50% was taken for granted, but since this decision has come at the same time of a very bad data on the unemployment ( which has risen to 9.1%), it has weakened the Turkish Lira. Technically, a bullish head and shoulder has been formalized and this certifies the end of the bearish trend 2.28-2.18. The bottom has been hit precisely (as always happened in the last 10 years) when the 30 weeks Roc had fallen below -10% and we have just got back in a positive territory. If history will repeat itself once again, then EURTRY will not reach a top until the Roc will not rise above 20%. The inflation data in early 2013 (January 3rd) could provide further upward pressure bringing EURTRY close to 2.41. For this reason we decide to enter long.

Trade: long EURTRY at 2.36 stop 2.30

Trade long EURTRY

Last Week Comment

The profit on the long position opened on EurAud was very good and generated by the expected strong resistance that AudUsd should have found in area 1.0580. Instead, the long trade on EurSek has closed in balance after an initial lengthening above 8.70, and then has retraced downward as a result of the decision to cut rates by 25 basis points by the central bank. The positions on the purchasing of JPY (short UsdJpy and short NzdJpy) have to be kept opened relying on the technical excesses of the overbought achieved by the cross.

Wall Street: The Speed Traders

Author BuzzInForex

Steve Kroft gets a rare look inside the secretive world "high-frequency trading," a controversial technique the SEC is scrutinizing in which computers can make thousands of stock trades in less than a second

 
2012-09-16 16:32:47

Preparing analysis and tools - Trading with Strategy part 1

Trading on the Forex market means having a very large number of currency pairs on which it is possible to operate both from the long side and from the short one. For this reason, the trader has to perform immediately a precise selection of where to focus its analysis.

The first element to consider is the liquidity and then the bid-ask spread. The liquidity of EurUsd is always very high and this allows brokers to offer their clients even an only 1 pip spread. Instead, concerning the EurZar cross, the major trades are performed mainly during the opening of European markets with bid-ask spreads far beyond those of EurUsd.

Lower liquidity certainly means higher costs in the entry and in the exit phases from the trade, due to high spread between bid-ask. Here below a spread table (source Oanda).

Currency Pairs List

A second factor to consider when choosing the object of the trade is certainly represented by the correlations that may allow a concrete risk reduction. There are some currency crosses that historically tend to move together with other crosses, and there are others that move in the opposite direction. For example, it is useless to open two long trades on EurUsd and UsdChf because the correlation is historically always very close to 1.

Vice versa, the negative correlation between EurUsd and EurPln can allow the trader to play on two completely different tables, because if EurUsd rises, then EurPln falls (see table below).

Currency Pairs Tablet

After selecting the best cross on which we want to operate, the essential thing is creating a set of automated tools that allow the trader to find the most useful and quantitative information in the shortest time.

In this regard, the trader can generate numeric tables updated in real time if he has a subscription to a prices provider connected to a graphic software (e.g. Metastock). The trader can then summarize in a simple Excel spreadsheet several technical parameters for each currency cross; for example, the simple moving average at 50 and 200 days, the RSI at 14 periods, the Adx, the value of the MACD, higher and lower Bollinger’s bands, Fibonacci retracements, etc...

Basing on these parameters, it is possible to identify the cross with technical values that deserve to be analyzed in depth. After founding the potential objects of the trade, we have to look for the technical movements that are more relevant.

The aim is clearly to enter long / short signals supported by strong technical indications with a low risk of loss. Among the techniques used to identify graphic signals, the most immediate and simplest ones are the breaking of trend lines, supports and resistances, or the primary retracements. Here are some examples.

A good indicator to see when EurUsd is close to a primary top / bottom is the percentage difference between spot and simple moving average at 200 days. When this exceeds +1 (or - 1) standard deviations from the historical average, then we will have to study graphic elements of breaking pattern. In our strategy, there are two alternatives: entering short on EurUsd when the bullish steeper trend line is broken downward, or waiting for the slower signal of the golden cross (average at 50 days below the one at 200).

EURUSD Buy and Sell options

Second example. Choosing a cross with a very strong trend and in order to do so, using a classical oscillator like RSI combined with a strength indicator as Adx. Finding a cross (in this case EurJpy) with Rsi below 30 and Adx above 30, this indicates a clear situation of oversold against a very strong bearish trend.

We know that, in order to see a trend as finished, we need divergences between Rsi and price that we cannot see here. So, we will have to find the best entrance technical (broken trend line, moving average test, etc ...) to formalize the short signal.

EURJPY Sell Options

Among the various analytical tools available to each trader, there are also those related to the financial information and especially to the identification of macroeconomic variables that can create volatility on a cross.

For this reason, it is useful to monitor the macroeconomic daily schedule (see table source Forexfactory) in order to identify in advance the market mover that can generate volatility in the currency cross that we are keeping under observation.

Economic Calendar

In the next article we are going to see how to execute a trade adopting some methods of money management with the aim of reducing the risk..

More articles you can find here: www.buzzinforex.com

Central banks greet 2012

Quantitative Easing TARGET

The Federal Reserve has surprised the markets with an increase in the QE up to $ 85bln, but at the same time setting an inflation and unemployment target (2.5% and 6.5%). The disappearance of the zero rate policy has cooled the enthusiasm on gold and equity, while it has strengthened EURUSD, again close to the resistance of 1.3170. There will be many macro data expected for the coming week, virtually the last one before Christmas. Among the most important ones, there are: December 18th, the current account deficit, December 19th the housing starts, December 20th the Phily Fed, leading indicators and then closure on December 21st with durable goods.

The direction of the German Locomotive

Following the important decision about the formalization of the union bank on March 1st, 2014, the Ifo index is the only real macro date appointment of the week in Europe. The confirmation of the optimism emerged with the ZEW index comes from this data. In Great Britain we can get some more economic information; on December 18th the inflation data will be released and on December 20th the retail sales of November that will try to recover from the bad -0.8% of October.

After the Japanese Elections...

The meeting of the Bank of Japan on December 20th will be quite a significant one. This event comes after the general election of December 16th and together with Jpy full of expectations after the tremendous weakness in the recent weeks that has led USDJPY close to the key resistance of 83.35. The day before, a macro data that will certainly affect the choices of the Boj on new liquidity measures, is the one concerning the trade balance in red for the past few months by now.

Rate Decisions In Every Corner Of The Globe

If monetary policy is one of the major market movers on Forex, then this week there will be a lot of volatility on many crosses. On December 18th, India, Sweden and Turkey will decide what to do with the cost of money; the expectations suggest the Turkish central bank as the only monetary authority that will intervene with a rate cut of 75 basis points at 5%. The next day, Czech Republic and Norway will announce their rate decisions.

Macro Issues On The Commodities Currencies

Canada will release on December 21st the data on inflation and the GDP of the third quarter, while on December 19th New Zealand will publish its GDP. Attention on Russia, which will release on December 18th the unemployment rate and retail sales.

Trade: long EURAUD at 1238 stop 1.2120

Our idea is that EURAUD is formalizing a bullish head and shoulder and this should favor an upside up to 1.30 in the coming weeks. EURAUD has been lingering on the 200-days moving average of 1,241 for weeks and AUDUSD is facing a technical barrier of absolute importance in the long run, i.e. 1.0580. The 14 days ADX has dropped below 15, a very low level that guarantees the explosion of volatility in the coming weeks.

EURAUD Currency pair

Trade: short UsdJpy at 83.35 stop 85.50

Considering the resistance that the market (83.35) is touching at the moment and the proximity to the regression downward line that leads the long-term bear market, going short on USDJPY with stop at 85.50 seems to be a good idea. The Roc at 12 weeks has risen above 6%, a percentage that has always cooled the rise of USDJPY in the past, intercepting the primary tops. Obviously, it's a game of chance and if we are in front of the reversal of the bear market started in 2007, then this view will not find a match in our analysis.

USDJPY Currency pair

Last Week - Comment

With a delay of one week, AUDUSD has exceeded the resistance of 1.05 and has reached the expected target of 1,058. This has confirmed the validity of our long direction, a lost chance of getting the trade back. AUDNZD is still over the stop loss and still represents a good long term opportunity to go long, while we are still steady on NZDJPY after the overcoming of the resistance 70; XAUUSD is moving around 1700 and anyway, we are still bullish on the gold and suggest to increase the long on the 200 days moving average of 1660. EURSEK breaks upward 8.70 because of the bad data on unemployment and inflation, and this has allowed us to go long with stop 8.49.

More articles you can find here: www.buzzinforex.com