The trend is your best friend in any financial trading market, as they say, and using a technical analysis chart for trend based trading is a simple method that at the same time can be very successful. Many traders over complicate the markets, especially at the beginning of their trading career. In fact simple systems can be the most effective.
Most traders use candlestick charts for this purpose, because they are so clear. Bar charts can also be used if preferred. Line charts would not be used.
The first thing to consider is whether the market is rising or falling. This should be visible at a glance, especially if we check several time periods. Use an indicator like Bollinger Bands to make sure that a rising market is not overbought, or a falling market oversold. Once we have this information, which should just take a few seconds to verify, we can begin to draw trend lines on our technical analysis chart. Here's how.
First, draw a straight line through the highest highs and another through the lowest lows.
1. Bullish market
If the two lines are approximately parallel and heading upward, there is an upward trend. The two trend lines can be used as support and resistance lines, which means that we assume the price will remain within the area between the two lines while the trend continues.
So if the price hits the lower line, you could buy on the assumption that it would soon rise again. First of course you would check against another indicator such as the Bollinger Bands and perhaps check in another time period to make sure that there are no signs that the trend is ending.
Some forex traders would also open a trade to sell the currency pair when the price hits the upper line, on the assumption that a retracement is due. This bucks the trend so requires extra care, but can be a profitable strategy.
2. Bearish market
If the two lines are approximately parallel and heading downward, then you have the opposite situation. The trend is downward. Again the lines act as support and resistance lines. This time you would be acting in line with the trend by selling when the price hits the upper line. Buying when it hits the lower line would be bucking the trend in the hope of a retracement.
3. Stable market
If the two lines on the technical analysis chart are approximately parallel and horizontal, the market is relatively stable and there is no trend. You could still trade on the basis of the support and resistance lines but most traders using trend-based systems would wait for a new trend to form.
4. Converging prices
If the two lines are not parallel but drawing closer together so that they would meet at an imaginary point in the future, sooner or later the price will break out and head in one direction or the other. Either wait for the breakout or place conditional orders so that if the price breaks above the limit of the upper line you would buy, and if it breaks below the lower line you would sell.
5. Diverging prices
If the two lines are not parallel but moving farther apart, this indicates that prices are becoming increasingly volatile. Most traders would stay out of this market.
Of course, financial trading is always risky and there are no guarantees. Always test systems thoroughly using the technical analysis chart in a demo account before risking any real money.
Thursday, March 4, 2010
Tuesday, March 2, 2010
Foreign Exchange Trade: 5 Top Tips
The foreign exchange trade market is an exciting place to invest and speculate. Large sums can be made in a short time, although for most traders, even the successful ones, the reality is a little different because of the need to take account of the high risk. So how should a trader act to put themselves on the right side of the equation? Here are our top tips for success in foreign exchange trading.
1. Be realistic
Anybody who gets into forex trading hoping to get rich quick is going to be disappointed. If you go out for maximum leverage on the smallest possible account, you are heading for big losses sooner or later. Forex traders do not get rich quick: they either make money slowly or they lose. We know which option we would pick!
2. Have faith in your system
It is essential to have confidence in your foreign exchange trading system, enough to see it through any bad patches. However, good systems take some finding and testing. Even if a system works for somebody else, you cannot expect to have faith in it until you have thoroughly tested it for yourself. So do not skip this step.
Once you are sure of the long term success of your system, stick with it and do not abandon it just because the market does not act the way you expect all of the time. Sometimes of course there are major shifts in the market and prices may behave differently for a while. If you think that is happening, switch to demo for a while. Don't start on a new system, it would be the worst possible time.
3. If in doubt, stay out
This is one of the catchphrases of the forex market - and probably other financial markets too. It is easy to become impatient when waiting for the trading signals to be just right, especially if we have not seen a trading opportunity in a while. However, this is not a reason for opening a trade too soon. Forex trading is exciting at times and boring at others - the only way to profit is to wait it out.
4. But do not wait too long
Hesitating when the signals are right is almost as bad as jumping in too early. You will be losing some of your profit on each trade if you constantly hover wondering whether or not to act. Your plan should be clear in terms of which charts and indicators you use to check your signal. Having done that, do not start consulting a lot of technical tools. It is time to act.
5. No regrets
Some trades lose and some trades win. Some make profits but not as much as they could have made if only ... (you had closed sooner/closed later/got in earlier etc). Unless you are in the testing process where different variables could make a difference to your final trading system, this kind of 'what if' thinking is a waste of time. No, it's worse than that. It is positively dangerous because it will distract you from the next opportunity and possibly lead you to start tweaking your system for no reason.
When a trade is closed, it is closed. There is nothing to do but record the results on your spreadsheet and move on to the next foreign exchange trade.
1. Be realistic
Anybody who gets into forex trading hoping to get rich quick is going to be disappointed. If you go out for maximum leverage on the smallest possible account, you are heading for big losses sooner or later. Forex traders do not get rich quick: they either make money slowly or they lose. We know which option we would pick!
2. Have faith in your system
It is essential to have confidence in your foreign exchange trading system, enough to see it through any bad patches. However, good systems take some finding and testing. Even if a system works for somebody else, you cannot expect to have faith in it until you have thoroughly tested it for yourself. So do not skip this step.
Once you are sure of the long term success of your system, stick with it and do not abandon it just because the market does not act the way you expect all of the time. Sometimes of course there are major shifts in the market and prices may behave differently for a while. If you think that is happening, switch to demo for a while. Don't start on a new system, it would be the worst possible time.
3. If in doubt, stay out
This is one of the catchphrases of the forex market - and probably other financial markets too. It is easy to become impatient when waiting for the trading signals to be just right, especially if we have not seen a trading opportunity in a while. However, this is not a reason for opening a trade too soon. Forex trading is exciting at times and boring at others - the only way to profit is to wait it out.
4. But do not wait too long
Hesitating when the signals are right is almost as bad as jumping in too early. You will be losing some of your profit on each trade if you constantly hover wondering whether or not to act. Your plan should be clear in terms of which charts and indicators you use to check your signal. Having done that, do not start consulting a lot of technical tools. It is time to act.
5. No regrets
Some trades lose and some trades win. Some make profits but not as much as they could have made if only ... (you had closed sooner/closed later/got in earlier etc). Unless you are in the testing process where different variables could make a difference to your final trading system, this kind of 'what if' thinking is a waste of time. No, it's worse than that. It is positively dangerous because it will distract you from the next opportunity and possibly lead you to start tweaking your system for no reason.
When a trade is closed, it is closed. There is nothing to do but record the results on your spreadsheet and move on to the next foreign exchange trade.
Monday, March 1, 2010
Technical Analysis Tools : Your Best Trading Friend?
The trend is your best friend, as the forex saying goes, and if you want to know when a trend is beginning so that you can jump on and profit from it, you will need technical analysis tools.
Of course, many traders will point out that it is fundamental factors, not technical factors, that drive the currency market. Events like a rise in interest rates or an announcement of a major power's Gross Domestic Product will cause an immediate effect and possibly also a longer term movement. So trends in currency price movements always have fundamental factors at the base.
Nevertheless, most of us are not in a position to make predictions of how the next major financial announcement will go and what will be its effect on the market. Forex traders working from home are not, for the most part, economic or financial analysts. So instead, we use technical analysis tools to show us in clear terms what has been happening in the market recently.
Identifying trends is a simple way to create a profitable forex trading system. All we have to do is see which way the price of a certain currency pair is moving and then buy or sell in order to profit from the movement. That assumes, of course, that the recent movement is a genuine trend that will continue. If it turns out to be just a fluctuation that quickly reverses, we will lose money. So how do we tell the difference?
One of the simplest ways is to draw trend lines on a candlestick chart. This means drawing lines through the highest highs and the lowest lows in a price movement that appears clear from the candlesticks. If the two lines are roughly parallel, this indicates a trend.
If they converge, coming together as if to meet at a point in the future, then this indicates that a breakout is likely, other things being equal. If they diverge, the market is probably too unpredictable for most trend traders to want to get involved.
Once a trading signal has been established in this way, we need to cross check the signal. For this purpose we can use the candlestick chart for a different time period. The normal practice here is to use a longer time period for the cross check, for example one hour if the first lines were drawn on a 15 minute chart, or a full day if the lines were drawn on an hourly chart.
We can also use indicators such as the MACD crossover. These are easily consulted in most broker software systems. Checking signals against technical analysis tools like this can help us weed out the profitable from the unprofitable trades and increase our forex trading profits exponentially.
Of course, many traders will point out that it is fundamental factors, not technical factors, that drive the currency market. Events like a rise in interest rates or an announcement of a major power's Gross Domestic Product will cause an immediate effect and possibly also a longer term movement. So trends in currency price movements always have fundamental factors at the base.
Nevertheless, most of us are not in a position to make predictions of how the next major financial announcement will go and what will be its effect on the market. Forex traders working from home are not, for the most part, economic or financial analysts. So instead, we use technical analysis tools to show us in clear terms what has been happening in the market recently.
Identifying trends is a simple way to create a profitable forex trading system. All we have to do is see which way the price of a certain currency pair is moving and then buy or sell in order to profit from the movement. That assumes, of course, that the recent movement is a genuine trend that will continue. If it turns out to be just a fluctuation that quickly reverses, we will lose money. So how do we tell the difference?
One of the simplest ways is to draw trend lines on a candlestick chart. This means drawing lines through the highest highs and the lowest lows in a price movement that appears clear from the candlesticks. If the two lines are roughly parallel, this indicates a trend.
If they converge, coming together as if to meet at a point in the future, then this indicates that a breakout is likely, other things being equal. If they diverge, the market is probably too unpredictable for most trend traders to want to get involved.
Once a trading signal has been established in this way, we need to cross check the signal. For this purpose we can use the candlestick chart for a different time period. The normal practice here is to use a longer time period for the cross check, for example one hour if the first lines were drawn on a 15 minute chart, or a full day if the lines were drawn on an hourly chart.
We can also use indicators such as the MACD crossover. These are easily consulted in most broker software systems. Checking signals against technical analysis tools like this can help us weed out the profitable from the unprofitable trades and increase our forex trading profits exponentially.
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