Forex and Middle of the Road Profits

Two things trouble the would be successful forex trader...when to get in, and when to get out. We look at the charts and are tempted to think a certain pair is cheap. But could it get cheaper? Is it cheap just because of the recent downtrend, and is the trend likely to continue when I get on? Should I get on going long, because it is cheap and must turn around soon, or should I get on in the direction of the current trend and ride it lower? These questions plaque a traders entry every day. But if that isn't bad enough, many traders never plan their exits in advance, and so once in, the agonizing starts all over. If it blows through a stop, oh well, just a plain and simple agony there. But what if t starts becoming profitable? Then the pain really begins for some traders. Should I get out now with a small profit? Should I take half of the table and let the other run? What if it runs a long way, and I could've had all that other profit had I left the trade all on? But what if it turns around and reverses and I have left the whole trade on and I lose my profit entirely? It's enough to make a person's head explode (and it will if you let it). This is why it is important to remember that the most important space to conquer, is the space between your ears. The market doesn't even know you exist. Its not out to "get you", though sometimes it seems like it, when it takes out your stops by a couple of pips and then reverses. Or when it just misses exiting you at your profit target only to retrace and give back your trade. The only funky stuff going on in the market is actually in your head. This is why you must get control in there. Set rules. Set targets. Set stops. Realize that when you enter the market, NO ONE knows where it is headed next in the short term. You look for your good entries based on the support and resistance of the trend we talked about yesterday. If your entry is bad and you get stopped, its strictly business. It doesn't mean you're a bad trader. If your system for entries is proven, you just have to know that sometimes you'll take your lumps. Just like that little position we entered in the sterling earlier this week. It was a high probability entry, but the flip side of the coin is that there is some probability it will fail. That one did. But our next one is paying off in spades now.

When I talk about middle of the road profits, or median targets, what I mean is this. All forex currency pairs trade around median ranges over 30-60 day periods. They will overshoot in one direction only to snap back the other way once the market gets too far overextended. When trading for those snap backs, aim for the middle of the price action over the last period. Then get out. Is it likely to continue moving in your direction? Yes. Should you care? No. You have to set boundaries. And learning to set them with profit targets is a real key to maintaining your sanity in this business. Perhaps you prefer using a trailing stop. Great. Then use it, but don't cry over profits lost when the market retraces to take out your stop. Set your goals, and be happy to reach them. Then get out. Leave some profit for somebody else. All traders have to eat. We all have to pay our bills. Once you reach your goal, be satisfied. Remember bulls make money, and bears make money, but pigs get slaughtered. Set your rules, and stick to them!

Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex Trading: Support and Resistance

In the trading of the forex market,w e established early on that the only real way to trade it profitably is with the longer term trend. Trade In the direction of the trend, and become a specialist in one currency. Learn it's movements, it's quiet times, it's volatile news releases...everything you can about it.

But also remember, learning everything you can about a currency and it's actions and reactions isn't a 30 day process. It isn't a 90 day process. Give yourself a year minimum of studying it every day. Certainly use historical charts, but you have to be trading it on a regular basis to get a good feel for the pair. And you have to use real money. Demo accounts only help people think they are good traders. There is no way to account for the real fear and greed that fills a traders heart when his own cash is on the line.

So having established that trading with the trend is the only way to go, the next thing that is crucial to remember is that you don't want to try to get in on the beginning of a trend. It is next to impossible to find when a currency turns a corner (except in hindsight when it looks so easy), so always let your trend establish itself before entering.

Once the trend is underway, the next logical question is that of when and where to enter. For the answer, we will look to support and resistance. If the trend is down, we want to enter at resistance. If it is up, we want to enter at support.

For instance, our recent sterling trade is short, as you can plainly see the direction on any weekly chart of the GBP/USD. Recently we came up to a weekly resistance level. This provides a reasonable place to enter, as the resistance is strong and well established. Where will it go from here? No one knows. That's why you always have a contingency in play. Either a stop loss, an offsetting trade as a hedge, another entry at the next resistance level, something to expand your advantage in the market.

But what is the best kind of support or resistance? And how many are there? Let's see:
Horizontal S/R
Diagonal S/R
Fibonacci S/R
Big Figure S/R
Old Resistance/New support
New Resistance/Old Support

Each of these deserves a decent treatment, and we have talked about some of this before. But it always bears repeating! For slower markets, I prefer horizontal S/R. For faster markets, I prefer angled trendlines. For breakout markets, I like the Fibonacci grids. For profit targets, I like the big figures. All this has come to me over years of trading trial and error. And especially narrowing down my trading to certain pairs. It is no secret that I like the euro, pound and aussie.

Study your support and resistance levels for your preferred currencies. You are nearly guaranteed to fail without this knowledge in your arsenal. But don't simply rely on back testing, that can only do so much. You have to put the trading plan it work in real time in real markets with real money. Just keep your leverage small until you have the experience you need to feel comfortable. Even then, don't get too comfortable. The market is like a pet lion...there's always a ferociousness just below the surface. And if you are careless, it will get you.

Also, remember this as a practical point. Support and resistance is not at a "pip". It's at a range. So if a swing high is established at a certain point, remember that the market may respect that, but will probably only due so within a certain range. If your swing high is 1.5100, and you put a stop loss at 1.5101, you haven't really given the resistance level the respect it deserves. You probably need 25 pips or more, in the case of overshooting for which the market is famous. So don't try to get your S/R down to the pip. A 50 pip range or level is better.

Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex and Making a Living

Everybody seems to want to know how to trade these days. Everywhere I go folks want to talk about it, whether I am there in an official capacity or not. While very few understand the concept of foreign currencies, all of them seem to have this same vague idea of people who never work, sit by a computer all day and make it into a money machine laptop ATM.

They associate it with freedom, an easy lifestyle, and unlimited wealth.

But the real truth is, for the 95% of traders who lose their stake in this market, it is hard, frustrating, and impoverishing to whatever extent they fund their accounts. Trading for a living is great, if you like trading. If you like wood working, and think you can augment your wood income with trading money, you're probably on the wrong track. Trading isn't for everyone, and certainly daytrading is for very few. Now the trading we do here at www.thefxtradingmasters.com can be done by almost anyone. But it does mean you have to set aside the time to learn, to read, to execute your trades. Also, making money at forex is a fairly different creature from making a living at it. I have for a long time been a strong advocate of making money and having a source of income besides your trading. Personally, I am a clergyman, and that was my calling in life long before I was a trader. I serve a wonderfully warm, family oriented parish in Baltimore, MD. Will I ever get rich there? Not monetary terms. But I have riches there which will far outlast this life. Nevertheless, I can simply live off of the salary they kindly give me for serving them. That also frees me up for other pursuits. Many of you know I also run a construction business. And I run the mentorship program. And I have my own personal trading. All of these, funnel together to create multiple income streams into a nice living. But I can't be a Rector at Faith Church forever. Nor do I want to run a construction company forever. I can do mentoring for a long time, and look forward to that, and even after my voice has given way and I can no longer preach the Gospel, I can still type and teach by way of the Internet. Only when I am finished with all of these other things will I truly be trading for a living. Only then will it be my sole source of income.

Having another income stream, whether it is a regular 9-5 job, or an Internet business of some sort, also takes the pressure off your trading game. Although I rarely have losing months anymore, when I do, it is not a big deal. I don't want to be trading with scared money. "Scared money always loses". So when you calculate what you need to make a living, another source of income is always helpful.

If however, you are ready to go it alone, and trade only for living, then you must set some realistic goals, and begin with a realistic lump sum.

Starting with your budget, let's assume that you need $5,000 monthly in order to achieve or to maintain your current lifestyle. In order to create that amount out of the forex market, you would need a lump sum of $100,000. It is true that aggressive trading could make more (easily more), but you're retired now. You don't want to spend your whole life at a computer. So a steady process of 5% is fairly reliable if you have practiced for a number of years, and are comfortable around the forex. If you need or want more or less, simply increase or reduce your trading stake.

Also, that should not be the only 100,000 that you have! At that point in your life, you'd like it to make up a portion of your portfolio only. Depending on how much you love trading, and how much you want to do it, will depend on what amount of your resources you want to allocate. But by no means would I put every penny into active trading.

Now if you are a good trader, and an active one, there is nothing more to be done to make 10% over 5% except for a bit more watching and strategizing. At The FX Trading Masters, that's what we shoot for. Some months we don't get it. Other months we get more. But you want a good even keeled approach to this, otherwise you will become the "scared money". A longer term perspective, and lower leverage, will get you much richer, than the other way around.

Trading for a living? It can be done, and it really is possible. But first, ask yourself if that is what you really want.

Happy Trading!

Bill
bill@thefxtradingmasters.com
www.thefxtradingmasters.com

Forex and the Using The Edge Of Leverage

The definition of leverage means to apply multiplied forced to something. Leverage has the idea of a mechanical advantage of some type...such as in using a lever. "Give me a lever long enough and a fulcrum strong enough and I will move the world." Anybody remember who said that? (Of course, I believe he said it in Greek, so it wasn't exactly like that, and that is also your first clue!)

The science of leverage offers us a few good insights into successful trading. Leverage gives a man an advantage. Whereas, without it, he his limited in his capacity to move large objects, with it, he can moves things many times larger than himself. He can also control the direction the object goes if he does so with some carefulness.

In trading, we always are looking for an advantage. ALWAYS. Trading without an advantage is like rolling a heavy rock uphill. Not only is is amazingly difficult---but it is very likely to return right back down over top of you once you let it go. Most of us have had that experience in trading. If we were on video, I'd ask for a show of hands. But we have taken poor trades, against the trend, or at the end of an exhaustion, only to see the trade start our way, then roll right back over us. Dazed and confused we get up, look at the losses in our account, and scratch our heads in wonder.

Trading good set-ups, like rolling a rock down hill, is far easier. And there is very little chance that he rock will return to run back over you as well. So I repeat, we are always on the lookout for advantages: better risk to reward scenarios, good trends with an entry on a pull back to support or resistance, reliable chart patterns that offer us shorter stops.

But one advantage we always have is the use of leverage. Now in science, we usually figure that the higher the leverage, the better. After all, you can accomplish more work with higher leverage than lower. Right? But that's not what I mean in trading terms. Higher leverage is ALWAYS WORSE. IT IS ALWAYS MORE DANGEROUS. If there were some way I could imprint that on the back of your hands so that when you sit down to the keyboard to begin trading, that would be the first thing you see, I would do it. A man or woman will never allow themselves to become a good trader if they use high leverage. It may work for a time, but will eventually blow up your account. THERE IS NO WAY TO AVOID THAT.

But leverage is helpful, in that it can really assist those getting started, and those who will use it in an advantageous and judicious manner. One of our basic trading rules is that a trader should not leverage his account higher than $1/pip for every $10,000 in account. This is fairly straightforward math. A nice 50 pip move will generate $50 off of a $10,000 account. That is 1/2 of a percent. Multiplied out over a month, that is 10% return monthly. A nice 100 pip move turns into 20% monthly. Of course, we can't do that every day. Sometimes decent set ups aren't there at the times of the alert. Or we miss the trade because it has already started to move before we got to the computer. Other trades are just plain losers, so we are out 50-100 pips. So it is unwise to simply multiply what you can easily make each day over the entire month. One must allow for down and negative days as well.

But be that as it may, low leverage will keep you from blowing our your account. And it will keep you in the game while you keep learning how to make 10-20% monthly. This is entirely possible. And so are even bigger bonanzas. Just a few weeks ago, in my private trading account, I topped 30% in 5 days. That was wonderful, but it should not be my goal. I can guarantee that if I started working for that each week, I would begin to lose money. Why? Because I would quit using my advantage. I would stay in trades too long hoping for a bit more. I would enter questionable trades. I might even be tempted to move my stops to give a trade more "room". Instead, I will just take it as a gift from God, let it add to my balance, and know that a week will come, (which just happened) that I will have a losing week. And I'll need those extra profits to smooth out my profit curve.

So always remember, one of your advantages is that you can trade small. Let it keep you in the game. Let it build your skill. Because good traders are NOT born. They develop. You can develop this skill. But only through the discipline of trading low leverage. After a few years, you can increase it if you like. But keep a close eye on your balance. If it starts to deteriorate, you'll know why. Better be on your toes to change that leverage back!

Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex and Trading Perspectives

It seems I have hardly gotten any writing done this last week, and indeed judging by the entry dates, I am absolutely right. My apologies for being so reclusive, but as many of you know, I was hit with a virus that brought me to my knees.

I rarely get sick, and that is a wonderful blessing. But sometimes we take our blesings for granted. Generally, I might get a little sniffle or slight cough, but this time I got the full treatment: a sore throat that was somethin akin to swallowing shards of glass, a cough that sounded like a herd of small hippos at play and a lack of appetite that cost me 6 pounds. It also cost me something else, we ended up with back to back negative trading weeks. I really hate that! Trading is hard work, and takes loads of concentration. But when a trader feels bad to begin with, then dopes him/her self all up on medicine, it can be a real recipe for disaster. A fuller statement of this idea would be; don't trade while you are drinking heavily, while emotionally upset, or while tired. All those things really affect your judgement. They certainly affected mine.

But that's not really the only perspective that I had in mind for today. As you all know, we are headed into the summer doldrums here in North America, a season of time when trading slows down, ranges often become tighter for days on end, and the waiting can be sometimes painful. But I am a big believer in low intensity trading. As it is, trading is intense enough, after all, your money is on the line. So anything that can be done to reduce the intensity is only going to make it much more enjoyable. And frankly, the more enjoyable your trading is, the more profitable it will be.

But in today's lesson, let's take in hand the persectives that come from the different time frames. As you all should know by now, I am a huge believer in longer term time frames. "The shorter your time frame, the faster you will be parted from your capital."

You must always have enough to trade another day. The longer your time frame, the more time you give yourself, to learn the important lessons of trading. If you blow up your account, you'll never get to the important lessons.

I have often thought of the forex as a herd of traveling elephants. There are several key analogies. Obviously, when they are running through your town you don't want to get in the way. However, if they are traveling the way you are going, you can hop on and get a very fast free ride. And...the best place to observe them, is from a safe distance.

But the problem for many traders is that when they see the dust and hear the noise of all the action in the market, instead of standing back to take a look at the stampede that is going on, they have this sort of innate idea that they will be better able to tell what's happening if they just get a little closer. So they keep shrinking their time frame, getting closer and closer to the noise and the action. But one should use a little common sense. You can only get so close to the stampeding herd before "WHACK!", and you are another casualty of the market.

I say, better to stand back and get the lay of the pack. You'll be able to better see where they are bunching together, where and why they are slowing down, you'll get a better idea of the direction that they are heading. And you won't put yourself at risk. Because after all, the market doesn't really care how close you get. It doesn't really car that you and your account are going to get demolished. It doesn't give anymore thought to you than those raging elephants do. And sadly, your outcome will be the same.

So stand back. The forex market is every bit as dangerous as a stampeding herd. Get your perspective before you get too close. There is a limit as to how close you can view something,before you can't make it out at all. Trying to examine an elephant on a molecular or atomic level will tell you nothing about the dangers you are facing. So it is that viewing the markets on a pip by pip, or 1 minute, or 5 minute chart and so on will provide some fascinating stuff to see, but it will not make you a richer trader. And it could lead to signifacant losses.

Keep everything in perspective!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex and Losing Weeks

As is sometimes bound to happen, all traders go though dry spells in terms of successful trades. The fact is, not all trades work out, and more often than not they seem to come in bunches together. How you perceive and handle these will be of great importance to your long term success.

Remember, no business can be successful when it is only tried for a month at a time. And if you don't treat your trading like a business, it will not be successful. But for many new traders, this seems to take the "romance" out of it. The excitement is gone, and they find it boring. I suppose they end up saying the same thing about many other avenues in life; work, hobbies, relationships. The problem with many people is not their lack of desire for something better, it's their lack of desire to work at it.

They would prefer to treat the Forex as a gigantic lottery ticket. But when it doesn't pay out as they think it should, their ready to ditch it and move on to their next "ticket". Often this is true of their systems as well. They stick with them for the 30 day free trial, but at the first sign of problems, they are ready to bail-out. A couple losing trades, and they are back on the hunt for a new guru.

Such traders will never find success. It will always elude them. Not necessarily because they would have been bad traders, but because they never gave themselves the chance to find out!

It is important to note that all traders are trading off of the same information. We have the same government reports, interest rates, and press conferences. We are all looking at the same charts, and seeing the same patterns.

Last week we saw two triangle patterns in the euro. The first one paid out nicely. The second turned into a stop loss. Why? Simply because the market is not identically the same time after time. Many times it is. Triangle patterns have a 70-80% success rate according to some. But sometimes they just don't produce the intended results. At that point, instead of breaking out to the upside, other traders were looking to weakness to fall through the rising trend line. It was the weakness which prevailed that day. Does that mean it was a bad trade?

Not at all!

It was a good trade, even though it was a loser. We followed our parameters, looking for continuation in an uptrend. What I am trying to say is that good trades can be losers, too. It is up to us at that point to shake it off, knowing that sometimes that is exactly what will happen. There's no going back to it to re-examine the pattern and say, "if only I had seen this, or done this."

Generally that kind of retrospection is more dangerous than helpful. It leads you to doubt your system, and makes it very hard to trade. No system is perfect. And if there was a perfect system, there are no traders which are perfect. Put together imperfect systems with imperfect traders, it's a wonder any of us ever make money.

But you have to stick at it. See it through. Sure---feel free to make improvements, or add new indicators. But once you have a good system, don't try to re-engineer it. Don't try to tweak it indefinitely. When losses come, just take them as the inevitable part of the life of a trader and move on.

DON'T GIVE UP!

Trading for a living really is possible.

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex and Next Euro Targets

"Everybody is wrong when the trend changes." This is an old saying in trading, and is well worth noting. It first means that if you are trading following the trend (which you better be) that your trade will be a loser when the trend turns on you. Not much you can do about that. You might as well try to stop the ocean tides from turning. But there is also a more subtle meaning that evades less experienced traders. That is, trends seldom turn on a dime. In a bearish trend such as we've had in the euro since the end of '09, the price action will make several false bullish hints at a turnaround, before actually pulling it off. Even then, the downtrend may not be completely over. So you must always be careful about committing to a direction until it is clearly established.

We noted in the day's trade alert (just go to www.thefxtradingmasters.com to sign up) that the euro has put together it's first string of multi consecutive up days in over 2 months. That speaks a good deal about the underlying risk appetite that is creeping back into the market, and is reversing some of the safe haven US dollar buying that has been going on.

And while I would expect that risk appetite to continue for at least a few more days, it doesn't necessarily mean that the euro bear has gone into hibernation. From here, at 1.2245, we are just bumping up against the 200MA on the 4H chart. Price action has stayed below here since mid April. Breaking this barrier would be pretty significant. We should note, this is the first real attempt to do so.

Beyond this level, we have resistance at 1.2320, 1.2350 and 1.2450. That last figure is also the 161.8 extension of the move from the current low.

On the news docket this week we have a few big ticket items. Tuesday will bring the CPI (inflation data) from the UK, while Wednesday will present their Jobless claims and employment rate. We'll also see US housing data, permits and new starts, which while generally considered to be level 3 data, has been known to cause big moves in the absence of any other news, and especially f the results deviate in a significant way from what is expected. On Thursday we will have the US CPI data, and see if rising prices caused the sales slump last month.

That should do it for today. Let's see what the market brings us.

Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com

Forex and Trading Triangles

While the world is awash in sovereign cash, interest rates are at extreme lows, and no one in power has either the guts or the brains (I'm not sure which is missing) to do what needs to be done to exit this crises, technical considerations take on a more significant place in forex market and trade calculation.

One of the most prominent chart patterns, especially in forex, with which you should be familiar are triangles.

There are three main patterns here that should be quickly recognizable, a symmetrical triangle, a falling triangle, and a rising triangle.

In the picture above you see an image (although not a very clear one) that I had to capture from off the web to illustrate these. The top image is a symmetrical triangle, where the top line is falling and the bottom line is rising. This is frequently referred to as continuation pattern. In other words, the market stops its move and rests, with prices compacting into an ever narrowing range. The likelihood is that the price action will break out in the direction of the already established trend. So the strategy is to enter the breakout in the direction of the trend, and set your stop at the opposite corner of the triangle, which forms the most recent swing high or low.

The next figure is that of a falling triangle, also known as a falling wedge. It has a falling upper line and a flat lower line. Simply looking at it should give you an idea of where prices will go upon exiting this pattern. As a rule, when they break the lower flat support line, the price action will drop. You can really see what is happening as the bulls a re defending their "line in the sand", but they can't push prices up. So each up move gets smaller and smaller, as fewer and fewer buyers are willing to take on the risk. Eventually the market runs out of buyer sand even the line in the sane fails. Set your stop in the same manner as the previous one, just above the upper corner of the triangle. You can also calculate an initial price target, bu taking the wide end of the triangle and applying it to the breakout. So a triangle that is 30 pips wide on the left end, will give you an initial target of 30 pips on the break down.

Rising triangle are traded in just the opposite manner. You look for the pattern to resolve itself to the upside, then target your trade using the wide portion of the triangle. Set your stop the same way.

Please note, this manner of setting stops and targets means you basically have a 1-to-1 reward to risk ratio in your forex trades. But as you are trading in the direction of an already established trend, you price target is only a "soft" one. there you may exit half of your position, and let the other half ride while moving your stop to B/E. or you can retain your whole position while moving your stop to B/E. Expecting the market to continue its trend, and trading in that direction, means you may have a much a larger target than initially calculated by the size of the triangle. At any rate, you should end up with pretty reliable trades, and a higher percentage of winners versus losers, even if you are 1-to-1.

Lastly, please note the chart of the eur/usd in the upper right corner, you can see a good picture of an ascending triangle. This is today's chart. A breakout could yield a 120 pip move!

Happy Trading!

Bill

http://www.thefxtradingmasters.com/

Forex, Time, and Distance

In response to the number of requests I've had to write about day trading, here is a significant lesson. This can be applied to longer time frames as well.

One of the most crushing moves for a novice trader is to be watching a chart, seeing a strong move take off, waiting for it to clear a resistance, then hitting the buy button, only to see the currency begin tanking like a rock.

Such moves are also called "traps". Depending on who you talk to it is called either a bull trap (one that traps unsuspecting bulls) or a bear trap (one that a bear uses to catch a bull). Since there doesn't seem to be a uniform usage, we'll just call them traps. Obviously, they can happen in either direction. Typically, they are fast moving, and extend a certain percentage beyond resistance. My experience is that they will often move to the 38.2 extension of the support or resistance, stop, and reverse.

That being the case, it pays to know where these reversal points are. Now you can' t just blindly set an order to reverse, you have to see as the price action approaches the point, if the pair is showing some signs of exhaustion. That, coupled with the fib extension, will often provide an excellent entry for one who is day trading. Also, if you are actually trading in the direction of the movement already, the 1.382 is an excellent target on a fast move, once the price clears the initial resistance or support.

Another means of measuring the same thing is the angle of the price action. In an uptrend, an angle of45 degrees is very pleasant. It indicates strength building, and no blow off runs toward exhaustion. Beyond that, every 5 degrees or so increases the likelihood of a strong reversal. once your pair is moving at an angle of 75 degrees, you can be pretty certain that this move will not last. If you have the time to watch it, waiting for the signs of exhaustion can prove to be a powerful trade. Even if it only retraces 1/3 t0 1/2 of the entire move, if it looks like good pips, then enter with a small small risk, just above the recent high, if it takes that out, exit immediately and wait for another sign of exhaustion.

This can be done on any time frame, but remember, the longer the time frame,the more reliable the signals are.

Also, the more familiar you are with a certain pair, the better you will get at this. Each pair contains its own idiosyncrasies, and the better you get at noting them, the better of a trader you will be.

For now, just remember, fast moves nearly always mean fast reversals. so even if y9u break a good support or resistance, maybe especially then, if the pair has made a long fast move, it may be best to stand aside, and wait for the extension, then reverse the pair on the way back down. Watch out for those speed traps!

Until next time...Happy Trading!

Bill

Forex and the Relative Strength Index

Today's' lesson has a very nice illustration that has set up on the eur/usd, so that is the chart you will see above (1H time frame). We will be discussing the Relative Strength Indicator (RSI).

The RSI was developed as a tool to measure the strength of any move, whether long or short, and it's likelihood to continue. It is also a forward looking tool, as if used correctly makes for a decent forecasting indicator. Most of you will recognize the value in that, as most all other indicators are lagging, and provide very little help in the way of forecasting.

On our chart above, the RSI is the to of the three indicators you will find at the bottom of the chart. The settings I use for the RSI are 3 periods, applied to the close, with the indicator itself showing levels of 30, 50 and 70. All of these are adjustable in your MT4 charts.

So let's talk first about the indicator itself. Generally, as prices are rising, the indicator will rise also, thus revealing strength in a rising, or bull, trend. The inverse is true for falling prices. So at first glance, it seems to not show anything more than the price action itself. So what kind of good would that be? But let's take a deeper look.

In today's chart you can see a swing high in the price action at around 1.1990. If you look at the RSI, you can actually see two little peaks corresponding with that rise. As the second peak on the RSI is really no higher than the first one, we see a divergence in the indicator. Because the price continued higher, but the indicator did not. this is the first "evidence" of weakness in the rally. Higher highs in the price should be met with corresponding higher highs in the indicator.

Also, you can see the red line I have drawn on the chart in the price frame, showing the support level for the euro. In the RSI frame underneath, you can see a similar support line on the indicator. Here is the forecasting value of the RSI. When a trend is weakening, the indicator will often weaken before the price action. Many traders use that a signal to sell...once the RSI has crossed below it's support level. In such a case, you would simply place your stop above the most recent swing high.

Other traders will wait to see the a second validation, and that is the RSI crossing below the 50 level. This signals that the move has turned bearish. As the move continues, (which this chart does not show), traders watch the RSI on subsequent rebounds, to see if the indicator stays below 50. If so, then the trend is still intact. Above 50 becomes questionable. Moves that continue on below the 30 level are considered very bearish.

For a bullish just revers the above information, and everything above 70 is considered very bullish.

In our chart, you can see that the last hour posted a strong rebound, closing well off of its low. The RSI remains below 50 and is pointed downward indicating a continuation. But as we watched the RSI cross the support line around 1.1960, and the impulse move continued down to 1.1916, that would have been a great move all by itself, even if it is reversing now. Following the price with a trailing stop would have you out with 20 or so pips, or simply keeping your stop at the recent swing and then moving it down as the price makes a new swing low, will also keep you in. If it turns into a longer term move, you may gain more pips this using the latter method.

Now some of you may be wondering why i didn't recommend this trade in today's alert. Here's why. For a short term trade, this is a very nice set up. But for the longer term trades wea re looking to make, I';d prefer to see a rise tot he Fibonacci resistance that you see marked in yellow. A rise to the line marked 61.8, with a stalling action in the price and then a cross of the RSI would be very nice. But i'd consider it a much safer entry to come in at that level, rather than on a weaker entry such as has been exhibited.

Remember, we want to cherry pick our trades from the very best set-ups, and not take ones that are marginal. And even if this turns into a big move down, it does not change the fact that the entry, and thus the prospects for the trade, are only marginal, rather than optimal. We'll watch to see how this unfolds, and comment on it tomorrow.

Happy Trading!

Bill

http://www.thefxtradingmasters.com/

Forex and The Continuing Euro Move

The euro has done it again. Over night we saw another new low hit against the dollar. Each new low gives us more opportunities to profit.

But last night something historic happened. The euro passed it's all time median point at 1.2130. That means that out of all it's entire range for its complete history, it has now returned from its very high highs, to the very middle of its all time range. What were the heights from which it fell? 1.5100!

That means it has fallen 3000 pips, and has 3000 more to go to the bottom of it's range. That would place it at around .9000.

Now while it may not stretch that far on this move, it is certainly well within reason that it would move half that far to 1.0500. An I am inclined to think that as the year unfolds, that may certainly happen.

So hang on to your hats, and let's ride this baby as long as we can!

Happy Trading!

Bill Jenkins
www.thefxtradingmasters.com

Forex and Faithfully Trading One Pair

I've been asked numerous times, "How do you choose which pair to trade?"

The question is a simple one, but the answer, and the rationale behind it, often eludes traders.

There are many wrong ways to trade forex. Which means there are a lot of ways to lose money. One of the fastest is by over trading. Most unsuccessful traders understand that to mean simply trading too frequently. But there is more. We have frequently talked in this forum about the dangers of leverage that is too high. Using such positions is another form of over trading.

But then there is this: trading several pairs at once. Especially when trading the majors, as they have various tendencies to move in in sync with one another either yielding to or overpowering the USD. So that in trading several pairs at once, often you will will find your trades are all essentially the same, either buying or selling them all against the USD.

Thus if you take trades in the euro, sterling, and swissy, they will all generally trend in the same way. But you have actually increased your leverage by 3x's. That seems great when the trades go your way, but the opposite move, if you've made the wrong call, will put a huge dent in your account. Also, if you are trading pairs that are moving out of sync with each other, then, more often than not, your trades will simply offset one another. Again, no great benefit in that. But if you've made the wrong call, you've doubled your leverage against yourself, and that's going to hurt.

Also important to consider is the effect of news on your pair. It is difficult, if not nearly impossible, to keep up with all the news on multiple pairs. It can be done, but the major effect is sheer confusion.

So after years of trial and error (mostly error in this department) my "infinite wisdom" on the subject is that a trader is better off to specialize in one pair. As you work with it day in and day out, you get a better feel for the currency, and how it acts and reacts. You get a feel for it's news responses, and how fast it moves and for how long. All this is important. But you also get to have a sense of which direction the news is moving. And, apart from the major releases, which secondary ones are likely to make the pair move, how much of a surprise the news has to be percentage wise to generate a move, how big the average move is based on your surprise percentage, and how long it takes for the move to play out.

Frankly, it is more than a little difficult to keep all of that straight for multiple pairs, even though you could print it out on a spread sheet. But additionally, if you are trading multiple pairs at once, then you actually have to watch them in your portfolio in real time.

I'll be the first to admit, I am no genius. But that's OK. Whatever impediment that is to becoming a good trader, I've gotten beyond it. But I've also learned my limitations. And I tend to think that my limitations are not all that different from the average trader. But trying to trade multiple pairs has virtually always proven a serious mistake, for the reasons I've mentioned above. But if you don't think they apply to you, more power to you. But you better experiment with them very carefully. Don't bother doing it with demo accounts. The truth is, even a marginally bad trader can make money with a demo.

Why?

Because nothing is at stake. Any trader worth his salt knows that the heart and mind work far differently when real money is on the line. Period.

So if you want to experiment with multiple pairs, do it in a real account, with the smallest leverage possible. Then make your evaluation over several months...6 at a minimum.

But now we have to get to the first question. I have tried to show why I find it prudent to only trade one pair at a time. I hope that will save you a boatload of money. But how do I find the right pair? That is a little more simple. In general, I want to find the pair that has decent volatility to make the moves I need.

But when I say "decent" volatility, I mean it in two ways. First it has to have enough volatility. Trading a boring pair is not all that much fun, or profitable. Second, it should not have too much volatility. Trading a gut wrenching roller coaster gets old in a hurry also.

Next, I want to find a compelling story. What is making this pair move, and, how long can I expect it to last? The Euro has been that story for over a year. Is it playing out now? Is the excitement all gone? I doubt it. We've taken a bit of a breather, but this looks like it has the ability to continue moving. The volatility is neither too high nor too low. And of all the pairs to trade, it has the narrowest spread, so it is least expensive. Plus, I tend to think that what traders are doing to the euro now, they will be doing to the US dollar next. So we can use this as the training ground for "cutting our teeth" for when the USD goes on fire sale.

In my first successful days of trading, I was actually a sterling specialist. But when the recent credit crunch came, it became too volatile for me. So it was time to switch to the euro. Up until then, the euro was just a boring currency as far as I was concerned.

The day will come when traders will no longer be as fond of the euro as they are now. Volatility will die down, opportunities will become more scarce. Then we will look abroad for another pair to trade!

I hope that this was helpful!

Happy Trading!

Bill
www.thefxtradingmasters.com

Forex (FX) and Andrew's Pitchfork, Part 2

I realized too late that I failed to include the chart in the blog last time. So I will edit the post to add that later today.

For this post let's view another technique in the use of the pitchfork.

We noted last time the median line of the fork which is the core of the indicator, and you could say that everything revolves around it. As prices tend to return to a median over time, we will look for the price to return to the median line of the indicator.

So let's say you are in a downtrend, and the price backs up to the median line. There are three options for price action from here. A continuation of the retracement to the upper line in the fork, a consolidation around the median line, or a reversal of the retracement and a continuation of the downtrend toward the lower line on the fork.

But how do you know which is in the cards?

Let me repeat something I said in one of the early lessons of the blog...NO ONE knows what's coming next. It is true, there are big dealers and sovereign wealth funds that really move the market when they buy and sell, but no one really knows where the market is headed. (This one thought revolutionized my trading.) You look at the overall trend, and you want to catch a wave, just like a surfer. Some waves work out, some don't. But if you want to catch a downtrend, you have to be willing to sell when the currency is moving upward. In a strong downtrend you can make money when it breaks to new lows, because many times it will be blowing through stops and can really pick up steam. But the best short trades will be from higher peaks, not lower valleys.

OK, back to our downtrend and the fork. When price retraces to the median line, it is foolhardy to just hit the sell button and hope for the best. If there is going to be an end of the retracement here, the market will show some weakness. DON'T BE IMPATIENT. Wait for the weakness. This will show up in several possible forms...and it is here that I really like the candlestick charts. Sometimes you will see a shooting star formation. Or a hanging man, or a hammer. We will go into detail with some of these at another time. But instead of reinventing the wheel, just check out some sites on candlestick charting. There are a lot of good ones like the following: candlestickgenius.com, gotcandlesticks.com, candlecharts.com, and chartingwithcandlesticks.com.

Before you enter, you want to see that the retrace has run it's course and is out of steam. Remember, no system is fool proof, and the longer you trade, the better you will become at spotting weakness. If a couple of weak candles appear and nothing happens by way of follow through, don't enter a trade. Assume that consolidation is underway, and look for signs of a break out a bit later. Keep in mind that consolidations like to break out in the direction of the overall trend, so you would look for a short trade. Also remember that consolidations produce frequent false breakouts to the opposite site of the overall trend to produce a "bull-trap". Many unsuspecting traders will jump at a move to the longside coming out of consolidation, only to watch in horror as it reverses and continues the original downtrend. So watch those false breakouts. If it is actually changing trends, and you see a break out to the up side, wait for a retracement back toward the consolidation, then at the candles which give signs of renewed strength, hop in long for the next leg.

Keep in mind your parameters of the pitchfork at this juncture as well. A break up from the median line (during a downtrend) is far more likely to resolve itself by hitting that upper line, and then falling back. In doing so, you have a great point of entry at that upper line, especially if it coincides with a declining trendline, or a fibonacci retracement level. The more concurrence you can have, the more sound your trading venture can be.

That should do it for today.

Happy Trading!

Bill
www.thefxtradingmasters.com

Forex and Andrews Pitchfork

4H eur/usd chart


We'll take in hand a lesser used technical indicator today and discuss how to put it on your chart, and how it is best employed.

An important thing to remember is that like all technical indicators, it is not a magic trick, nor is it infallible. But with some practice, it can be an effective tool for trading reversals.

The pitchfork as you see in the chart above is so named because it resembles a farmer's pitchfork when it is placed on a chart. It's usage is based upon the median line theory of prices. Simply stated, prices tend to return to a median when in a trend. Frequently at the median, they post a reversal. Another real possibility is that at the median, prices will begin to congest and stall. Then either breakout to the up or downside. The following article will deal mostly with downtrends. Just reverse the directives for an uptrend.

To apply an Andrews' Pitchfork, first you must have it in your charting package. It is based on a three point diagram. For a downtrending price pair, you need a swing high, followed by a swing low, followed by another swing high, either at the same price as the previous high or lower. That, of course, is the definition of an downtrend. A high point, followed by a lower low and a lower high. With the MT4 chart package, click on the insert tab in the upper bar. The dropdown menu will include an listing for Andrew's Pitchfork. Click on that and move your cursor over to your first swing high. You'll see that the cursor has become a #1 with a crosshair and 3 lines that resemble a pitchfork.

Click on that first swing high. You'll see the cursor will retain the second 2 symbols, but the 1 will change to a 2. Move your cursor to the 2nd swing high and click. Then the 2 will change to a 3. Move the cursor to the swing low in between the two swing lows and click on that. When you do, the pitchfork will automatically form.

What you will see is a median line in the middle, a lower support and upper resistance. That falling upper support line will frequently restrain prices as they prepare to fall to the median line.

On the other hand, a rising trend will find that the lower line will contain price action as it seeks to return to the median.

It is simply helpful to remember, that prices often seek to find a median. They do not like to be overstretched too far with out seeking to return.

So play around with that a little on various time frames. Like with most indicators, you'll find it more reliable on longer time frames than shorter ones. Also, when looking for a reversal at the median line, remember to exercise good money management and reasonable candle watching for weakness. If the candles do not display weakness, you may not get a reversal.

That will do it for today, tomorrow, we'll look at some more applications of the pitchfork.

Happy Trading!

Bill
http://www.thefxtradingmasters.com/