Forex and Range Trading

We quoted yesterday a statistic that tells us that FX pairs are in a non trending state nearly 65% of the time. That's a lot of range bound pairs. In order to make those periods profitable, a number of traders have tried various schemes of "range trading". What that means is identifying a range, then selling its' tops and buying it's bottoms. When they flash up their charts,you see price action that rolls up and down and looks as reliable as the ocean tides. Even a monkey could profit from this! But let's not jump the gun. Range trading can make you money, but spending the majority of your time looking for ranges and trading potential ones will cost you financially and emotionally. I rarely recommend range trades in the service, and here's why. Although pairs may be range bound for the majority of the time, the ranges do not remain the same. So the challenge is to be able to quickly identify a range, so that you still have time to take advantage of it. After all, if you start trading a range after it has made 3 similar tops and three similar bottoms, you will likely get burned as it will soon abandon those parameters. I find it best to look for particular set-ups that produce ranges, rather than looking for ranges themselves. This weeks action in the sterling has proven to be a good example.

The sterling had been in a multi month downtrend. It hit an extreme price and began to rise. Demonstrating a bullish determination, it broke through daily weekly and fibonacci barriers. But then it got stopped at a major fib retracement...the 68.2. It may have been the technical barrier that halted the advance, but when we calculate in the other factors of the week, we get additional framing for our picture. There's big news coming out this week, a rate announcement. Also we have new Monetary Policy Committee members who want to weigh in and could divide the decisions. Also we have the non farm payrolls due out at the end of the week. All those items working together, can produce something of a stalemate in a currency pair which is what produces the "range". So bumping against a major fib, after several days of one way price action, but having to wait for significant data, these together produce ranges. One should then look for three points to begin trading. In this case the first point would be a swing high, followed by a swing low (point 2) to establish a lower support, then look to sell if the pair has trouble upon reaching the previous swing high. Generally, if I like the set-up, I'll try to get a good sell entry, and aim for a 2/3 drop in the range then exit with a profit. If the pair struggles at the lower end of the range, I'll look for a decent entry and try to get 2/3 on the way up. never shoot for the whole range. It will always disappoint you.

Happy Trading!
Bill
bill@thefxtradingmasters.com
www.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 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/