OKE FOREX: April 2013

Friday, 26 April 2013

More on how to trade news

I promised to write on the topic how to select the best candidates for your trades in my last post. However, I see that I have a shortage of time and will not be able to finish it this week. Besides, I have written a few posts about it and do not want to repeat myself too often. So, this theme will be dealt with in my future post. Maybe I will collect my thoughts and post an article on that next Tuesday. Today I want to add a few thoughts on how you can trade Forex news releases. I wrote a lot on the topic too, so this will simply be an addition to what has been written. Be sure to read my post on the topic with specific rules for trading these macroeconomic events.

With time this strategy of mine has evolved and I use more freedom in trading the news. I often skip even those events that are of high importance if I do not like the technical structure of the currency that should be affected most by the upcoming release. I do it, because I see that not all events (even of high importance create volatility and move prices sharply).

So, with time I tried to incorporate more of technicals to this fundamental way of trading. I got better with this specific strategy and want to share just a few thoughts about it now.

My technical preferences

I like trading news when currency pairs are stuck in ranges or are consolidating. This creates a much bigger chance for a breakout. If you see a consolidation pattern or a narrow range of a week or more you can be sure that the market has lost momentum and direction and is waiting to be pushed by some fundamental factors. It often happens when news comes out.

I monitor around 27 pairs every day and know what state they are in at any given time. I wait for the prices to stall, lose direction and start ranging. I also like when those ranges are very small 150-250 pips in size. After staying in this pressed state currency pairs then explode one direction or another.

Some pairs are known for their natural tendency to stay for longer periods in ranges than others. Canadian dollar is one of them. If you look at the chart of cad/chf pair from the 1^st of March till 25^th of April (2013) you can clearly see how it loves these small ranges and you can also see how it leaves them with explosive moves. The areas that are marked by ellipses indicate moves that were pushed by some kind of news. That�s how Forex pairs leave their ranges or move sharply within them. You want to take advantage of that. Wait for important news from Canada and see what happens when it is released.

Another thing that I have noticed is that when pairs are in larger ranges they tend to move from the very top to the very bottom and then back. They might stop somewhere in between, but tendency is always to seek top or bottom. So, when prices reverse at the bottom they often move up even if the news that comes out is negative. It means market has caught tendency and is shaking off the news. That is a feature of a trending market.

Knowing this I often place my order only in one direction now. If you have already read my other article on forex news trading you know that I often place buy and sell stops on both ends of four hour chart or use other time frames to position myself for whatever direction market will take after news is released. I tend now to place order only in one direction: in the direction of a tendency that market is going on at the moment. I also place only buy stops when market is at the bottom of the range and sell stops when market is at the top of it.

One more thing that I want to see in the price action before the news is released is some bias: bearish or bullish. I am sure that the �smart money� is aware of the upcoming direction of a given security (or may even know what news will come) and it is taking position in advance by either accumulating or distributing. When I see that I know that market is positioned for the news in a specific way. Most often than not it does take that direction when news is released! This is another reason why I often (now) put only one order (in one direction) before the release comes. What happens if the market goes an opposite direction? I just skip the move and wait for another one. If you do serious analysis you will see that there usually is at least one big move (often more) during the week where you can make nice money. So, if I missed one move another move is around the corner. Do not worry about the past, think how you are going to use upcoming opportunities.

A good example illustrating my point would be GDP data from Great Britain today (25^th of April, 2013). If you look at eur/gbp pair price action starting from the 17^th of April when a high in an up swing was made. Right after that the pair started making lower highs and sort of descending triangle was formed. A few attempts of bulls to go up were met by strong bearish pressure and price went down till finally news came out and eur/gbp collapsed. Therefore, I positioned myself only for bearish eur/gbp price action and placed only one order which was a sell stop. And down the Euro went!

Ok, I want to stop there and leave other insights regarding news trading for the future. This topic is definitely not finished. Get ready for more. Have a nice weekend and see you soon.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

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Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Tuesday, 23 April 2013

Volatile range trading strategy

So, it is high time to discuss the last market state: volatile range and try to define how you can trade it. I just want to remember that according to my definition are four types of market states: calm trend, calm range, volatile trend and volatile range. Each has specific conditions that make prices move in a unique way and specific strategies to trade these moves. Volatile range is probably the most complicated market state as it is pretty difficult to trade. However, as I do not believe that markets are random I will try to share with you some insights of mine regarding the conditions of this specific market state.

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What is volatile range?

Volatile range is directionless choppy price action that is most often contained within specific market range, usually a very small one. It often travels from one small range to another, then back, then to the first level again. These kind of ranges often develop after huge market moves and it indicates that market hast lost momentum and is consolidating before making new move. This market state can last from weeks to months and even years. These volatile ranges often develop other volatile ranges within themselves. If you look at the chart of gbp/nzd pair below you will see what a volatile market range looks like.

You can clearly see how after sharp move down the pair started consolidating and moved into a prolonged big range with smaller sub-ranges inside. I like comparing this kind of price action with an elevator in a three-four store building. The elevator has very limited space to travel in a building of such size and it can change its� location very fast by going from the first to the third floor and then back.

You can see price blocks that could be compared to building floors and see how price travels within our �price building� or stays at the same floor for prolonged period of time.

The way to trade these ranges

As you may see the ranges during these periods of choppy price action are quite small. gbp/nzd pair is very volatile and makes big moves and yet it can stay within 200 pip range for a few weeks, then move to another range of 200 pip width and then back to previous range. So, how do you trade that?

Firstly, you need to wait and become sure what the size of the range is. You look at the chart and see price past action. In a real life situation you may not be sure where the bottom or top of the range is if it has just started to form a new range. After any significant trend is over wait for the security to form a range. That is: wait for it to make a top and a bottom of the range. Only then, when the price visits these places for the second time you trade REVERSALS. If you have been reading this blog long enough you have probably noticed how I love trading reversals. This is especially true about trading volatile range. There is not enough �meat to chew on� as range is very small, so you get the most by selling at the top of the range and buying on the bottom of it.

Let�s walk through some trades

From price action we may see that the pair made a top and a bottom of the range from 14^th to 19^th of February (2013). On the 19^th it visited the bottom of the range for the second time and made a reversal. This was the first possibility to buy. A big bullish 4 hour candle at the bottom gave us a clue that buyers started stepping in and we bought at the break of two 4 hour candle charts at 1.8248 level with a stop below the low of the day and exited at previous top at 1.8390 (ten pips before even number).

The price made a reversal there and we placed a sell stop order below the bearish 4 hour candle at 1.8342 with a stop above the high of the day and exited at previous low of 1.8160 or at 1.8210 (ten pips above the even number).

Then price proceeded to break the floor and made the bottom for another floor 1.7954. It then quickly returned to the previous floor and hit the ceiling of the top floor again. It made a few attempts to break it, but failed. If you had traded the price action purely technically you would have lost on the first attempt to go down on the 26-27^th of February, but if you had waited till fundamentals came out you would have skipped the above mentioned dates and traded GDP of British pound and made a successful trade by selling Pound again below 1.8339 level with a stop above day�s high and closed your trade at 1.8210 after four days. You see how the price lingered for a few days and only then collapsed by reaching the floor again. Trading these ranges requires a lot of patience. Choppy price action might get on the nerves of any trader.

On the 1^st of March the pair made a reversal at the floor and started rising, but failed to reach previous top. So, either you would have exited with some profits at an even number at 1.8290 (ten pips below even number( entry point 1.8232 with a stop loss 1.8166) or you could have pushed your stop at break even and got neither profit, nor loss from this trade.

Then for about two weeks the pair got stuck between two floors until it made to the ground floor (from past perspective (we know that it was not ground floor now)) again. It formed a cluster of candles (that indicates a reversal) and broke upwards back to the top floor. A break of the floor could have been a good possibility to enter the market and come back to the ceiling of the floor. So, a buy stop at 1.8170 with a stop 1.8052 and the target of 1.8390 would have been an excellent trade.

Do your own homework

The pair then again made two attempts to break the level and failed. I do not want to continue telling how you could have traded these as now you can pretty much figure that for yourself. Do your homework, analysis and design the best ways how you could trade these situations in the future. When the same market conditions appear you will be equipped to make an intelligent guess and smart trade. You will make mistakes along the way, but practice makes perfect. So, continue analyzing the right side of the chart (the first one) trying to find best entry, stop loss and take profit areas for your trades. You won�t believe how much you will learn by simply doing this. People fail to trade successfully not because they do not have any strategy, but they tend to be reactive rather than proactive. You need to be ready before things start happening rather than reacting to what is happening. Daily analysis (maybe even writing a trading journal) would help you a lot to become a proactive trader who plans his trades and executes as well as manages them with sound discipline.

Conclusion

Trading volatile range requires: establishing high and low of the range, trading reversals at both ends when market price action confirms a reversal (bullish and bearish candles, 123 reversal patterns and fundamental news releases), setting stops above high (if selling) and below the low (if buying) of the day market reaches the top or bottom of the range. Your target always is the other end of the range (if buying you go to the top (resistance) , if selling you go to the bottom (support)). Do not forget that market can slip through current range and set new one. Be flexible and watch what happens when market reaches its� freshly made bottom or top. Finally, plan your trades and trade your plan. This is how you will become a pro using any kind of trading system.

Ok, time to finish! I have covered all market states and finally finished my series. Next time I am going to tell you how to select best candidates for your trades. I wrote somewhat on the topic, but I want to deal with the theme exclusively, so that you could learn to choose the best pairs that have the highest potential to move strongly.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

http://www.etoro.com/A41516_TClick.aspx

See related posts:

Best Forex trading system

Calm range trading strategy

Calm trend trading strategy

Volatile trend trading strategy

Short lived momentum reversal trading system

How to make money in trading breakouts

Nicolas Darvas trading system

Disclaimer

Thursday, 18 April 2013

Volatile trend trading strategy

This post is a continuation of my series on different market states. I want to briefly remind you that market can be in 4 types of states at any given time: calm range, calm trend, volatile range and volatile trend. Each of the states requires specific ways of analysis and trading. Before you make any decision to trade you need to define what conditions are in the market and only then wait for opportunities to implement one or another strategy. I have already covered calm range and calm trend trading strategies and today I want to define volatile trend market conditions and shape a method for trading this specific market state.

It is very easy when you see the market orderly making higher highs and higher lows in an uptrend or lower highs and lower lows in an uptrend. It is also easy to trade orderly swings in a calm range. It is more difficult, however, to trade choppy trends that rally high, then go sharply down, then again up, then down. Nevertheless, if looking at longer time frames you see some direction, there definitely are ways to spot areas of probably support and resistance and to trade those to make profits.

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What is a volatile trend?

I define volatile trend as price move in a clear direction within the boundaries of a channel. There is a specific trajectory of the move and you can draw two trendlines that the price is confined to till the trend is broken and prices reverse or a new channel is formed. Some people give names for those trendlines: inside and outside of a channel. Whatever you call it, the point is to understand price action inside the channel that is caged within those lines.

2009 saw a very volatile trend in eur/usd pair that lasted for eight months. I want you to look at the chart and see how eur/usd travelled upwards that year. That�s what I call a volatile trend! If you carefully analyze the price action of the pair in 2009 you will surely notice that the pair managed to form two short term volatile swings downwards and one longer term trend upwards.

Market conditions change very often

It is quite natural for a price to break out of a range (calm or volatile), form calm or volatile trend, then shift to volatile (or calm) trend, or to volatile or calm range. This happens because market absorbs all fundamental factors that have been running one move or another and this causes market conditions to change. Depending on the type of factors that start driving the market after initial factors change, market may shift into any of the states I have mentioned above. All moves (trends) come to an end and the manner markets move changes too. So, you should spend more time for analysis and less for trading at all times, especially when market conditions start changing. Now, let�s come back to eur/usd pair in 2009 and see how market conditions changed a few times per year.

Analysis of 2009 eur/usd trends

The year started from a collapse of prices after forming a peak at the end of the year when strong calm trend upwards finished. The early move down (from the 5^th of January) started as a calm trend and later (on the 23^rd of January) transformed into volatile (channel type) downtrend. It lasted till the middle of March when the volatile downtrend (in a shape of a channel) was broken and a short calm up trend started. It lasted only about a week and then a short volatile down trend started. It lasted till the first of May when the down trend channel was broken upwards and a long (6 months) volatile uptrend started that lasted till the beginning of December when upward trend channel was broken downwards and a calm bearish trend started. So, we had three volatile trends in 2009, two short term down and one longer term up.

How do you trade volatile trends

Since I see volatile trends as price action caged within a channel and moving in a clear direction it is best to enter your trades when market corrects to the support trend line (if the move is upwards) and to the resistance trend line (if the move is downwards). I want to trade only in the direction of a trend and keep my positions longer than I do in day trading.

Entries, stops and exits

The points when price reaches a trendline are best for entries. I do not have a magical mathematical exact rule for that, but rather use a few ways of entering the market, whichever seems to be the best at the moment. As I am not purely a technician, but use a balanced techno-fundamental approach to market price action I watch for both technical and fundamental confirmations where and when I should jump into a trade. At times, I do pure technical trades at other times purely fundamental and most often I have mixed trades.

A nice technical way would be to place a sell stop below the low of the day at the top of the channel if the trend is downwards (meaning the counter trend rally is over). If we take as an example eur/usd short term volatile trend from the 18^th of January to 12^thof March you would have placed a sell stop below the low of 27^th of January at 1.3118 as the price hit the top of the channel. Your stop would have been above the high of the same day at 1.3330.

What about exits? I hold to a philosophy that it is very difficult to predict tops and bottoms, so I want to catch the bulk of the move, not the entire move. In our instance I would have exited (taken my profits) at the previous low of the channel at about 1.2760 with about 250 pips of profit. It was possible to trade the rest of the move down in some ways, but you would have used other rules and methods for entries, but the same for stops and exits. Study the chart and find how you would have taken two more short positions in the move and where you have placed your stops and take profit orders. It was possible to trade against the prevailing trend following the same rules (buying above the high of the day when lower trend line was hit, with a stop below the low of the same day). However, exits would have been more problematic as this is downtrend and previous high was not reached. You should find more advanced and complicated rules for trading against the trend.

You should also not forget that we look at the chart in retrospect knowing and seeing what happened, but at the time the only thing you would have known was that the pair was in a downtrend, the move was slowing and it was your best intelligent guess that the pair will either go into a range or continue going down in a slower fashion.

That�s why I also watch fundamentals closely to get the grasp of where the market might be going and in what manner in the nearest future. The fundamental way for entries would have been to wait for important fundamental news and market reaction to it and go with the flow. Read about my Forex news trading strategy to see what I mean.

Trading breakouts of the channels

Another excellent way to trade these volatile trends is to trade breakouts of the channels. Most often than not you have fast and calm trends developing right after that. They are often short lived, but the distance the price travels after a breakout of the channel is pretty attractive for any swing or trend trader. All three volatile trends of 2009 were followed by channel breaks and followed by fast calm trends. Look at the chart to see for yourself.

How could you have traded those? In this case rules for entries and stops are very simple. You just have to enter your order the day the channel closes after breaking the channel. If a downward channel is broken upwards you enter a buy stop position above the high of the day when market closes outside the channel. A stop loss order should be below the low of the same day. If an upward channel is broken downwards you enter a sell stop position below the low day of the day when the market closes outside the channel. The stop loss order should be above the high of the same day.

Exits are as always the most difficult part. Having a few orders entered gives you a better choice for exits as you can exit the first position when you have some profits (at an even number or closest support/resistance level) and let the rest of your position ride with the market. There are a lot of ways how to exit the rest of your position. Some traders close bit by bit when market makes a new high (even daily (in an uptrend)) or a new low (even daily (in a downtrend)). Others use a ten/twenty day low/high rule. If a market moves below ten/twenty day low in an uptrend or above ten/twenty day high in a downtrend they would automatically close all of their position. Some look at historical charts and determine to exit before some levels are reached.

As nobody really knows when the trend will end this part is the most difficult. However, as the market has some momentum in these breaks you can definitely grab nice cash and leave some of the table without big regrets. 95 percent of traders are losing their money anyway. 3 percent are on break even. So, if you manage catch half of the move and come out with profits you are among 2 percent of traders who are really making money.

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Conclusion

Volatile trends most often move in waves in a channel. You must trade only in the direction of the prevailing move and try to avoid counter trend moves. Entries and stops are the easiest part. You will have to think carefully how to exit your trades and cash in your profits. Wait also for breakouts from the channels as these often create fast and calm trends (with minor retracements and counter trend moves). And yes, do not forget money management. Never risk everything on one trade. Learn to protect your capital and with time you will learn how to make it.

Ok. I hope you benefited from the post. I would continue the topic of different market states in my next post. Hope to do it very soon! If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

Read related posts:

Best Forex trading system

Calm range trading strategy

Calm trend trading strategy

Short lived momentum reversal trading system

How to make money in trading breakouts

Nicolas Darvas trading system

Spotting how market trends change

Disclaimer