Thursday, 24 November 2011

6 key elements of technical analysis

Today I want to talk about importance of technical analysis and various aspects of it that should help you in making profitable trading decisions. I know that most people want to know the fundamentals of economics, finance and see the big picture of how global economy works. However, we should understand that our perception and understanding of what we see in the world may be very subjective and if we make decisions (in trading) based on those subjective assumptions we might end up losing all of our capital. Therefore, I am more for doing technical analysis than I am for doing fundamental analysis. This does not mean you should not study fundamentals. It means you have to compare what you know with price action and follow the market, not your opinion.

Even if your opinion is right about economy you should never forget that there are a lot of powers working in the market and they have enough capital to push the price where they want, no matter what state this or that economy is in at a given moment. This can have a very negative impact on your trades, especially if you are a short term trader. I saw a lot of times how good economic news is accepted very negatively by participants, or market makers I�d better say and prices start falling. So, if you follow your opinion you may be right and lose money, if you follow the market your fundamental opinion might be wrong, but you make money. So, that is a big plus for studying technical analysis.

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1. Resistance and support levels

I personally believe that resistance and support levels are the greatest tools of TA. These are levels where price comes and usually reverses. These levels are extremely important in range trading for when prices are stuck in ranges support and resistance levels are visited a lot of times and they do hold till finally a breakout occurs. One would wait for reversals around these levels and often be able to catch a new swing and go to the other end of the range making nice money. Patience and risk management is the key element here.

2. Technical indicators in technical analysis

Technical indicators have been developed by a variety of trading specialists to help one in making trading decisions with the help of those indicators most of which are based on moving averages. The most popular indicators are: MACD, RSI, various moving averages, Stochastics, Bollinger Bands, Pivot points, Price channels and many more. I do not want to mention all of them, nor discuss them in detail as I do not believe you should base your trading decisions on those alone. Try to use them with other technical or fundamental analysis tools. My favorite indicators are MACD and RSI. I wrote posts on the usage of both of them as well as moving average indicator.

3. Price action

It is a movement of a security in some direction and by using tools of technical analysis a trader is often able to guess the direction of price in advance. The application of those tools might be subjective as looking one and the same pattern two traders will probably form a different opinion. If one includes things such as fundamental news releases into one�s analysis his accuracy in predicting price action will grow. Most traders like looking at candlestick patterns, support and resistance levels and other methods to predict direction of price in the nearest future. No one will do it one hundred percent correctly all the time. Learning from mistakes and perfecting one�s methods of analysis should make one�s speculation better.

4. Trading strategies

There are plenty of trading strategies that purely rely on application of technical analysis. If you visit sites like Forex factory, Babypips, dailyfx and many more you will find a lot of free trading strategies that are based on TA. Most are based on the application of technical indicators, some on breakout of support and resistance levels, others on news trading and many more. If you are a newbie you can visit one of the above mentioned sites and back test some of the strategies, which you will like most.

5. Chart patterns in technical analysis

Those that like trading swings or trends that last longer than a week will often wait for developing chart patterns that would indicate a continuation of an existing trend, show a possibility of a break out of a current chart pattern, show places of a possible reversal and many more. The most famous chart patterns are: triangles, head and shoulders, inverted head and shoulders, wedges and rectangles. Some traders rely purely on those patterns while making their trading decisions and make big money in financial markets. One of them is Dan Zanger who made millions in stock market when it experienced dot.com bubble. He also pays much attention to volume, which is not very important if you are a Forex trader for you cannot know exact volumes if you are trading currencies. It is important if you are trading stocks though.

6. Trends and swings

Predicting long term trends and swings is probably one of the best things that technical analysis can help you to do in trading securities. We know that securities tend to stay in ranges for a long time. Some say that the ratio is ten to one. It means that securities could be in ranges for about ten months in ranges a year and only two months trend. But if one wants to make consistent profits, one should also learn how to identify an emerging trend and trade in the direction of it. One of the best ways to do it is to identify the limits of a range (support and resistance levels) that a security is in at a given period of time and wait for those limits to be broken. That�s how a lot of traders of the past and present made millions of dollars. They also kept building a line of positions after the breakout and would exit all of them when they saw the slightest sign of reversal.

That much information about technical analysis. I hope to expand the post and add more information on the topic in the nearest future.

Saturday, 24 September 2011

Trend for 24th of September 2011

Hi trend traders and independent market analysts. Today I wanted to remind you about importance of 123 pattern in your trading. I hope you noticed that very often at the end of the move (in a range or a trend) we have some reversal patterns. In most cases they would be: head and shoulders or 123 structure. I wait for those patterns near important support and resistance levels or at the end of a swing. If the move is strong and continues for a long time you will want to search for a reversal on daily or even weekly charts. If it is a short term (one week or a few day move) you would be willing to see the pattern on 4 or 1 hour charts.

I want you to look at eur/aud daily chart and see two 123 patterns there. Both of them formed at the end of strong moves and presented unique opportunities for those who like trading reversals to enter reversal trades and jump on to a new developing move. As eur/aud tends to develop big moves you would definitely have to watch the pair for possible reversal patterns at important support and resistance levels.

Friday, 23 September 2011

Trend for 23rd of September 2011

Hi fans of market trend analysis. Today I just wanted to talk a little about selling breakouts of support levels. I will take gbp/usd as an example. You can see that the pair has been falling for almost a month and is close to very important support now. You can also see that the pair reversed today and this may signal the bottom in the pair. But the pair has been falling and you can see in the chart how you could have successfully sold support breakouts on a number of occasions.

You could have taken the first short position at 1.6355 level, right after the pair formed a peak at resistance of around 1.6600 level. As the down trend progressed one could have gone short at 1.6211 (not a perfect short example), then at 1.5900 level and finally at 1.5700 level. As always, it is best to wait when the pair starts ranging after a move and forms some kind of a bottom. Then one could wait for the bottom to be broken and sell a breakout when it occurs. I usually say that Asian sessions are for ranging and European and American ones for breakouts and trending.

Do your own analysis about it and you will see. Hope you enjoyed this short post.

Wednesday, 21 September 2011

Forex factory

I decided to call this post Forex factory. I got the idea from the famous Forex forum under the same name. It sounds cool and shows exactly what it takes to become a successful Forex trader. You have to undergo a series of processes in the same manner as some product undergoes various stages in a factory until it goes for sale. Those who have attempted to trade stocks, commodities or Forex know that it is not easy to be a profitable trader. Most traders get burnt within two months of their trading. Most of them decide to leave trading and make money or realize themselves in some other way. I remember myself and my first steps in Foreign Exchange market. I repeated the statistics and lost my initial deposit it 2 months. I almost left the thing, but after a few months having seen some repetitive technical structures in the market I decided to study the thing more carefully. After some time I was able to come back to the market by trading trends and swings with a friend of mine and this time we managed to make money, not to lose it. In the post I want to share some of the things that I believe are necessary to become a successful forex trader. I guess that for those who are not new these processes in �Forex factory� will not be new, but for some it will be, so let me start.

Forex factory rule number 1 � understand the basics of the market

Anybody who wants to be a successful Forex trader should understand the fundamental part of Forex. One should know how this market operates, what causes prices to change, have understanding on what kind of orders exist and which type of orders are best at various conditions market can be in, the biggest size of position that one can take without risking to lose too much, best times for trading, closing and leaving open positions and a few more things. I remember my friend opening a real Forex account with one of European Forex brokers. At one time he had usd/jpy pair open and wanted to close it. However, the platform he was using was rather complicated. So, instead of closing the order, he opened another one. My friend did not know how to close his position. Finally he had to phone company�s help desk and after some twenty minutes of talk his order was finally closed. I believe he was lucky that the thing did not happen during some news release. Having one standard lot open with 2 thousand bucks in the deposit and not knowing how to close it could be a fatal mistake at the time when news comes out. So, you can blow off your account just because you do not understand a few basic things about Forex trading.

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Forex factory rule number 2 � have a thoroughly tested and profitable trading system

If you want to be a successful Forex trader you must develop or simply get a tested and reliable trading system that could be used long term. I am sure that with time you will be able to develop and use as many trading strategies as you want, but when you start you should master one. I would really advise you to try the system for at least two months and if that is possible try to backtest its� performance for twelve or twenty four months. If the system is not profitable within that period of time, do not deceive yourself that it will be successful. Just drop it and search for another one. If it is profitable just go ahead and use it trading in small lots until you feel comfortable.

Forex fatory rule number 3 � develop a trading plan

Ask any trader who has been in the market for five or more years and is able to trade profitably and he/she will tell you a well developed trading plan is a must. A plan can remind you about the direction that you take, goals you want to achieve and the way you are going to trade. It must include: frequency of your trades, rules about entering and exiting the market, what market conditions should be present in order for you to execute a trade. It should also remind you how you are going to solve complicated situations in trading; let�s say when the market starts going against you. It must also remind you how you should behave when you have a few bad trades one after another and maybe even a few good trades one after another.

Forex factory rule number 4 � stick to your plan

After developing your plan you should stick to it and follow it with strict discipline. Other things will not work long term if you do not follow the plan that you have made or you make too many exceptions to it. Your trading strategy could be the best in the world, you can have a terrific plan and excellent understanding of fundamentals, but if you do not follow those and start making spontaneous trading decisions you will surely burn your account. Succesful trading does not start with improvisation. It might come later, but if you improvise all the time you will probably become a gambler, not a trader (and a bad one too!). Simply follow your plan blindly and only when you see that something repetitively does not work, then you make adjustments to your plan. Just do not make those adjustments every day for your trading plan will have too many points, which will become too difficult to follow. So, have a plan and keep to it.

Forex factory rule number 5 � learn to control your risk

If you want to stay long in Forex market and finally become a profitable trader, you should also have a risk management system. You should have it outlined in your trading plan, but as it is very important I decided to mention it as a separate point. Your deposit is the tool you work with to make more money. You cannot trade without money. Before you can make money, you should learn how to protect the amount that you have. Read any article on risk management (in trading) and you will always find that the rule of not risking more than two percent of your capital on any given trade. I would say that you should not risk more than one percent when you are starting. As the time goes one you will be able to increase the percentage. In the meantime, learn to manage your risk.

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I hope the article was useful. It cannot reflect all the necessary things that one should know as a Forex trader, but I believe it conveys the most important things. You should stick to the points till they become your second nature and the process of trading becomes automated. With time you will develop your own trading style and strategies, but before profits come you will have to undergo a painful learning process. Good luck in staying in Forex factory and becoming a profitable Forex trader.

See also:

Original Forex factory forum
RSI
MACD
Swing trading

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