Let’s Trade Flags

Today I say Let’s trade flags.  And  no, I’m not saying you should swap flags among your flags. The flags I’m referring to are chart patterns used in price action analysis. Sure, they are less popular than triangles wedges, and other price action patterns. but they’re just as reliable as the other patterns. So we’re gong to do as we always do. We’ll find out what these flag patterns are and how to trade them. So of we go.

 

First up is:

What are Flags?

A flag is a continuation pattern where a strong primary trend is followed by a period of consolidation before it resumes in the direction of the dominant trend. Shaped like  a rectangle,the flag is formed by parallel lines that slope  against breakouts emanating from support or resistance levels. Once the flag takes shape,an upward or downward trend,courtesy of the bulls and the bears,respectively suggests that the previous trend is about to resume.

When it comes to identification, the flag can be very difficult to spot. flags can form whenever a currency pair’s price consolidates. However,the most important factor to watch out for is a strong breakout above or below support and resistance levels. They may not completely eliminate the possibility of a reversal,but they do lower the odds.

Let’s take a look at illustrations of bullish and bearish flags.

bullishflag-bearishflag

As you can see,both the bullish and bearish patterns exhibit continuation patterns at the resistance and support levels.  Notice the tall poles that form after breakouts  at both resistance/support levels of the uptrend and downtrend. They help lower the possibility of a reversal.

Next we’re going to look at three Components of a Flag Pattern

First:

Flag  Pole

The flag pole is the main facilitator as far as price action goes.  It is represented quite well by both the uptrend and downtrend. The question bugging most people is “How do you calculate the flag pole’s price move?” Well, calculate the previous swing high or low from the current swing high or low. Let’s  see an illustration below.

flag-pole

Keep watch over the  tall flag pole you see to your left in the bullish pattern. Like I said in my description, the flag pole is the main initiator in the price movement.  Wondering about measuring the price movement?Just calculate the last high/low to the current high/low.

Flag

At the risk of repeting myself, the flag is the real McCoy in this pattern. Like we said earlier, it starts with a strong trend  followed by a period of consolidation where the main players take a breather before resuming hostilities regardless of whether it’s an uptrend or downtrend. Just to refresh your memory,let’s take a look at another illustration of the flag in action.

flag2

 

This is a classic flag move. You have a classic bullish move followed by a period of consolidation, as indicated by the two trend lines. After taking a huge breather, the bulls resume their journey. It goes without saying that long breathers,or long periods of consolidation can lead to aggressive breakouts. It’s like the calm before the storm.

Last but not least:

The Continuation 

This is where the main actors have finished taking a breather and are resuming their journey. In other words, the market  has finished consolidating and the main players are continuing to follow the trend-  whether it’s an uptrend or downtrend.

continuation

This is what  a continuation looks like.  After a taking huge breather(my short for consolidation), the bulls march on upwards. The blue and red trend lines represent  the period of consolidation. Nice looking trend if you ask me.

Now to  the burning question of the day

How Do We Trade Flag Pattern?

Well,

Trading Signal

Just like any other trade,look for a trading   signal. You  can find this trading signal in the breakout. If you are trading the bullish flag, make sure you make your buy trade when the candle closes above the upper side. If  you are trading the bearish flag, place your sell entry on the lower side of the bearish flag pattern.

Stop Loss

Of course, after you make your entry you put in a stop loss. You’d be crazy not to do that. Wouldn’t you?Anyways,for the bullish flag,place the stop loss below the lowest bottom in the flag. Conversely, for the bearish,flag,place your stop loss at the  highest top.

Take Profits

Close out 1/3of your position size and take the profits. This to protect your trade against  any unexpected U-turn by the market.. Also to protect your position, raise your stop loss target just above the initial  profit target. So that if the price reaches your second profit target, you will close another 1/3 of your trading position and lock in with further profits. No what do we do with the remaining trade? You readjust your stop loss just below the second profit target. If the price continues to soar, keep watch over the price action and hold the last 1/3 of your trading position for as long as you see fir.

Let’s take a look at the GBP/USD chart.

Technical-Analysis-Using-Flag-Patterns

As you can see the green circle represents th moment the price broke through the upper  part of the flag. BINGO! That will be the perfect time to make your entry trade. Once you execute the trade you put in your stop loss as shown in S/L1.  Then with each target, you move the stop loss upwards, locking in profits,as price surges on. The magenta nd purple arrows  show the size of the flag and size of the pole. And as each target is hit, the stop loss is adjusted to protect the trading position.

The end comes when the price breaks the third stop order(S/L3).  As I’m sure you’ve noticed,the price reverses, creating unpleasant consequences for the long trade. Now I hope you’re sensible enough by then to get out while you cano r else…….Kum ba yah.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

That’s wrap for “Let’s Trade Flags.”  I hope you make significant profits with this flag pattern, Till next time take care.

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Find, Enter,Manage

Don’t let the title scare you.This is not a shrink session. We’re just going to take a walk on how to find,enter,and manage our forex trades. We’re going to hold each other’s hand and try to find a trade signal, set the profit margin, et the stop lossand   Hopefully, by the time this session is over, there will be no clouds left as to how to trade price action setups on the charts.

First up:

How Do I Find A Trade Signal?

Where else would you find a trade signal? On the price charts of course.  You need scan through your price charts to look for possible trade signals. While you look for your signals, you should have at the back of your mind which currency pairs you’re comfortable trading with. Make sure to do this everyday at the same time. I suggest you do your analysis between the time that the New York session goes to sleep and the European session wakes up. Why this time window? because this is when market activity from the previous day tapers off, and Asian traders take over. By the way, Asian market session is not as feverish at the New York or Europe.The more reason why you stick with the former.

Now where are the best areas to look for trade signals? Conventional trading  wisdom has it that you point your focus at the following places:trends,levels, and good old price action. These three areas is where the action is. The trend lookout can be tricky,but to make life less  complicated for yourself, just look for higher highs/higher lows and lower lows. I hope you remember these two. If not, quickly refer to Trade Trends With Price Action Analysis. You can also apply moving averages by looking out specifically for the 8 and 21 EMA’S(Short for Exponential Moving Averages).If you’re not sure about your moving averages, get with We’re Moving Averages Part I and We’re Moving Averages Part II.  Let’s take a look at illustrations of the above:

Starting with Finding An entry signal on a Trending Market

Long_short

As you can see there are entry signals for long position on the uptrend and short position to sell on the downtrend. So long as you’re clear in your mind of a  trend developing,you can jump in with your entries.

Next is:

Support/Resistance

support.resistance

 

As you can see,the bull and the bears are bouncing and breaking out all over the place .  Keep your focus on the breakouts at the support and resistance  levels. Because that’s where you’ll make you trade entries.

Next up is:

How  do I Place A Stop Loss?

Again,as conventional trading wisdom would have it, place your stop loss at the most logical level.  Some you’re probably murmuring among yourselves”What does he mean by ‘Place Your Stop Loss At The Most Logical Level’?” Well, basically you want the market to tell you tha your trading position is in danger of taking a hit.You can do this through a strategy known as ‘Set and Forget.” You just set your stop loss and go enjoy life while the market does the dirty work.

Now why in the world would I want to trigger a stop loss against my trading position? Because you want to protect your trading position from sustaining a massive hit in case the direction of the prevailing market trend does a 360 on you. I mean look at it this way: You want to give your trade enough room to breathe.In so doing , you put your stop loss at a level that is not too close,and not too far from your trading position  – talk about walking a fine line.

And you definitely do not want to commit trading suicide by placing your stop loss to close to your trading position in a desperate attempt to make a humongous profit. That’s not a trading mentality, that’s a gambler’s mentality. You’re building a business, and so must be disciplined and patient in your trading decisions. You place your stop loss based on the trading signal and prevailing market conditions. You can’t let greed override your sense of logic.

Now that we’ve let of some steam, let’s take a look at a few illustrations of placing stop losses.We’re going to use a few of the most popular trading strategies out there.

Starting with:

Pin Bar Stop Placement

 

pinbar_setups

Notice the little black arrow pointed at the pinbar in the bullish trend. You place your stop loss below the pinbar’s long stick-or higher low. See the same black arrow pointing at the pin bar in the bearish trend. The difference here is that the pin bar in this instance is standing on its head with the long thick stick pointing upwards.To protect your short position, just above the high of the pin bar’s tail.

Next up is:

Inside Bar  Stop Loss At Bullish Trend

bullish-insidebar

Notice the inside bar at the beginning the bullish trend. The inside bar is characterized by a higher low(The long tail) and a lower(high) the small tail. The stop loss is always inserted at the lower high end of the inside bar.  Insert the stop loss anywhere else, and you risk singing kum ba yah for a very long time.

Now let’s move on to:

Placing Stop Loss on Inside Bar on Bearish Trend

bearish- insidebar

As I’m sure,you geniuses have deduced by now, the inside  bar can also be spotted at the bearish trend, except that they look different.  Unlike the uptrend,where it looks thin and skinny,this inside bar here,is bigger and full with smaller wicks at the high and low ends. If you don’t want to be singing kum ba yah over your trading account, I’d strongly suggest that you place your stop loss just above the upper wick. This way you save your  selling position from  sustaining a major hit.

How Do I Place My Profit Target?

When placing your profit target,  aim for a risk ratio of 1:2. Let  say your initial risk is 100 pips. You then look place a reward distance of say 200 pips. Let’s get one thin straight. You should think  measurement not risk.You’re spreading the pips around to offset any major losses.

Then check to make sure they’re no support or resistance levels in the way of  your  profit target. The last thing you want is to  get caught up in any bull/bear conflict. You want to make sure the coast clear for you to make your profits without any hustles. In any case, even if there is the whiff of a bull/bear tussle,just use your discretion as to whether you want to take the trade or not. Left to me alone I’ll let it go.

Let’s take a look at how placing a profit target is done

profit-target

As you can see,  the profit target is as far away  from bull/bear conflict as possible.  It’s in a very good place,minding its own business. The last thing you want is dodge bullets from bull/bear consolidation at the support/resistance levels. You’d be better off erring on the side of safety here.

 

A word of warning though: Don’t get greedy here: Take more than your 1:2 profit ratio ONLY if it exists on the chart. If  you start imagining things, kum ba yah will be weighing on your conscience again.. If you’ve inserted a trail stop in the hopes of racking a huge profit based on what is really showing on the market. Just don’t get the urge of setting a new profit target once price closes in on it, or even worse,you develop this delusion that the market will always have our back forever. The forex  market has no friends,and it’s not a Santa Claus either. So you need to get your signals ,stops, and profit targets straight before making your entry.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “Find, Enter, Manage”.  Hopefully, you’ve learnt that you don’t just jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

Looking to open a forex trading account?

Sign up with EasyMarkets

Download Free eBook on Forex Analysis

 

 

 

 

 

You Need To Sharpen Your Trading Edge

If you want  to rake  in the cash as a forex trader, you need to sharpen your trading edge. And no, I’m not saying  act like you’re the hottest thing since Muhammed Ali.  Having a trade edge requires you to identify conditions in the forex market that enhances the probability of you making a winning  trade. And please,forget about using indicators,or any kind of weird gizmo to develop your trading edge – They are  not going to help you. You need a deadly combination of knowledge of the market and plain old instincts to develop your trading edge.

We’ll  look at what a trading edge really is and then learn how to sharpen our trading edge.

I guess the first question we need to ask is:

What is A Trading Edge?

Well, a trading edge is basically a set of conditions  in the forex market that increases the probability of you chalking  a winning trade.  These conditions must be present in the market in order for your entry trade to be a winnable one. if  you are able to recognize these conditions, you have the edge over everybody else especially those  traders who have the gamblers mentality rather than the  traders mindset. If the conditions aren’t present, DO NOT BOTHER ENTERING A TRADE. Failure to listen to that still small voice could be fatal for your  trading account.

 

Can You Give Us Examples Of A Trading Edge Please?

Sure. For instance could base your trading edge on identifying the when the market is trending. You want to look to look out for the bulls heading for Mount Everest or the Bears heading for the Grand Canyon. For those of you wondering”What is he talking about?” The bulls represent the bullish  trend initiating a strong upward surge  when price goes up.While the bears represent the  bearish trend heading downwards after the price takes a tumble. Just in case some of you have completely forgotten what trending markets look like?Let’s take a look at a graph of the aforementioned.

bullishbearish-trend

These,ladies and gentlemen  are two illustrations of  bullish and bearish trends   In the bullish chart, the blue candlesticks surging upward represent the bullish trend.  Whenever you get a bullish candlestick engulfing a bearish candlestick(black..But could be any other color depending on platfom).( That’s means a bullish trend is developing or the bulls are heading for the hills.  Please make sure you get at least two more bullish candlestick confirmations before you enter your trade. If you jump in straight away, you risk losing some much needed cash

In the bearish chart pattern,the black  candlesticks heading downwards  represent a bearish trend. This is where the bears take over and force the price to take a tumble. And, the bearish trend kicks off a bearish candlestick engulfs a bullish candlestick. Make sure you get at least 2-3 bearish candlestick confirmations to establish a bearish trend. And please, look to sell on a bearish trend NOT BUY.(You only buy on a bullish trend). You make the mistake of making entering to buy,that will be your own massive headache.

So if your trading edge is bullish and bearish trends,this is what you need to identify when looking for trades.

Another example of a trading edge is support and resistance levels. If you’re the type who gets a huge thrill from trading support and resistance levels, this is for you. .  Again,in case some of you have forgotten, the support level  catches price as it falls. Meaning that it bounces of this level  rather than break through it .  So basically it acts as a trampoline of sorts. But in case price breaks through this support level, it continues dropping until it bounces off another support level.

The resistance level is the complete opposite.It rather acts as a barrier against price as it rises.But once price breaches this level, it heads for the hills until it runs into another resistance level. Now let’s take a look at illustrations of both levels

support_resistance

 

Ladies and gentlemen,this is an illustration of support and resistance levels in action in the USD/JPY session.  At the resistance level,the bears are playing trampoline as they try to break through the support level. However, when the bears do break through, don’t forget put in a trade.Will you? But , at the resistance level, the bulls basically tell  the bears”Get out of our way” as they breach the resistance barrier and head for the hills.

So  if you   prefer trading as support and resistance level as your trading edge, these are the conditions that must be present on the market for you to trade these levels. If anybody is seeking information on trading support and resistance levels, get in touch with my Identify Support and Resistance Levels With Price Action Analysis post.

Let’s get one thing straight. The above strategies are just two examples  that you could use as your trading edge. You could use any of  the other trading strategies that we’ve discussed on this blog as your trading edge.Just make sure the conditions for these strategies are present in the market for you to trade them That is assuming you really care about not blowing trading account to smithereens.

Now that we’ve identified what a trading edge, how do we sharpen our trading edge?

Well, there are a few ways  of getting your trading edge sharpened like a knife. Starting With:

Pay Attention To The Price Action

As a price action trader, naturally you need to pay attention to the price action – no ifs,no buts. You  need to watch what’s happening on your price action chart like a hawk.  Be on the look out for trading opportunities in conditions such as support and resistance levels, trends, and general trade behavior. Let’s take a look at the graphic below.

price_action

This is an illustration of what you will be staring at. As you can see, there are so many trading opportunities along the support level that you can take advantage of. You just need to keep your eyes wide open.

Some of you may be wondering “I thought pattern trading was also part of price action trading.?” Sure it is.But you’re only looking at  the last two candlestick entries as signals. Besides,these candlesticks are  a few of several candlesticks on the charts. Now I’m not saying ditch pattern trading altogether -absolutely not! I’m just saying you need to be more holistic in your analysis.

Learn One Price Action Setup At A Time

If  you want to maintain your sanity as a price action trader, learn one price action setup at a time. If you think cramming all the price action setups  all at once, you’ll suffer mental meltdown. You see the way a nuclear reactor melts down after overheating. That’s exactly how your brain will react when you try to force it to cram  every price action setup. Just allow your brain to digest one price action setup at a time,and you’ll eventually ease into the flow of the forex trading process

Once you’ve perfected  your chosen setup,you can then  look to make your entry. Like I said earlier, As I said earlier look at strong trends,whether price is rejecting support or resistance, and   whether there is leg room for price to maneuver,et,c.

Not sure of which price action setup to work with?Let me give you  two setups you can work with. We’ve dealt with these setups already on this blog in the not too distant pat.,but this is to refresh your memory.

First:

Pin Bar Reversal

pinbar_setups

As you already know, the pin bar is characterized by a long stick, popularly known as a wick. Anytime you see this candlestick, think sharp reversal or rejection of price. The bullish trend suggests a  continuation after the bulls take a breather from butting heads with the bears.

The same scenario  pertains in the bearish trend. and   The pin bar in this scenario also   represents a sharp reversal or rejection of price by the bears. The same continuation pattern also exists in the bearish pattern with the bears heading down south after taking a breather from butting heads with the bulls.

So if  you want to make the pin bar reversal your trading cup of tea,these are the conditions to look out for. For more information on the pin bar, look up Pin Bar Strategy – How To Trade It

Next is:

Inside Bar

insidebar_setup.jpg

As you can see the inside bar is a two bar situation where the smaller bar(inside bar) is within the higher to lower range of the previous bar. The candlesticks  encased in the squares in both the bearish and the bullish trends represent the inside bar  setup. The bigger candlestick is affectionately called the mother bar.(Almost like mother hen).  Whenever you see such a setup,- whether bullish or bearish,it’s time to enter a trade.

If you want to know more about Inside Bar strategy, look up Trading The Inside Bar.

Less Is More

There is a painful reality you need to accept in forex trading. It is basically this:LESS IS MORE. The notion that trading more  makes your forex account looks good completely baseless.. If anything, it puts your account in harm’s way especially when you make losing trades. Picture this scenario: You enter an average  trade without thinking it through.  You then recognize a juicy trade,and you say to yourself”..Hmmmm time to make up for a lost trade.” Luckily for you, you make a decent profit,which excites you to no end.

I have a huge problem with this trading mentality. Why? Because you lost an average trade, you’re then forced to jump back into the market  just to break even. I have traded like that in the past. And believe me,it;s not fun at all. You’re stressed out, struggling to look out for what you believe to be the best trade out there to make up  for lost money. Not only are you putting your blood pressure in harm’s way trading this way, but you’re also puting your trading account under pressure . Imagine if your forex account could talk. It’ll probably be screaming in your face saying”YOU DONT KNOW WHAT YOU’RE DOING.” Now that will be very humiliating. Wouldn’t it?

The morale of the story is just concentrate on one trade that will bring you maximum profits. All you have to do is develop the sniper mentality where you lie in wait for the best trade to come along. Once the trade shows up on your charts, you pounce like a lion,make your trade and earn some  nice profits. Just make sure the trade has a high probability of sucess. If you want to know how to identify high probability trades, refer to  How To Spot High Probability Trades.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “You Need To Sharpen Your Trading Edge.”.  Hopefully, you’ve learnt that you don’tjust jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

Looking to open a forex trading account?

Sign up with EasyMarkets

Download Free eBook on Forex Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forex Trading Basics – Top To Bottom Part I

Ever since I started this forex trading blog, I’ve gotten some amazing feedback from you readers. Infact, some of the  reviews of my  have been so tremendous I’ve felt my head expanding  as big as cyberspace itself. Now I don’t want to jump ahead of myself, but I’ve a feeling some of you would like to join the forex trade bandwagon. But you don’t know how. So,being the nice guy that I am,  going to do a two part series on Forex Trading Basics-Top To Bottom Part I. It’s my version of Forex Trading 101 where you’ll be fed the fundamentals of forex trading. I basically want to feed you the milk before you start chewing the bones of the forex trade.  You’d be tak  crazy to take  the plunge without the necessary tools right?

So let’s get started with:

Exchange One Currency For Another

The only motivation behind forex trading is to exchange one currency for another. That’s all!- Nothing sinister going on here. By exchanging one currency for another, you’re hoping that the price will change so tha the currency that you bought  initially will shoot up in value as against the currency that you sold.  Let’s take a look at the little graph below:

Trader’s Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500 -10,000 +12,500**
You earn a profit of $700 0 +700

** EUR 10,000 x 1.25 = US $12,500

 

What you see here is the exchange rate in action. The exchange rate is simply the ratio of one currency  valued against another currency. Per this definition, the USD/CHF shows how many U.S dollars need to buy one Swiss franc or how many Swiss Francs you need to buy one U.S dollar.

You Need To Know How To Read A Forex Quote

If you want to make it as a forex trader,you need to know how to read a forex quote.  There is no getting around this one. If you can’t do this,you’re in trouble. Seriously though, currencies have always been quoted in pairs since time memorial. I’m sure you’re aware of famous partners such as GBP/USD AND  USD/JPY . They’re perfect examples of a forex quote. Now why’re they quoted in pairs? Because in every forex transaction, you’re doing two things at the same time – buying one currency and selling the other. Let’s take a look at British Pound/U.S.Dollar

GBP-USD

 

The first currency listed to the left of the slash symbol is termed the base currency(In this case the British Pound). While the second currency on the right  is labelled the counter or quote currency(In this case U.S.dollar).

When you buy, the exchange rate lets you know how many units of the quote currency you need to pay to get one unit of the base currency. So going by the above example, you have to pay 1.51258 U.S. dollars to buy 1 British pound.

But it’s a little bit different when you sell.  Here, the exchange rate lets you know how many units of the quote currency you get for selling the base.  Again going by the GBP/USD pair, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

And please get this once and for all. the base currency is the main catalyst for the buy or sell routine. For instance if you buy EUR/USD, you’re buying the base currency and selling the quote currency at the same time, In Tarzan talk, “Buy EUR, sell USD.”  You buy the pair if your trading instincts tell you that the base currency(EUR) will gain in value as against the quote currency (USD). You sell the pair when those same trading instincts scream in your head that the base currency will take a dip as against the quote currency.

 

Know How To Go Long/Short

You need to know how to go long or short. In other words, you must decide whether you want to buy or sell. If you want to buy(buy the base currency and sell the quote currency), let the base currency rise in value and then sell it back at a higher price. And if you want to sell(sell base currency/buy quote currency), the value of the base currency must drop  for you sell it back at a lower price. So  remember these two formulas: long=buy. short=sell . Let’s take a look at theAUD/JPY graphic below.

Long-short

This is a classic illustration of entering long/short using AUD/JPY in the 1hr time frame.  You go long when you spot engulfed candlesticks. By engulfed candlesticks,when a bull(strong candlestick) engulfs a bear(white candlestick. This suggests the value  has risen,and it’s time tobuy.This is exactly the case at the lines of support and resistance where the strong bull(white candlestick) engulfs  the bear(blue candlestick). The bulls are basically saying  the value of the currency has risen,and so they’re putting in a bid to buy. When you see something like this,why waste time?

As the short entries suggest,the value of the currency has dropped enough in value. So it’s time to sell. That’s according to the bears. Since they helped drive the price down,they’re now in the driver’s seat calling the shorts.

Know How To Ask/Bid

Not only should you know how to ask/bid as a trader,but you should know the difference between these two terms. For the record,all forex quotes are quoted with two prices –  The bid and the ask. Let’s see the graphic showing both terms.

bid-ask

This EUR/USD graphic illustrates the bid/ask scenario.. The bid is the price at which you’re willing to buy the base currency in exchange  for the quote currency. It is the best currency at which you(the trader) will to sell to the market.

Th ask is the price at which the broker is willing to sell the base currency in exchange for  the quote currency. It is the best currency at which you(the trader) will buy from the market. The ask is also known as the offer price. After all,if you want something you ask for it.Right? Also,let’s make one thing absolutely clear: The bid price  is  usually lower than the ask  price. Try do it the other way round, and you’re sure to get a massive rejection from your MT4 software.

Wanna know the difference between the bid and the ask price? It’s popularly known as the spread. On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588 The ten pip difference is known as the spread, which we will be getting to next..

What Do We Mean by Pips In Forex Trade?

A pip is a popular acronym for price interest  point. Basically the pip measures the amount of change in the exchange rate for a currency pair.Most currency pairs are rounded up to four decimal places, so that one pip is 0.0001. The only exception is the yen,which is rounded up to two decimal places(0.01). So keep that in mind in case you decide to experiment.

However, forex  brokers are getting sexy these days.  They’re now offering fractional pips called pipettes to add extra precision when quoting  exchange rates for certain currency  pairs. Just so, you know a fractional pip is equivalent to 1/10 of a pip.So for instance, you can round  EUR/USD currency pair to five decimal places while the yen moves up a notch to three decimal places. Makes life more   for you  yen traders out  there . Doesn’t it?

Forex traders also use pips to make reference to gains and losses they’ve sustained in their trades. So when you hear a trader say “I made 40 pips in this trade,” he’s basically saying “ he profited by 40 pips.  However, the actual cash representation of these pips depends squarely on their value.

Speaking of which:

How Do I Determine Monetary Value Of Pip?

“How Do I Determine Monetary Value Of Pip” translates into “How Do I Calculate Profits.”Well, the monetary value of a pip is dependent on three crucial factors: the currency pair being  traded, the size of the trade, and the exchange rate. Let’s say a $300,000 trade between the USD/CAD pair closes at 1.0568. Here is how the profit is calculated.

  1. Determine the number of CAD each pip represents by multiplying the amount of the trade by 1 pip as follows:

300,000 x 0.0001 = 30 CAD per pip

 

  1. Divide the number of CAD per pip by the closing exchange rate to arrive at the number of USD per pip:

30 ÷ 1.0568 = 28.39 USD per pip

 

  1. Multiply the number of pips gained, by the value of each pip in USD to arrive at the total loss / profit for the trade:

20 x 28.39 = $567.80 USD profit

Seems fairly straight forward isn’t it?

Just to solidify your understanding of the calculation process, let me show you another example using the EUR/GBP pair and   using the same steps above.

Currency Pair Exchange Rate at Close Pip Change Trade Amount
EUR/GBP 0.8714 +29 350,000 EUR
  • Number of GBP per pip: 350,000 × 0.0001 = 35
  • Per Pip Value: 35 ÷ 0.8714 = 40.17 EUR per pip
  • Trade Profit / (Loss): 29 pips × 40.17 = 1, 164.93 Euros

Hopefully this example helped smooth things.

If you want to find why the forex trade is the biggest industry on the planet refer to Why Forex Trade Is So Popular?

 

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interpret what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.

That’s a wrap for “Forex Trading Basics From Top To Bottom Part I.” Hopefully you now have a feel for what you need to know to get started as a forex trader.. Next I’ll share with you more things you need to know  to make money as a forex trader in “Forex Trading Basics From Top To Bottom Part II.” Till then,take care.

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Trading The Bull Trap

 

Today we start our three-part series on false break strategies by  saying “Trade The Bull Trap.” No,  the bull trap is not meant to trap live bulls. However, the bull trap is set up for a different kind of bull – the naive  buyer on the  forex market. Sometimes, buyers are easily sucked into an uptrend,thinking it’s safe to enter a trade. Then,much to their shock and horror, the bears springs  out of nowhere and drag the price down, leaving the bulls with the tails between their legs. That’s what the bull trap does to naïve bulls. It lulls them into a false sense of security, and then pulls their legs from underneath them.

So we’re going to do a few things today. We’re going to find out what a bull trap is all about. Then we’ll look at three bull trap patterns you need to know about. And finally, we’ll learn how to avoid the bull trap.

But first things first:

What Really is a Bull Trap?

Well, a bull trap is a contraption set up for naïve bulls in the uptrend. You see,the price surges through or breaks through the resistance barrier and heads for the hills so to speak. The sad part about this sordid mess is that naïve bulls, looking to make a quick buck fall for this sucker punch. They’re like “hmmmmm………The market looks very promising .How about  we cash in right now while the iron is hot?” Sounds like a good idea right? Well unfortunately for the naïve bulls, the uptrend like a Boeing 747 running out fuel across the Atlantic Ocean.

Then the unthinkable happens. The bears burst out of the  woodwork and drag the  price down. The price  drags down  leaving the bulls literally holding the bag.  Not to mention the fact that all their stop loss entries take a major  hit as a result of this huge reversal.

The question we should be asking ourselves is:

Who Is Behind This Carnage?

Well,it turns out that the main culprits are big time professional traders in a desperate search for cash to fund their huge trades. They basically say to themselves” How about setting up our rookie traders for a huge crash? We make them believe  an uptrend is about to start and then boom! We set the trap on them and then we cash in on the price drop. This may sound sadistic to some of you out there,but it seems perfectly legal. In fact, you can also cash in on the bull trap.You just need to keep your eyes wide open as  the bull trap unfolds. Let’s look at an illustration of the bull trap

bulltrap-example

This, my friends is a classic example of the bull trap in action. See how the price gives the impression of a strong uptrend,but  then the bears burst out of the woodwork and drag the price down, leaving the bulls in a huge fix. I guess the moral of the story is don’t count your chickens before they ‘re hatched.

Three Bull Trap Patterns You Need to Beware of

I assume you are all aware of the famous sign “Beware of the Dog”. Mentally you should also have the sign”Beware of the Bull Trap.”  As a matter of fact, I’m going to show three bull trap patterns you need to beware of  out there on the market.

Bull Trap#1- Candlestick Break and Close

Bull-Trap-Chart-Pattern-1-1024x485

This bull trap pattern shows a price break at resistance but then the bearish downtrend resumes almost immediately.

Bull Trap#2 – Candlestick Breaks Resistance Level But Closes Below Candlestick

bull-trap-chart-pattern-2-1024x476

This bull trap pattern shows an uptrend breakout at the resistance level but the bears eventually take over  and head for the valley.

Bull Trap#3

bull-trap-chart-pattern-3-1024x476

Another classic case of a bullish breakout at the level of resistance, and the bears taken over. Once the first two candlesticks kick in downwards, that’s the beginning of the bull trap.

Now that we know how deadly the bull trap can be, I guess the most obvious thing to do is to learn:

How To Dodge The Bull Trap

1. Place a Large Enough Stop Loss

Place a large enough stop loss to avoid getting caught in the bull trap. The trick is knowing high the price will climb before it crashes.

2. Only Trade In The Direction of the Trend

You’d be better off if you only trade in the direction of the trend. Because 90% of the time if the breakout does not follow the trend, it can only mean one thing-BULL TRAP! And you sure do not want to be at the mercy of those smart traders do you? If you  still aren’t sure about how to trade trends, do me a huge favor, and visit myTrade Trends With Price Action Analysis post.

3. Trade The Retracement.

While you’re considering other options, you may want to consider trading the retracement In case some of you  have forgotten, a retracement is a temporary reversal of the prevailing trend. With that in mind, just wait for the price to temporarily drop, and then you place your buy order.

Keep Your Eyes On The Next Two Candlesticks After Breakout

If you really do not want to get caught in the bull trap, keep your eyes on the next two candlesticks after breakout. Why?  Because these two candlesticks trigger the  bull’s loss of momentum and the unfolding of the dreaded bull trap. So here is what you need to do when these two scenarios occur

  • Take all your profits and head for the hills. You do not want to be laughing at the wrong end of your mouth.
  • You can also put in a stop loss to trail stop your trade and gather whatever is left of your  valuable profits
  • Or use some of your profits to move stop loss to break even point or move stop loss to lock in some profits. This is a very risky option, so you may have to think long and hard about this.

Let’s see a classic graphic of what I’m referring to.bull-trap-trading-warning-signs-1024x486

As you can clearly see from the graphic, The bulls have been sucked into this hot uptrend. But notice the momentum stall once the first two bearish candlesticks kickstart the downtrend. The bull trap alarm should be ringing in your head, the moment you see this scenario unfolding.

 

How To Trade Bull Trap

If you want to sink your teeth into trading the bull trap Here are a few ground rules you need to follow

  • Watch out the price surge towards the resistance level and see if you can spot a bull trap pattern.
  • Upon spotting the bull trap, place a stop pending order at least two pips below the low.
  • Next place a stop loss at least two pips above the high
  • But if you want to make a profit,  either aim for the previous swing price at the lower low or risk reward of at least 1:3

If you’re not sure of your support/resistance level trading, see my Identify Support and Resistance Levels With Price Action Analysis post.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades

 

Well that’s a wrap for “Trading The Bull Trap”. The bull trap can be a huge tease if you fall for it easily. But it can be profitable if you know what you’re doing. Next time we’ll touch on trading the bear trap. Isnt it great to turn the tables on the bears? Till next time ciao!

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We’re Moving Averages Part II

Today we finish our two part series on moving averages with “Moving Averages Part II.”Yeah I know some of you don’t want this series to end, but all good things must come to an end. Just to refresh your memory we started off with We’re Moving Averages Part I. We defined moving averages and took a look at the two main averages tools – Simple Moving Averages a(SMA) and Exponential Moving Averages(SMA).

Today we’re going to close the show by learning how to use moving averages to find trends.We’ll then find out how to use  moving average crossovers to enter trades, and lastly, how to use moving averages as dynamic support and resistance levels.

So let’s start off with:

Use Moving Averages To Find Trends

It’s possible to use moving averages to find trends. If anything,moving averages help you determine the trend. You can start by plotting a single moving average on the chart. But remember this: When price stays above the moving average it means that price is in an uptrend.And when such a scenario unfolds,,it’s your signal to enter a trade. Let’s take a look at an illustration of this scenario.

moving-trend

As you can see, the blue line represents the moving average. And if  the price is higher than the moving average. It’s time to put in a buy trade and laugh all the way  the back.

get hairy sometimes. Let’s say USD/JPY goes into a downtrend.But a news report causes the price to surge even higher. You  then discover that the price is now above the moving average. So you say to yourself.  “Hmmm…How about I put in a buy trade now  that the market is hot”? So you put in a buy trade  with the confidence of a soothsayer that USD/JPY  will surge further  upwards. Suddenly, out of no where you get faked out.(Remember the fakey pattern?) Instead, the trend goes downward, and the price keeps getting lower, leaving you holding the bag.. Let me show two illustrations of this scenario.

Change-Trend

The USD starts a downward trend. Then all of a sudden,an uptrend starts taking shape.Of course you gets sucked into believing it’s time to make a buy trade.

 

fakeout

As you can see , you get fooled by the market as it continues with its downward slope,leaving you  holding the bag.

The moral of the story is that you plot not one, but two moving averages. Why? because with two averages you get a clearer signal of whether the pair is trending up or down, depending on the order of the averages. One thing you need to understand is that in an uptrend the faster moving average should be above the slower moving average.It’s vice-versa for the downtrend. Let’s take a look at a 10 period MA and 20 period MA.

10-20

As you can see an uptrend is developing  nicely here with the 10 SMA above 20 SMA. With two trend lines,you should be able to tell whether a currency pair is trending up or down.  Assuming you’ve finally figured out how use moving averages,you can  combine that with your knowledge of trading trends  to decide whether to go long or short on a currency.

If you want to get adventurous, you can put more than two lines on your chart. Just make sure the lines are in order of importance(Fastest to slowest in an uptrend, and slowest to  fastest in  a downtrend.This way you can tell whether the currency is in an uptrend or downtrend.

By the way if you’re still at sea about trading trends, go back to my post Trade Trends With Price Action Analysis

Use Moving Average Crossovers to Enter Trades 

It’s also possible to use moving average crossovers to enter trades. No, I’m not referring to Kobe Bryant’s deadly crossovers.  I’m referring to moving averages crossing over each other. How do you  discern these signals?Just plot a couple of moving averages on your chart, and hang tight for a cross over. If one moving average crosses the either,it’s a signal that a trend is about to change. This trend switch is your queue to make a solid entry. and a chance to cash in big.

Let’s take another look at  the USD/JPY daily chart to explain moving average crossover trading.

.crossover

Between April-July, the pair seems to be in a good place trend-wise. Then it reaches its peak at 124 before  before making the downward spiral. By mid-July, the 10 MA crosses below the 20 MA. And what happens next? A nice downtrend takes shape. This downtrend takes shape because of the two moving averages crossing each other.

One thing you need to understand is that yes, a crossover system works wonders in a trending environment. But it flames out in a consolidation environment;when prices  start ranging. And when that happens it make take a while before you spot another trend.

Using Moving Averages As Dynamic Support and Resistance Levels

It’s even more possible to use moving averages as dynamic support and resistance levels. If you’re wondering whether you’ve come across this term before, yes you have.You saw it in my  Something Called Confluence post. Dynamic support/resistance levels arenotlike their static horizonta lsupport/resistance brethren. Dynamic support/resistance levels are constantly changing faces depending on current price action.

A lot of forex traders view moving averages as key support or resistance. These traders buy when price dips and tests. the moving average. Or they buy when price rises and touches the moving average. Let’s take a look at the 15 minute chart of GBP/USD for illustration

 

It seems 50 EMA is holding the line quite well.Whenever the price approached 50 EMA,and tested its mettle, it hit right back and forced price to bounce back down.

But there are times price will elude EMA  before reversing in the direction of the trend. And there are also occasions when price will just bamboozle through EMA all together. What you could do in such a scenario is plot two moving averages on the charts You buy or sell only when price is in the space in between the moving averages. This area is also as the zone.

Let’s take another look at this same 15 minute chart using 10 and 20 EMA’s

price-zone

Fromt he look of things, price drifted past price few times, but start heading downwards afterwards. The whole point of this strategy is that just like hrizontalsupport/resistance levels, the dynamic version should be viewed as zones of interest.Think of the area between the moving averages as zones of support or resistance.

Break Through Dynamic Support and Resistance.

Just like any barrier, you have to break through dynamic support and resistance. As you already know,moving averages at as support and resistance. But they can be brittle at times-causing them to break just like any other support/resistance level.

The 50 EMA on the GB/USD’s 15 minute chart should clarify things

dyna-zone

It looks like it held really well! Every time price approached 50 EMA and tested it, it acted as resistance and price bounced back down.

There are also times when price just bamboozles past EMA  altogether. What you do in such a scenario?   Plot two  moving averages, and only buy or sell once price is in the middle of the space between the two moving averages. You could call this area “the zone.”

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

 

Well,that’s a wrap for”We’re Moving Averages Part II.” We learnt that moving averages can be very useful tools in price action analysis. They help forecast prices in both present and future.The trick is trying to choose which moving average to use for your analysis.I hope you’ve had fun as much as I have. I know I have.Till next time,take care.

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Forex Market Goes Sideways

It’s really fun trading the trends. All you have to do is check whether the market is trending upwards or downwards,then you make your trades. In fact it is said in  forex circles that the trend is your friend(Whether it’s true not, that’s another show.). But there comes a time when  the forex  market goes sideways. By that I mean the market neither experiences  an uptrend nor a downtrend. It’s skidding all over the place the way a car skids over a slick road.

This can be very dangerous because you risk losing all your profits from your previous trades in this scenario when you don’t need to trade. So to help you not caught in this slick sideways trap, I’m going to show you what to do when the forex market goes sideways. But before I do, let me show you what a sideways market looks like.sideways-market

This is a classic example of a sideways market. The is no evidence of a consistent uptrend or downtrend. The chart is skidding all over the place You’d be crazy to risk your money in such a mess.

Now that we’ve gotten the introduction out of the way, onward to the business at hand.

Is The Market Worth Trading?

The first question you need to ask yourself is “Is the Market Worth Trading?” To make that determination,  head straight to the daily chart time frame and find out whether the market is trending up or down. If not, then the market is sideways. If the market is sideways,then the next question you need to ask ourself is “Is it withing trading range(Or range-bound)? Or is it chopping sideways? If the sideways  market is range-bound then it’s worth trading. Let’see what a sideways market that is range-bound  looks like.

sideways-range.png

 

This chart is a classic illustration of a sideways market that is range-bound. The sideways market is range-bound because it’s   swinging between the support and resistance levels. Also there is  reasonable distance between the support and resistance levels. This provides great opportunities for trading signals, and the possibility   that the price will edge closer to the range.

If The Waves Are Choppy, Dont Trade

If the waves are choppy, don’t trade. And by waves, I’m referring to the choppy markets.When we say a market is choppy,  we refer to a market that  has high consolidation. This  type of market area is a no go area because the distance between reversals is too small for profitable risk reward.

If you want to test whether the market is on choppy waters, just head to the daily chart time frame , and ask the questions we posed earlier. Let’s see what a choppy market looks like.

choppy-market

This looks ugly doesn’t it? The price action looks choppy and it’s moving in  a narrow range. These are definite symptoms of a choppy market. You do not want to risk your money in this mess.

How Do I Trade Sideways Market?

Just look for buy and sell signals at the support and resistance levels of the trading ranges.   One  great trading strategy for sideways markets is the fakey pattern. Here, you wait for the market to make a false break of the trading range-which of course creates profit opportunities for you.This strategy is quite useful as it creates deadly moves in the opposite direction back towards the other end of the range. Let’s take a look at a false break in  sideways/range-bound market.

false-break

As you can see there are pin bar buy/sell signals all over the trading range at both support and  resistance levels. You can make a sell/buy entry trade at both support and resistance levels.But make sure you really know what you’re doing or you’ll get burnt.

If you’re not sure about support and resistance levels refer back to Identify Support and Resistance Levels With Price Action Analysis.  And If you’ve forgotten what pin bars are, refer to Pin Bar Srategy – How To Trade It

If you’ve stumbled in here looking to join the forex trade bandwagon look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

That’s a wrap for “The Forex Market Goes Sideways” It’s possible to make profits from sideways markets. But you need to play your cards carefully, or your trading account will go up in smoke. Till next time, take care.

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Download  Free eBook On Forex Analysis