How To Make The Most Out of Double Top and Double Bottom Chart Patterns

Hello and welcome to another edition of the bulls vs the bears.  A while back we did a two part series on  How To Trade Chart Patterns Like A Sniffer Dog Parts I and II This time we are going to look individually at these trading patterns. We will start with a popular pattern called the double top and bottom  pattern.

We are going to learn how to make the most out of  the double top and bottom pattern, In other words we are going to learn how to trade the double top and bottom.

First of::

What is a Double Top? 

A double top is a reversal pattern that forms after a protracted  bullish trend.. The tops, also known as peaks take shape when price hits  an unbreakable level-or a level that can be broken. after hitting this level, price ricochets slight but  turns around to test the resolve of this barrier once again. If price ricochets off this level again you have a double top.

Let’s see an illustration of this price action.

Ladies and gentlemen here is what a double top looks like. If you look up top you see two peaks forming courtesy of a strong surge by the bulls. See how the second top was held at bay by the high of the first stop. This should tell you right away  that a reversal is about to take effect.Why? well, the bulls’ surge upwards is running out of gas.

So with that in mind you place your stop loss  just below the neckline.  This is because we expect the bulls to do a reversal of their upward surge. Now let’s see whether the reversal does  takes place.

See There you have it! The reversal does take place. As we stated earlier, price breaches the neckline, triggering a bearish slalom down the slopes. This is easy pickins as far as profits goes.

Also notice how similar in height the downward surge is to the double top formation. Use that information in setting your target profits.

Next up is:

Double Bottom Formation

Just like the Double  Top formation, the double bottom formation is also a  trend reversal. But here should be looking to long instead of short. This because these formations come about after  a long period of dominance by the bears during their surge downwards.

In simple English these formations take shape after an extended downward trend. Now let’s see an illustration  of the double top in the price action below.

Ladies and gentlemen here is how the double bottom pattern looks like.  As you can see two valleys have formed because the bears have reached the end of the road. The bearish downtrend has fast run out of gas.

See how the second bottom failed to crack the first bottom.  That means the bearish shift is almost over, and the bullish shift is about to begin. In other words get ready for a bullish reversal.

Now let’s see whether the bullish reversal does occur.

Voila! The bulls do take over the next shift! Price cracks the neckline , triggering a major surge up the hill. See how the price push is the same height as the double bottom formation? Just like the double top setup, you use the height  information in setting your target profits.

That’s a wrap for “How To Make The Most Out of Double Top and Double Bottom Chart Patterns. ” Double top and double bottoms are reversal patterns that you can easily run to the bank with. The precise entry and exit points that these two patterns create make them user-friendly for forex traders.

All you have to do is identify these patterns and run up your cash register. It’s that simple. Next time we will look at Trading  the Head and Shoulders Pattern.

Til next time take care

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How To Trade Breakouts with Ease

Hello and welcome to another edition of  the bulls vs the bears. A while back I did a post on  How To Cash In On Trading Breakouts. .  This week we are going to learn how to trade breakouts with ease and we we will be   looking at three breakout patterns

Knowing the type  of breakout you are dealing with is absolutely crucial if you want to succeed as a forex trader. Why am I saying so? Because it will help you understand the bigger picture as to to the happenings on the forex market. Breakouts are also crucial in the forex market’s scheme of things in that they help indicate the change in preference as to the currency pair you are trading. In other words they indicate the change in supply and demand. This pendulum swing those huge moves we so dearly love. And they create huge opportunities for racking up profits.

So the first breakout pattern we are going to touch on  is:

Continuation Breakouts

Continuation breakouts  are trade setups that shows price action skewing sideways. Here  buyers and sellers take a breather to contemplate their next cause of action after initiating huge moves on the market  Here, prices drop with the bears selling short to take their profits. Once they recover their bearings, they resume selling again. Consequently, it causes a period of consolidation which result in the skewing patterns you see on the charts. Let’s take a look at an illustration  of consolidation before the breakout  using the USD/JPY pair.

Ladies and gentlemen, here is an illustration of  consolidation. You have  sellers taking a break after closing  out their original trading positions.  You see  the sideways  formation that I  explained above? Now let’s see what happens when the bears decide to push price in the same direction

This ladies, and gentlemen is the continuation breakout that I explained earlier, Basically the bears have decided to continue with the initial trend that they initiated earlier. In so doing they are going to continue selling til they drop.

Next up  is:

Reversal Breakouts

Reversal breakouts occur where traders  run out of steam at the end of the trend. So they decide to do an about turn by pushing the price in the opposite direction. And just like its continuation counterpart, the traders take a long pause . Now let’s take a look at the reversal breakout in action

Here we see a consolidation period as a result of the traders taking a breather.However,realizing that the initial downtrend was running out of gas,  traders do an about turn and decide to breakout and head for the hills (as indicated by the green arrow). You can only imagine the profits they cold accumulate on their way up.

Last but not least is:

False BreakOuts

Now false breaks are very dangerous customers. False breaks take shape when price breaks through a certain level(e.g. support or resistance) but discontinues its advance in that same direction.  And when that happens you may find your initial trading position swallowed by a  blood sucking consolidation. Let’s a see a false breakout in action

The yellow circles in the upper and lower consolidation areas  represent the false breaks I referred to earlier.Instead of continuing in the same upward direction price does a complete pump fake and heads downward. What resembles a price increase is immediately followed by a  price crash straight  into a consolidation zone. Now someone is probably asking

How Do I Enter A Breakout?

Wait for price to retrace  back to its  original breakout level and see whether it creates a new high or low. Of course it depends  on the direction you are trading in.

Also do not pounce on the first breakout that catches your eye. In so doing  you deny  yourself an awesome chance of racking up huge profits.The downside to keeping watch is that you may miss out on profitable forex  trades as price accelerates at the speed of light. Trust me, I’m talking from experience.

That’s a wrap for “How To Trade Breakouts with Ease. ” It’s possible to profit from trade breakouts if you know which breakout you are trading. Think of breakouts as indicators of the grand scheme of things on the forex market. That they also help reveal the change in currency preference in terms of the currency being trades.

Til next time take care

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Expand Your Winning Trading Position

Hello and welcome to another edition of the bulls vs the bears. Last we touched on How To Scale Out of Trades. This week we  are going to look into how to  expand your winning trading positions. Basically we are going to   learn how to add to our winning positions. Someone is probably asking “How Do I add on to my winning position without losing my profits?”

Well here are a few simple rules you need to follow:

• Decide in advance  the entry levels for your additional pips
• Calculate your risk with  your additional pips in mind.
• Put in a trail stop to put your growing trading position withing your risk confines.

Now I can hear someone still  complaining”That’s all well and good. But I’m still confused.” No problem I’ll give you a:

Trading Example

You decide to trade on the trend using  the EUR/USD pair. You keep a close watch on this pair hoping  for a massive breakthrough. Unfortunately all you see is consolidation. So you say to yourself “Hmmmm.. let’s see whether  my trader pals will push this pair a little higher.” With that in mind you put in your entry at 1.2700. Immediately you discover that the consolidation gets stuck in traffic at 1.2650. So you decide “Okay, I’ll put my stop at 1.2600.”

But then a red light really flushes in your head. You’re like How about I take my profits at 1.3000? Because the bulls surge may not go further than that.”

Let’ see the first illustration of what we’re talking about.

Ladies and gentlemen, here is a layout of everything that we explained. Firs you see the entry set at 1.2700. Then it’s followed by the trail stop at 1.2600. Even more importantly the take profit is set at 100 pips which translates to $300- not to mention a risk reward ratio of 1:3. Sounds like a good day at the office right?

So you then say to yourself” I’m feeling on the top of the world about my trade. How about I add to my winning position since the market is moving in my favor.” So you decide to add more figures whenever you hit 100 pips. You thren  add a trail stop of 100 pips. Because you are adding additional figures, you decide on 1% as your risk parameter. Since your initial account  is $10000  your risk is 1% -or $100 You will add  10000 units every 100 pips and trail your stop every 100 pips.

Now let’s watch 3 graphics showing a change in risk-reward with each addition of pips

The three graphics above do  a nice breakdown of how to add to your winning positions without blowing your account to smithereens. Now before you get all excited about  adding every winning position in your mind’s eye, let me sound a little warning. Winning positions may not always be suitable for every  market situation. The best situation for winning positions is trending markets.

As you add  a winning position, the average price moves in your direction as well. Now you’re probably asking yourself ” What does this mean?” Well even if the market pulls back against you, you don’t suffer the humiliation of your trading position going negative. Also be aware that adding winning positions in range bound markets can be hazardous to your trading health. Your trailing stop could end up taking a major hit. In other words you could be completely stopped out. Even more precarious to your trading health you could you use up your entire margin. This could trigger a margin call from your broker. And we don’t want that. Do we?

That’s a wrap for “Expanding Your Winning Trading Positions. ” This brings to an end to our series on scaling in and out of trades. Sorry but all good things must come to an end.  I hope you have  blast learning how to scale in and out of  trades. I know I did. Before we end this series, let’s recap on the rules of scaling and scaling out of trades.

• Always use stop losses. Your trades will burn if you don’t use them
• Only add to losing positions if your trading positions are withing your risk parameters
• When adding to winning positions use a trail stop if your added position carries a huge risk.
• Before adding/removing from your trading position, Get your position size calculations right before you even think about entering a trade.  Failure to do that and your trading position is toast.
• Scaling in trades works with trending markets
• Scaling out trades works best in range bound markets

Til next time take care.

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How to Use Fibonacci Extensions To Rack Up Profits

Hello and welcome to to another edition of the bulls vs the bears.  Last time we  tried  Lighting Fibonacci Retracements with  Candlesticks. Basically we combine Fibonacci retracements with candlestick analysis. This week we are going to learn how to use Fibonacci extensions to rack up rock up profits. We are going to use  Fibonacci extensions to help us ascertain when to take profits.

I guess some of you are wondering:

What Are Fibonacci Extensions?

Well Fibonacci extension are levels that extend beyond the current price. Unlike Fibonacci retracement where you are dealing with four levels(0.382, 0.618 and 0.764), you only need to sweat about two levels:1.382 and 1.618. 

Once you identify a trend with a retracement, just pull up your Fibonacci tool  and you will see the extensions pop the 1.382 and the 1.618 levels onto your charts. Those two levels then become potential price target levels. You determine the Fibonacci extension levels with three mouse clicks.  Some of you are going ” How do you that?” Well click on the most recent Swing High, and then drag your cursor on the most recent Swing High. Last but not least, drag your cursor back down and click on any of the retracement levels.

The result will be that each of the price extension levels showing both the ratios and the corresponding price levels. Pretty neat right?  To help us create The Fibonacci extensions level let’s take a look at the at the price action on the  USD/CHF chart that we worked with when we used the Fibs retracements

If we remember correctly the 50.0  level held up quite nicely. as support. After surviving three tests, the bulls, who were buying  price  resumed their upward climb. They were so confident climbing that they even bypassed the previous Swing High.

Now let’s pull up the Fibonacci tool and hunt for the best place to rack up profits using the USD/CHF currency pair

First off let’s see what happened after the retracement swing Low happened.

• Price launches a comeback hitting the 61.8 level, which aligns nicely with the previous Swing High.
• Unfortunately it slips back to the 38.2 level where it runs into support
• Price then rallies and hits the resistance wall at the 100% level.
• A few days again price mounts yet another rally and runs into, you guessed it, another resistance barrier.

So judging from the example it’s pretty obvious the 61.8%, 100%, and 161.8% levels are the spots to rack up profits.

Now we are going to look at Fibonacci extension levels in a downtrend. In a downtrend the main objective  is to take profits on short trades. Why? because the market seems to find support at these levels.  Now let’s take another gaze at the USD/CHF chart we looked earlier in the Fibs lesson.

We recall seeing  a nice looking doji forming at the 61.8 level. Price then went into reverse as sellers smelled blood and dragged price all the way down to the Swing Low.

How about about we pull up the Fib extension tool and see the best places to rack up profits assuming we traded short at the 61.8% level.

The 38.2%, 50.0%, and 61.8% extension levels would have all been good places to take profit” />

Now here is a summary of what happened after the price reversal at the Fib retracement level.

• Price hits support at the 38.2 level.
• 50.0% level holds out as support but then turns into an event zone.
• 61.8% level aso turns into an event zone before price takes a dive to test the previous swing low.
• 100% level looks like it’s been busy acting as a support barrier also.

From this synopsis we could have picked up profits from the 38.2%, 50.0%, or 61.8 levels.  It is also possible that other traders were  watching these support levels like a hawk since they were also anticipating  significant profits as well.

What Do We Learn From These Examples?

That price  makes a put stop at support or resistance at the Fibonacci extension levels. But don’t be fooled into believing it happens all the time, because it doesn’t happen that way. But it happens enough for you to adjust your position and rack up profits, and more importantly manage your risk.

Unfortunately there is no way of  ascertaining  which Fibonacci extension level will put up the resistance. Another headache is choosing which  Swing Low to start from in creating the Fibonacci extension levels. One way to get around this is using the Swing Low from the previous examples. The point is there is nothing etched in stone as to which is the right way of picking the right swing points. But as they say, practice makes perfect.  So with a little practice you should be able to master picking the right swing points.

In short  you will have to use your discretion when using the Fibonacci tool.  You will have to determine how long the trend will stay on. Your decision  could either make or blow up your account.

That’s a wrap for ”How to Use Fibonacci Extensions To Rack Up Profits ”. Next week we will learn how to use the fibonacci indicator to place a stop loss.

Til  next time take care.

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How to Map Out Support and Resistance Levels Using Fibonacci Indicator

Hello and welcome to another edition of the bulls vs the bears. Last time  we learnt that  the fibonacci was not full proof. And that it could do a 360 on you. This week we are going to learn how to map out  support and resistance levels using Fibonacci  indicator.

Like we said last time, the Fibonacci tool is quite useful. But it can’t be used in isolation. It should be used in unison with other tools to discover the sweet spotup trades that you’ve been  salivating about. So we ‘ll take what we ve learnt and go hunting for those spotups.

If your Fibonacci tool happens to spot  support and resistance levels, combined with other price areas, then chance of price  shooting high from these areas are quite good.

Let’s take a look at an example of such a scenario using a daily price action  chart of USD/CHF

As you can see the bulls have been running the show. All these green candles make it crystal crystal clear as to who is in charge. The question you should be asking yourself is “When do I make my entry?” Using the Fibonacci tool, you you see the low at  1.0132  as your Swing Low and the high at  the high at 1.0899  as your Swing High. So your chart looks all set with all these Fibonacci retracement levels.

Let’s see how resistance support pans out in the next scenario on the same price action chart

As you can see we’ve laid a solid foundation to increase our chances of finding a solid entry. But the next question we need to ask is “Where do we enter?

Well as you can see 1.0510 put up great resistance. And coincidentally it just so happened to align with the 50% Fibonacci retracement level. As you can see the resistance got breached. And once it turns into support, that will be the perfect time to put in your buy entry. Now let’s look at where to place your buy entry.

If you put in your buy order around the 50% Fib level, you should be in a good place.  However we see some hair raising moments when the support level takes absorbs a second bite at the cherry. Price tries to break through the support barrier but is unable to close the deal. Eventually the pair do break through the barrier and continue with their journey.

The same setup can be duplicated on a downtrend. Just look for price levels with similar action from previous price action.  Come to think of it  the probability of price taking a ricochet from these levels are quite high. I can hear someone saying “Why do you say that?”  well support/resistance areas are very popular zones to place buy orders. As such buyers will be keeping a close watch on these zones.

While it’s not guaranteed  that price will shoot for the stars  from these levels, you can be confident about your chances of your trade entry returning a healthy profit.  It’s all a question of probabilities. If you stick with trades with a high probability of success, you will come out smelling like a rose.

That’s a wrap for  “How to Map Out Support and Resistance Levels Using Fibonacci Indicator.” Next time we’ll learn how to Combine Fibonacci Retracement with Trend Line Analysis.

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How To Calculate Risk Reward Ratio Without Blowing Your Forex Trading Account

Hello and welcome to another edition of the bulls vs the bears. Last week we   touched on Put In Your Risk You Get Your Reward. This week we are going to learn how to calculate your risk reward reward ratio without blowing your trading account. It’s absolutely crucial that you get get this part or else your trading account will be history.

I’m sure some of you rookie traders have been struggling with risk reward ratio for ages. Newsflash! Even experienced traders are totally clueless about how to calculate risk ratio reward  before making their trade entry. 

So basically we are going to learn  the whole process of calculating risk reward ratio. This will help you understand  how important calculating risk reward ration is to your money management strategy.  I guess the question everybody is dying to get answered is:

How Do I Calculate Risk Reward Ratio?

The formula seems fairly straightforward.  Let’s say you decide to risk 40 pips and you set a profit target of $80. Your risk to reward ratio is 1:2

Your risk(40 pips)to  reward($80)= 1:2 

Fairly simple. Isn’t it? However, when calculating your ratio, keep in mind the commission your forex trader charges you every time you enter a trade. Failure to pay attention to the spread could cost you an inaccurate risk reward ratio. Not to the mention the fact that it could distort your trading account also.

Let me break it down nicely. Let’s say you’re the type who  only risk 5 pips per trade in the hopes of racking up 10 pips per trade. Amd  you think you ‘ve hit the 1:2 jackpot, you need to rethink your trading strategy.

 Say your broker charges you 2 pips every time you trade the EUR/GBP pair. This means you are risking 7 pips(5+2) to make pips(10-2), which nets you a ratio of 1:14. Not the  same as 1:2. Is it? The rationale of this scenario is that   you need  a higher win rate to compensate for this huge risk reward differential. By the way the win rate is the percentage of winning trades you need to maintain to remain profitable.

This huge differential affects scalpers (Those who trade for short term gain) and day traders.  But for the swing and position traders, they’re sitting pretty since the trade on higher time frames. This huge differential could bite even harder especially if  you set tight stop losses and profits. Now let’s take a look at an illustration of the risk reward ratio using the GBPJPY pair.

Here we have a price action chart comprising of  a 100 pip stop loss and a 200 pip profit target. if we calculate the  risk reward ratio for these fundamentals the result will be less scary. However, if your broker hit with a 5 pip spread here is what the risk reward will look like:

105 (100+5) pips risk and 195(200-5)pips gives us a ratio of 1:85 How do you get a such a delicious ratio? It’s because the trade was in a higher time frame. This type of ratio works works perfectly if you are into swing trading or position  trading, you are in luck. Like mentioned earlier, these two trading categories work perfectly in higher time But if you are a scalper looking to make a quick buck, you could end up playing catch up, not to mention, blow up your trading account.

Relationship Between Win Rate and Risk Reward Ratio

Your win rate has everything to do with your risk reward ratio. I dare say your win rate plays a huge part in your risk reward ratio analysis. You need to figure out your win rate before even thinking about your risk reward ratio. Here is a simple formula you can apply if you want to continue racking up the profits.

So:

What’s The Formula?

It goes like this: Required Win Rate = 1 ÷ (1 + Historical Risk to Reward Ratio of Your Trading Strategy)

Let’s say your expected risk reward ratio is 1:1. If you plug into the above formula, you should get the following result:

1 ÷ (1 + 1) = 0.5, which is 50%.

This means that you need to be averaging 50% profits just to breakeven. Anything above 50% should make your trading account smell like a rose. But if the average dips below 50% expect a loud groan  from your trading account. Because regardless of how you perform in the short term, you will hemorrhage all your  money.

However, there is a way out of this. If you are able to establish a win rate of 50% on a 1:2 ratio, you should be able to make 50% on your capital.  All you have to do is to risk 1% of your capital – nothing more nothing less.

Another formula you can implement is:

Minimum Risk To Reward Ratio

You use this formula to calculate the minimum risk to reward ration you will need to stay afloat or stay profitable : Here is how the formula goes:

Required Minimum Risk to Reward Ratio = (1 ÷ Historical Win Rate of Your Trading Strategy) – 1 is 

Let’s say your historical win rate 50%. IF you plug 50% into the above formula, this is what you get:

(1 ÷ 0.5) – 1 = 1

Judging from the above result you need to maintain 1 risk reward ratio of 1:1 in order to remain profitable. Meaning that if you set a stop loss if 100 pips your profit target should be 100 pips. The preferable ratio among most traders is 1:2. So if you set a stop loss of 100 pips you should set a profit target of 200 pips. Mind you, these targets are not etched in stone. I’m just using them as illustrations of how to set your risk reward ratio.

You Can Use A Calculator To Calculate Risk Reward

If you  find calculating risk reward ratio is too taxing for your brain cells, help just arrived. And it’s called a calculator. Just calculate your risk ratio on your calculator and give your brain cells a break.  Also look out for free mt4 indicators on google. These tools are also useful  for calculating your risk reward ratio.

 If you prefer something  more specific look  for an fx(forex) calculator online. Just go on google and you should see the search results for fx calculator on your screen from top to bottom. But if you are scared of calculators  you can fall on on the tried and tested Microsoft Excel sheet. That should help simplify the calculation process.

Fibonacci Retracement Tool  to Identify Risk To Reward Areas 

Another tool  that can help you identify your risk reward areas  is a famous retracement tool called the Fibonacci Retracement Tool(or Fibs a forex  traders like to call it).  The fibonacci tool was originally  created to define levels of huge price swings.  Let’s look at a few examples

As you can see you can identify your risk to ratio areas using custom levels such 1.2,3, 4, e.t.c. So you label the risk to ratio areas RR1 RR2 RR3, e.t.c. RR represents the risk areas. Just remember that these levels only serve as reminders of potential risk to reward price levels of your trade. They are not actual calculations of Fibonacci ratios.

Now let’s  try to use the Fibonacci  to identify potential risk reward levels .

 

You see  the red diagonal line at the bottom of the chart? That’s the Fibonacci tool turned upside down. The blue lines streaking across the chart represent the Fibonacci  levels which you enter in your MT4 software. As you can see, the stop loss at the bottom is labelled 0 while the buy entry is labelled 100, These two levels symbolize the potential risk to reward ratios.

Right above these fibonacci levels is the potential risk to reward areas labelled RR1 and RR2 respectively

So  with the Fibonacci tool you  should be able to create a nice picture as to what price level your trade will produce a decent risk to reward ratio. Pretty exciting stuff. Isn’t it?

That’s a wrap for ” How To Calculate Risk Reward Ratio Without Blowing Your Forex Trading Account. ” Calculating risk to reward is a breeze so long as you have a grasp of how the fundamentals of risk to reward ratio work. However,  make sure you access the risk reward ratio of every trade you intend to enter in prior to entering your trade.  Regardless of the tool you you use to  do your calculation,  You absolutely have to do your due dilligence or you will get your fingers burnt severely.

Even more important, you need to understand the relationship between risk to reward with your  chosen  trading strategy.  Then spend as  much time as possible testing as many risk to reward ratios a possible to establish the best risk to reward fit for your trading strategy.

Once you find a risk to reward combination you are comfortable with, you then  calculate the minimum win rate required  based on your chosen risk reward ratio . In so doing you can keep a better eye on the success of your trading strategy.

Till next time take care.

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How To Find The Best Entry Points For Your Forex Trades

 Hello and Welcome To another edition of the bulls vs the bears. Today we are going to learn how to find the best trade entry points for your forex trades.  Your trade entry should satisfy two requirements: A reliable stop placement and humongous risk/reward potential.

I can hear someone saying”That’s easy for you to say.” Sure perfect entry points may be as rare as the eclipse of the moon.But it takes a little patience and a hunter’s mindset to spot them. So we’ll do two things. We’ll   look at three strategies  for finding the best trade entry points.  

First off:

Two Strategies For Finding The Best Trading Entry Point

First things first, look out for obvious price signals. The price signals should be as clear as day that you’d be blind not to see them. The daily chart frame is a good place to start from. Why? because the signals and patterns are so crystal clear you can’t afford to miss them. Next you are looking for confluence of factors that back up the price signals And by that I mean you look back at the previous trading periods to check whether the signal aligns with other key levels or has formed via a pullback.

For more information on confluence of factors look up Something Called Confluence

Basically make sure the signal lines up with as many supporting factors as possible to constitute the best trade entry point. If you are thinking of tweaking your trade entry, don’t even try it. you will receive severe burns to your trading position.

Now some of are asking:

Why The Wait For A Better Trade Entry?

1) First off, it  frees you to insert a tight stop loss which in turn makes you a profit on a substantial risk/reward. This means you can trade for a bigger position size.

2) You reduce the risk of being stopped out for a huge loss because you placed your stop loss out of harm’s way. by that I mean you placed your stop loss in a safer place.

3) You get to wait patiently while the trade forms. patience comes in handy especially if you are not totally sure that the trade is worth risking your precious cash on. While you wait patiently you place your stop loss. In so doing you save your self the heartache of a tsunami-sized stop out no to mention being wiped out by the market itself.

Now that we have gotten the reasons out of the way, let’s look at  a few examples of spotting the perfect trade entry

Ladies and gentlemen, here is a clear bearish pin bar signal(circled in red) along the level of resistance via the GBP/USD pair. The tail of the pin bar is obviously sticking out like a sore among the neighbouring bars. This must tell you that  the bears are planning their reversal and that they are going to push price further down in the future.

Now let’s look at the factors supporting the sell signal using the AUS/USD pair in the price action below

As you can see the evidence required to make a trade entry is  there for you to see.  We see  a downtrend that has been developing for a month with the signal developing after a pullback to the level of resistance. The signal so obvious that you don’t need a bolt of lightning to tell you that it’s time to make the trade. And of course the risk/reward potential is huge.

Since this is a long term trade you don’t need to stare at your screen like a bodyguard. Just get out of the house and head to the beach while your trade entry racks up the profits.

Now we’ll look to tweak our trade entry and improve our risk reward potential

Here we try to make our entry at the 50% point of the pin bar. There is no way we can get it at exactly 50% as it’s literally impossible. Not even Einstein could have got that right. But you can make your grand entry at the point of retrace just under the the 50% point and with a stop loss just below the pin high.  Aside placing a stop loss you could improve your risk potential from RR1 to RR2 as indicated above. Some have been known to increase the risk/reward to RR3.

Now let’s look at another entry example  using the daily time frame

Ladies and gentlemen, here is a trade entry in the daily time frame via the EUR/USD pair. We have a bearish pin bar forming as a result of the bears doing a sharp reversal. And just like the previous example, the pin bar clearly sticks out like a peacock. You can’t miss it.

As you can see a pin bar formation is taking place at the level of resistance  on the weekly chart. It’s pretty much consistent with the pin bar formation in the downtrend of the daily chart frame.

Finally let’s take a look at  a long tailed pin bar setup in the daily chart price action

Clearly we see a long tailed bullish pin bar at the level of  support on the right side of the chart.  That of course kicks of the bullish charge.  With your knowledge of long tailed pin bars, nobody needs to tell you that’s a the perfect entry point to put in your trade. No to mention the huge risk/ reward benefits that you will accrue from this setup

That’s a wrap for “How To  Find The Best Trade Entry Points for your forex trades”.   What you  need to understand from this lesson is that the best trade entries form with the help of supporting factors.  Basically you are looking for the coming together of a signal and a level, or  a signal and  a trend, or even a level and a trend

The trend at the time should be painfully obvious with the signals formed at a key level. With a little patience, training and reliable instincts you should be able to make your entry with consummate ease.

Till next time take care.

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Don’t Confuse Quantity With Quality of Trades

Hello and welcome to to another edition of the bulls versus the bears. Today I have another simple message for you: Don’t confuse quantity with the quality of your trades. There is absolutely no need to enter trades day in day out as if your pants are on fire. If you’re afraid of missing the next big market wave? Don’t bother! If you miss what you believe is a juicy trade pattern, you’re sure to see it the next day. Keep your fears at ease!

Don’t act as if forex trades are “reduced to clear situations”.  The forex market is not up for sale that you have to trade as if every trade could be your last. Do you know what this kind of strategy is called? It’s called overtrading. I can hear somebody asking:

What Constitutes Overtrading?

First off, you are always in a trade. You feel you absolutely must be in every forex  trade or else you are going to lose your sanity. You are so obsessed with the forex markets and your trades that you go to sleep with your trades and dreaming about the next trade. Even worse, you are involved in multiple trades which constitutes  forex suicide. But you can get away with multiple trades  only if you apply solid risk management.

IF you want quality trades just trade at least 6 times a month. Or  pick one or two high probability sets that are  solid enough to keep you outside of the house for long periods of time. Just set and forget and smell the roses.

Let me show you how overtrading affects your trading process and your trading account

You Trade Too Much You Blunt Your Edge

Yes! When you trade too much your trading edge  becomes blunt. Instead of focusing on quality trades which give you an advantage over other trades you settle for bread crumbs. By bread crumbs I mean low quality trades that fall outside the criteria for your trading edge. And when you  do that, your chances of prosperity become slim.

If you want your forex trades to  be high quality you need to know the difference between market noise and high probability price events(trades). Now market noise is a fancy term for sideway markets while high probability price events are, well. high probability trades. It’s absolutely crucial that you know the difference between these two trade categories or else you may end up taking trades that are nothing but loud speaker thumping noise and not real price signals. Even worse they end up blunting your precious trading edge.

For more information  on market noise and high probability trades look up Forex Market Goes Sideways and How To Spot High  Probability Trades.

Brokers Get Rich At Your Expense

The more you trade the more forex brokers get rich at your expense.  Of course I can hear somebody asking “But how do these brokers get rich at my expense?” They get rich through the spreads and commissions that they charge you. So that every time you trade they make money from your trades. So if you want to gain an edge over your broker,  TRADE LESS!

Too Much of A Good Thing  Is Bad

I’m sure most of you know the phrase “Too Much Of a Good Thing Is Bad.” You like something so much that it become an addiction to you. The same thing scenario applies when you trade too much. You become  fixated with the trading process that you feel like you have to jump into the market at every  opportunity. It’s like gambling. You get this huge adrenaline surge  to blow all your money all at once. And when that happens all your money is gone.

So How Do I cure My trading addiction?

 By laying out a trading plan where you identify your trading edge which will guide how you enter your trades on the market. Failure to develop a trading plan could be highly detrimental to your trading health.

Your trading addiction becomes progressively worse and you  will end up blowing up your  trading account. Two things could happen in the process. Either you learn your lesson and go back to trading the right way or you become so dehydrated from your addiction that you end up quitting as a trader all together.

I guess the appropriate question is:

How Do I Cure OverTrading?

First:

Trade Less

You need to trade less. In other words you don’t need to trade 70 times a month.  The ideal number is 5-7 times a month. Anything beyond that is a crazy addiction. While you are at it, put some strict rules withing your trading plan. At the same time add some flexibility to your trading plan to complement the rigidity. By that I mean where you place your stop loss, How you enter your trade, How much you can afford to risk, e.t.c.

Look For Trade  Setups Which Align With Your Trading Plan

You need to look for trade setups that align with your trading plan.  You must identify setups that satisfy the criteria in your trading plan, visavis your trading edge.  And while you are it, apply what is  known as a T.L.S. filter. Basically you create a set of criteria to ascertain whether the trade is worth risking your money on.  The filter must satisfy two  at least two of these criteria:Trend, Level, and Signal. These criteria are what you call multiple factors of confluence.  For more information on multiple factors of influence look up Something Called Influence

You need to adopt the mentality of a hunter waiting patiently for his prey to appear. It doesn’t  mean you go after every trade your eagle eye  spots on the price action chart. You only save your cash for trades that you know will take you to the Promised Land. Just like a hunter who only so many bullets to waste, you have only so much cash to risk. So be frugal with your money or your trading account will blow up like dynamite.

Set and Forget 

I’m quite sure you have heard this phrase”Set and Forget.” It’s a simple but effective approach. All you have to do is set your trade, forget about it and get on with life while the trade rakes in the moolah for you. Instead of jumping into the next available trade let your original entry play out for as long as possible to allow your your profits to accumulate.

You need to understand that solid trades take a while to play out . And if you want to catch the big waves on the market you need to adopt the hunter mentality that I alluded to earlier. Stay patient with your cash cocked, and when the opportunity presents itself, you pull the trigger. This also means that you stay away from your screen. Take a chill pill while your entry racks in the cash for you. In so doing you improve your chances of making substantial trades. You certainly do not need to trade loads of times to rake in those profits.

And Finally

Stick To One Market Direction

Please stick to one market direction.  If it’s the bullish trend you enjoy trading with do that. If it’s the reverse trend, by all means  do that also. But whatever you do, STAY AWAY FROM CHOPPY WATERS. Because you will crash and burn. The market is moving  sideways in this scenario. All you have here is a whole lot of noise, and the price signals aren’t that clear either.

And when you do get burned in choppy waters, you are tempted to jump into another trade again(Trade addiction anybody?) That’s highly dangerous and inflammable in that your trading account could end up in flames. So your best option would be to stick to markets that are strongly trending and moving in one clear direction.

For more information on sideways markets and trends look up Forex Market Goes Sideways and Trade Trends with Price Action Analysis

 That’s a wrap for “Don’t Confuse Quantity With Quality of Trades.”  Less is more where forex trading is concerned. Unlike what people may think here are not too may  trade setups to go around throughout a calendar year. So it does not make sense that you go kamikaze looking for trades like a chicken with his head cut off.  It only make sense to be less conspicuous on the market. The less you trade, the better your health will be.

Take a low frequency approach when trading. But that’s not to say that you don’t turn the other way on  the most obvious trade setups. Of course it takes considerable skill and education to identify the most obvious trade setups. I mean you don’t just accomplish these at the snap of your fingers. With the help of  price action techniques such as Set and Forget, you should be able to nail down obvious trading setups with ease.

Till next time take care.

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The Phenomenon of Risk/Reward in Forex Trading

Hello and welcome to another episode of the bulls vs the bears. Today we are going to look at the phenomenon of risk /reward in Forex Trading.  And I’m going to start today with a simple message:Put in your risk you get your reward.  Let’s get one thing straight.  Trade setups is all about possibilities. If you can visualize these possibilities  in terms of risk/reward you  should have no problem achieving consistency in your trades.

Now how do we achieve consistency in  trading? Develop a sharp instinct for identifying clear and unadulterated trade setups. Of course  You need to be at the right place and at the right time to spot these setups.  It’s like  the watching the eclipse over and over again.  Risk to reward trade setups give you a significant opportunity to make consistent profits.  So if you are able to master the risk/reward process, you’re on your way to the promised land. So how do we master risk/reward? First:

Draw Risk/Reward Levels

You need to draw risk/reward levels or ratios. before deciding on how much you want to risk.   Basically all you are doing here is calculating how much money you are willing to risk to give the trading setup the opportunity to convert from probability to actuality. Please do not think of reward first before risk. OR you put a stop so tight that it could choke the life out of your trade. Do any of these , and you will burn a huge hole in your trading account.

Now why do I say calculate risk first before reward? Because you want to create a heightened sense of awareness of the risk involved in each trade setup. In so doing you don’t obsess  too much how huge a profit you are going to make with the setup. In so doing you are able to manage risk more effectively than merely entering a trade like a gambler. The best traders in the business are the best because they are great risk managers.

Now once you have identified the trade setup and labelled the risk level, you then label the reward levels as multiples of your risk. Now there are three levels you need to draw: 1* the risk, 2*the risk, and 3* the risk. Now let’s take a look at a few illustrations of drawing risk/reward levels Right in front of you is a perfect illustration of risk levels drawn on a bearish breakout trap and reverse trade. As you can see the risk/reward levels are nicely  labeled from 1:1 through 1:3. The risk(labelled RISK) was entered as the bears broke out on the slope. However, the reward was achieved at the bullish reversal trend as price hit the 1:3 ratio. 

This is the classic case of price action and money management working hand in hand. Conventional wisdom says  a ratio of 1:3 is the optimal as far as getting a huge return on your investment. However, a note of caution: The higher the risk ratio, the harder it will be for you to get a return on your investment. That’s greed talking, not trading logic.

Let’s look at another illustration using the support/resistance route In this instance  we see the trade going long.  So naturally you let the trade run until you claim your profits at the resistance level. If you want to go short you claim your profits at the level of support. This technique only works during ranges or weak trends.

You don’t need to go for absolute highs in this scenario.Why? Because the market may not reach those levels and then do the reverse. Besides the market is in range mode which makes absolute highs/lows a pipe dream. So what’s the moral of the story? Since the market is in range mode, you don’t need to go gung-ho with your risk/reward. Just take a conservative stance and exit  with your loot a few pips earlier.

Use of Trailing Stops

Now should you want a a trade setup run forever, you will want to employ the use of the trailing stop. Now in case you’ve forgotten, the trailing stop is a market order that is placed below the market price. Somebody is probably asking”How Do we do this?” First set your risk ratio levels. But this time let the trade run without  a set exit target. Once the market moves in your direction, you use your pre-set reward levels to trail your stop loss. In so doing you stand a chance of locking in some serious profits and lessening your risk at the same time. The best way to use the trailing stop on risk/reward levels is when the trade is one or two times your risk.

You can also bring your trailing stop 50% closer to the entry level trade once the trade has hit the the 1R level. Reason being that you want to give the trade some air or room to breathe.  So that if you are up 1 to2, you trail your stop up to lock on 1 times your risk. If the market moves at 1:3 you  you trail your stop to lock in 2 times your risk. This technique is quite reliable. Why? because you are locking inn on your profits while at the same time leaving open the possibility of the trade turning in your direction. Now let’s a look at an illustration of the trail stop  on a pin bar setup.

This is a nice illustration of using a trailing stop to lock in your profits. The “R” represents the risk Entry level is at the engulfed level. You put your stop loss at the tip of the candlestick. Now as you can see the uptrend is running away and racking up profits at every turn. Why,?it’s because you have no set exit plan, paving the way for you to lock up more profits. For more information on trail stops look look up Forex Basics -Top To Bottom Part II.  I suggest you read up on Forex Basics Top To Bottom – Part I  so as to get the full trading pictujre

So How Do Achieve Consistency  In Risk Reward?

Very Simple! DON’T MEDDLE WITH YOUR TRADES! Stay out of them. You don’t want to enter a trade at a risk/reward ratio of 1:2. Later you enter a low probability trade and incur a loss. When you do this you limit the power of risk/reward, not to mention your own potential to achieve as a forex trader.

Let me illustrate what I’m talking about. Let’s say you are losing 65% of your trades at a ratio of 1:2 and you risk $200 on each trade. This means you are losing  35 out of 100 trades. This means you’ve lost 65*200=$13,000.00 However, you  made 2 times the risk on your winning trades($200):65*400=$14,000). So after 100 trades you made a profit of $14,000 even though you lost 65 of them. See the power of risk/reward? So what’s the moral of the story? You can still make money from your trades even if you lose more trades than you win. Just stay out of the way and let the market do the heavy lifting for you

That’s a wrap for “The Phenomenon of Risk/Reward in Forex Trading.” It takes discipline combined with knowledge to master Risk/Reward concept. Plus, you can’t second guess yourself either.  With these two concepts you could be the Usain Bolt of forex trading.  Just allow the trades to play out and you’ll be laughing all the way to the bank with your profits- even if you lose more trades than you win. It’s a win win situation. Til next time  take care.

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A Closer Look At Price Action Event Zones And Support & Resistance Levels

Hello and welcome to another edition of the bulls vs the bears.  Today we are taking  a closer look at price action event zones and support &resistance levels. Now price action zones/support and resistance levels are two crucial components of price action analysis that every forex trader must know like the back of his hand. I’m sure most of you are familiar support and resistance levels. They are one of the basic technical tools and are fairly easy to comprehend. In fact I’d be shocked if you have no idea of this tool.

However, price action event zones(or event areas) have been around for quite a while. It’s just that it’s only recent years that they have been introduced to forex traders. So we’ll define individually what these two tools are. And then we’ll identify the differences between these two tools. But first  off:

Price Action Event Area

A price action event area is a critical horizontal area on a price chart where a price signal is born(formed)  or from which  a huge trend move(up or down) or a sideways range breakout is initiated. These event areas are considered “hotspots” on the price charts.  You should watch them like a hawk in case price retraces back to them in the not too distant future. Expect the major players in the market to consider their options if price pays these event zones another visit. Now let’s take a look at a price event area using, you guessed it, a pin bar signal

Ladies and gentlemen here is the price event area  through the eyes of the pin bar signal. The grey shaded areas represent the   both the support and resistance areas.  The small white arrows pointing downward  represent the price retracing after bouncing off the key areas. However, watch the first white arrow at the first key level. Here the bulls  break  out  thanks to the pin bar formation along the line of support.

Next,  watch the second white upwards pointing arrow at the line of resistance. the line of support converts into a line of resistance, the bulls break through this key level and head for the mountains on the back of another pin bar signal. And when such an event happens, Huge profits await. Understand one thing about price event areas. If you miss the first price signal,  don’t panic! Just wait for price to retrace in the same event area and then you jump in. If you want to learn more about price event areas look up Identifying Dynamic Support and Resistance Levels.

Next up is

Support and Resistance Levels

As you probably know by now,  support and resistance levels are static horizontal levels that are drawn across the the price chart minus the highs and lows. Check out my post on how to draw support and resistance levels on price action charts. Now let’s look at an illustration of support and resistance levels

This graphic illustrates drawing of support and resistance levels.  As you can see there are no obvious price signals nor spectacular breakout from a consolidation situation nor key levels. These are standard support and resistance levels drawn across highs and lows.

However,  There are lots of examples whose lines are a lot more elaborate and longer in length  than this illustration. So don’t panic. Now Let’s look at support/resistance levels on a daily chart  time frame using the AUD/USD pair

Here is another illustration of  support/resistance levels drawn in the daily chart time frame. Some of you may be wondering “Why do we see support/resistance drawings, but no event areas?” Well it’s true that support/resistance levels dominate the charts. Just remember event areas carry a higher premium than support/resistance levels. Why?Because the reflect a major price occurrence at  Support/resistance levels.

On the other hand are drawn across market areas that bear little significance. Not to say support/resistance levels don’t play an important  role. But it’s the way it is on the charts. Now to the most important exciting part of this post:

What Is The Difference Between Support/Resistance Levels and Price Event Zones

Hmmmm……..How Do I Put this as clearly as possible without sounding offensive? Every event zone is a support/resistance area, but not every support/resistance area is a price event area. Now some of are probably  asking:

How Do I Tell The Difference?

For an event zone look out for a price action signal leading to to a huge breakout from a consolidation area or key  level. Let’s take a look at such an illustration using the power of confluence. Here is the classic illustration of a price event area using the AUDUSD pair. We have several price action signals along the key levels as indicated by the black circled numbers and the the red arrows. 

These price signals then touch off major breakouts at both support and resistance levels.  And yes, when such events occur, you have price action events in motion. For more information on multiple price singles look up Something Called Confluence Now let’s see why support/resistance levels are not price event zones using the CADJPY pair.

Here is why support/resistance levels cant be price event zones. If you look at the price charts you will see that unlike the price event areas there is no sustained consolidation before the breakout.

Even worse there is no evidence of a  price signal triggering the breakouts in either of the key levels. So based on what we see on this graphic, there is no way support/resistance areas could be labelled as price event zones.

That’s a wrap for “A Closer Look At Price Action Event Zones And Support & Resistance Levels.” As you can see price action event zones and Support/resistant levels help you understand the  overall dynamics of the formation of a trade. This give and go between the price signal/entry and the market conditions give rise to the high probability opportunities. Til next time  take care.

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