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TECHNICAL ANALYSIS Mon 10 Dec

FX Trading Education: GBPUSD trend stays alive for the day. Here's why...

Corrections are modest is the clue. The GBPUSD has trended lower today after the pair peaked against it's 200 hour MA a 1.27586.  Since then the price has moved to the downside.   The move has moved 255 pips from the high to the low. The corrections have been modest.  That is what a trend move does.  It moves: FastDirectional with limited corrections, and Tend to go farther than traders expectYou can see that and measure an intraday trend move by looking at the 5-minute chart. Below is that 5-minute chart for the GBPUSD today.  At the top of the chart, the pair was moving sideways, but when the price stalled at the 200 hour MA, it was the start of the first leg down (see red circle 1).  That leg moved down to a new low of the day (from the 1st hourly bar), but stalled.   The correction off that low  corrected up to the 38.2% of that leg down (just above it). That is a modest correction and implies that sellers are in control.   The price of the 1st leg higher then moved below the lows with momentum.  Sellers were pushing and the buyers were scrambling. The next leg down (red circle 2) saw a bigger move lower.  Like the 1st leg, the pair bottomed and started a correction.  If you put a fibonacci of the trend leg lower, you can measure the "will of the buyers".   If the buyers can't get above the 38.2-50% retracement area (I call it the correction zone), are they taking control?  No!  The seller remain in control.  Seller can lean against the yellow area. If the price goes above, the waters for the trend are muddy. Stay below, however, and the seller remain in control.  Start of trend leg 3 down. The third leg lower was a quicker and steeper trend move lower. The longs and dip buyers are really felling the pain. The price nearly runs to 1.2500, stalling just above that level at 1.2505 where another correction is started. The third correction has the same targets.  The fibonacci of the leg lower has the 1.2560-78 as the "correction zone". Stall in that area and the trend is alive. Move above, and the trend waters are muddy. Putting it another way, the buyers and sellers are more balanced. In this case, the correction moved right up to the 50% retracement and stalled again. Are the buyers taking control?  Not really.  They did put up a bigger battle vs. the sellers but are they winning?  No.   What next? Well, the sellers are still in control and the trend is still in play.  What would muddy the water is a move above the 50%. It might not end the downside momentum forever, but it does muddy the water. The sellers feel some of the pressure of a bigger correction.    Until then however, the trend potential continues.     The sellers remain in control.    Trends are: FastDirectional with limited corrections, andTend to go farther than you expectIf you can recognize a potential trend move early by noting the price action, measuring the corrections, seeing that trend legs stay below the "correction zones", you have a chance to ride that trend by understanding who really is in charge, and who is feeling the pain. The run in the GBPUSD today clearly shows sellers in charge and hurting any buyers in the process.  Until the waters get muddy, assume the pummeling has the potential to continue.   ForexLive

ECONOMICS Sat 8 Dec

What is Goodhart's law

When everyone is looking at something, it changes In quantum physics, the observer effect is the theory that simply  observing a situation or phenomenon necessarily changes that phenomenon. Economics has something similar, called Goodhart's law. It's named after British economist Charles Goodhart who observed that when a measure becomes a target, it ceases to be a good measure. The issue is that once everyone is watching a measure or a target and knows what it means, then the observers anticipate the effects and adjust for the outcome, thus changing the effect. The idea is prescient because of the market's intense focus on the yield curve inversion. When longer-dated yields fall below shorter-dated yields, it's a classic recessionary signal. Intuitively it makes sense because it signals a situation where people would rather have long-term safety than earn more yield in the near-term. Its effectiveness as a predictor of recessions is undoubtedly excellent but whether the curve is inverted is always a matter of interpretation. Surely 10-year yields falling below 3-month bill yields is an inversion but is 5-year yields falling below 2-year yields as strong of a signal? More importantly, does Goodhart's law apply? If all market participants believe it's a sure sign of a recession, then they will surely behave differently than they would otherwise. Similarly, central bankers are also watching the yield curve more closely than ever and as the curve approaches inversion, they may react. Taken to a further extreme, you may have central banker who actively target the entire yield curve in the belief that so long as the curve is steep, a recession can't occur. The idea of Goodhart's law is that any statistical relationship will break down when used for policy purposes. This is frequently seen in regulation and even in the workplace. Whenever targets are set, people find ways to game and abuse them, and so do broad markets and the economy. ForexLive

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EDUCATION FROM BROKERS | TRADING PSYCHOLOGY Wed 28 Nov

The role of luck in trading

Where does luck come in to trading markets? In the previous article, we talked about trading and probability . Continuing to develop this topic, let's talk about trading and luck. What is the relation between these two concepts? Can a trader count on luck to get profit? Is it possible to suffer from bad luck in trading? How random are the results of your trading? Technical analysts propagate the idea that there are sense and consistency to the market and there's much to be said in favor of that. After all, there are trends and patterns on charts that get replicated from time to time. However, there's still a lot of noise, i.e. moves of the price that can be explained by analysts only a posteriori but not as or before they happen. This noise can mess up with a trader's position. On the other hand, if things go just as a trader thought they would without any surprises from the market, a trader may consider himself/herself lucky. There seems to be a big element of randomness here. Are there any traceable borders of the randomness we observe in financial markets? Maybe the swings of the price, even the minor ones, are not random, it's just that people are not able to see the governing principle? How strongly a trader's success depends on skills and how much does it rely on luck? The authors who researched this idea a lot - Nassim Taleb, Michael Mauboussin, and Robert H. Frank - came to the unexpected conclusion that talent and efforts are not enough to succeed in the modern world, you should actually find yourself in the right place at the right time. It means that if we look at some traders who absolutely nailed it, it might seem that their success is the natural result of all the actions they have made. The reality, however, is much more complex. Most great achievements are to some extent marked by randomness. As the sociologist Duncan J. Watts cleverly indicates in the name of his book "Everything Is Obvious: Once You Know the Answer", people have hindsight bias and underestimate the role of luck, randomness, chance, or whatever you call it. The conclusion is that a trader's performance is a summary of skills and luck, the proportion of each unknown. Make it work So, it's not all up to us and the role of chance in our life can be big enough, even though we don't always realize that. Where does this idea can lead? It is abundantly clear is that one cannot rely on the mere luck while trading. Otherwise, there would be no real need for the word "trading" as "gambling" would suffice. A person can shape the world around him and doubting this idea will get you nowhere. At the same time, remember that you are not the master of the market and you can't wield it as you wish. The price won't go up just because you opened a buy trade and in no way can one trader beat the avalanche of the market. The sin of overconfidence will be sternly punished by the market. So, what's the best option here? You have probably heard about a pattern called the Pareto Principle (we wouldn't go as far as to call it an objective law). It says that 80% of the results are achieved with only 20% of the total efforts. That, of course, doesn't mean that you should twiddle your thumbs and reduce the number of efforts you make to achieve your goals. What it means is that by definition not all of your trades will be successful and only a fifth of them will likely account for the main chunk of your gains. Evidently your risk/reward ratio should be better than 1:1. Another idea to ponder is related to the time you spend on trading. If only 20% of it is really efficient, it's worth examining what you do during the remaining 80% and try to optimize it. There's always a way to improve productivity. For example, maybe you can spare a while for the analysis of your own trades? To sum up, we can say that as with many things, it's hard to give an unambiguous answer about what really leads a trader to success. Various factors are so closely intertwined that it's hard to separate them. It's a fact that good mathematicians and well-read economists won't necessarily make successful Forex traders. An understanding of price action mechanics comes to a trader over time. Experience will help you develop market intuition and an ability to control your emotions. And you'll definitely need some luck, but the necessity of luck should in no way limit your work on self-improvement. Remember that the disciplined risk management, the healthy mental state, reasonable expectations and actions, and the willingness to learn and practice are the things which will help you use your luck with 100% efficiency. P.S. Good luck in your trading!  This article was submitted by FBS. ForexLive

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TRADING TECHNIQUES | TRADING PSYCHOLOGY Fri 23 Nov

Trading and probability

The psychology when it comes to making choices "Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance." ― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets Forex is all about choosing a trade idea with the highest probability of success. However, human intuition and common wisdom can be rather deceitful and lead to poor judgments. In this article, we will revisit the main laws of probability that can be applied to trading and learn from them. The flaws of intuition The problem is that many times when we go with our intuition without giving it a deep thought, we make a poor estimate of probability. Let's resort to the prospect theory developed by Daniel Kahneman and Amos Tversky. This theory explores the ways we make decisions which are associated with risks. Imagine that you face a choice: 1. A 75% chance to win $100 with a 25% chance of getting nothing. 2. A sure profit of $70. There's one more test. This time necessary to choose between: 1. A 75% chance of losing $100 with a 25% chance of losing nothing. 2. A sure loss of $70.  Logic would say that a risk-averse person would choose option 2 in both cases (limited profit plus limited risk). However, in reality, the majority chooses 2 in the first choice and 1 in the second choice. The prospect theory shows that people overestimate the probability of getting no gain but overestimate the chance of losing nothing. They seek to reduce their risks and in doing so they may get a smaller profit and a bigger loss.  In other words, losses psychologically affect people more than gains. If the probability of success is low, people tend to risk more, while if the probability of success is high, they, on the contrary, are reluctant to take risks. It's clear, that to maximize utility, one should do everything the other way round. The same bad tendencies are observed with losses. The higher the probability of loss, the more people tend to risk. When emotions are ruling your trading decisions, you are not really trading, you are gambling. You are tempted to limit your profit and let your losses run. The solution that can help improve the situation self-control, a decent trading system (we'll return to this later) and the respect of risk management. Amanda Cox, the editor of the New York Times' The Upshot, provides a nice visual of the human fallacy in judging probabilities: The problem arises when we move from probability to predictions and actions based on these predictions. If we estimate the chance of profit by 80%, we may be carried away and disregard a protective stop. Even though it's hard to think probabilistically, traders should make this effort. The gambler's fallacy Let's make sure that the concept of probability started to sink in. Imagine that you toss a coin. The outcome is random, so the probability of either heads or tails equals to 50%. For example, you are betting on heads. Will the probability of your success decline after 5 heads in a row? The answer if no, it will still be equal to 50%. The reason is that we don't count the probability of several events at once, but start anew with an independent event, so the possibility of success is 50% each time. This is called the gambler's fallacy (the mistaken belief that, if something happens more frequently than normal during a given period, it will happen less frequently in the future) and was witnesses in Monte Carlo often enough.  Traders should also remember it when chilling after a set of gains or brooding over a series of losses. Befriending mathematical expectation Of course, a trading decision is more complicated than a coin flip. And yet, it all comes to probability. The goal of a trader is to build a trading system with a positive expectation and combine it with sound risk management. Regrettably, the maths doesn't allow us to predict the future performance of a trading system. All we can do is to study historical data gathered during the period when you backtested your strategy. The formula of positive mathematical expectation will be something like: [1 + (W/L)]xP - 1, where W is the amount of average winning trade, L is the amount of average losing trade and P is the probability of winning. Remember that mathematical expectation is not predictive in nature, but a system with a positive expectation is your basis for successful trading. The other crucial element is proper risk management. Incidentally, risk exposure is the one thing we can actually control in trading with tools like position sizing, risk-reward ratio, and stop loss orders. Risk management allows maximizing the gains provided by the trading system with a positive expectation while limiting risks. It's wise to use your power when it can be used and make it yield you the benefits. It's a way for a trader to stop looking for a "holy grail" (a 100% success system) and start actually making profits ― thinking probabilistically as he/she is doing so.   This article was submitted by FBS.ForexLive

3
TECHNICAL ANALYSIS Wed 21 Nov

EURUSD choppy but higher. If the dollar is going lower, what do the charts have to tell us?

If the dollar has peaked, what do traders want to see? Adam asks a key question at the end of his recent post.  "How much will the dollar fall if the Fed hits the pause button on rate hikes?" For me the price action and technicals help tell the story. Today the price action shows a rebound from yesterday's sell off, but the price action on the hourly chart shows choppy up and down trading.   What I see technically though is that the fall yesterday took the price below the 100 hour MA (blue line - bearish) and marginally below the 38.2% of the move up from the November 12 low. That level comes in at 1.13736.   What did NOT happen yesterday or today is a move below the 200 hour MA (green line) or 50% retracement.  That makes the move low more of a modest correction.   The rebound off that modest correction has taken the price back above the 100 hour MA currently at 1.1390. Watch that level for bullish/bearish clues intraday. Stay above and the dollar selling (higher EURUSD) can be expected.  Move below and the choppy run higher tilts more to the bearish side once again (with a move below the 1.13736 level more bearish).   So stay above the 100 hour MA allows the dollar to sell off more - technically. Taking a broader look at the daily chart below, what does it say about bullish/bearish and where can a more bearish dollar target? Well, the month's low fell below a floor at 1.1398-12 area (see green circles). That level can be tested before moving higher, and still lead to a more bearish dollar picture. Hence the importance of what the hourly chart says (il.e watch the 100 and 200 hour MAs there).   On the topside, if the EURUSD does continue its move higher (lower USD) by staying above the 100 and 200 hour MAs, the 1.1506-296 area (see red circles) has been a swing area and would be the next key upside target area. Move above that area will then target the 100 day MA at 1.1553 (blue line in the chart below - it is moving lower), followed by a downward sloping trend line at 1.1600 currently.  Above 1.1600 and the dollar has more room to roam back higher.  Of course the story line can change in an instant. If Brexit slows EU growth, if slowing US slows global/EU growth more. If Trump continues to go on a tariff rampage (trade deficits are not getting that much better afterall). If the Fed continues to tighten.  All those can keep the dollar bullish.  However, the price action will tell the story. So listen to the story by watching the price.   ForexLive

4
EDUCATION FROM BROKERS | TRADING TECHNIQUES Fri 9 Nov

Trading and probability

Embrace the odds in your trading "Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance." ― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets Trading is all about choosing a trade idea with the highest probability of success. However, human intuition and common wisdom can be rather deceitful and lead to poor judgments. In this article, we will revisit the main laws of probability that can be applied to trading and learn from them. The flaws of intuition The problem is that many times when we go with our intuition without giving it a deep thought, we make a poor estimate of probability. Let's resort to the prospect theory developed by Daniel Kahneman and Amos Tversky. This theory explores the ways we make decisions which are associated with risks. Imagine that you face a choice: 1. A 75% chance to win $100 with a 25% chance of getting nothing. 2. A sure profit of $70. There's one more test. This time necessary to choose between: 1. A 75% chance of losing $100 with a 25% chance of losing nothing. 2. A sure loss of $70.  Logic would say that a risk-averse person would choose option 2 in both cases (limited profit plus limited risk). However, in reality, the majority chooses 2 in the first choice and 1 in the second choice. The prospect theory shows that people overestimate the probability of getting no gain but overestimate the chance of losing nothing. They seek to reduce their risks and in doing so they may get a smaller profit and a bigger loss.  In other words, losses psychologically affect people more than gains. If the probability of success is low, people tend to risk more, while if the probability of success is high, they, on the contrary, are reluctant to take risks. It's clear, that to maximize utility, one should do everything the other way round. The same bad tendencies are observed with losses. The higher the probability of loss, the more people tend to risk. When emotions are ruling your trading decisions, you are not really trading, you are gambling. You are tempted to limit your profit and let your losses run. The solution that can help improve the situation self-control, a decent trading system (we'll return to this later) and the respect of risk management. Amanda Cox, the editor of the New York Times' The Upshot, provides a nice visual of the human fallacy in judging probabilities: The problem arises when we move from probability to predictions and actions based on these predictions. If we estimate the chance of profit by 80%, we may be carried away and disregard a protective stop. Even though it's hard to think probabilistically, traders should make this effort. The gambler's fallacy Let's make sure that the concept of probability started to sink in. Imagine that you toss a coin. The outcome is random, so the probability of either heads or tails equals to 50%. For example, you are betting on heads. Will the probability of your success decline after 5 heads in a row? The answer if no, it will still be equal to 50%. The reason is that we don't count the probability of several events at once, but start anew with an independent event, so the possibility of success is 50% each time.  This is called the gambler's fallacy (the mistaken belief that, if something happens more frequently than normal during a given period, it will happen less frequently in the future) and was witnesses in Monte Carlo often enough.  Traders should also remember it when chilling after a set of gains or brooding over a series of losses. Befriending mathematical expectation Of course, a trading decision is more complicated than a coin flip. And yet, it all comes to probability. The goal of a trader is to build a trading system with a positive expectation and combine it with sound risk management. Regrettably, the maths doesn't allow us to predict the future performance of a trading system. All we can do is to study historical data gathered during the period when you backtested your strategy. The formula of positive mathematical expectation will be something like: [1 + (W/L)]xP - 1, where W is the amount of average winning trade, L is the amount of average losing trade and P is the probability of winning. Remember that mathematical expectation is not predictive in nature, but a system with a positive expectation is your basis for successful trading. The other crucial element is proper risk management. Incidentally, risk exposure is the one thing we can actually control in trading with tools like position sizing, risk-reward ratio, and stop loss orders. Risk management allows maximizing the gains provided by the trading system with a positive expectation while limiting risks. It's wise to use your power when it can be used and make it yield you the benefits. It's a way for a trader to stop looking for a "holy grail" (a 100% success system) and start actually making profits ― thinking probabilistically as he/she is doing so.   This article was submitted by FBS.

1
BASICS Sat 3 Nov

How to find a great entry price and reduce your stop size

Placing stops: Mastering trade management and risk control Trade management is a key skill to grasp and a good entry price will enable you to reduce your stop size. Entering a stop is simply where you place an order in the market where you will 'exit' the market if your trade goes against you. You should always, always place a stop level as soon as you enter a trade.  The benefit of using stops is that it gets you out of the market instantly. The market can have shocks and surprises and run for hundreds of points in certain situations. You never want to be in a trade without a stop if you want to ensure you keep trading. So, be resolved to put your stop order in straight away, and preferably as you enter the market. How to decide on the size of your stopYou size of stop will depend on a large number of variables. Are you swing trading? Are you only expecting to be in the trade for 1 day? Are you basing your trade off the weekly chart? However, as a very rough guide, when you are day trading, you would usually want to consider a stop of around 25-50% of the daily average range. The average range of the chart you are trading can give you a good rough guide as to the size of stop you should be using.How your entry price impacts your size of stop lossOnce you have properly conducted your analysis for your trade (this article assumes that you have a good fundamental or sentiment bias for your trade) then you need to look for a key place to enter. Let's look at an example. Around the 23 October I was looking to buy Gold. The equity markets had been tumbling, the Italian budget crisis was in motion, the US China trade war was bubbling away and Gold had been bought strongly as investors looked to use it as a safe haven again. I considered that the time was right to buy Gold. I identified the 100EMA as the place that I wanted to enter. You can see my entry marked on the chart below by the small blue arrow just above the 100EMA on October 24. Sure enough, price moved down to the 100 EMA. I waited to see how price would react to the level and the rejection confirmed my analysis. I knew I wanted to enter long. As price returned to the 100EMA again, I entered a long with a very tight stop. I knew that my entry level was correct and any further falls down through the 100 EMA would mean that my analysis was incorrect. The equity markets were continuing to fall and at the time it was the S&P 500 falling, so I entered with confidence and made a profit that was more than double what I risked. My stop could be tight because I entered at the right technical place. Specifically that was  a place where the 100 EMA and a horizontal support level met. By looking for key places to enter, you can ensure that your stop is as small as possible. Obviously, the smaller the stop you can use the better.Place your stop in a place that you think price should not get to if you are correct in your analysis. Look for them and then, once you have found them, use them as your entry prices. Moving your stops to breakeven Now, once price moves in the direction of your trade you know that you can start reducing your risk. In the trade example above, once price had moved above the 50EMA just above the entry price and cleared the overhead highs at 1233.00, you could have considered moving the stop to breakeven. Risk would have been managed and limited. In certain situations it is also possible to trail your stop as you move into profit How a good exit helps you keep profitable Now, it won't matter how cleverly you place your stops if you don't take your profit. Make sure that you do actually take your profit. Use an area just before key technical places as targets. In the trade above there was an obvious place to take profit and that was at the overhead highs of 23 October. When I came to my desk on October 25 and saw price at those highs I took profit. I am very glad I did as I would have otherwise been taken out at breakeven. So managing your trades is a developed skill. This article has shown you that by choosing your entry place wisely, you can limit and reduce your risk in order to maximise your reward. ForexLive

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TRADING PSYCHOLOGY Sat 27 Oct

How to best view the emotions you feel while trading

Learning the role emotions play in your trading How are you trading at the moment? Or, more specifically, how are your emotions affecting your trading at the moment? Take a moment to ask, 'How do I feel when I am trading well as opposed to how I feel when I am trading badly?' Trading is a very emotional pursuit. In fact, you may have reached the conclusion that you need to remove the emotions entirely from your trading. This idea is the birth of the automatic trading robots. The thinking was that the emotions of a trader are getting in their way and if we can just entirely eradicate that from the trading process then trading will become easy. Now, this may well be the case for automated high frequency trading reacting quicker than humans, but many traders will have their own story of trading robots they have bought. The 'whatever you call it' turbo or Max robinator FX 2099. You may well have your own experience of that sure fire robot you bought back in 2010. All you had to do was sit on the beach and drink the cocktails bought to you. The dream probably lasted all of 3 weeks. My dream lasted until about day two.  The problem of course is that pure logic has it's weaknesses. In fact there are times when it is just stupid to be purely logical. The latest findings from neuroscience is that we should combine both our reason and our emotions.  Neuroscience sheds some light on the role emotions play in our decision making Now neuroscience is a relatively new science. The brain has been relatively poorly studied and it is only in the last twenty years or so that the science has really developed. The most up to date thinking is that as information comes into us through our senses that is evaluated by the amygdala part of our brain. The information is then given an emotional marker or label by the amygdala. Now, once an emotion is tagged to the event, the information goes up to the Cortex. So, in effect, we are only evaluating what we have already had a feeling about first. We feel first and think second. This is obvious to us when we consider the type of advertising that works. To sell a product a company engages our emotions and feelings and gets us thinking and feeling first. Adverts don't give us a list of pro's and con's about a product because we don't think in a way that is entirely detached from our emotions. Instead the adverts give us a feel, the music, the images etc and that is what prompts us to buy and then to think about the sale. The bottom line is that we feel, before we think. So, you see the issue?  We can't trade without emotion. It is a foolish approach for us to try. So, what purpose do our emotions have. Ok, emotions actually give us information by making us feel before we  think. That helps us respond quickly. So, if your feeling fear you will respond quickly to avoid the threat or danger. That feeling can speed up the whole process of reasoning. Emotions also help us to focus on what is important. We are drawn to respond to the greatest threats or dangers through our feelings.  Furthermore, emotions also help us to have confidence and competence. A competent trader is a confident trader and, usually, a profitable trader. Emotions are key in decision making Accept that all your emotions are very important in making decisions. Now, extremely strong emotions can hinder our trading, for sure. They need addressing. However, emotions are not your enemy. They are your friends. So start to think of emotions as your allies and not your enemies. Use the emotions you are feeling as you would a data feed. So, if you are feeling fear in a trade what does that mean? Perhaps you are over leveraged and the fear is warning you that you are in danger. Are you feeling confident? Perhaps that is telling you that your analysis is correct.  Maybe you lack confidence in your trading? Perhaps that is telling you that you don't have enough experience yet and you need to learn more. Listen to your feelings, and don't ignore them. See them as your assistant, rather than your enemy. Conclusion Emotions are there to help us, rather than hinder us. We have all heard about EQ - or emotional intelligence, and that is tapping into that emotional part of us. It is being able to reason emotionally.  Now, emotions can be out of control and they can be totally indulged. For example, if you feel angry it wouldn't always be appropriate to act on that anger. However, reasoning emotionally and being aware of your emotions is much more in tune with the way we actually think. Perhaps you are needing to learn to stop trying to suppress and ignore your emotions and to start listening to them. Perhaps they are trying to tell you something that you have been ignoring.

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EDUCATION FROM BROKERS Tue 23 Oct

How to get the most out of Fibonacci tools?

Making use of the Fib "Fibonacci" is a well-known word. It's the name of an Italian mathematician who became famous by discovering a peculiar series of numbers (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc). Every number in this sequence is the sum of the two preceding ones. The ratios of these numbers mysteriously correspond to the proportions of things in the universe, from sunflowers to galaxies. Long ago traders found that Fibonacci numbers and ratios can be suitable for technical analysis. Firstly, they are nicely mathematical and add a pleasing element of nerdiness. Secondly, they produce objective price reference points and thus reduce the subjectivity of analysis if used correctly. Today, MetaTrader has a built-in set of Fibonacci tools. It includes retracement, expansion, fan, arcs, and time zones. Fibonacci tools are used for 2 main purposes: To identify support and resistance levels (Fibonacci retracement).To predict the potential scope of price movement (Fibonacci expansion). Let's focus on Fibo retracement levels and Fibo expansions as these tools offer the greatest merit to Forex traders. Fibonacci retracement The primary task of Fibo retracement tool is to determine the size of potential correction against the main trend. It's very important to use this tool correctly. Here are the rules: Find a distinct high and a distinct low of the price.Apply the Fibonacci retracement levels from the left to the right connecting these two points of the price. For an uptrend, you'll draw this line from minimum to maximum. For the downtrend, you'll need to draw a line from maximum to minimum. Notice that there should not be higher highs or lower lows to the right of those that you chose.Include candlestick's shadows (wicks). Then 9 horizontal lines will automatically appear intersecting the trend line at Fibonacci levels of 0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6%. You can manually add 78.6% level. Where do these levels come from? If you divide any consecutive numbers of the Fibonacci sequence, for example, 88 by 55, you will get 1.618 (the "golden ratio"). The level of 61.8% comes from 55/89 being equal to 0.618, while 38.2% is derived from skipping 1 sequence in division e.g. 55/144 = 0.382. The levels of 0%, 50%, and 100% are not Fibo numbers but they still represent important landmarks for the price. If you take Fibonacci from an uptrend, Fibo levels will provide support and limit the bearish correction. At the picture above, bearish correction ended at the point C (38.2% Fibo level). If you take Fibonacci from a downtrend, Fibo levels will provide resistance and limit the bullish correction. When price arrives to the first Fibo level on its way, it's expected to pause. If the countertrend pressure is too big, it breaks the level and goes to the next one. Retracement levels of 38.2%, 50%, and 61.8% are considered the most important. If the price retraces more than 61.8% of the previous move (on a closing basis), the odds are that it will reach the beginning of a trend. There are 2 main ways to trade using Fibo retracement tool: Aggressive traders can open positions at every Fibo level. If the price breaks one Fibo level, such traders target the next one. This is trading against the main trend.Conservative traders wait for the price to rebound from a Fibo level in the direction of the main trend. A confirmation signal at the point C is needed before such trader opens a position. Important tips 1. Look at the area around a Fibonacci level rather than at an exact level. There's no pip-precision at the market. 2. Pay attention to the long-term trends. Fibo levels from longer-term trends and higher timeframes have more weight. 3. Use Fibonacci on several timeframes. When different Fibonacci levels converge, they become more significant. 4. Avoid using Fibos on very small timeframes. Experience shows that it works better from H1 and higher, though you can always experiment. 5. Don't count on Fibonacci alone. Fibonacci is not a ready-made solution for trading. To increase the probability of success, use other things together with Fibo retracement for confirmation. What combos can be there? Fibonacci retracement plus a trend line may produce a good entry point. The 200-period Moving Average that is in the same area as 50% Fibonacci retracement will be a stronger obstacle for the price. You can take profit in this area or enter in the direction of the main trend. In addition, look for reversal candlestick patterns near the Fibo retracement levels. Fibonacci expENsion Fibonacci retracement can provide you not only with correction levels, but also with some targets. If the price retraces 100% of the previous trend and breaks 100% level, you can use 161.8% Fibo as the next target. Fibonacci expANsion Fibonacci expansion is a separate tool. If a trend resumes after a correction to the point C and goes beyond the point B, you can expect the market to move to the point D. Its location may be found by applying the 'Fibonacci expansion' tool to points A, B, and C (D is the projection of Fibo levels calculated on the basis of AB from the point C). The point D is a good place for a Take Profit order. Conclusion Fibonacci tools offer a way to mathematically break price action into sectors. It's a popular tool used by billions of market players. As a result, if you do Fibo based on a distinctive movement of the price, the odds are that many traders will do the same thing and cluster their orders around the Fibo levels. Thus the self-fulfilling prophecy will make these levels "work" for traders. - This article was submitted by  FBS ForexLive

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EDUCATION FROM BROKERS Mon 22 Oct

Japanese Candlesticks: Trading Strategies

How to plan your trades using Japanese candlesticks Japanese candlesticks and their patterns can be a valuable source of information for Forex traders. We examined their structure and patterns in the previous articles . This time, we'll focus on applying the theory to practice and see how one can use the logic of candlesticks for opening trade positions. Have a plan Every strategy needs a set of rules and should consist of consecutive steps. When you are using candlesticks to enhance you trend trading efficiency, your plan can look like this: Define trend: find the path of the least resistance for the price.The setup: find a candlestick pattern (in particular, look for the local reversal patterns near support/resistance areas or continuation patters of the main trend).The predicted move: define the projected target of a pattern (look at the previous highs in an uptrend and the previous lows in a downtrend).Entry: determine the levelwhere you will enter a position.Exit: find a place for Take Profit and Stop Loss.At the picture below, you will find the example of such trade. You can see that it's rather austere in terms of tools: there's only an uptrend (defined by the presence of higher lows and higher highs) and a candlestick pattern. This is a workable price action base which, if necessary, may be accompanied by other instruments. The key idea is to stay disciplined and to follow the framework you've chosen. We can't help mentioning that an understanding of fundamentals may nicely strengthen this approach. Simple and elegant.There are trading strategies based on specific combinations of candlesticks. For example, the so-called "Third candlestick" strategy. The high and low of the first candlestick should be above that of the previous candle. The second candlestick should be bearish. A sell trade is opened at the start of the third candlestick (a confirmation from Stochastic oscillator is welcome). Take Profit is usually located at the close of the third candlestick and the Stop Loss can be above the high of the candlestick 1.There are tools that can make recognizing candlestick patterns easier - various custom indicators for MetaTrader that mark the patterns on your charts. You can find these indicators in the Internet and experiment. Of course, no indicator is perfect. Usually the machines identify patterns according to some formal signs like relative size of candlesticks' bodies and shadows. After you see a hint from such indicator, you will need to make a judgment on the quality of a pattern. For example, a bullish engulfing pattern is strong if it formed after a sizeable decline of the price.Go beyond price actionWhat if we combine Japanese candlesticks with some technical indicators? Man doesn't live by candlesticks alone. In the all-time market classics "Japanese candlesticks charting techniques", Steve Nison spends a great deal of time and paper explaining how to use candlesticks in combination with other techniques of technical analysis. Let's make a small overview of this idea. If candlesticks with long upper shadows form at resistance lines or levels, it means that the break up was unstained and the price is about to reserve back down. Moving averages with big periods (200, 100 and 50) can act as the borders of trends as well.You can also use moving averages for a simple strategy like at the picture below:Remember your friendForexLive Trading is a game of probability, and you have to go with the highest one. This leads to the benefits of trend trading as the safest way to make money. In bullish trend, look for bullish candlestick patterns for the opportunity to buy. If you see a bearish candlestick pattern, you may be inclined to ignore it or at least to look for a better conformation before implementing a sell signal. Understanding the market helps you use the most appropriate candlestick patterns and make the best trading decisions. Seek confirmation of reversals Let's have a look at another type of technical indicators - oscillators, for example, RSI. Trading on the basis of this indicator alone (i.e. buying it falls to 30 or selling when it rises to 70) is dangerous. However, when you use this RSI signal together with a signal from a candlestick pattern, it can produce decent results. You can also take the divergences between RSI and the price chart into account. Conclusion Candlesticks are a source of power. Make sure you know reversal and continuation patterns and then incorporate this knowledge to your own trading strategy. Good luck and may the Force be with you! - This article was submitted by FBS


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