How to Trade and Cash in on Wedge Chart Patterns

Hello and welcome to another edition of the bulls vs the bears. Last time we touched on How To Ring In The Profits Trading The Head And Shoulders Pattern.This week we continue our series on trading chart patterns by looking at how to trade and cash in on wedge chart patterns. Now wedge patterns are continuous or reversal patterns where traders are contemplating their next move at the end of a trend. When you see this this information, it means traders are thinking about where to drive the currency pair to next.

So  when you see a wedge chart pattern it means forex traders are contemplating on where next to drive  price. Wedge chart patterns could be either continuous or reversal patterns.

What  are we going to do?  Of course we’ll look at a few  wedge patterns. And then w are going to learn how to trade them.

First  off:

Rising Wedge

A rising wedge takes shape when price takes a breather between  support’s upward slope and resistance lines. In plain  English, price goes into consolidation between these two lines.  You will find that the support slope is steeper than the support lines. In this setup you have lows forming faster than highs. This leads to the wedge-like formation that we’re talking about.

When price consolidates be ready for a spectacular breakout. This breakout  could end up at either the top or the bottom. if the rising wedge forms after the bulls shift ends(or end of  uptrend), it means the bears shift is about to start. In other words a reversal pattern is about to commence. However, if a rising trend forms during the downtrend, it means  a continuation of the move. In other words the bears are still running the show. Regardless’, the formation of this pattern can only mean one thing –  Get your orders ready.

Let’s take a look at the price action in a rising wedge pattern

Rising Wedge Chart Pattern

Ladies and gentlemen, here is a rising wedge formed at a end of an uptrend. Notice  how price action is forming new highs, but at a slower pace compared to the lows.

Now let’s watch price breaking to the downside in the next graphic

Trading Chart Pattern: Rising Wedge After

Ladies and gentlemen,  the bears have have broken to the downside. When this happens, it means it’s time to go short. In other words, put in your sell order. The bears have broken through the trend line, meaning get ready for the beginning of a down trend,

Like we discusses in the last lesson, the price movement after the breakout is the same size as the height of the wedge pattern,

Now let’s look at the rising wege pattern in the bearish continuation signal

Rising Wedge Chart Pattern Bearish Example

Price descends from the downtrend.And then it goes into consolidation, resulting into higher highs and even higher lows(Would you believe?)  Now let’s see price break down to the downside

Rising Wedge Continuation Chart Pattern

Now price has broken at the downside. But the bears are like”Who cares? We’re still moving down the slope. That’s why it’s called the a continuation signal. And the bearish move is  the same size as that  of the height of the formation. Anh when that shapes up, it’s time to sell.

Last but not the least is:

Falling Wedge

Just like the rising wedge, the falling wedge acts as a reversal or continuation signal. The reversal signal is formed at the end of the bears shift(downtrend), suggesting that the bulls are about to start their shift. In other words un uptrend is about to commence.

The continuation signal is formed at the uptrend. This means the bulls continue their upward surge. Mind you, unlike the rising wedge, the falling wedge is a bullish pattern, Let’s take a look at the price action in the falling wedge pattern

Falling Wedge Chart Pattern

Here the falling wedge is in reverse mode. Notice the creation of lower highs and lower lows as a consequence of this reverse signal. This comes about at the end of the bears shift(downtrend).

Also, see how the highs’ trendline is steeper than the lows, trendline. Now let’s see the  highly anticipated breakout by the bulls.

Falling Wedge Breakout Forex Chart Pattern

The bulls launch a humongous surge for the hills after breaking breaking above the top of the wedge.The surge is equal to the height of the formation -as indicated by the vertical line. The surge upwards is the same size as that of the height of the formation.

 

Now let’s look at  where the falling wedge acts as a continuation signal

Falling Wedge Consolidation Forex Chart Pattern

Here price pauses briefly(or consolidates) after a strong push. This simply means that traders are recouping to consider their next move.  It also looks like price is raring for one last surge? Which direction will it go?Let’s find out in the next graphic\

Falling Wedge Continuation Forex Chart Pattern

See price break to the top side and head for the mountain. If you are smart. you can place a buy order above the falling trend line connecting the highs. You should be able to  grab some much needed cash along the way. You can take your profits at the height of the formation, as indicated by the blue line.

If you want more profits, just lock down a portion of your profits at the height of the formation. You close down part of your trading position and let the rest of your trading position ride with the trend.

For more information on  highs and lows look up Trade Trends With Price Action Analysis as Your Weapon of Choice

IF you want to know more about trend lines, look up look up How to Cash In Drawing and Trading Trend Lines

 

That’s a wrap for “How to Trade and Cash in on Wedge Chart Patterns.”  Wedges signal a  time out in the current trend. The forex traders are basically deciding which direction to take the currency pair. Wedge patterns could  be either continuation or reversal patterns.

Next time  we will look at how to us e rectangle patterns to trade breakouts

Til next time take care

Open Live  Forex Trading Account 

If you’re looking to open a live trading account sign up with EasyMarkets.

How To Ring In The Profits Trading The Head and Shoulders Pattern

Hello and welome to another edition of the bulls vs the bears. Last time we kicked of our series on trading patterns by touching on How To Make the Most Out of Double Tops and Double Bottom Chart Patterns.  Today we are going to learn how to ring in the cash trading the head and shoulders pattern. The head and shoulders  pattern is a reversal occurrence that is spotted in the uptrend. – i.e when the bulls are in full steam.

Now I can imagine somebody asking”Why the Head and Shoulders Pattern?”Well, the pattern resembles a head and a pair of shoulders. The pattern kicks off with a high(Shoulder) on the chart. Price then creates a 2nd high(Head), even higher than the the first high. The bulls are definitely on a high. And it sure ain’t  cocaine-induced. Guess what happens next? A third high(Shoulder) pops up on the chart. But this is a little lower than the second high, and it  is on the same level as the first high.

So the long and short of this pattern is this. You have a peak(shoulder) followed by a higher peak(head) and then by a lower peak(shoulder). This adds up two one head and two shoulders

You then draw a neckline connecting the lowest points for the two troughs. Fortunately the slope of this neckline  can be up or down. When the slope is down, a strong price signal is created.  let’s see an illustration of the price action on the head and shoulders pattern

Head and Shoulders Pattern

Ladies and gentlemen, here is the head and shoulders pattern in its majesty. The head is the second peak and highest point in the chart pattern.  Notice how the two shoulders form peaks, but not exceeding the height of the head.

Now I can hear someone  saying”Where do I place my  sell order”? First place your sell order below the neckline. You then measure your profit target by measuring the highest point of the head to the neckline. This distance covers how far the bears will head down the slope. Let’s take a look at the price action

Head and Shoulders Pattern Breakdown

As you can see   the the  bears  launch a huge spectacular breakout  below  neckline  at slalom speed. The size of their breakout is similar to that of the distance between the head and the neckline. Now some of you may be saying “Hmmm…I wish this breakout lasts for ever.” Well, if only wishes were horses. Just don’t be greedy. Take your profits and run for dear life.

Now let’s look at the flip side.

Inverse Head and Shoulders

Inverse head and shoulders  is another head and shoulders pattern. Except that this pattern is upside down. This formation takes shape after a long period of bearish domination. In other words the bulls take over after the bears run out of steam.

Here you have a valley(shoulder) followed by a lower valley(head), and then a higher valley. In other words, you have a higher trough, a lower trough and another higher trough.

Let’s take a look at how the price action plays out.

Inverse Head and Shoulders Pattern

As you can see, this is just like the traditional head and shoulders. Except that it’s flipped upside down. With that in mind, you place your order to buy above the neckline.

And just like the head and shoulders pattern you calculate  the profit target by measuring the high point of the head to the neckline. You’re measuring the the extent of the bears’ breakout after it cracks the neckline.

Let’s take a look at the bulls breaking through the neckline.

Inverse Head and Shoulders Pattern Breakout

There you have it! Price, represented by the bulls , has blasted through the neckline and is heading towards your profit targets. So once the bullish convoy hits your take profit target, take your profits and run for dear life

However, you can use trade management techniques to lock in some profits and still keep  your trading position open in case price continues in your trading direction.

For more information on  trade management look up Expand Your Winning Position

That’s a wrap for “How To Ring In The Profits Trading The Head and Shoulders Pattern.”  You can catch the head and shoulders pattern in the uptrend after the  bears have been  dominating for long periods. Once the bears run out of steam, then the bulls take over.

On the flip side you  have the  inverse head and shoulders which you can catch in the downtrend after a period of domination by the bulls. Once the bulls run out of steam, the bears take over.

Next time  we will look at how to trade wedge chart patterns.

Til next time take care

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How To Trade and profit from Forex Chart Pattern Chaos

Hello and welcome to another edition of the bulls vs the bears. Today we are going to learn  how to take advantage of forex chart pattern chaos. We are basically going to learn how to trade and profit from forex chart pattern failures.

Sometimes chart patterns can be very unpredictable. . You see a chart pattern that has huge profit potential written all over it.  You put in your trade order only for the trade pattern to do a massive U-Turn, leaving  your trading position exposed to a massive loss. That’s what forex chart pattern chaos is all about.  So we’ll define what  forex chart pattern chaos is all about and then we’ll touch on how to trade and profit from the ensuing chaos.

But first off:

What is Forex  Chart Pattern Chaos?

Forex chart pattern chaos  transpires when a specific chart pattern fails to take shape as expected. Consequently,price action does a fakeout instead of going according to plan. This in turn triggers an avalanche of stop orders from traders to salvage their trading positions. Fortunately for sometimes, out of this chaos comes  great opportunities to make profits.

Let’s tak chae a look at an illustration of a chaotic chart  pattern marked with the

Ladies and gentlemen, this is a  Double Bottom chart pattern as indicated by the W-shaped  blue lines. The magenta-colored line forms the neck line of the chart pattern. That line acts as a confirmation signal to make a trade.

See  how the price breaks the neck line in the green circle. Nobody hast to tell you that the bulls  are taken over from the bears. Unfortunately the price action makes that dreaded unexpected U-Turn, triggering a bearish fight back. Consequetly traders will be taken unawares by this sudden turn of events. No to mention the fact that they will be forced to activate their stop loss orders.

Your ability to grasp why chart pattern chaos occurs on the charts is absolutely crucial if you want to profit from their collapse. The gospel truth is that chaotic patterns don’t just happen in a vacuum. There is something bigger at work. In some instances, one chaotic pattern transforms into a definite pattern. If you were paying attention you’d notice that the collapsed Double Top Pattern  evolved into an Expanded Triangle.

Let’s take a look at the price action.

Double-Bottom-chart-pattern-failure-to-Expanding-Triangle

Now the upper and lower level of the Expanded Triangle represent the actual chart pattern. Sure the now to be decimated Double Top pattern(in blue) is the confirmation signal. But, like we stated earlier we see  price turn out  to create another bottom on the  lower level.

If you  are looking at the black horizontal support you should be saying”hmmm.. This area could come in handy in future.”Why?because when price breaches the lower side of the triangle, there is every reason to believe that a downward push by the bears is highly likely. And as you can obviously see, the triangle lives up to expectation after the bearish breakout.

Now the question on everybody’s mind is:

How Do I  Enter  A Chaotic Pattern Trade?

First things first. Identify the point of collapse. Usually you should spot a weak break and cut through, then a quick return to the breakout point. Then the price action returns to the key level of the pattern backed by stronger momentum as compared to that of the  initial breakout. And when this happens you have a chaotic chart setup.

The long and short is make your entry only when price action breaks out and closes beyond the original breakout  but only in the opposite direction

Next up is:

How Do I Place My Stop Loss In A Chaotic Pattern?

Just place your stop loss at the key level, previously used as the trigger for the previous  chart pattern before it collapsed.

How Do I Take Profit In The Midst of Chaos?

First off, check whether the price action will transform in to another pattern. If that takes places then you simply follow the take profit rules for that pattern. However if the failed pattern remains the same, then do yourself a favor and quietly make your exit.

When the previous collapsed pattern  remains the  , you then apply price action analysis to make your exit. Patterns such as channel breakouts, ascending triangle patterns, candlestick patterns. e.t.c. come to mind. However, when the currency starts stalling,  be on the lookout for possible reversal signals. Also keep a close eye on swing highs and lows for fire exit opportunities.

Now let’s take a look at an illustration of both the stop loss and  take profit using the USDCHF pair

Example-of-Trading-Failed-Patterns-1

Ladies and gentlemen here is an H4 chart featuring the USDCHF pair.  This is a classic example of how  to take advantage of chaotic patterns and make amazing profits from the carnage.

The image begins with a tight range ,  a consequence of a price drop. The range is represented by the black lines. Then out of nowhere the range breaks through the lower level, tricking everybody into believing that  the bears will kickstart a bearish trend. Boy are people going to have egg thrown all over their faces.  Because three periods later, the CHF slips back into the black channel through the  upper level, backed by strong momentum. Ironically this false impression creates a high probability signal after the USDCHF pair fail to breach the lower level.

You can place your buy order as indicated by the green circle. You then place your stop loss below the lowest part of the range. The stop loss area is indicated by the red horizontal line below the lower part of the range. The ranges crashes the confirmation area but collapses. It then does a u-U-Turn or makes a reverse.

The bulls then take over to start their bullish trend. see how the CHF creates a Rising Wedge pattern in the process. This will be great news for the bears as the Rising Wedge is know to have  a strong bearish disposition. Head for the exits the moment the price action breaks down the Rising Wedge. Expect a trendline breakout to coincide with the wedge breakout as well.

There is extreme disappointment among everybody  as the Rising Wedge fails to break out of the downside as everybody anticipated.  This pattern failure should favor the bulls as they are now in a strong position to rack up the profits. With that in mind the bulls take full advantage of their new found strength as they climb up the hills. Of course this creates a strong bullish run.

However, the Rising Wedge pulls a fast one on everybody when it fails to penetrate the downside. The silver lining in all of this is that the Rising Wedge’s failure does not create confirmation of a bearish takeover. So there is need to close the trade. This is what you’d call a non-confirmed pattern because the bulls are still in control of the bullish trend.

The bulls then resume their trend after the brief rejection. Buoyed by the non-confirmation information, price then creates a huge bullish push, creating an Ascending Triangle(as indicated by the yellow lines. With this new found momentum, the ascending triangle breaks the trend line from the side.

At this point in time, don’t be in a hurry to close the trade. Instead keep your cool until the yellow triangle pushes downward. That will be your queue to head for the exit.

Almost immediately,  price action what looks like another 360 by trying  to push upwards. Unfortunately price is unable to push through the trend line, signalling the end of the bulls’ advance. Even worse, the bears takeover at the end of the chart is your queue to exit with your cash pronto!

So basically the graphic shows three chaotic patterns. Two of these patterns were confirmed but eventually fizzled out, One of these non-confirmed patterns also helped us recognize the potential direction of the trend.

For more information on trading patterns, look up How To Trade Chart Patterns Like a Sniffer Dog Parts I and II

That’s a wrap for “How To Trade and profit from Forex Chart Pattern Chaos ” Some like to call it failed patterns as well. Basically these patterns look like profit potential but end up costing you profits by doing a complete reverse.

But luckily you can  trade and profit from the chaos. All you have to do is identify the origins of the chaos and then enter the market when you spot a breakout at a key level in the opposite direction of the trend.

Till next time take care.

Open Live  Forex Trading Account 

If you’re looking to open a live forex trading account sign up with EasyMarkets.

What Next After Entering A Forex Trade?

 

Hi and A Happy New Year to you. Welcome to the New Year’s edition of the bulls versus the bears. The question we are going to ask this New Year is “What  Next After Entering A Forex Trade?” This the most important forex trade management  question you are ever going to ask yourself.Why? Because failing to answer this question could be the difference between you being a prosperous forex trader and you hitting downright poverty.

When you master price action trading like the back of your hand, you need to learn how to manage your trades once they go live. You cannot afford to ignore this most important part of the trading process. Failure to follow this part of forex protocol could cause your account to blow up into smithereens. You may find what you believe is a price action setup made in heaven. But then that perfect setup could turn into  hell real quick  if you don’t manage it properly. So what we’re going to do is learn a few valuable tips on what precautions  to take  after entering a forex trade.

The first tip is:

Averaging In 

By Averaging in you are using your profit from your first trade to pay for the next trade. The neat thing about Averaging In  is that  it allows you to trade without fear. The danger here is you risk being stopped out  at breakeven point. Averaging In works perfectly in strong trends. But you ABSOLUTELY DO NOT want to push your luck averaging in during trading ranges or slow markets. You’ll end up shedding a lot of tears. Just sit back and wait for the price action setup to form at a key level once the market has pulled back. A classic example would  be your initial trading position moving in your direction and  then pulling back  50% back to your original entry . This pull back then results in a pin bar being formed at a key level. The pin bar formation would be the perfect  place to average in to add to your trading position.

Please DO NOT add to your trading  position just for the sake of it. You must have a price action reason for doing that. Let’s see the Average In technique in action.

Ladies and Gentlemen, This the Averaging In technique  action courtesy of the EUR/USD pair. As you can see the EUR/USD pair is being sold 1.4450with a mini lot. As you can see the trading position locks in on a 100 pip profit. But then the big players   turn around to form a fakey setup at  your initial trading  – position something rookie traders easily fall for. When that happens you add a second mini-lot armed with a 50 pip stop loss. You then slide your stop loss to the first stop to lock in a  50 pip profit. Now  if your second  trading position does a U-turn and smashes your 50 pip stop loss, your first position stops you out for a 50 pip profit and helps  you land at breakeven.

You’re probably saying to yourself”Hmmm.. This is a great way to add to a trading position that is moving in your favor.” But, you may end up at breakeven point, and still lose all your money. At the same you could make twice as much money as well. In others words Averaging  In  can be a  a double-edged sword if you allow it to.. Let me sound off with a warning though.You NEVER, I repeat, NEVER add to your second trading position without adjusting your stop loss on the first trading position. The whole idea behind Averaging in is that you move your average entry price close  to the market price. If you make your price double, and don’t put a trail on your stop loss, you will cause a tsunami-size hole in your forex trading account.

Speaking of Trailing Stops, how about

A Few Trailing Stop Techniques.

First is:

The 50% Trail Technique

One popular trailing   technique is the 50% trail technique .  Basically you are trailing your stop up to 50% of  the distance between your trade entry and the latest high/low as the trade moves in your direction. Of course as the market  moves in your favor the profits start rolling in. The 50%  trail technique gives your trading position more room to roll in the profits. But let me sound a little warning though! You could also lose all your money if your trade U-turns and slips below the 50% level and stops you out into the stratosphere. Let’s  look at an illustration of the 50% level trail stop technique

Take profit halfway

Ladies and gentlemen, here is the 50% trail technique in action. As you can see price has moved halfway in your direction. And when that happens you just  lock in your pro Like I hinted earlier, the price  can make a dramatic U-turn, go beyond the 50% mark and stop you out. So keep your eyes and ears on the alert for that possibility. And by the way, it pays to move your stop loss to break-even point once price hits your take profit.

You can also look out for support and resistance levels in the event that your take profit gets tapped by the price. At support and resistance don’t just concentrate on the 50% stop trail. Look out for a confluence of factors such as price confirmation signals and the 50% stop trail.

If you want to learn how to use trailing stops and other market orders look up Forex Trading Basics Top ToBottom -Part II. You’d be better served looking up .  Part I also.

Another   trailing stop technique you could use is:

Moving Averages

Another popular stop loss technique is through the use of moving averages.  I’m sure some  of you are like”Yeah we’ve heard of moving averages.” Well  for those who don’t know, , moving averages strike out previous prices within a specific time frame  and are nicely displayed in a straight line on your price chart. They are useful for identifying hot trends, and kicking out unnecessary noise on the charts.  I’m not going to get into detail on moving averages  for purposes of the subject  at hand. But if you want to know the workings of moving averages look up my two part series We’Re Moving Averages Part I and Part II.

So how do we use a trail stop with  moving averages?Well, basically you can do it three ways:

  • You can pick the trend you want to take a ride with
  • Use the appropriate moving average
  • Head for the exit when price moves beyond the trailing stop.

You can use the moving average three ways. You can go short term, long term, and mid -term. If you want to go short term, you can cruise with a 20 day  EMA(Exponential Moving Average).  If you want to go to medium term, take a ride with the 50 day EMA. But if you want to go long term and rack up the profits for months , jump on the 200 day EMA. let’s take a look at each of these three moving averages starting with the 20 day EMA

Ladies and gentlemen, here is what a trailing stop of the 20 EMA looks  like.20 EMA represents 20 days of price action within a particular month. And the red line represents ts the strong uptrend during those 20 days, As you can see, the 20 EMA captures the uptrend  very nicely in the way it aligns itself with the bulls(uptrend). Now once  price closes  below the 20 EMA just make your exit gracefully. Or else your account will  be feeling a tsunami that day. Now let’s take a look at the 50 EMA.

Ladies and gentleman here is the 50 EMA representation on the chart. the 50 EMA represents 50 days of trading on the charts. The nice line straddling along the charts represents the strong bullish trend.  You can place your trailing stop and make your graceful exit once the price goes beyond the 50 EMA barrier.

Finally let’s take a look at putting a trailing stop  using the 200 EMA

Ladies and gentlemen here is an illustration of a trailing stop in action via the 200 EMA using the EUR/USA. pair.   In case you’ve forgotten, 200 EMA represents 200 days of price action from November all the way up to September.  The red line reflects the price action from November all the way up to September  And the red circle represents the stop loss, As you can see the price has closed below the 200 EMA.  Now would be the perfect time to make your exit while the exit door is still open with your profits still in one piece.

The 200 EMA is perfect if you want to go long term. You could make  a lot of moolah (money) using this strategy. By the way,you don’t need to stare at your screen all 200 days. Same goes for the 20 EMA and 50 EMA. You’d go totally insane doing that. Just set and forget and let the market do the heavy lifting for you.

That’s a wrap for ”What  Next After Entering A Forex Trade?” This is the most important question you ‘re ever going to ask.And it could be the difference between prosperity and extreme poverty. Yo do not want to just enter a trade and just hope that some silver bullet racks up the profits.  Forex trading strategies  such those that  we’ve just discussed will almost certainly help you safeguard your trades. Next time we’ll discuss how not to exit trades too early.

So til  next time take care.

 

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Wide Stop Losses Absolutely Crucial For High Probability Trade Success

kk2

Hello and welcome to another episode  of the bulls versus the bears. Last time we learnt How To Place Stop losses The Right Way. This week we are going to learn how to place  wide stop losses. According to some people wide stop losses are absolutely crucial  for long trade or high probability trade  success. So if you’re allergic to tight stop losses on day trades, then wide stop losses on long trades could be it for you.

Stop loss placement has been the cause of considerable hair pulling for a lot of traders. They just don’t know how to utilize it. You see, you don’t just put your favorite trading strategy out there and hope for the best. Where you place your stop loss is just as important as where you place your trades on the price charts. The sad aspect of this confusion is that many traders resort to setting tight air sucking stop losses on their trades.  This is the result of lack of understanding on the whole stop loss process. And obviously their limited understanding of   trading issues such as position sizing and  risk reward ratios, proper stop loss placement and , you guessed it, wide stops.

So  here is what we are going to do. we are going to clear up all this confusion around placing stop losses.  I’m going to make a case for why Wide stops are beneficial for your forex trading success. Hopefully you would have learnt how to correctly place stop losses and not pull your hair in frustration this time around(if you have any hair left at all). Even more importantly, you would have understood how to leave your emotions out of the stop loss placement process and not place the stops too tight that your stops end up getting obliterated by the market.

I guess the main  question is

Why Should I Place Wider Stops?

Very simple. Give the market room to breathe.You should know by now that the forex market pretty much has a mind of its own. It can turn on you without a moment’s notice. Knowing this, you should factor this revelation in your decision making as far as deciding where you want to place your stop losses. You just can’t place your stop loss anywhere and hope for the best. You’re just wishing for the stars here and that is not good trading strategy. That is a recipe for disaster.

You need to give the market room to go through its routine everyday.  How do you do that? Pull up a tool on your meta 4 platform called Average True Range(ATR) for short).The ATR gives you a daily blow by blow update on the daily range movement over a period of time. The ATR basically measures the distance between previous highs and lows  within a specific time frame. You  get a graphic showing the forex market’s current state of volatility.  This crucial information should help you decide where to place your wide stops.

To activate the ATR on   the MT4 platform  go to <Insert> and then select Average True Range. Upon selecting the the Average True Range, default setting of 14 days will be attached to your chart. You are free to adjust the number of days if you so choose.

How do you adjust the number of days? Drag the cursor to the bottom of your price chart and then  select<ATR(14) properties. This brings up a popup window as shown below.

Parameters-of-ATR-in-Forex-Trading.

Then under <Parameters> tab you should see a field named “Tab” Just changed the”14″ setting to your preferred setting. The new settings will be applied automatically . If you want to know how to use the Metatrader platform check out Metatrader 4 Part 1 and Metatrader Part II

Now let’s take  a look at another  EUR/USD graphic with the ATR in action.

Image result for eurusd showing atr of above 100 and near 100

As you can see the graphic below the price action shows the ATR reading of  the market’s daily range . The daily reading here is 150 pips.Make sure your wide stop is near or bigger than the ATR reading, Anything less could cause a nuclear-sized  hole in your trading account.  Next image please.

how to use the

Here is the EUR/JPY volatility reading within the past 14 days.  As yo can see the 2.44 reading suggests the market’s high volatility and the .96 reading  reflects the market’s low volatility.. Now based on that information, the stop loss is placed at the 1.29  mark. Just  make sure our stop loss is at least half of the ATR’S volatility reading. In so doing, you don’t run the risk of incurring a humongous loss on your trading position.

Let’s say the EUR/USD moves 100 pips over a period of days. Why would you want to insert a 50 pip stop loss.For the life of me I don’t get this logic. But some traders, for reasons best known to themselves  contrive to commit this mistake. But then again you have to consider factors such as time frame and price action setup as well as the prevailing market structure.

Wide Stops Allow Long Trades Time To Play Out

The nice thing about employing wide stops is that they allow long trades time to play out. Big trades usually take days or weeks to unfold. If you think you can use 50 pip stop loss to catch a 300 pip surge, forget it. Let’s   look at illustrations of a tight stop loss and a wide stop loss,

Right before our eyes is a tight  stop loss at the support level at the 1.13300 mark. Like I intimated earlier, the problem   with such a tight stop loss option is that you don’t give your trading position enough room to find itself. And in  such a scenario, your tight stop loss is more than likely to be blown off the water together with your trading position.  And as you can see the stop loss has been totally stumped and the bulls are heading for the mountains.Now you see why you’re better going wide with your wide  stop loss?

Speaking of which, let’s take a look at  wide stop loss in its pomp.

Image result for wide stop loss

Now here is  a wide stop using the EUR/USD  in price action. Now as you can see the wide stop loss was placed a good 25 pips from the entry position at the 1.08500 mark. This is a very smart move.   Why? Because it keeps you   in the trade, giving you the opportunity to make a decent profit. Not to mention the fact that it gives your trade  more room to breathe.  Get your stop loss too close and you put a noose round your trade’s neck.

Wide Stop Losses Give  You Trading Peace of Mind

If there is one thing traders value over everything is trading peace of mind. And wide losses gives you a whole  lot of peace of mind. They’re even more effective when trading higher time frames,  especially using the set and forget strategy. You don’t need to sit in front of your screen all day waiting for the market to approach your stops.

Instead you focus all your energies on finding the best trades available. And you can also identify trends and  common price action patterns – Things that really matter. So if you really want your trading peace of mind  to be at ease, here is a simple formula for you:Set your wide stops and tweak your position size to reflect your risk per trade;Nothing much to it.

That’s a wrap for ”Wide Stop Losses Absolutely Crucial For High Probability Trade Success”. Too many forex traders lose their money to over-trading and tight stop losses so tight even a needle will  have a hard time getting through. They don’t allow their trades room to maneuver.  And when you insert tight stop losses, your stop losses get stumped.

Unfortunately a lot of forex traders do not heed this advise. They rather tempt fate by placing a tiny stop loss on a trade that could play for weeks and bring in a huge profit in the process. Consequently their lack of understanding of position sizing, not to mention greed send them crashing to the ground.

So instead of placing a tiny tight stop on 20 trader, how about putting wide stops on two trades that last   go on and on for weeks ?And raking in profits in the process.

Til next time take care.

 

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Trading The Daily Chart Is The One and Only Way To Go

Hello and welcome to another edition of the bulls versus the bears.  Do you remember when we asked the question Should I use the One Hour and Four Hour Time Chart Time Frames To Confirm Daily Price Signals ?Well we’re going to talk about trading the daily chart time frame.  In fact I dare say that trading the daily chart is the one and  only  way to go.    And in fact, you should touch base with the daily charts before entering any trade.

Why should anybody trade the daily charts? because the daily chart has  a gold mine of information a trader cannot overlook. If anything the daily chart is where most of the trading action takes places,and of course that is where all the profit possibilities exists. Once you’re done reading this post, you and the daily chart will become bosom bodies.

I guess the first question  some of you will be :

How Do I Trade The Daily Chart?

Well,you should start by analyzing the last few months of price action trading on the daily time frame. The following questions should be occupying your brain cells while doing your analysis:

  • Is the market trending? And if so in what direction?
  • Is the market consolidating?And if so where is the high range and low range?
  • Where are the next resistance/support levels?
  • Do you see any patterns emerging on the charts?
  • Are we edging closer to a pivot number or round number
  • What is the relationship between the moving average and current price? Look up We’re Moving Averages Parts I and II

And while you’re glancing through your questions,make sure you mark key support/resistance levels that will help shape your market bias long or short term.  Based on this analysis, you should be more informed when entering your trades.   And you should be more comfortable making trades free of second guessing.

Now Why Do Traders Trade on Daily Charts?

Simple. Unlike the lower timeframes,  the price action is less chaotic and more reliable. In fact the price action is described in some quarters as smooth. Not only that,but you do get a clear perception of which direction the market wants to go. Unfortunately you don’t get that kind of clarity on the lower time frames where you get nothing but deception.

Also you’ll be able to assess  your risk:reward in a higher probability setup than you’d normally do  in say a 15 minute time frame. The supply and demand swings that you see on a daily chart are more accurate than you’d normally see on a lower time frame. If you want to get ahead of other forex traders on the daily chart, get  a solid grasp of the potential profit vs risk concept.  Once you figure this concept out like the back of your  hand you should be laughing all the way to the bank.

Make More and Trade Less

If you want to profit from trading the daily chart,make more and trade less. How do you accomplish that? By switching to a higher time frame.  If you are the type trying to scalp on the 15 minute 30 minute,or 60 minute charts, I suggest you switch to the 240 minute(or 4 hr ) chart and end of day chart. Those lower time frames will certainly not help you.

Are There any advantages to Trading  The Daily Chart?

Sure. For starters the signals and patterns on the high time frames on the daily charts are  more reliable than those that you see on the lower time frames.  Often times what you might  like a chart pattern or candlestick pattern on a one hour time frame could be nothing but fake  market noise. However,watch a chart pattern progress over several weeks on the daily time frame,and you’d most certainly want to jump in on that deal .

Another advantage of trading the daily chart is the cost of trading advantage. Most brokers  spreads and commission are the same regardless of your profit target. Let’s say you enter a trade for the EUR/USD pair and it has a spread of two pips. You then wind up paying 10% of the profits on a 20 pip target as opposed  to 1% of the profits on a 200 pip target. Now if you ask me that’s a huge difference in cost. Now if you are a short term trader, you may want to seriously consider your short term future as this could have a monumental effect on your bottom line.

Don’t OverTrade

If you want to profit on the daily chart, I have a simple piece of advice for you – DON’T OVERTRADE.   You do not want to develop an addiction to the price action by feeling the urge to  sneak in and out of the market every chance  you get. You experience so much blood rushing to your brain that you can’t help yourself sometimes. This can only bring you nothing but grief and will only end up putting a nuclear-sized  black hole in your trading account.

When you overtrade, you feel you have to micromanage everything. You end up over-analyzing your charts, and  jumping in and out of trades. Even worse, you don’t trust the market enough to execute your trade when you enter your trade. You trade like a gambler rather than a logical thinker. You are thinking with your emotions instead of your brain cells. Even worse you  are only going with your gut feelings.

How Do I Get A Hold of  My Emotions?

Use what is popularly known as the “Set and Forget” Approach. Basically you set your Stop Loss and Take Profit target the moment you place your entry. Once you set your Set and Forget in motion, just get away from your screen and go to the beach while the market executes your trade for you. With a little practice you there will be no need for you stare at the screen all day scavenging for trades.

Look For Solid Trends

When trading the daily chart, look for what I call solid trends. Identify trends that have profit written all over them. You want to make sure you chart the least course of resistance. In other words, if a market is moving in  a particular direction, the odds of  price continuing in that direction are very high.

When searching for trends on a daily chart,make sure you’re looking at the right data. Here are a few techniques you may wan to employ when searching for emerging and established trends”

Swing Highs and Lows- Here the market makes high highs and higher lows during an uptrend. However it’s the reverse in a downtrend, where the market carves out lower high and lower lows.

50 and 200 SMA – The 50 and 200 periods are the most scrutinized as far as Simple Moving Averages goes.  Compare where price is relative to these averages, and look out for price crossing these levels. It could be a precursor to future price moves. Look up We are Moving Averages Parts 1 and 2

Trendlines – Trendlines come in very handy as far as identifying trends and potential reversal points goes. Be on the look out for possible breakouts outside the trendline as this could signal a possible reversal

Multiple Time Frame Approach

If you are an aspiring forex trader, I strongly suggest you the multiple time frame approach, or top down approach as it’s popularly known..  You start off by analyzing the longer time frames such as the monthly and weekly charts. Then you move down to the daily chart. Only then do you  analyze charts such as the 4 hr, 1 hr, or much lower.

A multiple time frame analysis helps in trade selection and filters out bad trades. You would definitely want to consider the daily chart as part of you r multiple time analysis.   If you’re looking for support and resistance levels to trade  off, the daily chart is the place to look. It will be in your best interest to follow what’s happening on the daily chart, regardless of  your time frame of choice. Whether you’re a  day trader or swing trader, you will want to ride on the momentum of the daily chart.

Now if you trade solely on one time frame, you could be trading straight into a hurricane. You could  be trading straight into a key support/resistance level, or the trend in your time frame could be nothing but a correction. Or even worse, you could be walking straight into a candle reversal situation. It definitely pays to expand your time frame horizons in order to catch profitable trades.

Combining Swing Trading With Daily Chart

Do you realize that you could make a killing combining swing trading and the daily chart? Sure you can. You can start by coming to the daily chart and the 4 hr chart to look for price signals and polish up your trade entry.

Now how can you use swing trading to combine both time frames and create a gold mine? First plot all major levels on the daily chart including support/resistance levels, and supply and demand levels. Then zoom down to the 4 hr level to monitor price interaction  at these levels. You now establish the 4 hr timeframe as your trade entry timeframe.

You then look for a strong price rejection such as  a reversal candlestick pattern or a strong breakout through these high time frame levels. This should serve to create high probability setups for you as a swing trader.

With your end of day  strategy, you can assess  your risk versus reward  in a higher  probability manner instead of   hourly or 15 minute manner  The supply and demand swings on the  daily chart are more reliable than on the lower timeframes. Having a solid grasp of the profit vs risk on a trade as projected on the chart  will put you streets ahead of other traders that ignore this type of analysis.

That’s a wrap for ”Trading The Daily Chart Is The  One and Only Way To Go”   The importance of incorporating the daily chart time frame in your trading cannot be emphasized enough.  In fact trading in a higher time frame is the fastest way to increase your profitability as a trader.

Psychologically you will be a free man as well. You don’t need to spend the whole day in front of your screen scavenging for trades that may not even exist. Just activate “Set and Forget” and let the market execute your trade for you. You can head to the beach and come and check your profits sitting comfortably in your trading  account. Even more important learn to detach your emotions while you trade. Just leave things alone and your sanity intact.

Til next time take care.

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How To Trade Breakouts Via Rectangle Chart Patterns

Hello and welcome to another edition of the bulls vs the bears. Last time we touched on How to Trade Cash In On Wedge Chart Patterns.  This week we are going to touch on how to trade breakouts via rectangle chart patterns

. First we’ll define what a rectangle chart patter is. Then we get into the really exciting stuff. We’ll look at two types of rectangle chart patterns and how to trade them.

So First off:

What Is A Rectangle Chart Pattern?

Well, a rectangle chart pattern comes into play when price is bound by parallel support and resistance levels. A rectangle chart pattern takes shape after a period of consolidation between the bulls(buyers) and the bears(sellers). In case you’ve forgotten what consolidation is about, this is where buyers and sellers reach a stalemate after trading uppercuts with each other.

Price then takes a crack at(or tests)  support and resistance levels several in a desperate attempt to break out and head for the hills or the slope(depending on whether the bulls or the bears are in charge.. Fortunately price breaks out of prison and heads wherever direction the wind  decides to blow it. That of course depends on when whether the bulls or the bears are in charge.

Let’s look at an illustration of the price action on the rectangle chart

Rectangle with support and resistance

As you can see price is sandwiched by  support and resistance levels running parallel to each other.  Now all you have to do is hold your horses and wait for one of these levels to go on the break and tag along for the ride.

Now shall we look at the two types of rectangle chart patterns that I told you about.

Starting with:

Bearish Triangle

A bearish triangle  takes shape during the downtrend when price consolidates for a while. Of course during the consolidation period, the bulls and the bears trade uppercuts in an attempt to get the upper hand.

But of course  the fight ends in a stalemate. This causes the bears  to  take a breather and revise their notes before deciding where else to drive the price. Let’s take a look at the price action with the bears

Bearish rectangle after a downtrend

The bears break out at the bottom of the rectangle chart and go at full speed down the slope. If you are smart, you’d put in a sell order just below the level of support and rack up some sweet profits along the way.

Now let’s see how it pans out in the  price action breakout

Bearish rectangle pattern and breakdown

Now price, led by the bears surge beyond the level of support. The surge of the bears is the same size as the rectangle pattern,which is illustrated by the blue upward arrow. It is also where you set your take profit target.

Notice how the bears surge past the take profit target. That’s a queue for you to amass more profits along the way.

Last but not least is:

Bullish Rectangle Chart Pattern

The bullish rectangle chart pattern shows up in the uptrend. Now just like the bearish pattern, price goes into consolidation. And just like the bearish pattern, the bulls try to knock out the bears but to no avail. So the bulls take a breather to decide on where else to drive price.

I can hear someone saying”Which direction is price heading to?” Well, there is only one way to find out.

Bullish rectangle after an uptrend

And as you can see, price is heading in one direction -upwards according to the blue arrow.  Now let’s see by how much the bulls headed upwards

Forex bullish rectangle pattern and breakout

Well the bulls, accompanied by price have broken through the rectangle by a country mile  and are heading  for the hills. However the height of the bulls surge is similar to that of the rectangle chart pattern-  as the blue upward arrow  suggests.

So if you want to make some money just place your buy order(or long order) just above the level of resistance. It would be worth a lot of cash and your while at the same time.

 

That’s a wrap for “How To Trade Breakouts Via Rectangle Chart Patterns.”  We started by saying the rectangle chart pattern comes about when price is stuck between support and resistance levels.  And during that formation price goes into consolidation where the bulls(sellers) and the  bears(sellers) take turns throwing left hooks but neither side lands the knockout punch. They then take a breather to decide  where to drive price to next.

We also did say that there were two types of rectangular patterns. There first was a bearish rectangle pattern which occurs during the bearish trend  where price consolidates while the bears catch their breath. The same situation happens in the bullsih trend where price also consolidates with the bulls also catching their breath and deciding what to do next.

Next time  we will look at how to trade bearish and bullish pennants

Til next time take care

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