How to Smile All the Way To The Bank Trading Pullbacks In a Trend

Hello and welcome to another edition of the bulls vs the bears. Today we are going to learn how to smile a little bit. We are going to learn how to smile all the to the bank trading pullbacks in a trend. Trading pullbacks in a trend is one trading strategy that has stood the test of time. I can imagine somebody asking”Well, what’s so special about trading the pullback? Well just like any other strategy you make your entry in the market after confirming the direction of the trend. This way you don’t make your entry on a crazy whim and risk the market doing a nasty 360 on you.

If you want to successfully  trade the pullback you need to cultivate the mentality of a sharpshooter. Just like a sharpshooter, you wait for hours if not days for the  trade setup to take shape before pulling the trigger. Even more important you need to identify the point where the retracement move is likely to end. Because if you miss it, you miss out on a lot of cash.

So before we dive into how to trade the pullback  we are going to answer a few questions starting with:

What’s The Whole Idea Behind The PullBack Strategy?

Well the whole idea behind the pullback strategy is to buy low during the uptrend and sell high during the downtrend. You put your stop losscloser to your entry instead of placing your order in the direction of the trend.

Now before we get into illustrations of trading the pullback, there is a burning question that needs answered. And it is:

Why is The Trend The Trader’s Best Friend?

I’m sure most of you have heard the famous forex”The Trend Is Your Best Friend.” Newsflash!The trend is your only friend until it runs out of gas.

Anyways back to the main question. You see while most of the major forex players have access to all the current forex information, the forex market is pretty much in consolidation mode. Forex player pretty much take a breather trying to figure out their next moves. However things get very interesting when press releases about economic fundamentals are released. If the data differs from that of the forex market, expect to see significant price movements. Why? that’s because the forex market is trying to make sense of the new information to find a new alignment.

Now once price establishes a trend by pushing price up or down, traders start taking their profits and head for the exit. Their mindset is  price cannot for any higher or lower than it is now or they just want to save their hard earned cash. Better safe than sorry. Right?Anyways regardless of the traders, motives, they affect the trade’s momentum, causing the pullbacks that we see on the market.

There are two things you need to know about  pullbacks. First off they show up at a previous consolidation zone or pivot point on the price action chart. Second pullbacks test a previous support and resistance level. Now a lot of forex traders place their orders around this support and resistance area since they’ve seen these levels convert into pivot zones.

Consequently when a pullback of the trend touches these price levels, accompanied by market orders, the market sparks a resumption of the trend(Getting the picture now?). If the opposite happens, both support and resistance levels get breached, resulting in a deadly trend reversal.

If you are getting started as a trader I suggest you kick off with trading pullbacks rather venturing in the unknown with reverse trends. I assure you will be eaten alive trading countertrends. The good thing about trading pullbacks is that even if the price goes beyond your entry You get a second crack at a missed signal. As you get comfortable trading pullbacks you can now make the transition to more complex strategies to complement your pullback trading.

Now that we’ve identified why the trend  let’s get into how to trade pullbacka The first step is to trading pullbacks is:

Identify The Trend

Of course you should be able to identify the trend if you want to perfect the art of trading pullbacks. If the price on the left is lower than the price on the right and creating higher highs and higher lows, you have yourself an uptrend. You can’t  miss it. Y However, if the price on the left is higher than that of the right you have yourself a downtrend. You can’t miss either of the two.  can also employ the use of moving averages to confirm a trend when a crossover is in effect. You can also use the crossover to confirm a pullback resuming the prevailing trend. Let’s look at an illustration using the GBPUSD pair.GBPUSD-Moving-Average-Trend-Identification-Uptrend

The green line suggests the bulls are powering the GBP USD pair upwards. However, the addition of two moving averages  colored in red(13 EMA and 21 EMA)  confirmthe temporary momentum in the market.

Notice how the red EMA crosses the green EMA. That’s the pullback we’ve been talking about. However, the GBP ends and the uptrend resumes his journey when the red EMA crosses back above the green EMA(as indicated by the red arrow).

Now let’s look at an illustration of trading the pullback in the  downtrend  again using moving averages

GBPUSD-Moving-Average-Trend-Identification-Downtrend

We see a similar scenario in the downtrend. Just like the uptrend, red EMA crosses above the green EMA, signalling a pullback. As soon as  red EMA crosses below green EMA, it signals the end of the GBUSD pullback and the resumption of the downtrend.

Unfortunately there is one major stumbling block when using crossovers. You see, crossovers only take shape if the pullback momentum is strong, as was the case in the first scenario. The trend then resumes, leaving you acting like a deer stuck in the headlights. You start wondering whether whether to enter the market or not, which shouldn’t be the case especially if you have a solid trading edge.

Even worse, the EMA starts to lag as an indicator. Such that by the time it generatesthe signal,the market may have you buy and moved in the opposite direction of the prevailing trend.

Consequently the risk to reward ration of your trade also takes a substantial hit. In that case, you’d be better off trying to identify a potential reversal area during a pullback and using better price action analysis to place your trades.

For more information on moving averages look up We Moving Averages Parts I and II

Next up is

Identify Potential Pullback Reversal Area

Another way of trading the pullback in a prevailing trend is identifying a potential pullback reversal area. If you are familiar with support and resistance analysis you would know that old resistance turns into new support and  old support turns into new resistance. Let’s take a look at an illustration using the GBPUSD pair

Identify-Pullback-Reversal-Area

Initially GBPUSD run into strong resistance at the 1.5750 mark twice. Once price breaks through this level we witness the first pullback finding solid support at this level.. These old support levels are a convenient place to place your limit orders on the side of the prevailing trend.

Just place  your limit order a few pips above the old resistance, and you should earn yourself a decen trisk to reward ratio in the ensuing breakout. This only works if the pullback doesn’t penetrate below the pivot line.

Now let’s look at another illustration of potential pullback reversal zones using the Fibonacci retracement levels.

04-Fibonacci-Pullback

As you can see  Fibonacci retracement levels are also  very useful in identifying  potential pullback reversal areas.  Here we draw two Fibonacci retracement levels on the same uptrend at different levels using two different colors. The green colored retracement levels identify the first swing point while the red color retracement level spots the second swing point.

Notice how price pulled back to the 23.6 Fibonacci level after the first upsurge. Price then pulls back to the 38.2 retracement level after the second upswing. Price then resumes its upward climb.  When you make use of the Fibonacci tool whenever price carves a new high during aan uptrend, and a new low during the downtrend you will find that price defers to the retracement levels. Also Fibonacci levels act as support and resistance levels in disguise. You can also find confluence signals from both support and resistance levels and a Fibonacci resistance levels. And when you find these signals you have yourself a high probability setup.

For more information Fibonacci retracements look up Lighting Up Candlesticks with Fibonacci Retracements

And Finally:

Best Strategy For Entering The Market After A Pullback

One recommended strategy for entering the market after a pullback is the use of price action patterns such as a pin bar or engulfing patterns. When you find these two patterns near a previous support or resistance, or near a moving average, that is confirmation that the pullback is ending and the trend is about to resume, Let’s take a look at an illustration using the GBPUSD pair.

Price-Action-Enter-Market.-pullpack-trading

Here the moving average and the downward trendline tell us of an ongoing downtrend. Once that ‘s confirmed we then see strong resistance at the 1.5750 level as the GBPUSD pair get rejected a few times. Please do not jump into the lion’s den blindly. Just wait  for the bearish pin bar to make its appearance to tell you that the pullback has run out of steam.

The pin bar makes its entry when prices breaches below the low of the pin bar. And when that happens expect to make decent profits with minimum risk and fuss.

Understand that when trading pullbacks you are making use of the power of confluence and increasing your odds of making a profit.A combination of existing trend support and resistance, and price action patterns, cuts down your risk and increases your profits in the process

For more information on trading pullbacks  look up Trading The Pullback With Panache

That’s  a wrap for ” How to Smile All the Way To The Bank Trading Pullbacks In a Trend”  Trading pullbacks with a multiplicity of factors sets you up to trade high. However you need to a clearly defined trading trading strategy that identifies your trading edge.

Your  trading edge outlines the circumstances under which you will  enter the market. Instead of jumping into the deep end just wait for confirmation after identifying a trend and a potential reversal zone.When you sit and wait you are in absolute control of your trading situation. You decide where to place your stop loss and where to exit the trade. Do this, and you will be smiling all the way to the bank

Til next time take care

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How To Cultivate The Right Mindset For Forex Trading

Hello and welcome to another edition of the bull vs the bears. Today We are going to talk about having the right mindset for forex trading.  Inn short we will be looking into the psychology of forex trading.

If anybody ever tells you that prosperity in the forex market depends on your forex strategy , Ask that person” What have you been smoking?” Yes a solid forex strategy helps but that’s partly the story. you see success as a forex trader largely depends on having the correct trading mindset, your thought process and the way you respond to the movement of the forex markets. If  you go about chasing after the hottest trading bot or fancy indicator you are going to be sorely disappointed You should rather be focusing on cultivating a positive mindset and managing your trades and emotions properly. If you fail to do these two things you will just be chasing the shadows of the market and you will hemorrhage  a ton of money too.

The first question we need to ask ourself is:

Why Do Most Forex Traders Lose Money?

The answer is very simple. Most forex traders have this weird fantasy of making millions overnight.T  Consequently they  lose  all their money, leaving a nuclear-sized crater in their trading accounts. This mindset comes about as a result of unbearable pressure the put on themselves to  make these huge profits. And when you start out trading this way, you react with your emotions instead of thinking logically. Naturally youb end up blowing your trading account.

The next question you need to ask yourself is

What Emotions Should You Avoid While Trading?

Here are some toxic emotions you need to avoid like  the plague while trading.

First off:

Greed

If you act like a greedy price you will in all likelihood lose your money. The greed comes in when you don’t take your profits  Don’t make th costly mistake of not taking the profits because you think  the trade is going to run forever in your favor. The forex market  can do a 360 on you at any time. That’s why   the take profit option is there for you to make the exit when you price hits your target.

Another habit you should avoid is adding to your trading position simply because the market has moved in your favor. You only add to your trading position if it’s founded on price action logic. Anything else is just pure greed. Of course risking too much on one trade is also born out of greed. Too much greed will most certainly blow up your account.

Next up is :

Fear

Fear can hit you two ways. First it can hit you if you are just entering the forex market for the first time and have not yet developed a trading strategy on which you place your trades. Even worse, fear can also grip you when you lose successive trades or when you  sustain a loss so large that you suffer a humongous emotional breakdown, h

Now I can hear someone asking”How do I overcome those demons lingering in my head?”First of make sure  you decide how much you can afford to part company with in the event that you lose a trade. This is very important because the losses are going to happen. Just make sure you get that through your head. Once you get that sorted out you are able to move on when you lose a trade. There is one thing you need to understand about fear. Fear causes you to miss out on great trading opportunities. If  you want to take advantage of these trading opportunities, get rid of those demons in your head.

Revenge

How many times have you said to yourself”I’m going to get back at you guys for blowing up my trade?” Listen,  don’t blame it on the forex market. The thing is there are no guarantees that every trade that you enter in will be a winning trade. This why you need to develop a trading edge. If your trading edge doesn’t exist don’t trade. It’s a simple formula most traders just don’t seem to apply. Now don’t ask me why because I have no idea either.

Also revenge is also borne out of a need to jump back into the market to make  for what you lost on the market. Of course this will result into a loss more humongous than the previous loss, a loss largely based on emotional rather than logical trading.

Next up is:

Euphoria

Dont get me wrong! I have nothing against Euphoria. In fact euphoria is a good thing. But it can also work against you especially when you make a huge profit or you chalk consecutive winning trades. Overconfidence kicks in and all of a sudden you become swollen headed , thinking that you are the biggest thing since corn bread. Then all of a sudden, you experience back to back losses  and you are like “Hey what’s going on here.”

Of course you are tempted to jump  back into the market to make up for your losses(See a pattern developing here?). That’s your emotions going into whiplash mode after suffering those humongous  losses. You are so overconfident you fail to see the red flags  teling you that any trade can be lost. Like I mentioned earlier if you have your high probability trading edge, you should be able to make a fair amount of profit in the long term. Just make sure you apply discipline and patience. To borrow a line of a m song by legendary R&B group Midnight Star, Don’t force it. Just chill out and let it flow.

Now that we’ve gotten the emotional cancers out of the way, it’s off to the question of the day. Which is

How Do I cultivate The Right Trading Mindset?

The first thing you need to do is:

Know Your Trading Edge and Master It

You need to know your trading edge like the back of your hand. Your trading edge is your set of conditions that have to be present on the market for you to part with your money. That gives you that mental edge over the other traders. You can’t be sitting there waiting for the market to part the the Red sea before you make your entry.

Here is a very simple  piece of advice a veteran trader gave me  a few months ago.  She simply said “If your trading edge is not present on the market don’t trade.” It’s as simple as that.

Next up is:

Manage Your Risk Properly

If you value your cash you’d do well to manage your risk properly. If you do not control your risk on all your trades emotions take over your brain. And when that happens you know disaster starts knocking on your door. What’s so scary about emotional trading is that you are don’t even realize your emotions are kicking in. It’s like  an adrenaline flood. You’re just gambling instead of making use of  a well thought out trading strategy.

So how do you avoid trading emotionally? Only risk money you can afford to part company with per each trade.  Go into the trade with the mindset that you could lose on a given trade given what you know about the forex market. When  you get that sorted in your mind you won’t cry over spilt milk that often.

Next up is

Do Not Over-Trade

I cannnot stress this enough. over-trading will most certainly destroy your trading account. Like I mentioned a few minutes ago, only trade when your trading edge is present. Don’t trade when you feel like it or when you are only 50% sure your trading edge is present on the market. If your mind starts wavering, the market will most certainly make you pay for your uncertainty.

Once your emotions kick in they are hard to stop. It’s like an onrushing flood. Just apply  logic and your emotions will leave you alone.

Get Yourself Organized

If you want to prosper as a forex trader you absolutely have to get yourself organized. You need to develop a trading plan and apply religiously. Treat t forex trading as a business instead of a Las Vegas Casino. There should be a method to every trade that you place on the market. Even more important, stay calm. Don’t get carried away with your emotions.  Every trade must be thought out before you make your entry. Once you accomplish that, the demons will stay out of your way.

That’s  a wrap for ”How To Cultivate The Right Mindset For Forex Trading .”  You absolutely need  a solid mindset to succeed as a forex trader. You cannot approach forex trading with a gambler’s mentality or else you’ll lose heavily. Forex trading is a business just like any other enterprise. You must be calculating in all your trades. You must  be purposeful with every trade rather letting the  chips fall where they may. It could be the difference between prosperity and poverty.

Til next time take care

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Five Support and Resistance Types You Absolutely Must Know

Hello and welcome to another episode of the the bulls vs the bears. I know we’ve already covered  support and resistance levels in the past. But today we are going to look at five support and resistance types you absolutely must know .The forex market can be every unpredictable. It goes up and down, and sometimes it veers sideways.

Some of you may think ‘ hmmm..support and resistance is too complicated. Well support and resistance levels is the backbone of price action analysis.. And they help form the basis for understanding the forex market. Through price action trading, support and resistance levels help us decide where we are going to place our stop loss and take profit targets. More importantly, support markets helps us understand three things:What;s happening on the market, what has happened on the market, and what is going to happen on the market.

So what are we going to do?We are going to look at how to use the seven support and resistance levels.

First off:

Swings Highs and Lows

One support and resistance level that you absolutely must know  is the traditional swing highs and lows.  You find these levels by zooming in to a longer time frame such as the weekly chart or even monthly chart.  It’s been said you get a broader view of the market and the flash points within the market. What you want to do is simply identify obvious levels where price either reverse higher or lower or lower and draw horizontal lines at them.

Mind you, these lines don’t have to be perfect. They may either intersect candlesticks or be mere event zones.  You absolutely have to do this when analyzing any chart. That should be the first step on your analysis itinerary. Let’s take a look at an illustration using the GBP/USD pair

This is the bird’s eye view that I was referring to. See the entire cocktail here – support and resistance levels, trends, and sideway markets. They immediately jump out at you in this time frame. You cant miss them.

Now let’s take a look at the daily  chart(or time frame) to get a clearer picture

Here you see short term levels that you don’t see in the weekly chart. As you can see price finds support at 1.4000 level. Take a look at the two  huge  bullish candlesticks.  The first one has a huge shadow and the second one resembles a very bullish reverse candle. The buyers keep pushing for the hills.  The previous day’s candle looks huge to set a strong tone in the day’s trade.

The buyers now have the option of taking a breather(consolidate ) and  create another huge candle and go long in this trade. This should cause price to surge further upwards and hit the resistance barrier around the 1.27500 level. So as you can see there are shor term levels in the daily chart that you don’t see in the weekly chart.

Next up is:

Swing Point Level In Trends

Swing point levels in trends reminds me of this popular forex saying. And it goes like this?”Old support becomes new support, and old resistance becomes new resistance.”  This phrase refers to the scenario where the market creates higher highs and higher lows or lower highs and lower lows.

If  I were you, I’d take note of the formation of these landmarks.  Some one is probably asking “Why should I do that?” Well the market breaks up or down through these levels, that will be your cue  trade temporary retracements also known as pullbacks back to these levels. With pullbacks you are dealing with temporary reversal of the prevailing trend, whether it’s charging up or nosediving down. When you see these landmarks form, get your trade ready.

Now let’s take a look at this phenomenon using the GBP/USD PAIR.

Identify-Pullback-Reversal-Area

This is the classic illustration of the swing phenomenon we were talking about. You have resistance turning into support. Here GBPUSD pair twice run into strong resistance along the 1.750 mark twice. Once price breaks through this level we see the first pullback along the level of support.

Also these old support and resistance levels provide the perfect opportunity to place your limit orders on either side of the trend. You could place a  buy limit order above the old resistance to align yourself in the direction of the breakout with a handsome risk to reward ratio so long as the pullback does not penetrate below the pivot line.

Next up is:

Swing Point Levels in Containment and Risk Management

Swing point levels are very useful as far as containment and risk management goes.  You can look to buy or sell at swing points even if they are not part of  a trend. One such instance is when the market goes into consolidation or the market goes sideways.Just use your most recent swing high or low as your entry point.

Let’s look at an an illustration of swing point levels using the EURUSD pair

Swing point levels as containment and risk management

The image  above shows a sideways market stuck between the support and resistance  levels. This happens after price broke through the support(formerly resistance) at the bottom end of the chart. The additional support level in the middle of the range . Look to buy at the level of support and sell at the level of resistance wherever you see those swing points. And you use these swing points as your profit targets.

Next up is:

Dynamic Support and Resistance Levels

Dynamic support and resistance levels are probably the most exciting patterns of all the support and resistance levels.  They can pull back and find support or resistance without the need to stay horizontalThey change from period to period. I have this saying that dynamic support and resistance levels travel at the speed of light in that changes on the charts happen at lightning speed.

One tool that epitomizes dynamic support and resistance levels is the one and only moving averages. They help smooth out price fluctuations by helping you distinguish between price noise and actual trend direction When we mention moving average we are referring to the average price of a currency pair for a specific number of periods.  Let’s see what dynamic support and resistance levels look like

price movements

See those squiggly lines? They reflect  the moving averages. They reflect specific periods on the charts, One popular tool used to measure moving averages is exponential moving average(EMA for short. This moving average focuses on the most recent trading data.

See those three EMA tolls in different colors in the bottom right corner? They are three of the most popular EMA’s for measuring moving averages. 200 EMA looks at trading data covering 200 days, 100 EMA  looks at 100 days of trading while 50 EMA touches on  50 days of trading data.

Now the 200 EMA is considered the most popular moving average. I can hear somebody asking “Why should I care?” Well they say the 200 EMA is where all the action is as far as trading activity is. And the small red circles reflect the way price reacts when the EMA’s  approaches it. Sometimes price may steer clear of the 200 EMA. And when that happens it’s best to switch to a higher time frame to get a clear picture of where the price is in relation to the 200 EMA.

For more information on moving averages look up We’re Moving  Averages Part I and  II

Next up is

Trading Range Support and Resistance Levels

Trading range(or sideway markets) support and resistance levels offer numerous high probability trades if you keep your eyes open for these opportunities. The trading range is just price bouncing between two paralle levels on the markets. Just keep an eye out for the trading range and then look out for price signals at those levels.

This is a much better option than just buying on a support breakout or sell on a resistance breakout. Because the last thing you want is to suffer continuos whiplash trying to buy or sell at these breakout levels. Just get confirmation through the signals that a breakout has taken place before you start trading them. Let’s take a look at what life on a trading range support and resistance levels look like

typical trade in a ranging market

Here we have a ranging market with four sell opportunities at resistance level and two buy opportunities at the support level. Just place your stop loss orders just above the resistance level and below the level of support. Please don;t even try going long at resistance or short at the support. You’ll burn your trading account that way.

Notice the way price has broken through the lower support line and the upper resistance line. This creates false breakout signals only to return to the trading range. All this action is in the 5 minute time frame, and you want to forget that in a hurry. Focus on the long term time frames such as the h4 or daily.

For more information on trading ranges look up Forex Market Goes Sideways

That’s a wrap for “ Six Support and Resistance Types You Absolutely Must Know.” I hope  you ‘ve understood how the above types of support and resistance levels work. Basically you use support and resistance levels to do the following: as indications of the state of the market, decide which levels to buy or sell from,  how to define risk, and as a basis to understand what the market has done, what it’s doing, and what it’s about to do next.

When you combine a clear understanding of support and resistance levels together with price action and market trends you have what is known as T.L.S – Trend, Level, and Support.

Til next time take care.

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