How to Map Out Support and Resistance Levels Using Fibonacci Indicator

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

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

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

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

Daily chart of USD/CHF with Fibonacci retracement levels

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

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

Resistance turned support at 50.0% Fib?

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

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

Resistance turned support at 50.0% Fib holds and price eventually makes a new high

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

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

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

That’s a wrap for ” ”. How to Map Out Support and Resistance Levels Using Fibonacci Indicator.” Next time we’ll learn how to combine Fibonacci with Trend Lines.

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It’s not The Quantity of the Trades… It’s The Quality

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

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

What Constitutes Overtrading?

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

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

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

You Trade Too Much You Blunt Your Edge

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

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

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

Brokers Get Rich At Your Expense

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

Too Much of A Good Thing  Is Bad

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

So How do you cure your trading addiction? By laying out a trading plan where you identify your trading edge which will guide how you enter your trades on the market. Failure to develop a trading plan could be highly detrimental to your trading health Your trading addiction becomes progressively worse and you  will end up blowing up your  trading account. Two things could happen in the process. Either you learn your lesson and go back to trading the right way or you become so dehydrated from your addiction that you end up quitting as a trader all together.

I guess the appropriate question is:

How Do I Cure OverTrading?

First:

Trade Less

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

Look For Trade  Setups Which Align With Your Trading Plan

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

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

Set and Forget 

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

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

And Finally

Stick To One Market Direction

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

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

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

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

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

Till next time take care.

 

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How Do I Hone My Craft As a Forex Trader?

Hello and welcome to another edition of the bulls vs the bears. Today  we are going to ask a simple question. “How Do I Hone My Craft As A Forex Trader?” Yea I know it’s a loaded question that could take all day to answer. Not to worry! We’re going not going to take all day answering this question. Do you know why so many people fail to prosper  as forex traders. Very simple. They just do not have the patience and discipline to succeed as forex traders.

Even worse, they don’t have the mental fortitude to prosper as a forex trader. They  keep on blowing their trading accounts to smithereens on a regular basis . Then they  come up with all kinds of excuses ranging from being born in the wrong family to the global  credit crunch of 2009. I wont surprised if they add metal handicaps as well. So if you want to be the best forex trader that you can be, here is what you need to do.

First:

Don’t Be In A Hurry To Get Out Of Trades

Yes,Don’t  Be in A Hurry To Get Out Of Trades. Even better make sure the traders are high probability trades. They should be the type of trades that can run for weeks and months and get you substantial profits. Just set and forget them and smell the roses while the market executes on your behalf. By the time you check  your balance you’ll find a nice healthy balance staring you in the face.

Make full use of the time frames in the forex markets. Don’t be anxious to hit the exit button too soon. Let the trades ride for as long as possible so as to give you a chance to ride the big waves and net some huge profits in the process. That’s how the top traders  become prosperous.

Be Smart Placing Your Stop Losses and Don’t Be Greedy

If you want to be the best forex trader you want to be, then be smart placing your stop losses and don’t get greedy. Being smart with your stop losses could be the difference between prosperity and poverty. Ever heard pf the line “Greed is Good” in the popular movie “Wall Street”? Well greed can also detonate your trading account if you decide to gamble with your money. I strongly suggest you use a wide stop as part of your trading strategy.  Why? Because the last thing you want is to place a tight stop and then your trading suffers a nuclear-sized hit in the process, throwing your whole strategy out of joint. Your best option is to place your wide stop outside of price ranges and beyond key levels. This way you save your trading position from taking a major hit.

Keep Your Price Action Charts Clean

The main feature of price action trading is clean price action charts.  With that in mind you need to keep your price action charts clean and devoid of all those indicators. Why? because you want a clear and accurate view of the forex market. Even more important, focus on end of day data. The best way  to do this is to zone in on higher time frame charts.

That’s where most of the action takes place and you will have your best chances of success trading this time period. If you’re thinking of scalping, you will be digging your own grave. Not only will these short term frames  cause you to lose all your money, but they will also you enough stress to last you a life time. And they will also lower your chances of regular long term trading success.

Develop Clear Trading Strategies

If you want to prosper as a forex trader then you need clearly defined trading strategies. It’s like going to war, if you have a plan to win the war you will lose terribly. You need a set of trading setups and then you wait patiently for your trading edge to line up  for your trading signal to form.

You most certainly need a trading plan consisting of   the most effective trade setups that you hope to find on the price charts. So for instance if you are a pin bar enthusiast, you’d be on the look out for the pin bar and its different variations among other price action signals. It’s an absolute must that you have a checklist of some sorts before doing your analysis and then putting in your trade.

Understand How Risk/Reward Works

Ask the most successful forex  traders and they will tell you this:”Understand How Risk/Reward Works.”  And they are absolutely right. Because you need to understand the calculations behind risk reward and how to make it work by placing your stops and profit targets at the right places. For risk/reward to work for you, do ABSOLUTELY NOTHING. Yes!ABSOLUTELY NOTHING!  Because hitting the exit button when trouble looms will cause you to leave potential profits on the table. So to help contain your emotions and fears just apply the set and forget strategy and head for the beach. By the time you get back from smelling the roses, you should see profits in your forex trading account.

Look Out For Factors of Confluence

One of the biggest indicators you should look out for on the charts are factors of confluence. Now in case some of you have forgotten factors of confluence are coming together or intersection of two or more key levels. The intersection of these levels  creates a hot point or point of confluence in the forex market. Part of looking for factors of confluence is knowing what constitutes confluence. Examples of factors  confluence you  should be looking out for are : uptrend/downtrend, Exponential Moving Averages(Look up Moving Averages 1 and II), and static support and resistance levels. You need to find as much evidence as possible on the charts to support your trade. For more information on factors of confluence look  up  Something Called Confluence.

Your Thoughts and Your Actions Must Be On The Same Page On The Forex Market

Make sure your thoughts and your actions are on the same page on the forex market. If these two things are not in sync, your chances of  prospering on the forex market are very minimal. There is something crucial you need to understand. You cannot afford to trade like a gambler nor should you allow previous bad trades to affect you too much. Just be cool calm and collected,  even if  those voices in your head try to force you to jump into the market.

You need to get your thoughts and actions on the same page such that you develop a sixth sense about the intentions of the forex market. Once you are able to get your thoughts and actions to work in tandem, your ability to navigate the forex markets will be less problematic.

Treat Forex Trading Like A Business

You need to treat forex trading like a business. If you think about it, forex trading is a business. Just like any other business it has costs/expenses(losses). It also involves the use of external equipment such as internet connectivity, computers, e.t.c. And  you make revenues(winning trades). You make profit when your revenues outstrip your losses. So now that you have that in mind, here is what you need to do. Try not to risk too much on your trades or else you will cause your trading account to hemorrhage.  Even more important you need to know what you are doing. You cannot be winging it like a Las Vegas gambler.

That’s a wrap for “How Do I Hone My Craft As a Forex Trader?” You need to work on yourself before you can perfect trading on the forex markets. When you accomplish this feat then you your trading will improve. Some of  you are probably like “How Do I Work On Myself?” First learn as much as you can about forex trading. Keep an open mind and do not make failure part of your vocabulary. And remember, there is no “Silver Bullet” strategy to trading success. Just work on yourself, stick to your trading plan, and keep your eye on the prize. Til next time  take care.

 

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How To Look Into The Crystal Ball Of Your Next Forex Trade

Hello and welcome to another edition of the bulls vs the bears. This week we are going to look into how to look into the crystal ball of your next forex trade. No, we’re not learning how to be soothsayers overnight. We are going to learn how to anticipate the next trade before it happens.   To paraphrase a famous saying it’s preparation meeting opportunity. If you want to be a successful forex trader, you need to have a plan. You can’t go in  with the attitude of “wing it and let the chips fall where they may”

Based on your trading plan you anticipate on how the next trade is going to shape up . This is where preparation meeting opportunity comes in. With your trading plan in place you should have a fair idea of what the next trade is going to look like. So basically  we are going to learn how to anticipate trades and then make our entry.

First:

Understand What The Forex Market is Doing

You need to understand what the forex market is doing. How do we do this? By identifying in advance variables such as where the key levels are, where the hottest trends are, price signals et.c. It will be in your best interest to turn this habit into a regular routine every week. Some of you may be going “But this is boring.” Well, boring is good, especially if you plan on being prosperous as a forex trader. Once you’re able to ascertain what’s happening on the market, you should  be able to make your entry without fear or favor. 

You can now focus on anticipating trades at key levels and other value areas. One you recognize a price signal forming at one of these areas, you can make your move without thinking twice about it. By price  signal we are referring to a price action signal, or even a retrace to a key level. So don’t just react to the happenings on the market. You should know way in advance of the next trade formation based on your identification of the key levels. Now let’s see an illustration of  key areas that have already been mapped out. Image result for forex mapping out key levels and identifying trends Ladies and gentlemen, here is an illustration of  an old resistance level now turned into support. The old resistance is marked pink at the far left corner. Whereas the support area is labelled blue. Notice the three support areas labelled blue. It’s pretty obvious that there is an ongoing struggle between the bulls and the bears. Price seems to be holding up quite well. And when that happens, it can only mean one thing – The bulls are about to break out and head for the hills.

With that in mind you gently place your buy signal close to the tip of the bullish candle right on the support level and watch the bulls start their procession to the hills. For more information on key levels look up Identifying Support and  Resistance levels with Price Action Analysis

Keep Your Eyes On Dynamic Zones

You need to keep an eye   on dynamic zones in the markets. By dynamic zones we are referring to areas where  price action is happening at the speed of light. You see the whole idea behind anticipating trades is having a plan as to how you will react when so and so happens. This approach is more professional than trading like a Las Vegas gambler. with no rhyme nor reason behind your trades. You need to trade like a sharp shooter instead of  a suicide bomber.

Now how  does one keep in tune with the dynamic zones?Well performing  weekly and daily market analysis is one way of getting  in tune with the dynamic zones. In fact it’s the only way to stay in tune with the dynamic zones and learn to anticipate high probability trading scenarios. Your marksmanship as a trader will come in real handy in this scenario.

When you sit behind your laptop, there is no need for you to hunt for trades. By time you  turn the power button on, you should have a pretty good idea of which markets are hot right now and where to look for signals. And the best place to search for trading signals  are in areas of confluence and key levels. based on previous analysis you’ve already done.

Let’s take a look at a classic example of such a scenario. confluence

Here you have a nice looking example of the confluence scenario I just explained. Keep a close watch on the three price signals.  The first signal is at the level of support via the engulfed candles. The second signal is at the level of support. And the third signal is at the breakout point where a bullish trend forms.

The neat  thing is all three signals are unfolding at the same time. They’re coming together simultaneously. Where three such scenarios form, your crystal ball should tell you that it’s time to cash in. For more information on trading confluence areas, look up Something Called Confluence.

That’s a wrap for ”Trading Less Will Bring You More Profits.” Instead of reacting to what the forex market is doing, how about anticipating what the forex market will be doing? You can only accomplish this task by identifying the key levels, hash out a trading plan and anticipate the trades. In plain English, exercise self-control instead of allowing the forex market to control you.

I’m going to be real honest with you. The market will not always appear on the high probability /confluence areas that you highlight on your price charts. But when it does appear you need to be ready like a marksman. This where your trading edge comes in real handy. If it’s not present on the price charts DON’T BOTHER TRADING. If you have no idea what a trading edge is look up You Need To Sharpen Your Trading Edge. Til next time take care.

 

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After Entering A Forex Trade….What Next ?

 

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 “After Entering A Forex Trade….What Next ??” 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 ”After Entering A Forex Trade….What Next ?”. 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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How To Use Average True Range Indicator For Forex Profits

Hello and welcome to another edition of the bulls vs the bears. In my last post  Wide Stop Losses – Absolutely Crucial For High Probability Trade Success I mentioned in passing an indicator called the Average True Indicator(ATR for short). Today we are going to learn how to use the Average True Indicator to achieve  forex profits.

I guess the first question we should ask is

What Is the Average True Range?

Well the Average True Range  is a single line  indicator that measures the volatility of a currency pair or market. The Average True Range indicator was originally  invented by a gentleman by the name of  J. Welles Wilder to measure the volatility of commodities in the futures market. I guess folks in the forex market saw it fit to  apply this indicator to enhance their profits. If you think the ATR measures  price trends or price direction like Moving Averages Conversion Indicator(MACD), think again. The ATR measures when volatility is high and when volatility is low. If you wanna learn about Moving Averages, look up Moving Averages Part I and II

Let’s look at an illustration of the ATR using the USD/CHF pair.

Managing_Forex_Risk_with_ATR_body_Picture_1.png, Managing Forex Risk with ATR

Now this is the ATR for the USD/CHF pair.  The single line at the bottom of your trading window is the ATR.  This line measures the fluctuation of the forex market. The high peaks  suggests high market volatility.  The ATR measures this fluctuation within a specific time frame.  So as you can see, the ATR time measured the forex market volatility between April  4th to August 19th 2013. 68 ATR indicates high market volatility  whereas 24 ATR suggests low market volatility. We’ll explain that in detail

If you’re looking to use the ATR to determine your entry and exit points, you are absolutely on point. When volatility is high, markets move at the speed of light. n However.when market is  low, it suggests low volatility and that the market is in consolidation mode.

The ATR is also useful for traders who are addicted to getting a blow-by-blow gauge of the current level of market volatility. For those of you who like to anticipate potential price breakouts, the ATR is the perfect tool to use.  Please be aware that forex markets move from periods of high volatility to low volatility and back again regularly.  Thus it makes common sense to use the ATR to measure the ebb and flow within the forex market.

I guess the appropriate question  to ask is

How Do I calculate the Average True Range?

Well, to calculate the average true range a specific period you need to identify the True Range of the specific period on the price chart.

Now how do we find The True Range? Well,you need to do three calculations and  pick the one that gives the highest value:

  • (Current Period High) – (Current Period Low)
  • (Current Period High Absolute Value) – (Close of Previous Period)
  • (Current Period Low Absolute Value) – (Close of Previous Period)

The highest figure from these three formulas is your actual True Range. Once you get the True Range, just average the values for the period  on the chart

Now Some of you are probably thinking “Whew!This is complicated.”  Well I have a solution. Make sure your trading platform  offers the ATR as a tool such that the ATR calculates  these values automatically. This way you don’t have to worry about crunching these figures by yourself. So long as you understand how the ATR works, that’s  half the job done. The rest  is gravy.

The default Average True Range formula uses a 14 day period EMA indicator. However,  you can always  manually adjust the period to suit the time frame you’re looking at. So if you’re looking at a 10 day period, you simply change the period from 10 to 14. I’ll explain in depth later in the post.

ATR Useful For Setting Stop Loss and Take Profits

We’ve already established that ATR tells you when volatility is high and when volatility is low. Now you’re going to love what I’m about to say. You can also use the ATR to set your  wide stop loss  based on prevailing market conditions. Not only that, but the ATR helps you avoid strangling your trades with tight stops in high volatility periods and wide stops in low volatility periods.

If you are passionate about high probability trades, you should be able to make a killing with the help of the ATR. The ATR will most certainly help you set high probability take profit points. If the ATR records a fairly high reading you’ be crazy not to stat in the trade for a biger profit target.  Your expectation should be that the high market volatility will lead to a humongous price adjustment. Now let’s take a look at such a scenario using the EUR/USD  pair.

Average-True-Range-Indicator

Here is the price action chart for the EUR/USD pair for the  February 2016 – 2017. Now as you can see the ATR is etched  below the price chart  Now the red arrows pointing at the high peaks of the ATR indicate point to periods of high values associated with high volatility in the market. Now some of you are probably wondering “/what are those humongous candles in the price chart circled in red?” Well those candlesticks are formed at the corresponding times indicated on the ATR.

But remember this. when the ATR readings start stumbling, it means the market is taking a breather. By taking a breather it means the market is very quiet. In plain forex speak, the market is recording low values associated with low volatility.  The bulls and the candlesticks are usually smaller, and price action is as quiet as a cemetery. And when you have these two issues. , it means the market is in consolidation mode or moving sideways. In other words the bulls and the bears are taking a breather to plan their next move.This is where your tight stop losses come into play.  While they plan their next move, just set small realistic profit targets. After all, the players are taken a breather, which means  there will be little movement from price.

The ATR can  can also help you predict future events in the forex market. If your crystal ball spots  the ATR slowly climbing upwards you can be sure that market volatility will stay on the high side. However, be prepared for  a change in market behavior in case the market transitions from high to low or low to high.

ATR  On MT4 Platform

The ATR is nicely placed in your Metatrader 4 platform. Now some of you are wondering”How Do I activate The MT4 ATR Indicator?”  Well got to “Insert” and choose “Average True Range. You should see the default 14 day Exponential Moving Average.

I’m sure some of you are thinking”But what if I  want to change the 14 day period to something else?” Sure you can do that. Just select”ATR Moving Properties” and you will see the following popup window as shown below.

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

Now do you see the “Period” field under the “Parameters” tab? Just change the ’14’ value to the setting of your choice. Your new setting will reflect instantly. To learn how to trade on the MT4, look up Metatrader I and Metatrader II

Something You Need To Know About Average True Range

Yes, we all know that the Average True Range is used for measuring  market volatility. But there is something you need to know about  ATR. You can’t use The Average True Range in isolation. You should use  ATR together with your trading plan, your trade entry,  stop loss placement and profit target(or take profit entry). We’ll be discussing these three in detail

The ATR is also better served when it’s included with price action analysis and a  Trailing  Stop Loss Order based on an ATR value. If you are looking for entry signals price action patterns are the best place look. Looking for examples of price action patterns? How about candlestick patterns, trend lines, trend channels?e.t.c

Now onto our full length discussion starting with

Stop Loss Placement

Once you enter your trade, you place your trailing stop with the help of your ATR. The logic here is to ascertain the distance you want to trail the price. Once the price action moves in your favor, the stop loss will tag along with price according to the distance you’ve set for the current price.

But if the price kicks against your trade, the Trail Stop will stand in attention like a statue. It will not move an inch. In light of this, the Trailing Stop acts as a wide stop when the price moves in favor of your trade. This allows you to stay in the trade longer and  make maximum profit as the trend persists.

So basically the rule for using a Trailing Stop with respect to the ATR  goes like this. If the line representing the ATR Indicator is in the upper half of the area, you put a wide stop loss order in the market. But if the ATR indicator records a value in the lower half of the area, that’s when you employ a tight stop loss.Why, because market volatility is lower at that time. Meaning, the bulls and the bears have taken a break. Let’s look at an example

Image result for how to place stop loss with high atr

The blue ATR  upward lin suggests a high ATR. In . And when  that happens you place your Trailing Stop on the large dark blue candle as indicated by the top arrow. If the market volatility were lower, you’d have had to place  a tight stop  since the market is in consolidation mode. So the bigger the candlesticks, the higher the market volatility. And the smaller the candlesticks, the lower the market volatility.

Next Up Is

Setting Profit Target

If the ATR in the upper half of the indicator, multiply your pattern by two. This means your target will be twice the normal size of the pattern.  Once your trade hits the bigger target, you gently exit your trade. You’ll be doing your trading account a huge favor.

However, if the ATR line strays into the lower half of the indicator you   set your profit target at the minimum potential of the trend pattern. But if the line is still in the lower half of the indicator, the bulls are still moving upward, you can still double your profit target. So the same idea applies whether the line is trending up or down.

Let’s say the bulls help the price of the EUR/USD  break through a triangle pattern. You decide to buy this pair expecting that price will spike up. Now The triangle pattern trading rules require to stay in the trade for a minimum price move equal to the size of the trading pattern. However, if you happen to spot high ATR values you may want to stick around and watch the price increase to twice the size of the triangle pattern. Another option would be to exit half of your trading position on your original profit target, and then close the other half of the trade at the second profit target.

Now let’s look at an illustration using the GBP/USD pair

ATR-Trading-Strategy-with-Price-Action

Here, ladies and gentlemen is the H1 (1Hr)chart for the GBP pair for July 5-14 2016. As you can see a long trade opens up when the bulls break through   the upper level. Notice how the middle of the ATR indicator(green in color) has been marked to merge the upper and lower part of the indicator.

The blue horizontal lines on the price chart  represent the range of the GBP/USD pair. While the blue horizontal lines of the ATR area shows the ATR line in mid stream.

Now take a close look at the ATR line breach the middle level and set up shop in the upper section o the ATR indicator. Now see the price breach the range through the upper level and creating a long price signal in the process. At this time the ATR line is in the lower half of the ATR indicator. In that case,you put in a Buy Order(Green color) on the premise that you will pursue the minimum target of the pattern equal to the size of the range(As indicated in purple).

As we climb up, we see that the ATR line is also climbing(See below the price chart). Simultaneously we see this same line move into the upper section of the ATR indicator a few times. You don’t need to be a rocket scientist to conclude that the volatility for GBP/USD pair is on the increase. So you exercise the option to increase your profit target  at twice the size of the triangle pattern. You then adjust your Trailng Stop as illustrated on the price chart. Once you have adjusted  Your Trailing Stop you can now afford to hold your trade until price reaches twice the size of the range, as indicated by the two magenta lines at the upper level.

Let me explain a few happenings in the price action.The first red arrow shows the distance between  new Trailing Stop and the entry price. Once the 2x target is hit, GBU/USD takes a tumble.The second arrow at the end of the chart shows the moment the price hits the Trailing Stop when the trade has not been closed.

Let’s take a look at another illustration of the ATR Trailing Stop at work using the same EUR.USD pair.this time we’ll be working with a bearish channel

ATR-Trailing-Stop-Trade

Ladies and gentlemen, I present to you the H4(4hr) chart  for the EUR/USD pair from May-June 2015 using the ATR Trailing Stop.

As you can see, a bearish channel kicks off things on the price chart. Notice how price of the EUR/USD breaches the bearish channel through the upper level during low volatility. Remember when I said you could place a Buy  order during  low volatility even if the line is trending upwards? Well this scenario is a classic illustration. At this point place a Buy Order(labelled Green) and  place a Trailing Stop Loss on  the previous  bottom swing as indicated  on the chart.

Also see how price takes another crack at an already compromised upper channel. In this situation d you adjust the distance of the Trailing Stop to better absorb the market volatility. You can also measure the distance between the breakout point and the low of the previous channel which then becomes the new pip distance for your new Trailing Stop.  You’d be better off settling at 140 pips.

See how the bulls finally  hit  the Trailing Stop after a couple of strong sorties? After the first sortie, price nearly strikes the Trailing Stop after a slight adjustment (as indicated by the red arrows). But this time The Stop Loss stands ready to absorb whatever price throws at it. Had you not adjusted the distance of the Trailing Stop, your stop would have taken a massive hit, and you would have missed the next bullish sortie. Unfortunately, after the second bullish sortie, the Trailing Stop takes an uppercut from price once the bulls and bears go into consolidation mode. It’s obvious they’re tired from absorbing each other’s jabs. They need a break.

Triangle channel trades usually have no specific rules. As such, the Trailing Stop becomes your best friend in such complicated times. The Trailing Stop becomes even more useful when deciding to exit half of your profit target instead of the full target. Just be sure to widen and tighten your ATR Trailing  Stop  depending on values showing on the ATR indicator

That’s a wrap for ”How To Use Average True Range Indicator For Forex  Profits”.  As you can see the ATR is very helpful in placing your stop losses and profit targets. If anything it will save you a whole lot of headaches as far gauging the stability of the market.  You don’t  need to crunch calculations as how to ascertain your ATR. Your MT4 platform will take of that at the backend for you. But f you think you are smart enough to crunch these calculations by your self, you’re welcome to try.

Now if you wanna learn how to set stops, take profits, buy orders and other market orders, look up Forex Trading Basics Part I and Part II

So til  next time take care.

 

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