How To Find A Shooting Star Pattern

Hi Everybody, Bill Poulos here and I wanted to show you yet another candlestick pattern: The Shooting Star.

I really like this candlestick pattern a lot, because it’s usually a pretty solid indicator that things are abou to move. Here’s what we’re looking for: It will occur either as a green candle or a red candle body at the end of an uptrend. So here we have the market trading higher. You get a very small candle body and a very long upper shadow. Now you can have somewhat of a lower shadow, but not much. When that occurs, then you’re going to sell below the low of that candle body, sell short. Place your stop above the high, expecting the market to reverse and head down. Now you don’t need both of these at that pattern. I’m just showing the two versions. You’re going to get either a green candle body or a red candle body. Either one will do the job. So that’s called the shooting star. Now let’s look at the cousin of the shooting star which would be the hammer for a bullish reversal.

 

What’s The Easiest Way To Put In An Entry Order?

We often get a lot of questions from beginners who ask: “I want to start trading, but how do I place my first order?” So, in today’s article I want to discuss a little about three different entry order types, but I’ll do it in a way that benefits both newbies and veterans alike. Even if you’ve done this already, it’s still good to brush up on things. So let’s get started!

The three main entry orders I’m going to talk about are the Entry Market order, the Entry Stop order and the Entry Limit order.

Market Orders:  Most people are familiar with what is call a market order.  A market order is an entry order the either buys or sells the currency pair at the current market price.  With a market order the entry occurs at the next available price.  This means that there is no guarantee that the price you want will be the price you get.  All you know for sure is that you will get the pair at the next available price.  Although you won’t know the exact price you will have a pretty good ideas of what it will be, especially in the forex market where the prices are filled quickly.  This type of order is what most traders will use to enter a trade quickly.

Stop Orders:  Another type of order that is common but less used is the entry stop orders.  These are used for both buying and selling of the currency pair once the price begins to move in one direction or the other.  This type of order will allow you to identify a price that you want to enter into the trade once the price moves up or down.  This order will be above the current price if you are buying and below the current price if you are selling.

For example, if the EURUSD is in a consolidation pattern where the price has hit a resistance area of say 1.3000 multiple times and you think it would be a good idea to buy it but want to wait for it to move above the resistance you could put a entry buy stop order in at 1.3010.  This would allow the price of the pair to move up and outside of the consolidation resistance and enter you into the trade as the price breaks out above this area.  The opposite would be true if the price was consolidating and the support was at 1.2500, you could place an entry sell stop in at 1.2490 and you would be filled as the price breaks down through the support in anticipation that the price would continue to move lower.

Limit Orders:  The final order type we will discuss is the limit order which is similar to the stop order but will be placed below the buy price and above the sell price.

For example, if the EURUSD is moving up and you thing that it would be good to buy it if it pulls back to an area of support you could use the entry limit order.  If the price had run up to the 1.3050 area but support was at 1.3000 area, you could place your limit order to enter the trade if the price moves back to 1.3000.  You would not be guaranteed a price but you would be getting in at the price you want.

For now, take some time to practice in your demo accounts how to place each of these order types.  As you increase your ability to use different order types you will give yourself other choices on how to place your trades.

Gold Price Patterns Using Candlestick Charts

Well after several months of Gold trending down, this week we saw the price finally break out of this downward price pattern.  Notice the circle in the chart below which shows where this break out occurred.  Often times when prices break an area that has held resistance for some time you will see it run up for a while.  Keep that in mind as you look for opportunities to enter into Gold trades.

Today I wanted to spend a few minutes discussing some commonly used and seen gold price patterns.

BULL FLAGS:

The bullish flag pattern occur in a market that is trending higher.  In this situation we are waiting for a confirmation from the price to break out of the flag, which is a made up of a short term down trend.  Notice that the circle in the chart above illustrates the area where this breakout is occurring.  Once the price breaks out of the flag you can expect a strong move above this area by the amount of the flag pole.

BEAR FLAG:

The bearish flag pattern occur in a market that is trending lower.  In this situation we are waiting for a confirmation of the price to break out of the flag to the down side.  Notice that the circle in the chart above illustrates the area where this breakout is occurring.  Once the price breaks out of the flag you can expect a strong move below this area by the amount of the flag pole.

 

ASCENDING TRIANGLE:

The Ascending Triangle pattern is a pattern that occurs in an up trend and is formed by a horizontal resistance and an increasing support level. The expected move is the amount of the height of the triangle at the base and is generally considered a continuation type of pattern.  Once a break out happens you would look to place your stop loss back down below the level of the triangle itself.

DESCENDING TRIANGLE:

The Descending Triangle pattern is a pattern that occurs in a down trend and is formed by a horizontal support and a decreasing resistance level. The expected move is the amount of the height of the triangle at the base and is generally considered a continuation type of pattern.  Once a break out happens you would look to place your stop loss back above the level of the triangle itself.

PENNANT:

The Pennant pattern is a short-term consolidation price pattern within an intermediate trend, which can be in either an up or down trending situation. The key to this pattern is the decreasing  range offered in the candle(s) and shadow(s). The area of the support and resistance lines are converging upon each other to form a pennant.  The expected move is the amount of the height of the triangle at the base.  Direction is determined on the breakout of the triangle and should be entered in on the confirmation candle which can simply be the first closed candle out of the pennant formation.

RECTANGLE:

The Rectangle pattern forms a short-term to intermediate term sideways trend or channel.  The distance between support and resistance will vary but will be identified by strong support and resistance areas.  Rectangles are also known as channels, basing patterns, and price consolidation. Rectangles can be at the top or bottom of trends and will allow for continuation or reversals to occur.

Although these are not the entirety of price patterns out there, the do give yo an idea of what some look like and how they might be traded.  Take some time to practice to see if you can begin to identify them on the charts.

Down And Out With Market Volatility

Is market volatility getting you down or even out?

Has the financial news got you down? Many traders are feeling the anxiety that comes from the currents ups and downs of the market. This anxiety may even be causing some traders to consider stopping trading until a “better” market comes along.

The first thing to understand and remember is that there is NO perfect market! The market isn’t really good or bad, it just IS.  There is nothing we can do to change this. In fact, if the market didn’t go up and down we would not have any trading opportunities. Certainly there are times, like the present, when the market is more uncertain than we would wish for. But, if we allow the market to get into our heads we can really find ourselves overly anxious and even discouraged to trade.  Trader’s who tend to be preoccupied with catching only perfect trades, and never losing on a trade, end up being disappointed with themselves when they fail to meet these goals.

There is no doubt that during times of market uncertainty can lead to fear and anxiety over our trading style and methods. However, if we start to question our successful trading methods, you may start to question the sanity of trading altogether, and you may decide that it is better to sit on the sidelines and not trade at all.  During uncertain times like we are in currently, tightening up our stops is a common reaction among newer traders, however more seasoned traders understand that tightening up our stops during more volatile times can be the worst thing we can do.  In fact, doing so can almost guarantee that we will lose on the trade.  The thought is; if we are going to lose anyway, we want to lose less that we would have under normal circumstances.  This kind of defeatist attitude is allowing our fears to overcome logic and will lead to more unsuccessful outcomes.  The only way to absolutely eliminate market risk is to stop trading, however this will also eliminate any opportunity to be successful and make any trading profits as well.

The only real way to reduce our risk is to reduce our EXPOSURE. The best way for a trader to reduce our exposure in a volatile market is not by tightening up our stop but by reducing our position size.  Tightening our stops may reduce our potential exposure, but it also increases our probability of taking a loss.  So if we are going to reduce our exposure by reducing our position size and we normally define our risk as 2% per trade, then we may want to consider reducing our exposure per trade to 1% or even .5% instead.

So, if we are feeling anxious or discouraged  because of the current market uncertainty, the best thing we can do is NOT to worry about changing our methods, or  but simply reduce our position size, therefore, reducing our exposure to the volatility.  This will help us control the fear and anxiety that come from trading in times like we are currently experiencing.

Candlestick Patterns 101: Bullish Engulfing

Hi Everybody, Bill Poulos here. Now last week I took you though a deep dive about what the Bearish Engulfing Candlestick Pattern looks like, how to spot it, and what it means. So now, I want you to take a good look at its cousin, the Bullish Engulfing Candlestick Pattern. It’s pretty much the opposite of the Bearish Engulfing and it looks like this:

Okay, here is the bullish engulfing pattern where you’ve got a blue (or green, black… whatever you choose to represent a candle that closes higher) candle body engulfing the previous day’s red candle body. Here we’re looking for a market that’s been dropping consistently over a rather long period of time. You get the idea. The market is heading down and we get this pattern, and we’re going to go along if we get a trade the next bar above the high of the engulfing candle. So if we get a candle up next (like we do) we’re going long. Typically the market won’t always go straight up, but typically it’s going to move up. You place your initial stop below that low right at the bottom of the last red candle and away you go!

Now some things to remember… they’re not always going to look this clean. But they need to be deliberate. So don’t go out looking for them and trying to make one up when it’s not really there. That second candle needs to clearly engulf the previous candle, on both high and low. This is crucial. Just because it “kinda” looks like one, is not good enough. You need to be sure and disciplined to wait for the right one. Also, it’s important to know that this is trading, and there’s always going to be risk, so it very well may not go up from here. That said, this is still one of the most powerful indicators out there for a trend reversal. In my experience it works amazingly well and is something you need to consider.

Till next week when we go over another one of my favorite candlestick patterns… good trading!

Know Your Forex Trading Risk

Today I want to spend some time discussing the topic of trading risk.  This is a topic that we should all be well aware of and one that we should be practicing control over.  In the market there are only a few things that we can control.  We cannot control where the market is moving or what other traders are doing.  We cannot control the ultimate outcome of our trades.  One of the few things that we can control is the amount of money that we allow the market to work with.  Our risk can easily become higher than our comfort level if we are not careful.  There are several things that we need to discuss so we can better know how to control our risk.

  1. Defining Risk:  Each time we take a trade we need to decide how much risk we are going to take in that single trade.  This risk is usually defined by determining a percentage of our account we are going to risk.  Typically, the maximum amount that one would risk in a single trade would be 2%.  This amount is the most you should risk but not the amount you have to risk. You can risk a smaller amount if you feel so inclined.  The way that we would determine this amount is to first find our account size, then figure out what our percentage risk of that amount would be.  For example, if we have a $10,000 account and are risking 2% our risk would be $200.  This is the amount we would lose if the trade went to the stop loss.
  2. Justifying Risk:  In order to justify the risk we are taking we will need to have a reason or evidence on the chart to indicate we should do something.  For example, we would need to have a reason why we would place a stop loss at a specific point on the chart.  That reason may be as simple at using a moving average or looking for the past swing low or high.  Once we have the evidence to put our stop loss at a specific point we can then know the number of pips we are risking on the trade.  So if your entry for a long trade was at the price of 1.3020 and your stop loss was placed at 1.3000, you would have a risk of 20 pips.
  3. Quantifying Risk:  This is where we make the determination of the position size we are going to be using when placing the trade.  By looking at your defined risk in correlation with your stop loss you will know exactly how many lots you will be buying or selling.  Using the examples from above if we have a 2% risk of $200 and a stop loss of 20 pips we would calculate our stop by dividing our dollar risk by our number of pips risked.  In this example we would take our $200 risk and divide it by 20 to get 10 mini lot for our trade.

An additional thing to remember when determining risk is to know the pair we are trading.  Pairs with the USD in the second position generally have a pips dollar amount of $10 for a standard lot size.  With our example from above we are using mini lots in the calculation to determine the lot size.  If we were trading standard lots we would trade 1 standard lot.  Pairs that have something other than the USD in the second position are going to have a pip value of something other than $10.  You can check with your dealer to know their exact value per pip. Take some time to review your process for determining your position size so you are never in a trade with more risk than you want.

Trading Candlestick Patterns – Bearish Engulfing

Hey everybody, Bill Poulos here. I the past I’ve already gone over some candlestick patterns, but today, I want to dig deeper on them. I think candlestick patterns are CRUCIAL to finding great trends, and great trends often lead to big profits. So as you can see, you really need to know how to spot these. Now over the next few weeks I’m going to go even deeper on what I believe are the four best candlestick reversal patterns and how easy it is to spot these on any highly liquid market. Now don’t be trying to do this on illiquid markets or markets that don’t trade deliberately where they hopscotch around or there are a lot of gaps, a lot of wide range days. Those are dangerous markets and very unpredictable. But if the market’s trading in a fairly predictable fashion, meaning up or down in a nice easy trend, preferably a sustained trend. When you get these reversal patterns, they can be highly effective in helping you identify the end of a trend and the beginning of a counter trend move. And so I’m going to just review these with you.

First pattern I want to review with you is called the Bearish Engulfing Pattern. Now we are going to be using obviously candlesticks here. And for those of you who are new to candlesticks, let me just show you quickly what a candlestick tells you about the trading and pricing, what a candlestick tells you about the pricing information for a time period. So when you see a candlestick with a green or white body (which means the time period closed up), it will often have an upper shadow and a lower shadow. Now this is all the price information summarized for one time period. Let’s say it’s for one day’s worth of trading, but it could be one minute, five minutes, ten minutes. It doesn’t matter. It’s one unit of time. So on a white or green “up” candle, the opening price is at the bottom of the candle body and the closing price at the top of the candle body. The high price of that time period is the top of the shadow, the upper shadow. And the low price for that time period is the bottom of the shadow. So if it’s a bullish time period, bullish day for example, you’re going to see a green or white candle because the close is higher than the open. On the other hand, if it’s a bearish day, the candle is going to be red or black because the open will have occurred at the top and the close at the bottom, signifying a lower close than the open. So if you see a green/white candle, it’s generally a bullish day. If you see a red/black candle it’s generally a bearish day.

Now with the bearish engulfing pattern like the one above, is what happens when the black (sometimes red) candle body engulfs, so to speak, the previous day’s candle body. In this case a white (sometimes green) candle body. Now this could be a black candle body but the most powerful bearish engulfing patterns will have just like we see it here, a white candle body engulfed by a black. Now that’s the pattern.  Typically you’re going to have a market that’s moving up. And this market could be moving up for several days, several weeks, even several months before you get this pattern. Or if you’re trading fifteen minute forex charts for several bars, several hours, before you see this pattern. And when this pattern develops, what you want to do is consider going short on a trade below the low price of the engulfing candle. So if on the next candle the market trades on down, you’re going to get short right on the next candle. You’re going to place your initial stop just above the high of the engulfing candle. Remember not all patterns are going to give you a profitable trade. But this is a very powerful formation that oftentimes will reliably identify the end of trend, a major trend, and the start of the counter trend down.

Okay, that’s what that pattern is telling you. Now it’s pretty easy to spot. Don’t be trying to force it. Make sure that it’s obvious. If it isn’t obvious to the eye, you probably don’t have a good pattern. You know, if it just barely overlaps a candle body, or engulfs a candle body, that’s going to be a weaker pattern. You want something that pops out at you, that looks just like the example above.

Next week, we’ll go even deeper on the the bearish engulfing’s cousin: the bullish engulfing pattern. Till then, good trading.

Are We Really At The Mercy Of Our Brokers?

I recently received a notification from one of the Forex brokers that I use for my live trading accounts stating that they were being purchased by a larger broker that provides equity, futures and options trading.  This didn’t really bother me much because I am familiar with both companies and in fact recently moved a retirement account into the larger purchasing company.  I then received another email from the Forex broker stating that they are going to be the main Forex trading arm for the new group.  Again this is all fine with me from a client standpoint but it did make me wonder what would happen if it wasn’t fine with me.

There have been a few very large brokers recently getting shut down ceasing operations which of course locks their client’s money up for an untold amount of time.  Even when the money is freed up there really is no way to know with certainty how much will actually be available to be recovered by the total client population of the firm.    This of course can not only dramatically and immediately effect ones personal net worth it will also hinder the ability to invest those dollars meaning that there can also be a substantial opportunity cost as well.

The older we get as investors the less time we typically have to maneuver our funds and set ourselves up for retirement, college tuitions or other reasons to save money so if a large portion of those assets are all of a sudden gone or tied up we could have a serious issue in the future.

Of course presenting a past problem is fine and stating that the likelihood of it happening again is fine also but the question really is what we can do about it to put ourselves as investors and traders, clients of the brokers, in the best possible position to avoid a devastating loss.  I have recently spoken to an investor that told me that 50% of his total retirement account is tied up with the most recent broker closure and another investor told me that he is hoping to recover 21% of his total funds from another past closure.

I believe that the best and most basic course of action that we can take is not to get married to our brokers.  I personally look at brokers; regardless of if they are just Forex brokers just equity brokers or both, the same way I look at banks.  Banks offer pretty much all the same products and they are trying to achieve basically the same thing for their clients, the only thing they really have to offer me is service.  In the past I may have included safety but with what has transpired in the financial services industry as whole over the last few years that part of the equation has diminished greatly.  If a broker is not making it as easy as possible to be successful trading shorter term or investing longer term dollars, move to a different broker and move now.

In talking about this subject to some of my colleagues recently another consideration that did come up was to only use brokers that are larger and publicly traded companies.  The reason for this is that a public company is held to a higher standard from a reporting and an accounting standpoint so it may make some sense that they could have more longevity than a smaller broker.  A larger broker will also be more likely to be better funded with larger cash reserves that of course will help overcome typical business ups and downs and also liquidity issues.  Being a member of government overseen organizations and industry policing efforts is also a very important consideration because just from a common sense stand point it seems that the more critical eyes that there are looking at an organization the less opportunity there may be for corruption or blatant disregard for the good of the clients, us.

In the past the long term investing mantra was always diversification, diversification, diversification, but that was really intended towards investment diversification.  In today’s world we also need to look at broker diversification as well.  Due to corruption, poor decisions and the general business climate only using one broker may be as bad as putting all of our financial eggs in one basket.

Buy Low, Sell High… Easy Right?

Today I want to spend some time discussing what might be the easiest thing to say but the hardest thing to do.  That is to buy low and sell high or to sell high and buy low.  Sounds simple right?  Take a look at the chart below and you can see how much money can be made by following this basic rule.

If you sold at the first high point and bought back at the first low point you would have made 180 pips.  Then if you would have bought at the second low and sold at the second high you could have made 140 pips.

So if it is as simple as buying and selling at highs and lows, why doesn’t everyone just to it?  Well the truth is it’s not quite that simple.  If we knew where the lows and highs were located we could make all kinds of pips, but the fact is that we don’t know where they are located until after the happen.  By this time it is too late and we may have missed the trade altogether.

So if the key is to find highs and lows the next question should be how can we  find something that may help us in identifying these points.  With the hundreds of indicators available how do we know or choose which ones to use.  Ultimately it’s not about having multiple indicators but having something that can help.  In the end, remember that it is price action that matters, not what an indicator tells you.

Let’s take a look at one particular indicator that might help us in identifying these lows and highs.  This indicator is a Simple Moving Average.  When trying to use this to determine the highs and the lows we will look to see both the direction it is moving and where the price is in relationship to this indicator.  In the chart below we are using the 20 period SMA to help visualize when these highs and lows are happening.  Also notice that the vertical lines show where these changes have been confirmed.

Notice that as the 20 SMA moves down and the price is below it that the price is coming off of the highs and as the 20 SMA moves up and the price is above it the price is coming off the lows.  Although the indicator itself does not make the price move, it does help us to visualize when the lows and highs have been put in place.

By remembering the old saying, buy low and sell high we are making sure we are trading in the right direction.  By using a simple moving average we can better visualize this concept on the charts.  Take some time to practice using an indicator to help you better identify these important areas of buying and selling.

How To Use Fibonacci Retracements

When trading any type of precious metals chart we want to be able to identify a few things including the Trend and Support/Resistance. One of the tools that can be used is an indicator called Fibonacci Retracements. Leonardo Fibonacci was a mathematician from Italy back in the Middle Ages and whom this indicator is named after. Although not discovered by Fibonacci he is the one who made common the Fibonacci sequence to the modern world.

This sequence contains a number pattern that is common in nature and can be found all around us. The sequence is created by adding together the two prior numbers and is as follows: 0,1,1,2,3,5,8,13,21,34…………. So, 0+1 = 1 and 1+1 = 2, and 1+2 = 3 etc. These number when applied to the financial markets can be used as areas where we might see the price experience some slowing and where the price might retrace or where it might break through. Using these number traders can come up with a percentage of retracement where the price may move back to. The commonly used percentage areas are the 23.6%, 38.2%, 50%, 61.8% and 100% to name a few. These areas are where a trader would anticipate seeing the price retrace back to after a move up or down. These areas will tend to act as support and/or resistance points on the chart.

Take a look at the chart below to see how this indicator looks on the chart. In order to draw the Fibonacci levels you would first start at the beginning of an up or down trend and draw it to the end of the trend. In this example, the line starts at the letter “A” and ends at the letter “B”. Notice also how the price will tend to slow or stop at the various Fibonacci levels. A good example is where the word “Resistance” is located. This area coincides with the 38.2% retracement level.

Once you have identified these levels you will want to know what to do as they are approached.  There are two main things you can look for, either a break through the area or a bounce off the area.  As the price approaches the Fibonacci Retracement level you will begin to look for one of these two thing to happen.  If the price begins to break through, you can look to trade it for a move to the next Fibonacci level.  If it bounces off the level, you will look for it to move to the opposite retracement level.  Either way this indicator can give you information as to where the price may encounter a barrier to the price action.  In addition, many traders will use these levels to identify both the stop loss area and the target area for a trade.

As you look at the charts for the metals that you are trading, take some time to look at how the Fibonacci Retracement indicator might help you in identifying these important support and resistance areas.