4 Trading Tips To “Live” By

If you will pardon me getting personal, I was recently at the doctor who was discussing some simple things I could do to become “more”  healthy.  Just because some of these suggestions might be “simple,” doesn’t necessarily mean they are “easy” to accomplish.  Sometimes the simplest things are the most difficult to implement because we are creatures of habit.  Sometimes we really need to force ourselves to do the simplest, most logical things. To me the best way to make a change that may not be a habit is to write it down and determine that we are going to do whatever it is, for at least a 30 day period.  One suggestion is to write it down on a 3×5 card and put it in a prominent place, in plain view, but a different place each day, so that it is “stays” noticeable every day until it becomes a habit. One of the simple suggestions that the doctor gave me was to reduce my intake of sodium.  To be successful at reducing sodium I first need to understand why reducing sodium is so important to me and what benefits I can expect (EDUCATION).  The next thing would be to understand how much sodium I am eating, and then determine things I can do (DEVELOP A ROUTINE) to help reduce my sodium intake. The next thing is the follow through by continuing to update a log to monitor my sodium intake (KEEPING A LOG).  Lastly and perhaps the most important thing I can do is to report back to the doctor my routine, progress, to get further ideas and encouragement (REPORT TO A MENTOR).

  1. Now let me relate this simple example of reducing sodium for better health and lower blood pressure, to our trading. Educate yourself.  First, we need to get the best and most accurate information and education concerning our trading, finding a simple easy to implement strategy for entries, exits, and risk management.
  2. Develop a specific Trading routine. To implement a good trading routine, the best strategy is a simple strategy.  The easier to implement the better.   Also, very important is that each trader, honestly evaluate his or her own risk tolerance. Then we need to develop risk management rules that will follow our risk tolerance.  I suggest until we are comfortable with our own risk tolerance, we limit our risk to no more that 1% of our portfolio per position.  We then need to determine a consistent daily trading routine whether it is trading a few minutes per evening, or more active day trading during the market.  Once we make these determinations we should implement them consistently for at least 30 days or 1 month.
  3. Keep a trade journal.  To successfully implement a strategy or new trading routine, we need to keep a trading log or journal and make it as specific as possible, by including trades, explanations for entering or exiting all positions, including all winners and losers alike.
  4. Report to a Mentor or Trading Partner.  The last thing would be to find a mentor or another trader who you can share your trade journal with to get ideas and to hold yourself accountable to your routine and trading goals.

If we are not having the success in our trading that we are looking for, here is a simple framework with 4 very important steps that are essential to trading success (or success in other endeavors, as well).

Current Market Trends (Part 2)

Hi there, Todd again and I wanted to wrap up my two part series on what the current market trends are right now. So let’s jump right back into it picking up where we left off with the JPY.

USD/JPY

Notice in this chart below that the 40 period SMA is pointing down but the price is above the SMA.  This would indicate to us that the momentum is weak to the down side.  Be careful when the trend is not currently strong as the prices may become a bit choppy.

GBP/USD

Notice in this chart below that the 40 period SMA is pointing up and the price is above the SMA.  This would indicate to us that the momentum is moving higher and the price is in a current up trend.  When the tend is up or bullish we want to look for opportunities to buy this pair.

AUD/USD

Notice in this chart below that the 40 period SMA is pointing up but the price is below the SMA.  This would indicate to us that the momentum is weak and may be getting ready to change.  In a situation like this we would want to be more cautious in our trading decisions.  At least until the trend becomes strong.

EUR/USD

Notice in this chart below that the 40 period SMA is pointing up now and the price is above the SMA.  This would indicate to us that the momentum is moving higher and the price is in a current up trend.  This is also a newer trend as the SMA has recently turned higher.

Take some time to review your rules for determining the trends of the pairs you are trading.  Having simple rules will help give you confidence you can consistently identify the trend of the pair.

Current Market Trends (Part 1)

Today I want to spend some time looking at the current trends on the 6 major currency pairs.  Knowing the direction that the pair is moving is critical in knowing the type of trade we should be taking.  If we know the trend is moving up, we want to look for opportunities to go long (or buy) the currency pair.  If the trend is going down, we want to look for opportunities to go short (or sell) the pair.  This seems like a fairly simple concept but one that can be difficult to get a good grasp on.  One of the reasons it can be difficult is that we often times have not clearly defined how we determine this trend.  Another reason the can be difficult is we become discretionary in the way we define it.  In order to avoid this discretionary aspect of determining the trend, we will want to have simple and clear rules for saying that the trend is moving up or down.

Consider the following as an example of a simple set of rules for determining the trend on a currency pair.  We will use the chart below, which is a daily chart of the USD/CAD.  On this chart we have placed only one indicator.  This red line is just the 40 period Simple Moving Average.  When using this indicator we can see where the price has been over the last 40 bars.  If the average price of the pair over the last 40 bars has been moving down, the SMA will also be moving down.  Although this, like other indicators, is a delayed or lagging indicator it can still be used to show us the long term momentum that is happening on the chart.

The following simple rules can be applied to help better determine the trend the pair is moving in.

Uptrend:

–      40 SMA pointing up

–      Price above the 40 SMA

Downtrend:

–      40 SMA pointing down

–      Price below the 40 SMA

If the chart shows a different alignment that what is listed above, the trend is not yet strong enough to call an up or down trend.  In that case you may want to look for something else to trade.

Take a look at the following pairs to see the direction the current trends are moving.  Again, knowing this will help you know the direction you should be looking to take your trades.

USD/CAD

Notice in this chart below that the 40 period SMA is pointing down and the price is below the SMA.  This would indicate to us that the momentum is moving lower and the price is in a current down trend.

USD/CHF

Notice in this chart below that the 40 period SMA is pointing down and the price is below the SMA.  This would indicate to us that the momentum is moving lower and the price is in a current down trend.  This trend is a newer trend than the last pair but still in a down trend.

Tomorrow, I’m going to go over a few more examples, but hopefully these two examples will help you make some smart decisions with your trades this week.

What Happens When Metals Breakout…

Today I want to spend a few minutes discussing the topic of breakouts.  Breakouts occur when the price on the chart has been in a consolidation pattern or in other words has been moving sideways on the chart.  This sideways movement is caused by the markets taking a “breather” and usually before the price begins to move again.  If you can start to identify the times when these sideways consolidations are occurring you can then know when to look for the breakouts.

The ideas behind the breakout is that the price, after moving quietly along, is ready to move quickly out of the sideways range it has been moving in.  Take a look at the picture below which illustrates the price breaking out of the sideways consolidation to both the up and down side.

When we see this type of consolidation we can look to set up a trade that will be entered in as the price begins to move out of the range.  In the above example, notice that the entry could be placed as the price move either above the resistance line on the breakout or below the support line on the breakout.  In addition, you can identify where to place the stop loss exit by closing the trade as the price moves back above the line where it broke out from.

There are two good examples of this on the daily charts for Silver and Gold.  The first chart is the chart for Silver.  Take a look at how it has broken to the up side.  This bullish breakout can be the beginning of an extended move to the upside and one where we can look for opportunities to buy Silver.

Notice that the price of Silver broke up above the area of resistance about 5 days ago.  The key is to look for the times when the price breaks out so we can take advantage of the move out.  Once the move out of the consolidation occurs we can then look to enter the trade on other time frames also.

Now take a look below at how Gold has broken to the upside and notice how we could have taken a long position on the break to the upside.  We can also look to trade a shorter term time frame on the breakout in the direction that the breakout occurred.  This means we can look at the 5, 15 or 60 min. time frames for shorter term trading opportunities.

Take some time to look on the charts for these sideways consolidation so you can see the value of these breakouts.  Also practice looking to enter the trade and setting the stop loss to make sure you understand how to trade them.

What’s the Difference Between “100 Pips” and “100 Pips”?

I have the chance to speak to allot of different traders each week regarding a variety of trading and market related topics in both the equities and futures markets, I find that one of the most common and consistent themes is that many of them are very concerned with the size of their winning trades.  When it comes to trading bigger is better when it is on the winning side but reducing our losses and eliminating some of them altogether in some ways may actually be more important.  What if we can do both, what if we can maintain or increase our winning trades while at the same time we reduce our losses and eliminate some of them altogether.  I’m certainly not saying that the bigger is better concept is a bad thing however I have made some observations over the years through my own trading and through what other traders tell me.

If a Forex trader has a goal to net 100 pips per trade, which is not necessarily unrealistic depending upon the timeframe they are trading on and the methods they use, many traders can achieve this goal sometimes but where I find that they typically fall down is consistency.  Many of them get very stubborn insisting that each trade reach their set goal which in some ways ends up like trying to fit a square peg into a round hole.  For me this brings up the question, “Do you want to make money the easy way or do you want to make money the hard way”?  You cannot dictate to the market and make it do what you want it to do you can only react to it and take what it will yield.

What makes sense to me and what I try to do in my own trading is to control my profit through my position size.  If I want to make 100 pips I would rather make that 100 pips by getting 10 pips with 10 lots versus 100 pips with 1 lot.  How many times each day does a currency pair make a 10 pip move versus a 70 or 80 or 100 pip move?  The bigger moves do happen and they can happen quickly but I’m pretty comfortable with the fact that I can get 10 pips on most of my setups versus being in a trade for an extended period of time hoping that the market will move far enough in my direction for my trade to work based on my own set criterion.

Every trader has different goals but the common goal is to make money, how that is done of course is personal preference but it seems that it may make the most sense to only trade very high probability setups putting yourself in the best position possible to achieve consistent returns by capturing a small number of pips with a big position size.  The market doesn’t have to move 100 pips for you to make 100 pips.  Most people know the answer to the question “How do you eat an elephant”?  Of course the answer is, “One bite at a time”, the same thing applies to the markets especially the Forex market because of the leverage.

If you can afford a big enough position size you can make big, consistent and pretty safe money making 5 pips or any number that makes sense to you.  Very few traders have methods that are designed with the goal of earning 5 pips but how many times do you get into the market and your trades not go 5 pips in the money?  If you are using a good solid method it would be very rare that your trade wouldn’t go at least 5 pips in the money regardless of what happens thereafter.  If you are trading a small account this may not be very appealing but if you can trade 10 or 20 or more standard lots, how hard is it to get 5 pips profit, 20 standard lots still yields $100.00 per trade and how many time each day can you do that?  This may be a very low number with a very big position size partially for illustrative purposes but the point still remains that you do not need to get a big move in the Forex market to make big and more importantly consistent money.  Step back and take a look at your favorite trading method and determine how far it goes in the money before your stop is reached.  It is likely that virtually 100% of them go at least 5 pips in the money and they may all go 10 pips in the money.  What if you could trade with confidence knowing that a huge percentage of the time your trade will win?

So again I ask the same questions as above, “Do you want to make money the easy way or do you want to make money the hard way”?

Did Bullish Divergence Show A Bottom In June?

Did Bullish Divergence indicate the market bottom in June?

How can price action patterns and indicators predict a market reversal?  Last week we talked about Divergence as a possible indication of a market trend change, with an example of bearish divergence.  To review what divergence is:  Divergence occurs when the price action makes a new high or low in the direction of the trend while the technical indicator used starts to move in the opposite direction.  This week we should complete the discussion of divergence by going over an example of Bullish divergence, which is the opposite of Bearish Divergence and indicates a possible bullish change in the trend to the upside.  If we can more easily identify these divergence patterns, we can have a great method to look for potential changes in market direction.   Bullish Divergence occurs in a down trending market when the price is hitting lower lows, while at the same time a technical oscillator like Stochastics, RSI or MACD is producing higher lows.   When we see Bullish divergence, this could be a strong indicator of a possible market bottom and a signal to look for a possible trend reversal.  If we look at a chart of the Standard and Poor’s 500 there is a strong bullish divergence signal that occurs right around the beginning of June.  Notice that in a down trend the price had hit a new swing low of 1266.74 on June 4th.

BULLISH DIVERGENCE INDICATED ON CHART BELOW

Since this Bullish Divergence pattern showed on the charts as of June 4th the Standard and Poors 500 started to move up immediately in a bullish direction by more than 150 points, which has been a big swing back up to the current highs.  The Bullish Divergence in this case indicated the bottom of the market and a change in momentum from the bear market to a bull market.

Traders Challenge:  Look for these bullish and bearish divergence setups as shown for possible changes in market direction.

The Bearish Tweezer Candlestick Pattern

Hi Everybody,

Bill Poulos here again for your weekly installment of candlestick patterns. I know I’ve been talking about these patterns for quite some time, but there’s  a reason for that. They’re important. You see, there are hundreds and hundreds of methods, tactics, indicators… thousands even. Some of them are garbage, some of amazing, but they all have something in common: They take a little bit of work to understand and identify.

Now in the trading systems I develop and teach my students, I pride myself on choosing fairly common indicators that are relatively easy to use and spot, but they still take a little bit of work to spot and use.

SO, that’s why I love candlestick patterns. They’re both easy to use and to spot. I mean, most of these patterns practically jump off the screen at you. PLUS, they pretty powerful indicators. Once you see one, the chances of a big move is going to be relatively high.

And all of this is true for today’s candlestick pattern as well. Today, we’re going to look at the Bearish Tweezer. They usually look something like this:

This is a bearish tweezer and is another powerful reversal pattern. The market has been moving on up. Then what you get is a nice green candle body followed by an abrupt reversal, red candle body. This signifies that while the bulls were in control here, they abruptly lost control to the bears. What you want to do then is go short below the low here, right in here, expecting the market to drop. Stop would be above these highs right in here. Okay, again on these patterns, if you don’t see it appear very obviously, then you’re probably trying to read too much into it. When these occur, you will recognize them.

What Type Of Chart Should I Trade With?

“What type of chart should I trade with?” is a common question I get from many of my students. Now I prefer to use candlestick charts, but that’s just a personal preference. There really isn’t a right answer to this. BUT, before you decide on what makes the best type of chart to use for your trading, I want to go over all the different types that are out there so you can make an educated decision for yourself.

In general, there are 3 very common chart types including candlestick, line and bar charts.  Now these are not the only chart types available but they are the ones that most traders are using.  Other less common types are the range and renko chart, but we will leave those to another time.  We will discuss each of these individually and let you figure out which one will work best for your own tradings.

The line chart is the simplest chart to look at in that it only shows the closing price of the pair you are trading.  It avoids having all the open, high, and low prices on the chart so it looks very simple.  This also can be a problem in that you don’t see all the movements that happen during the time you are looking at.  Some times the open, high and low can give you valuable information about the sentiment of the market you are trading.

 

Bar Chart

Another type of chart that is used and one of the most common is the bar chart.  This type of chart is created by looking a lines that show the open, high, low and close.  In a chart like this you will be able to identify the times when the price is moving fast and volatile and when it is moving slow and flat.  The way to read this chart is to know that the vertical bar is the range for the time frame you are trading.  The top of the vertical line is the high and the bottom of the vertical line is the low of the time frame.  It also has a hash mark on both sides, the one on the left is the open and the one one the right is the closing price.  If the close is below the open then it is red and if the close is above the open then the bar is green.

Candle Stick Chart

How To Trade Gold During A Consolidation

Today we are going to look at what has been happening in gold over the last few months.  Generally we like to see a market moving in a nice, deliberate trend either up or down.  There are times when gold is trending up or down where we can find opportunities to trade,  but there are also times when gold just trades sideways and we need to know how to trade during these times.  This sideways movements can be more difficult in trying to find good trading opportunities but they are still there, we just need to know how to find them.  Whether we are trading in a trend or sideways movements we need to be aware of the direction the momentum is heading.  In the case of a sideways trend, the momentum is usually pushing the price to the right, not up or down.  Sometimes this sideways consolidation can help us if we know where to identify the areas of support or resistance and where to place our trades.

In the more recent month we can see how gold has be caught in a strong sideways consolidation.  This has given some opportunities to look for short term trades both to the up side and down side.  Take a look at the chart below and you will see where these areas for buying and selling have occurred.

Notice the green support areas and the red resistance areas.  These lines that we have drawn show areas where we would consider buying or selling gold.  If the price is at the green line we would look to buy in anticipation that the price will bounce up off the area and if the price is near the red line we would look to sell in anticipation that the price will bounce down off this area.

When we see the price action moving in a tighter and tighter range like we see here we need to anticipate that a time will come where the price will break to the up side or down side.  So, in addition to buying and selling in between the two lines, we can look to take trade on a break out of the two lines.  Take a look at the chart below to illustrate how you would look to buy or sell as the price breaks out of these levels.  When the price breaks out of the support or resistance levels you would look to go long or short in the direction of the breakout.

So even though we see that the price of gold is consolidation in a sideways pattern, there are opportunities to look for trades.  It could be that we are trading within the channel between the support and resistance lines or it could be looking for the price to finally break out of these lines.  Either way keep an eye out for the times that  you can take advantage trading gold in a sideways channel.

What To Look For In Morningstar & Eveningstar Patterns

I want to start off talking about the Morningstar Candlestick Pattern.

 

These typically will develop after the market’s been going down for quite a period. It’s just the reverse. You’ve got a red candle body, the bears are still in control, but then you get this little floater candle in here where this candle body is below the lows of these two candle bodies. You get this abrupt move up. Green candle body. You’re going to buy above that high or better yet, above the high of the last three bars. Your stop is going to be down here below the low of the floater. The market should again bounce up at least temporarily if not for the longer haul.

And the cousin to the evening star is the morning star. These typically will develop after the market’s been going down for quite a period. It’s just the reverse. You’ve got a red candle body, the bears are still in control, but then you get this little floater candle in here where this candle body is below the lows of these two candle bodies. You get this abrupt move up.

Green candle body. You’re going to buy above that high or better yet, above the high of the last three bars.

Your stop is going to be down here below the low of the floater. The market should again bounce up at least temporarily if not for the longer haul.

The next candlestick reversal pattern that I like is the evening star. This one is a little bit more complex. It takes three candles to form, but you can see immediately what’s going on here.

We’ve got a market that’s been moving up for a long time. It continues to move up but then you get a little floater candle in here. It’s a narrow range day, typically a red candle body, but it can be green. Then it’s followed by an abrupt move down as signified by the red candle body.

Now these candle bodies on either side need to be longer than the candle body in the middle. The candle body in the middle needs to be floating above the highs of these candle bodies. Okay, when you see that pattern, you get a move down below the lowest low of these last three bars here. That’s a pretty good place to sell short.

So if you get a move down, you go short.

Place your stop above the high right in there and you’re good to go. That’s another powerful reversal pattern that you’re going to see the market at least temporarily reverse and oftentimes it’s the start of a new trend down.