In the world of forex trading you will find all kinds of various ways to take trades.  Many of these way use specific indicators to identify these entry and exit points.  Some of them even use multiple indicators to identify these points.  The problem with some of these is that they become so confusing with all the indicators that they are not very effective for most traders.  Another problem of multiple indicators is that they often times take our attention away from the most critical part of trading.  This most critical part is to look at the price action that is currently happening.  Price action should be the most important thing we look for and indicators should be secondary to this.  By keeping our priorities straight when looking at charts we will be able to better use indicators along with the price action.

Take a moment to review the two charts below.

This first chart has multiple indicators being uses.  Notice that the chart if fairly cluttered and a bit confusing to look at.  Now this does not mean that you cannot use multiple indicators but you need to make sure that they do not take the place of simply looking at the price action.  The indicators should be able to improve our entries based on price action, not replace the price action.

Now, take a look at the chart below and notice that there are not any indicators, just a clean and clear looking chart.  This chart allows us to see what the price is doing and to be able to identify where an entry may occur without the indicators cluttering up the charts.  Once we have identified a possible entry we can then add indicators to support our decision to enter or exit a trade.

 

By knowing and using this order of importance when looking for an entry, we can focus on what is the most important part of trading – price action.

Once we become familiar with the price action and begin to rely less on indicators, we can begin to see things as they really are.  Indicators often times give us a false sense of security and can lead us in the wrong direction.  As you start to see the price action you will begin to pick out specific price patterns that can be used in your trading.  These patterns are generally created as the trend is established and the areas of support and resistance are defined.

Price patterns are simple ways to learn to enter and exit trades.  There are many types of price patterns and include continuation and reversal types.  The one type I want to look at today is the price pattern called a triangle.  This is a simple pattern and one in which every trader should be familiar.  Take a look at the chart below.

 

Notice that the lines of support and resistance here are pointing towards each other forming what looks like a triangle.  This converging of support and resistance is created as the price is consolidating in a tight range.  This consolidation will, at some point, break out of the area.  This move with be either above the resistance or below the support line.  The entry would be to look for this breakout and to enter either long or short, depending on the direction it moves.  A stop loss is place at a point back inside the triangle, in case the price decides to reverse.

Simple price patterns like this can be a clear way to identify your entry and exit point when trading.  Take some time to simplify your trading by focusing in on price action and avoiding too many indicators, then look for price patterns such as triangles to enter into trades.

So far this year the price of gold and gold ETFs have drifted in a downward fashion but is that likely to continue or is it on the verge of presenting us a with a great buying opportunity?  Unfortunately just like many economic questions the answer to this question depends upon whom you talk to.

The value of gold has historically been very volatile.  To a large extent its price movement works inversely with the stock market. When there was trouble in the world; a war, a natural disaster or a stock market meltdown, it was said that the smart money moved to gold.   Consequently it had been successfully used as hedge against a drop in the stock prices of portfolios for many years.  This did change several years ago when some investors in very wealthy oil producing nations began to flock to the US dollar instead of gold in stressful times but in recent years it seems as though there may have been shift back at least partially to gold. 

When the collapse of the real estate market began in the US around 2007 and 2008 and was made public in August of 2008 the stock market quickly followed.  It isn’t too surprising that for a few months after that there was a tremendous amount of volatility in all markets until there was a beautiful bullish divergent pattern that emerged in the spot price of gold and many gold based index funds and ETFs in October and November of 2008.  After that time there was a steady and very strong rise in the price of gold and many investments having to do with gold that didn’t reach its peak until almost two years later.  Since the peak in September of 2011 the price of gold has been basically range bound fluctuating up and down but not really going anywhere while the S&P 500 has remained range bound with an upward bias.  The price of gold today is basically in the middle of its recent range though it is slightly in the lower half of the range. 

Most experts believe that this will continue with a likely downward bias for the rest of the first half of this year.  The predictions for the second half of the year are where there seems to be a lot of differences of opinion.  Some gold experts believe that the price of gold will continue to drop while others believe that it will rise sharply.  The reason that some are looking for a rise in the metals value is due to the looming potential currency wars by industrialized nations from around the world.  Many countries are interested in devaluing their currencies to increase exports and to lessen trade gaps. 

If an actual currency war does break out and we see the largest nations make attempts to devalue their currencies this could create havoc in the world markets, just about all of the world markets.  We have seen several hundred pip moves in the Forex market within minutes of an announcement of intervention by the central government of a highly traded currency but what happens if all of these countries begin to announce their intention to intervene to weaken their currencies?  We could see ups and downs in the markets all over the world like we have never seen before with a likely steady and rise in the price of gold throughout this time.  Stay tuned because it could be a fun year and don’t forget about what gold could potentially do for your portfolio in the relatively near future.   

Today we are going to look at the concept of deliberate markets when looking to trade.  A deliberate market is one in which the price action is moving in a consistent and careful pattern.  As trades are identified we need to consider the volatility that is currently happening with the market.  Gold and silver can become volatile at times and especially when news is pending.  Knowing what to look for to identify volatility can help us avoid times when the market may become less deliberate in the movements.

Take a look at the picture below which shows both a deliberate and a non-deliberate price action:

Notice that the deliberate movement consists of a pattern of higher highs and higher lows while the non-deliberate price action has a not distinct pattern of highs and lows.  By avoiding these non-deliberate patterns and looking for the deliberate ones we can place our trades in the best situation for a profitable outcome.  When trying to trade in a non-deliberate market we can anticipate seeing quick moves which can cause us to take quick losses on our trades.

Take a look at the chart below.  This chart was taken from today’s price action before and after the ECB Press Conference.  You will notice that the price action was extreme and quick in the moves that happened during this announcement.  The initial swing was to the downside, followed by a large up move which ended up selling back off.  This type of move can be expected but we cannot anticipate the direction or timing of the moves very quickly. 

When looking to trade we must always look for the upcoming news that might impact our position.  If the news is happening soon we may decide to hold off on entering the trade until after the announcement.  If you are looking to take a trade in anticipation of a big volatile move then you need to make sure you are using good risk management rules.  The only way to avoid the possible negative move is to avoid trading during these times.  If you are determined to trade you can simply adjust your risk level down when determining your position size.

Now take a look at the 1-hour chart of Silver and you can see a more deliberate pattern that it was making.  This deliberate pattern of higher highs (green arrows) and higher lows (red arrows) is what we want to see to trade.  These deliberate movements can give us confidence that we are trading during the right market conditions.

We are not looking for perfection, just to trade during times where the market is less volatile and more deliberate.  The charts will seldom look like the picture above where it is moving perfect but you should be able to eliminate when the market is too volatile.  This can be done by knowing when the news is going to be reported and by looking at the charts to see the times when it is going through extreme moves.

Take some time to review your charts and become comfortable with identifying deliberate moving markets.  Also, make sure you have access to an economic calendar from your broker.  Doing these few things can help you avoid non-deliberate markets.

Today, I want to give you a really important stock market trading tip: Don’t replace a bad decision with another bad decision. Generally speaking it is said that most people travel in social circles with others that have an annual income that is within approximately $5,000.00 of their annual income.  This of course means that if you are successful financially you most likely will spend time with other people that are financially successful but if you struggle financially your friends are probably struggling too.  I notice that the same holds true with traders in the respect that good and successful traders will likely talk to other good and successful traders while inexperienced or unsuccessful traders will spend their time with other unsuccessful traders.  This leads to an obvious problem when an unsuccessful trader looks to change trading methods getting new ideas from other traders they know, those traders are very likely just as unsuccessful so they are basically swapping bad ideas back and forth.

Rather than regularly changing trading styles or methods and incorporating bad ideas from others into their trading traders may consider working their current ideas to the fullest extent, massaging them and adjusting them as necessary until they get them to work or until they know for a fact that they will not work and only at that point change.  Just because an idea doesn’t work perfectly all the time doesn’t mean that it can’t or won’t work better with a few adjustments.  Play with adding and subtracting indicators, adjust currently used indicators and trade the method consistently in a practice account until you know for sure that it won’t work and then overhaul your approach.

Treat your trading business as a business, just like any business your trading business needs a business plan or in this case a trading plan.  Many traders seem to want to skip the part about running a business that includes creating a business plan; they seem to want to go right to the part where they count their profits which in many cases will never come.  Very methodically plot out your trading style, plan or method one step at a time from the very first thing that should be done each time you are looking for a good entry point onto the market to thing that will make you exit the trade.  This may start by determining what kind of trading day or market environment it is that you are seeing; is it a nicely rolling market up and down, is it a long nicely trending market or is it a choppy sideways market that really isn’t going anywhere.  The reason for doing this is to determine if the trading method you are using will succeed under the current market conditions.  You may have developed different methods for different types of markets and if that is the case you must determine which one to use.

Keep track of the type of market your methods work best in and only trade specific methods in the type of market that they are likely to succeed in.  What does the recent price action need to be doing, how are the technical indicators lining up and specifically what do they need to be doing.  If you use a moving average or averages do they need to cross or turn or be at particular levels and are the other indicators in the position or at the level that they need to be at.

Once you have achieved a good clear trading method that will work a good percentage of the time when it is applied then you will be faced one of the most difficult things a trader must do and one of the few things that we may actually be able to control; we have to discipline and control ourselves.  We must dogmatically and unemotionally apply our trading method with no regard or real picture on the outcome.  The outcome only matters if we make it matter and if we make it matter we have become emotional about it which means that it is very likely that we will fail at some point.  If you know that your trading method will work about 70% of the time you also know that it will not work about 30% of the time, so what’s the problem, make your trades with no attachment to the outcome while monitoring your progress making sure that the 70% – 30% percentages continue to apply and make some money.  If you win 70% of the time you should be profitable.  Each trade in our trading business is just a business decision.  Some business decisions work out and some don’t, appreciate the ones that work, learn from the ones that don’t and leave the emotions out of trading, my observation is that emotional traders rarely succeed. 

 

In today’s article I would like to talk a bit more about the topic of trends.  Specifically, how we can use moving averages to help us know if a trend is moving up or down.  It is critical in your trading to be able to identify whether or not the trend is bullish or bearish.  In the past we have discussed using price action as a way to identify these directions but today we will look at using a simple indicator to help in clarifying what we are seeing on the charts.

First, I want to review the moving average indicator.  This is an forex indicator that has many uses and can even be used to look for entry and exit points.  The basic idea of a moving average is to show us what the average price is of the currency, stock or futures chart we are looking at.  Moving averages can be both short term or long term and can give us an idea of the bullish or bearish nature of the chart.  A short term moving average would give us the near term momentum while a long term moving average will give us a longer term view of the direction the price has been moving.  With this indicator you can choose the amount of time the moving average is using.  The simple moving average is the most commonly used average and simply takes the closing price of the chosen time period and adds them together, then divides by the time period chosen.  So with the 20 period simple moving average it would take the closing price of the last 20 bars, add them together, then divide by 20.  This number would then be plotted on the chart to give you this average price.

Take a look at this chart below which show a red line.  This red line is the 20 period simple moving average and shows us where the average price currently is located.  It also show you if the average price is getting higher or lower.  This movement, up or down, is what we can look at to help us identify the trend of the chart we are trading.  This chart is a daily chart of the USD/JPY.

One thing to remember is that this moving average line will change base of the the time frame chart you are using.  In this chart the period we are using is the daily chart, this means that the simple moving average is looking at the past 20 day to give the average price.  If the chart had a period of 15 minutes, then the simple moving average would represent the average price over the last 20, 15 minute bars (or last 5 hours).  In either case it give us the direction price has been moving during the chosen time period.  You can simply look at this line to tell you if there is a bullish up trend or a bearish down trend.  The you can look to trade in that direction.

Knowing that the average price has been going up or down is no guarantee that the it will continue to move in that direction, but it does give us the suggestion that it can continue to move in that direction.  This is what the trend tells us, not that it will, but that it is likely to continue in the current move.  Bullish and bearish trend come as price is pushed up or down and using the moving average is one way to help us better see these trends.