Forex Trading

A Simple (But Not Easy) Way to Double Your Money in FX

Below is in excellent article from Boris Schlossberg.  He addresses one of the biggest hurdles faced by all forex traders (but particularly new traders): the psychology of expectations.  So many of us are initially lured into the ‘pits’ by wild claims of endless, easy riches.  A little common sense should reset such outsized expectations pretty quickly, but unfortunately, common sense is awfully uncommon.

Boris does a good job of pointing out the hucksters, and helping traders get their arms around what a very acceptable level of returns can be.  Read this and see how it jibes with your own set of expectations. 

 

Hosting an FX street webinar this week I made an off the cuff remark that when trading Flow I aim to make 20 pips for every 3 trades I take. I was instantly greeted with derision in the chat room.”So little! Why even bother?” Which of course sent me into a state of paroxysm as I went on five minute tirade trying to explain to the novice traders in the room that 20 pips every three trades was actually a very generous return and they should be grateful if they can achieve that target over a sustained period of time.

One of the things I despise about our business is the amount of nonsense and sheer outright lies that are constantly peddled to new traders. The most odious con in FX is “My system made 1000 points in the last week. Try it now!” First of all, realize that most currencies move less than 1000 points in a year much less a week. Secondly, if you are actually naive enough to fall for that lie then you will almost certainly lose all your money.

Understand that on a cash on cash basis most professional FX money managers earn less than 5% annual returns. I know this because at BK we get the Barclay’s Currency Index every month and the returns are measly. We have been fortunate enough to beat the index every year since 2008, but our own returns are nowhere near the 1000′s of pips per year that you see shamelessly advertised on the Net.

So, given these real life constraints how can you double your money in FX in a year? Well here is one possible, though by no means certain scenario that you want to consider. Let’s assume a standard $5000 FX Trading account (this is an average account of most retail traders). Let’s further assume that your trading strategy generates 20 pips of profit for every three trades, or approximately 50 pips per every 10 trades. If you trade 10 times per week using 4:1 leverage ($20,000 notional amount per trade) you would expect to make $100 per week. At 50 weeks per year that adds up to $5000 or a doubling of your account.

Note that this is hardly an example of a glamorous turn-$5000-into-a-million trading strategy that is commonly used in FX. I applied leverage sparingly and targeted very modest weekly returns and yet if you can achieve these limited goals on a consistent basis you stand a good chance of doubling your account. That’s why 20 pips every three trades is nothing to scoff at.

Monday, November 28th, 2011 Boris Schlossberg, Evergreen, Forex Trading No Comments

A Rocket In My Pocket

Some of Boris’ suggestions make me a bit uncomfortable: his thoughts on risk/reward ratios, some of his technical triggers, etc.  They just don’t sit well with me.  But the following article he emailed followers is right on the money.  See what you think.

“I think I just fell in love,” I announced to my business colleague as we walked around a Ducati parked casually on sidewalk of downtown Melbourne.  The bike was  monster, it’s speedometer showing that  it could go beyond  230 kilometers per hour. In Melbourne motorbikes are everywhere, strewn along the outer edges of its sidewalks often left completely unchained. For  a bike enthusiast  like me a day spent walking aimlessly around this beautiful city was a true treat as I gawked at the gleaming steel and fat rubber tires of some the most beautiful machines in this world.

 
I have never owned a bike and have ridden on one only once in my life but I pine for the motorcycle experience with the intensity of an unrequited lover.  I adore the power, the speed,  the overall beauty of the machine. Is there anything cooler than flying down some deserted road, wind at your back, every muscle in your body fully focused on the task at hand as the bike relentlessly swallows concrete?  
 
 
Well maybe not.
 
 
As I was leaving Melbourne reality quickly jarred me out of my Walter Mittiesque fantasies of glamour and adventure on the road. Driving  on the main highway towards the airport, you are confronted by an endless parade of billboards that proclaim, “Motorcyclists are 38 times more likely to suffer serious injury.”  Not 38% but 38 times! That statistic stopped me cold in my tracks and suddenly riding a motorbike was no longer so appealing.
 
 
I had always known that bike riding was dangerous, but until that moment I had never realized just how fatal it could be. Having the odds so starkly spelled out suddenly made it much clearer to me that this was activity best pursued through the reverie rather than reality.
 
 
Seeing those signs pass me by every few meters or so, I thought wouldn’t it be great if we could have those warnings as traders? Imagine if you were about to do something stupid like double up for the fifth time in a row on a continuously losing position and warning popped announcing “This strategy has a 90% chance of blowing up your whole account.” Unfortunately trading comes without warning labels and we must learn all our lessons from the school of hard knocks. Fortunately an accident in trading will only wreck your money not your body – yet another good reason for why you should trade small until you master the rules of the game. Like the deadly combination of speed and concrete trading can be completely unforgiving, which is why we should learn to quickly abandon all the romantic fantasies turning $1000 into 1 Million and focus instead on reducing risk as much as possible.
Driving a simple four door sedan with you seat belt firmly strapped in place may not be  nearly as exciting as flying down the road in a Ducati Diavel, but it is the right thing to do if you want to survive. Something we should all keep in mind when we sit in front of our FX screens ready to take on the market.
Monday, October 17th, 2011 Education, Evergreen, Forex Trading No Comments

USD/SGD Divergence Cues Swing Trading Opportunity

Swing trading remains one of the most reliable approaches to trading today’s markets – even with the current volatility as untamed as it is.  There are a number of specific approaches to the general idea of swing trading – this article uses the idea of ‘divergence’.   A divergence occurs when actual price activity and price based indicators begin telling different stories; for instance, higher highs in the price chart contrasted with lower highs on the indicator.  These divergences often point to a change in the underlying activity which isn’t immediately apparent to the human eye.

 

Walker England , Trading Instructor,

October 6, 2011

 

USD/SGD Divergence Cues Swing Trading OpportunityUSD/SGD Divergence Cues Swing Trading Opportunity

USD/SGD Set to Swing from 1200 Pip Retracement

The USD/SGD has been one of the strongest market trends. The pair has steadily made lower lows dating back to the March 2010 high at 1.557. Recently the pair has reversed. Since July 2011 the pair retraces 1208 pips from its low of 1.1988 up to the October 4th high of 1.3196. This move against the trend offers traders a chance to rejoin the broader daily trend and potentially swing the pair back with a selling bias.

 

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USD/SGD Divergence Cues Swing Trading OpportunityUSD/SGD Divergence Cues Swing Trading Opportunity

Fundamentally, the USD remains weak. Unemployment is still residing at 9.1%, with most market participants predicting the rate to not to change for Friday news event. Expectations can be found updated on the DailyFX economic calendar. As this news week unfolds we will look for chances to enter in the market with our daily trend.

Taking Price in to an 8HR chart we see divergence forming on the USD/SGD. Divergence can be seen by noting the USD/SGD created a higher on October 3rd. The MACD (Moving Average Convergence Divergence) Indicator has created a lower low during the same time frame. Traditional divergence, as represented by a separation of price and an indicator, is a tool utilized by swing traders looking to find a top / bottom after a period of price volatility.

My preference is to sell the USD/SGD in the direction with our broader daily trend with entry’s placed under 1.3000. Stops should be placed over resistance at 1.3250. Limits should be placed at 1.2500 for a clear 1:2 risk reward ratio. A second target may be placed at the 200 MVA on our 8Hour chart near 1.2290.

Alternative scenarios include price breaking through resistance found from the December 2010 high.

 Walker England contributes to the Instructor Trading Tips articles .To receive more timely notifications on his reports, email wengland@fxcm.com to be added to the distribution list.

Read more: http://www.smh.com.au/business/daily-forex/usdsgd-divergence-cues-swing-trading-opportunity-20111006-1la1o.html#ixzz1agaB1rTA

Thursday, October 13th, 2011 Education, Forex Trading 1 Comment

Vince Farrell: So, Now You Want to Save the Euro?

Vince Farrell is a good thinker when it comes to involvement in the financial markets.  I particularly like his observation: “I don’t trust Medvedev/Putin either. Well, actually I do. I trust Medvedev/Putin to be what they are. If I go swimming in shark infested waters, I shouldn’t blame the shark when he acts like a shark. “   It’s right on the money – we have to recognize reality as it is, not as we’d like to imagine.


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Published: Tuesday, 27 Sep 2011 | 1:00 PM ET

The market has found its Nirvana. The Europeans have floated an idea to solve the ills of their financial world.

The European Financial Stability Facility — EFSF — was created last year to assist troubled nations.

The original funding was 440 billion euros (if all the sovereign states agree to its expansion in the upcoming votes). Since that will not be nearly enough, and since the problems have at their root excessive debt, the geniuses decided to create more debt.

The EFSF, it is suggested, can lever itself 8:1 and borrow from the European Central Bank, ECB. We’re talking a couple of trillion. But don’t worry, the Europeans that are having all the trouble will guarantee it. Maybe.

Chancellor Merkel has signed on to the need of extreme steps to save the Euro and said Germany will do whatever it can to help Greece regain market confidence. This is a big change from her prior calls to punish Greece for its wasteful ways. Her commitment to the Euro is impressive in light of the popular anger over the situation.

But, and there are several buts, Andreas Vosskuhle (you remember Andy. He was always a bit grouchy) is now head of Germany’s Constitutional Court. He told the local rag, Frankfurter Allgemeine, that “The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature. …..There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit….then Germany must give itself a new Constitution. A referendum would be necessary. This cannot be done without the people.”

That may or may not be legally correct. It would certainly delay if not kill the concept. The markets are choosing a deal over a non-deal. But Germany still has to vote this Thursday (Parliament, not the populace) on expanding the original EFSF to allow it to buy European Union bonds and to invest in banks. The politicos will probably go along with it, but let’s wait for the vote.

And isn’t this a bit of a daisy chain? The EFSF creates a European Investment Bank, EIB, that forms a Special Purpose Vehicle, SPV, that issues bonds that buys busted debt. The Rube Goldberg structure strikes me as a way of getting around something. Does it circumvent German law, and the original demand by Germany not to leverage a rescue package?

Another issue is the use of leverage. Borrowing a few trillion from the European Central Bank is still the same as borrowing from the member states in that they guarantee the bank. Bailing out the profligate might not make for a real effective disciplinary lesson.

But maybe I’m just being a grouch.

I can’t help but think one headline out of Europe could halt the whole market rally. Suppose a country like Slovakia says not one more penny for bailouts. We can’t afford it. Wait, Slovakia did say that and the market seems not to care. I guess I am being a grouch. But watch out for this rally. I don’t trust it.

I don’t trust Medvedev/Putin either. Well, actually I do. I trust Medvedev/Putin to be what they are. If I go swimming in shark infested waters, I shouldn’t blame the shark when he acts like a shark. Someone should have reminded Russia’s Finance Minister, Alexei Kudrin, about that particular fact of life. Despite being well respected in the international financial community, he complained about the new structure and was gone as fast as Representative Anthony Weiner should have been. I trust Putin to be like the KGB Colonel he was. To do otherwise in unwise.

Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC. 

Tuesday, September 27th, 2011 Forex Trading No Comments

Why the Euro Has More Room to Fall

Published: Tuesday, 13 Sep 2011 | 12:12 PM ET
By: Kelley Holland
Currency Blogger, CNBC.com
 

 

 

 

 

 

 

It’s not just the euro’s troubles making a certain euro-dollar trade look good. It’s also the dollar.

All the fear and loathing aimed at the euro[EUR=X  1.3696    0.0029  (+0.21%)   ]  lately has obscured the outlook for the dollar[.DXY  76.99    -0.60  (-0.77%)   ]- which in relative terms is pretty good, says Todd Gordon, co-head of research and trading at Aspen Trading Group “We’ve been talking about the euro but the dollar has asserted itself as the safe haven currency,” Gordon told CNBC’s Melissa Lee, especially since the Swiss franc[CHF=X  0.8789    -0.0015  (-0.17%)   ]and Japanese yen[JPY=X  76.89    -0.26  (-0.34%)   ]are facing government intervention.

News events are making investors run scared, Gordon says, and “U.S. dollar and risk aversion will continue to be the choice.” On the other side, last Friday’s resignation of Germany’s Jürgen Stark from the European Central Bank “opens the door” to interest rate cuts in Europe, Gordon says, as does the imminent departure of Jean-Claude Trichet.

Technical patterns also suggest the euro is due to fall further, Gordon says. Looking at Fibonacci patterns, he compares each corrective leg to the next corrective leg, and that suggests the trade is to go short the euro against the dollar at $1.37 with a stop at $1.39 and a target of $1.32.

Oh, and step lively. Gordon notes that the euro has been falling precipitously in the last few days, and he thinks that $1.32 target could be reached this week or next.

Tuesday, September 13th, 2011 Forex Trading No Comments

‘Buy All the Euro You Can’ If Greece Defaults: Jim Rogers

Published: Friday, 9 Sep 2011 | 12:54 PM ET



A Greece bankruptcy would actually be a good thing because “it’s time for people to acknowledge reality,” well-known investor Jim Rogers told CNBC Friday.

“If you’re bankrupt, go bankrupt, reorganize,” Rogers said. “Countries have been going bankrupt for centuries, there’s nothing new about it.”

Stocks tumbled Friday amid renewed fears that Greece may default on its debt, as well as the sudden resignation of a key policymaker of the European Central Bank.


Rogers said that if Greece defaults, some other countries will default too—Italy, Spain, Ireland and a few others.

If this happens “the euro will go down a far amount. But I would buy all the euro I could at that point because then that would mean that Europe is going to have a very strong, sound currency,” he explained. “People can not lie about their finances anyone, people have to run a tight ship.”

 ”It would be a lot of pain between now and then, but boy if that happened in the next month or so, buy all the euros you can,” Rogers said.

The new head of the IMF has said to the [euro zone], ‘guys you’ve got to raise more capital’ [and] they do. They’re the ones who bought all this garbage, why should you and I and Finnish taxpayers bail out banks that made mistakes? I didn’t make those loans, they made the loans,” he explained.

In addition, Rogers went on to say he was long the U.S. dollar. “The only reason I’m long…is because everybody in the world, including me, has been terribly pessimistic. And whenever that happens you should take the other side of the trade.”

 “So I’m long the U.S. dollar, I have no confidence in it, its going to be a diaster, but as we speak I own probably more U.S. dollars then I’ve owned in years, and certaintly more than any other currency.”

Monday, September 12th, 2011 Education, Forex Trading No Comments

What Type Of Forex Trader Are You?

What are some things that separate a good trader from a great one? Guts, instincts, intelligence and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames that assist traders in developing their ideas and executing their strategies. At the same time, timing also helps market warriors take several things that are outside of a trader’s control into account. Some of these items include position leveraging, nuances of different currency pairs, and the effects of scheduled and unscheduled news releases in the market. As a result, timing is always a major consideration when participating in the foreign exchange world, and is a crucial factor that is almost always ignored by novice traders.


Want to bring your trading skills to the next level? Read on to learn more about time frames and how to use them to your advantage. 

Common Trader Time frames
In the grander scheme of things, there are plenty of names and designations that traders go by. But when taking time into consideration, traders and strategies tend to fall into three broader and more common categories: day trader, swing trader and position trader

1. The Day Trader
Let’s begin with what seems to be the most appealing of the three designations, the day trader. A day trader will, for a lack of a better definition, trade for the day. These are market participants that will usually avoid holding anything after the session close and will trade in a high-volume fashion.

On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This is in order to capture more profit from a rather small swing. As a result, traders who work in proprietary shops in this fashion will tend to use shorter time-frame charts, using one-, five-, or 15-minute periods. In addition, day traders tend to rely more on technical trading patterns and volatile pairs to make their profits. Although a long-term fundamental bias can be helpful, these professionals are looking for opportunities in the short term. (For background reading, see Would You Profit As A Day Trader? and Day Trading Strategies For Beginners.)

Figure 1
Source: FX Trek Intellicharts
One such currency pair is the British pound/Japanese yen as shown in Figure 1, above. This pair is considered to be extremely volatile, and is great for short-term traders, as average hourly ranges can be as high as 100 pips. This fact overshadows the 10- to 20-pip ranges in slower moving currency pairs like the euro/U.S. dollar or euro/British pound. (For more on pairs trading, see Common Questions About Currency Trading.)

2. Swing Trader
Taking advantage of a longer time frame, the swing trader will sometimes hold positions for a couple of hours – maybe even days or longer – in order to call a turn in the market. Unlike a day trader, the swing trader is looking to profit from an entry into the market, hoping the change in direction will help his or her position. In this respect, timing is more important in a swing trader’s strategy compared to a day trader. However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that followed a precipitous drop in the GBP/USD currency pair. The entry would be placed on a test of support, helping the swing trader to capitalize on a shift in directional trend, netting a two-day profit of 1,400 pips. (To learn more, read The Daily Routine Of A Swing Trader and Introduction To Types Of Trading: Swing Traders.)
 

Figure 2
Source: FX Trek Intellicharts


3. The Position Trader
Usually the longest time frame of the three, the position trader differs mainly in his or her perspective of the market. Instead of monitoring short-term market movements like the day and swing style, these traders tend to look at a longer term plan. Position strategies span days, weeks, months or even years. As a result, traders will look at technical formations but will more than likely adhere strictly to longer term fundamental models and opportunities. These FX portfolio managers will analyze and consider economic models, governmental decisions and interest rates to make trading decisions. The wide array of considerations will place the position trade in any of the major currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.

Additional Considerations
With three different categories of traders, there are also several different factors within these categories that contribute to success. Just knowing the time frame isn’t enough. Every trader needs to understand some basic considerations that affect traders on an individual level.

Leverage
Widely considered a double-edged sword, leverage is a day trader’s best friend. With the relatively small fluctuations that the currency market offers, a trader without leverage is like a fisherman without a fishing pole. In other words, without the proper tools, a professional is left unable to capitalize on a given opportunity. As a result, a day trader will always consider how much leverage or risk he or she is willing to take on before transacting in any trade. Similarly, a swing trader may also think about his or her risk parameters. Although their positions are sometimes meant for longer term fluctuations, in some situations, the swing trader will have to feel some pain before making any gain on a position. In the example below (Figure 3), notice how there are several points in the downtrend where a swing trader could have capitalized on the Australian dollar/U.S. dollar currency pair. Adding the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross. However, over the span of two to three days, the trader would have had to withstand some losses before the actual market turn could be called correctly. Magnify these losses with leverage and the final profit/loss would be disastrous without proper risk assessment. (For more insight, see Forex Leverage: A Double-Edged Sword.)

Figure 3
Source: FX Trek Intellicharts
Different Currency Pairs
In addition to leverage, currency pair volatility should also be considered. It’s one thing to know how much you may potentially lose per trade, but it’s just as important to know how fast your trade can lose. As a result, different time frames will call for different currency pairs. Knowing that the British pound/Japanese yen currency cross sometimes fluctuates 100 pips in an hour may be a great challenge for day traders, but it may not make sense for the swing trader who is trying to take advantage of a change in market direction. For this reason alone, swing traders will want to follow more widely recognized G7 major pairs as they tend to be more liquid than emerging market and cross currencies. For example, the euro/U.S. dollar is preferred over the Australian dollar/Japanese yen for this reason. 

News Releases
Finally, traders in all three categories must always be aware of both unscheduled and scheduled news releases and how they affect the market. Whether these releases are economic announcements, central bank press conferences or the occasional surprise rate decision, traders in all three categories will have individual adjustments to make. (For more information, see Trading On News Releases.)


Short-term traders will tend to be the most affected, as losses can be exacerbated while swing trader directional bias will be corrupted. To this effect, some in the market will prefer the comfort of being a position trader. With a longer term perspective, and hopefully a more comprehensive portfolio, the position trader is somewhat filtered by these occurrences as they have already anticipated the temporary price disruption. As long as price continues to conform to the longer term view, position traders are rather shielded as they look ahead to their benchmark targets. A great example of this can be seen on the first Friday of every month in the U.S. non-farm payrolls report. Although short-term players have to deal with choppy and rather volatile trading following each release, the longer-term position player remains relatively sheltered as long as the longer term bias remains unchanged. (For more insight, see What impact does a higher non-farm payroll have on the forex market?)

Figure 4
Source: FX Trek Intellicharts
Which Time Frame Is Right?
Which time frame is right really depends on the trader. Do you thrive in volatile currency pairs? Or do you have other commitments and prefer the sheltered, long-term profitability of a position trade? Fortunately, you don’t have to be pigeon-holed into one category. Let’s take a look at how different time frames can be combined to produce a profitable market position.

Like a Position Trader
As a position trader, the first thing to analyze is the economy – in this case, in the U.K. Let’s assume that given global conditions, the U.K.’s economy will continue to show weakness in line with other countries. Manufacturing is on the downtrend with industrial production as consumer sentiment and spending continue to tick lower. Worsening the situation has been the fact that policymakers continue to use benchmark interest rates to boost liquidity and consumption, which causes the currency to sell off because lower interest rates mean cheaper money. Technically, the longer term picture also looks distressing against the U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.

Figure 5
Source: FX Trek Intellicharts
Like a Day Trader
After we establish the long-term trend, which in this case would be a continued deleveraging, or sell off, of the British pound, we isolate intraday opportunities that give us the ability to sell into this trend through simple technical analysis (support and resistance). A good strategy for this would be to look for great short opportunities at the London open after the price action has ranged from the Asian session. (For more, see Measuring And Managing Investment Risk.)

Although too easy to believe, this process is widely overlooked for more complex strategies. Traders tend to analyze the longer term picture without assessing their risk when entering into the market, thus taking on more losses than they should. Bringing the action to the short-term charts helps us to see not only what is happening, but also to minimize longer and unnecessary drawdowns.

The Bottom Line
Time frames are extremely important to any trader. Whether you’re a day, swing, or even position trader, time frames are always a critical consideration in an individual’s strategy and its implementation. Given its considerations and precautions, the knowledge of time in trading and execution can help every novice trader head toward greatness.

Richard Lee is currently a contributing analyst for ForexAlliance and BinaryMagnates.com. Employing both fundamental and technical models, Lee has previously been featured on the DailyReckoning, DailyFX.com, Bloomberg, FX Street.com, Yahoo Finance and TradingMarkets.com. In analyzing the markets, he draws from an extensive experience trading fixed income and spot currency markets in addition to previous stints in options, futures and equities.

Read more: http://www.investopedia.com/articles/forex/09/day-swing-position-trader.asp#ixzz1WjRxxlo0

Thursday, September 1st, 2011 Education, Evergreen, Forex Trading No Comments

John Murphy’s Key to Success: Simplicity

by JimWyckoff

 
“My work has gotten better due to simplifying my approach,” John J. Murphy, the veteran technical analyst, author and CNBC resident technical analyst, told a group of equities and futures traders attending the Technical Analysis Group (TAG) XVIII trading conference sponsored by Dow Jones Telerate in New Orleans.

Murphy said he relies heavily on five or six “useful” technical indicators, including relative strength indicators, trendlines, moving averages, Bollinger bands, classic chart patterns such as triangles and double tops, and Fibonacci retracement levels.”You must trade a combination of technical signals, not just one” indicator, said Murphy. He said that many times he’ll set up a “good” column and a “bad” column regarding technical studies. If the “good” column has the overwhelming evidence supporting a selected trade, Murphy will enter the trade. But if the evidence supporting a trade is not strong enough, he’ll bypass the trade.

Murphy correctly called the topping of the U.S. semiconductor stock index (SOX) during midsummer (of the year this story was written). His reasoning was plain and simple: the SOX uptrend line was broken, followed by a double-top formation. “The first sign of a top is breaking of an uptrend line,” he said.

On moving averages for individual stocks, Murphy likes to use the 50-, 100-, and 200-day moving averages. If the 200-day moving average on an individual stock is broken on the downside, “big trouble” is in store for that stock. Also for stock sectors, he said if a 50-day moving average breaks down, “that sector is in trouble.”

Charting a stock market sector divided by the S&P 500 is a favorite method the veteran technician uses to determine if a given sector is underperforming the broad market. (Examples: SOX index divided by S&P 500 index, or NASDAQ index divided by the S&P 500 index.)

Another good technical indicator is the Moving Average Convergence Divergence (MACD), said Murphy. The MACD uses exponential moving averages, as opposed to the simple moving averages used with an oscillator. Gerald Appel is credited with developing the study.

Longer-term technical signals are more powerful than shorter-term signals, said Murphy. “Longer-term charts give you the value of perspective,” he said.

Many traders consider Murphy’s book, “Technical Analysis of the Futures Markets” to be the bible of technical analysis.Murphy heads his own consulting firm, based in Oradell, N.J.

 

http://www.traderplanet.com/articles/view/16-john_murphy_s_key_to_success_simplicity

Why I Add to Winning Positions

By Walter Peters | TradingMarkets.com | April 05, 2011 01:40 PM
 

 

Many traders find a great trade setup; take the trade, and then watch. If the trade goes in the opposite direction – if the trade does not do well many traders will consider adding to the position.

Averaging down, adding to a losing position, it does not matter what it is called, it is basically taking more of a losing position. It is no different than making reservations for a restaurant that you don’t like because the food made you ill and the staff was rude. It sounds funny but it is true. By adding to a losing position you are asking for more of what you don’t like.

Now, let’s consider this scenario. Let’s say that you make reservations for a restaurant, you show up to find your table waiting for you, the staff are wonderful and the food is great. Would you only eat an appetizer because you didn’t want to “ruin the experience?” Would you leave early because you don’t want to have “too much of a good thing?”

You probably wouldn’t if you are like most people.

But this is exactly what many traders do – they add to losing positions (often maximizing the loss) and they rarely add to positions that immediately go in the expected direction.

Think about what that means for your trading account. That means that when you are right you are not maximizing profits and when you are wrong you are increasing your losses.

One great way to increase your profits is to add more positions as the trade goes in the expected direction. This is a lot like making reservations for that great restaurant – you know the food is good and you want some more!

Many traders can exponentially improve their profits by simply adding to winning trades and resisting temptation to add to losing positions.

EUR/JPY Chart

Here is an example from this week. With this trade I sold the EUR/JPY at 137.00 and targeted the red line down at 136.00. I could have simply sold the EUR/JPY and waited for the market to hit 136.00 – and then I could congratulate myself and be very happy since the trade made 100 pips. But instead, because the trade went in my direction I added to the trade and made 280 pips instead. This is how it unfolded. I took one position at 137.00 and then I put additional sell orders in at 136.50 (one position), 136.40 (one position), 136.30 (one position), 136.20 (two positions) and 136.10 (two positions).

Additional sell orders Chart

Instead of 100 pips on the winning trade I had several positions 100+50+40+30+(20×2)+(10×2) = 280 pips. Notice how I did not immediately add to the trade, but instead decided that if the trade went 50 pips in the expected direction I would allow the additional sell orders to kick in.

Target Hit Chart

What would have happened had this trade immediately gone against me? Well, I would have only lost on the first position, thereby limiting my losses. I think it is important to wait for the market to give you feedback before you start adding to a winning position, so I always place additional orders at least 50% closer to the profit target than the initial position.

Think how much more money you would make if your losing trades were more than 87% smaller than your winning positions … it is a lot like making reservations for that excellent restaurant, over and over again.

Walter Peters, PhD is a professional forex trader and money manager for the DTS private fund. In addition, Walter is the co-founder of Fxjake.com, and often coaches other traders. If you would like to learn more about Walter’s trading strategies, take a look at Walter’s upcoming webinar.

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Original publication: October 29, 2009
 
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Thursday, August 18th, 2011 Education, ETF, Evergreen, Forex Trading, Stock Trading No Comments

Avoid These Four Technical Pitfalls

 Everyone is a chart reader these days, but the venerable practice isn’t as easy as it looks — there are just a few ways to make money but a thousand ways to be wrong. This is especially true now that all sorts of fundamental types are staring at price patterns because their 9-to-5 discipline no longer works.

The devil is in the details with pattern analysis, because no two charts are exactly alike. And above all else, chasing the same patterns that everyone else sees in the books, or on the Web, it is a straight shot to the poorhouse. But that doesn’t stop legions of amateur technicians from throwing cash at the same losers over and over again.

In reality, observant technicians can find good trading opportunities with relatively little effort, because they know exactly what to avoid when looking at similar sets of patterns. This is an advanced skill set that’s missing with the majority of folks who believe they possess magical powers because of their chart divinations.

With this admonition in mind, let’s talk about stock scanning and your evening research. Chart database programs offer advanced tools that search quickly for your needle in the market haystack. Many traders think the purpose of these nightly scans is to find perfect positions that can be mindlessly executed, but nothing is further from the truth.

The most accurate scans just take you to the next step, where you’re forced to discover the trading opportunity for yourself. This “last yard” of effort is where armchair technicians fail miserably, because their unskilled eyes try to fit all sorts of random chaos into predictive patterns that, in reality, aren’t so predictive.

The most effective way to overcome this form-fitting bias is by embracing subtlety when you’re flipping through the price charts. You can start by internalizing these four cautionary patterns that are lying in wait to steal your money.

Bunny Slopes

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There’s little profit when price rises or falls in an overly gentle pattern. Conversely, real opportunity comes when strong tension between bull and bear energy gets released suddenly, trapping one side and triggering sharp directional movement. Of course, this is nothing more than opportunity cost translated onto pattern analysis.

The good news is it takes only a second or two to identify a weak angle of attack on a price chart. Ironically, trading bunny patterns during periods of high volatility is a bona fide defensive strategy, because it limits risk. Perhaps that’s why you’ll find so few of them after last year’s market crash.

Border Disputes

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Stand aside when price action gets caught at, or in between, big moving averages. These conflict zones eventually yield trades, but patience is required because the battle can go on for weeks. For example, notice how Broadcom (BRCM – commentary – Cramer’s Take) has chopped along the 50-day moving average for almost three months now while everyone waits for it to break out or break down.

In particular, focus on interplay between price and the 50-day and 200-day moving averages as you flip through the charts. You’ll often see ping-pong action as price bounces back and forth between the two major barriers. Not surprisingly, these pivots will provide interesting swing trades as long as you don’t overstay your welcome.

Davy and Goliath

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Conflicting patterns in different time frames trap many traders in very bad positions. These trend relativity errors occur when you see a great pattern but miss the larger support or resistance that’s going to screw up the trade. Avoiding this error is simple. Look above and below the entry price for the setup that’s catching your eye.

Then do the math. Realistically, how far can price travel before it runs into a major brick wall? If that number is less than 3 times the distance to your logical stop loss, avoid the trade entirely. This sounds easy, but marginal traders have a really tough time staying out of trouble with this pattern, because it looks too good to pass up.

Trend Mirrors

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What happened in the past has a major impact on what happens in the future, so look to your left before taking the trade. Trend mirrors point out all the past debris that will affect price movement right now and into the future. In particular, current action responds to pivots created by old highs, lows and gaps with startling reliability.

 

In truth, price reacts a lot more than it acts. In other words, prior reversals and gaps generate major swings during current price discovery. With this in mind, smart technicians gauge the adverse impact of all prior highs/lows, gaps, volume spikes, and candle shadows when they’re examining an interesting pattern right here in the present.

 

 

 
ABOUT THE SWING SHIFT
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Alan Farley writes The Swing Shift three times per week for RealMoney.com. RealMoney.com and TheStreet.com also publish “Alan Farley’s The Daily Swing Trade”. Discover profit opportunities others don’t see with this outstanding daily advisory newsletter. For more information, The Daily Swing Trade

 

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Tuesday, August 16th, 2011 Education, ETF, Forex Trading, Stock Trading No Comments