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Wednesday, February 24, 2010

Technical FOREX Analysis

Decoding Technical FOREX Analysis

Just like their counterparts in the equity markets, technical analysts in the FOREX market analyze price trends. The only real difference between technical FOREX analysis and technical analysis in equities is the time frame. FOREX markets are open 24 hours a day.

Because of this, some forms of technical analysis that factor in time have to be modified so that they can work in the 24-hour FOREX market. Some of the most common forms of technical FOREX analysis are: Elliott Waves, Fibonacci studies, Parabolic SAR, and Pivot points.

A lot of technical analysts combine technical indicators to make more accurate predictions. (The most common tendency is to combine Fibonacci studies with Elliott Waves.) Others prefer to create entire trading systems during the process of technical FOREX analysis in an effort to repeatedly locate similar buying and selling conditions.

10 Tips

Trading by Numbers

01: Pay attention to the market. Exit and enter trades based on market information. Don’t wait for a price you think the currency should hit when the market has changed direction on you.


02: There are times when, due to a lack of liquidity or excessive volatility, you should not trade at all. On a similar note, never trade when you are sick. You can’t count on yourself to be alert to the shifts of the markets, and make good decisions.


03: Trading systems that work in an up market may not work in a down market, and a system that works for trending markets, or for range bound markets may not work in other markets. Have a system for each type of market.


04: Up market and down market patterns are ALWAYS there, but you have to look for the dominant trends. Always select trades that move with the trends


05: During the blowout stage of the market, either up or down, the risk managers are usually issuing margin call position liquidation orders. They don't generally check the screen to see what’s overbought or oversold; they just keep issuing liquidation orders. Make sure you stay out of their way.


06: Trust your instincts. If something feels wrong about a trade, don’t make it. It’s better to be superstitious than to loose money.


07: Rumour is king. Buy when you hear the rumour, sell when you hear the news.


08: The first and last ticks are always the most expensive. Get in the market late, and out early. And never trade in the direction of a gap, either opening or closing.


09: When everyone else is in, it's time for you to get out. If a stock or currency is overbought, it’s time to exit your position.


10: Don’t worry about missing out on an opportunity to trade. There will always be another good one just around the corner. If the trade you are considering doesn’t meet all your entry signals but it seems to good to pass up, remember, you’re never going to run out of trades you can make.

Profits Run

Let Your FOREX Profits Run

Once you’ve designed and tested your system, there are a few trading fundamentals you will want to become familiar with. The first one is to always let your FOREX profits run. Let your trade go as long as it can and then take your FOREX profits once it moves back a bit from it’s high. This way you will be sure it has peaked, and you won’t be watching a position you closed keep climbing up, offering other traders higher and higher profits.

However, this is easier said than done. When a trade starts to become profitable, many traders quickly give in to their natural fear of losing the profits and close out the position. While it may seem reasonable to quit while you are ahead, it’s better to let your profits get as large as they can before you exit a trade.

Most trading consists of long stretches of small wins and losses that are followed by a few highly profitable trades. It’s these trades that can make the difference between realizing profits and simply breaking even; or even suffering a loss because of your trading costs, such as commissions, spread, and slippage. The key here is to let your profits run when you have a chance to.

You can do this by having trailing stops that are placed outside the daily noise of the market. This will ensure that the stops are not so tight that you are stopped out during ‘normal’ trading process. Moving the stops up as the price goes up, always keeping the same margin for noise, will make sure that you take your FOREX profits, not loose them.

This means you won’t get the maximum profit out of a winning trade, which is another reason why so many traders find this rule hard to implement. In fact, you should consider adding to any trade that is a winner, and think about widening your stops on it rather than trying to figure out how tight your stops can be to capture the largest amount of profit. If the trade has already shown you that it will be a winner, chances are it is a low-risk idea to add to the position now rather than ‘strangle it’ with stops that are too tight.

Make sure your trading system has room to let profitable trades run. If you have a procedure in place for these types of trades, then you won’t be tempted to take your FOREX profits too early when they do occur.

Manage Risk

Manage Your FOREX Risks to Maximize Profits

One tip for managing FOREX risks is to never add to a losing trade. If a trade has started moving against you, adding to your position on that trade will be extremely risky. The likelihood of it suddenly turning around and becoming profitable is very slim. If you are convinced there is potential for profit in the position, wait until it shows some profit before adding to it.

If you do wait until a position has shown a profit before adding to it, you will soon notice that nearly every losing trade ends up hitting your stop loss and does not change direction. Sometimes the trade does turn around before it hits your stop and becomes a winner. You can consider yourself very lucky if that happens.

But sometimes the trade hits your stop loss and then turns around and becomes a winner and you’ve guessed wrong. However, this is even more rare. But whatever happens, it is never worth adding to a losing position, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital on top of your initial risk.

Another tip for managing FOREX risks is to never risk too much capital on a single trade. You can’t trade without capital, so if you lose all your capital you are out of the game indefinitely. In poker, they say that going all-in works every time but once. It is the same in trading. If you risk all of your account on every trade it only takes one loss to wipe you out. You will be out of the game at some point, it’s only a matter of when

In general, you should keep your FOREX risks to 1-3% of your available capital on any individual trade. This percentage is calculated using the size of the position, the difference between your entry price and your maximum stop price, and your amount of capital. All trades that you make should seem almost inconsequential to your capital. If you are worried about the size of a trade it is too big, and you should reduce your position immediately.