Use The Fibonacci 127 For Consistent Profits

A solid currency trading strategy consists of entering a trade at the right place, having a stop that is properly calculated, and setting a reasonable profit target level that works time after time after time.

Many newer traders set too ambitious profit targets expecting the trade to be "the big one" and hoping it will help offset the losses they have accumulated.

However, a far more effective currency trading strategy is to set a reasonable profit target each time, not expecting the home run, and being satisfied with smaller profits which on a consistent basis will build the equity in the account surprisingly quickly once the compounding action kicks in.

Here is where the Fibonacci tool comes in.

This article assumes a trader knows how to use the Fibonacci tool which comes as a standard technical analysis tool on most charting software packages.

While the key retracement levels are 38, 50, 62 and 70 percent, two extension levels are commonly used - 1.27 and 1.62 percent.

The Importance Of Fib 127

It is the 1.27 level we are interested in.

Why?

Because price regularly gets to the 1.27 level, or at least within a few pips of it. Price also gets to the 1.62 level fairly often but not nearly as often as the 1.27 level.

So if you are trading with the trend, always a safe currency trading strategy, and price has pulled back to the 50 or 62 retracement levels, there is a very reasonable chance price will reach the 1.27 target.

If price pulls back to the 79 retracement level it may not go so far. If you trade from that retracement, you will want to take the first profit at the end of the swing as price may not extend beyond that point to the 1.27 or 1.62 level.

Some traders just focus on this currency trading strategy when going with the trend:

• In at the Fib 50 retracement
• Out at the Fib 127 extension

Why is this such a sound currency trading strategy?

Because the Fib 38 retracement level does not offer such a good risk reward ratio many times. There is always the risk price will pull back further and take out your stop.

On the other hand, price frequently fails to reach the 62 or 79 retracement levels so the trader is left on the sidelines as the trade fails to get filled.

The 50 level is frequently reached so the trader has a good chance of getting his order filled.

On the other hand, the 127 extension is not too ambitious. In at 50 and out at 127 will often net a profit of somewhere between 25 and 40 pips. With a 20 to 25 pip stop the risk reward ratio is satisfactory.

How To Use Fib 127

Here are some other factors to consider when using the Fib 127 extension:

Look to see if this level coincides with other factors such as

A previous key level of support or resistance on the higher time frames such as 1 hour, 4 hour, daily, or even weekly.

The 200 EMA (Exponential Moving Average) on the 1 hour or 4 hour. This often provides quite a strong level of support and resistance.

A pivot point (Central Pivot Point, R1, R2, S1, S2, or M1-4 levels ) calculated from the previous day's High, Low and Close.

Even when targeting the Fib 127 as the profit taking point, it is wise to trim a couple of pips of the limit order. So often price will nearly reach Fib 127 and pull back.

Yes it might go on to touch it later but in the meantime price retraces and you have to have the mental stamina to be able to handle that.

Many traders would rather just take a slightly smaller profit and save themselves one or two hours of price consolidation with the risk they may lose the profit altogether.

A solid currency trading strategy develops over time. A key ingredient is not being too ambitious. The Fib 127 extension level is a reasonable profit target you can use regularly to extract your wages from the Forex market!

Source: http://www.realisticforex.com

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Are Your Stop Loss Killing You?

Currency day trading generally involves moving in and out of the market within a short time, from a few minutes when the market is moving quickly to a few hours, in order to take a small number of pips, perhaps 5 to 20 in the case of the scalper, or 25-40 in the case of a longer term move.

Wrongly positioned stops can really cause trouble for the newer trader and result in needless losses which in time can kill the account.

Here are five guidelines when setting stops for currency day trading which can help avoid much grief:

Don't Set Your Stop Too Close To Entry

Don't set your stop too close to price action so a spike in price can take out the trade before price continues in the direction the trader anticipated in the first place. Allow some breathing space.

Don't Make The Stop Too Large

Don't make the stop too large in relation to the profit target resulting in a poor risk reward ratio.

Don't Set An Arbitrary Stop

Rather than setting the stop according to an arbitrary number of pips such as 20 or 25, study your charts and observe the next levels of support or resistance above or below your entry point and set your stops accordingly.

It could be by setting your stop at 25 you are just below a key level of resistance which price is very likely to come back and test. It may just touch the resistance level going past your stop and then continue on down. How frustrating when you entered a short trade and you were right all along as to direction. Much better to put your stop the other side of the resistance line so it acts as a protection level.

Of course, if doing that means your stop will be 30 or 35 pips away from your entry level you may choose to sit on the sidelines and let this one go. The risk would be too great in relation to your profit target. What's the sense of risking 35 pips to try and gain 20?

Avoid Round Numbers

Another common error newer traders make is to set a stop at a round number. Round numbers are psychological barriers in the minds of many traders and price often will come and test a round figure.

Some currency pairs, e.g. GBP/USD seem to react frequently when reaching key levels such as 1.9700, 1.9800 etc. It makes no sense to put your stop at that number as there is a high chance price will just come back to touch it or go beyond it by a few pips before reversing.

Don't Move Your Stop Back Once The Trade Is In

A major mistake newer traders make is moving the stop back once the trade is in progress. This really is a NO NO! As price comes dangerously close to the stop. the newer trader gets nervous and thinks, "I didn't leave enough breathing space. I'll just move it back another 5 pips." This habit spells disaster when currency day trading.

Think out your trade carefully before pulling the trigger. Spend just as much time calculating the stop position as you do the entry point. Once you have set the trade with carefully researched entry, stop and limit points, put it in, and leave it!

Just mastering the self-discipline to follow this guideline strictly will save you so much grief in the future.

Handle Losses Professionally

Finally, if your stop is taken out, learn to handle the loss in a professional way. Losing is part of the currency day trading scenario. You have to get used to it. Look upon it as paying the rent!

As long as you stick to your solid currency day trading system you will have more winners than losers over time and your account will gradually and consistently grow.

Master the art of controlling your stops using the 5 guidelines above and live to see another day when currency day trading online!

Source: http://www.realisticforex.com

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The Forex Almighty Stop Loss

Stops matter more than almost anything else in trading. So few understand them. Some don’t even use them at all – mental or otherwise.

The misunderstandings about stops contributes to more losses than just about anything else in trading. Think about your philosophy on stops. Do you have one? Can you articulate it? I’m willing to bet that 99% of traders do not have written stop loss rules.

This ebook is about stops and using them correctly. It’s about destroying some of the myths surrounding stop loss orders. It’s about helping to make you a better trader.

Myth 1: There is a Magic Ratio

I know that a zillion people are going to write me and criticize what I’m about to say. Let me say up front: if you read to the end of the ebook, we talk about what a smart ratio includes. I’m not against ratios per se. I’m just against “holy grail” ratios. I think the illustration below captures the thought. People will tell you, on message boards and in courses and on the Web and in videos and in books that you have to have a “certain” ratio – your average win has to be greater than your average loss. Is this true? Is that really, really true?

No! It’s a bunch of BS and it has caused more traders than I can list to go broke trying to get 50 pips for every 25 that they lose. Or 100 pips for every 30 that they lose, because someone was talking to them about having to have twice as many pips on their wins as they have on their losses.

You can’t just think about your stops in relation to your gains. You can’t cut off every trade just because it’s reached a point at which it equals 50% of your average gain. That’s ridiculous. While it might be true that you’re doing really well if your average gain is bigger than your average loss, there is no – ever, ever ever – magic ratio. It simply does not exist. It never has, and it cannot be proven to have existed.

What if your average loss is 50 pips and your average gain is 50 pips, but your win% is 70%? Doesn’t the reliability of your system have something to do with it? What if your system wins 68% of the time, and your average bet/trade size is 3% of your account value? Can you see what I’m getting at? If you only think of trading in terms of your avg loss vs. your avg. gain, you’re not getting the entire picture.

I think that most people who talk about ratios are implicitly telling you this. They’re assuming that your system is 50% profitable. I’ve even seen ratios where they “build in” your bet size and your win% -- those are better ratios by far. But don’t become obsessed with finding a system that returns some magic ration of wins to losses. You don’t have to find that magic ratio. It doesn’t exist.

And here’s the rule: You need to backtest your system. You need to know its average win and loss. You need to set an optimal bet size. But there is no magic ratio.

Myth 2: You Don’t Need a Stop Loss

Think about it: what would your car look like if you took out the brakes? Hell, you don’t need them! You can just take your foot off the gas when it’s time to slow down, right!

People start to think that they should t ake out their stop loss because “Every time I lose, I realize that the trade came back later and everything worked out.” Well, you know why that is? Because we were in the middle of a ranging market, where the price jumps up and down – and they get lucky. But what if the market stops ranging? What if it starts trending? In that case, if you don’t have a stop, the trend ceases to be your friend. It becomes your worst enemy.

My first trading account was comprised of $2,000 that a friend gave me. He trusted me and he said, “Trade it. Lose it. It’s trading money, not scared money. If you lose it, it’s not a big deal.” He thought that by saying that, I would be more relaxed. While there is some truth to that statement (scared money is rarely good trading money), it’s also dangerous to say. Think about it. What do you think I did when I bought the USD/CHF and it started to fall? I thought, “The trade’s going to come back to me. It’s going to start going up again.” I also thought: “This isn’t scared money. I’m going to stay in the trade no matter what.”

Of course, staying in the trade lost me my first account. You could already see that one coming, as soon as I mentioned it. If you hear someone say that you don’t need a stop loss, then you’re hearing a maniac. Do you need a stop loss order? A specific order in your trading platform? No. If you’re worried about your broker “fishing for stops” then you can just have a mental stop loss order. This is a point at which you, as a disciplined trader, manually close the trade. This is harder to do than just putting the order in your trading platform or telling your broker over the phone – but it still works better than hiding from your losses as they grow and grow.

So here’s the rule: You must at least, at the very least, have a Stop Loss order in your head (that you obey no matter what), or in your trading platform, or given to your broker over the phone.

Myth 3: My Broker Hunts for Stops

If your broker hunts for stops, then you need to change brokers. And please, don’t fall for the “every spike means my broker is hunting for stops” mentality. Having your stop loss hit is part of trading. You have to build that into the plan. Orders are cleared out all the time by spikes. Do all the banks in the world conspire to hunt for stops together? Rarely. Does your broker? Perhaps. It’s possible.

If you think that’s what happened to you, then complain about it. Raise some hell. If it happens to you again, do the same. If your stop gets plucked a third time, though, then tough luck for you. You should have switched brokers.

I empathize with you if your stop keeps getting hit really close to where the trade turns around and runs in your favor. But you can’t be complaining that “If my broker would stop hunting for stops, I would be a profitable trader.” If you think that the world of currency brokers – all of them – are conspiring against you, then you’re in the wrong business. You have to build some slippage (reasonable, not excessive) into your trading plan. You have to account for the fact that sometimes your stop is going to get hit unjustifiably and you’re going to have to make a call. But don’t become obsessed with a paranoid mentality about brokers hunting for stops. If every broker hunted for stops, then they would go out of business (and plenty of them do). The best solution here is to find a better broker and then stick with them, warts and all. No broker is perfect. Some are better than others, of course, but none are perfect.

Myth 4: No Matter What I Do, I Lose

If you really believe this, here’s what you need to do: Take your wallet in your right hand, and then, with your left hand, grab some gasoline and a match. If this is too much to hold in your left hand, then use your foot to hold the match. Now pour the gasoline on your wallet. Now light it on fire. You have to stop beating yourself up. I’m not sure if you think that self-affirmations (the power of positive thinking) is a load of crap or not.

Actually, I don’t really care. Well, I care about you personally, but I don’t care if you think that positive thinking works or not. Because it does. The most successful traders in the world don’t spend time thinking about what stupid people they are, about how prone to lose they are, about how awful they are, about how they don’t deserve to be successful. They might not spend time in the lotus position thinking happy Zen thoughts, but they’re certainly not bending over and thinking about how much it’s going to hurt when the currency market gives them a swift kick in the backside.

Truth 1: People Who Lose Deserve It

This is true. I wrote an entire ebook about this, which you can get for free on my Web site. But here’s something I think I failed to include in the ebook: if you lose money in currency trading, you deserve to lose it. Currency trading has laws just like Physics, Math, Biology, or any other Science. When you break the law, there is a consequence. If you lost money, that’s a consequence. Every consequence is preceded by some law.

I really mean this. It’s true. You lost money when some natural law of trading is violated. Most of the time, it’s because you don’t have a trading system in place – no written rules (see more on that below). Sometimes, it’s because you didn’t set an appropriate stop.

When you start to take responsibility for your own losses, your trading improves.

Truth 2: The Best Stops Are Part of An Entire Trading Plan

Can you imagine if McDonald’s didn’t provide rigid instructions on cooking their hamburgers? Do you know what would happen to quality control?

Uh, maybe that’s a bad example. A lot of people think McDonald’s is gross. Okay, imagine it anyway: what if McDonald’s entire business strategy was:

We’ll look for good opportunities, and then we’ll take them. No other rules, not about what constitutes a “good” opportunity. Not about what to put on the menu at individual restaurants.

Can you imagine how much worse McDonald’s would be? No rules about how much to charge for food, no rules on whether they should serve food at all (although this is actually a question I’ve had for some time).

Your trading is no different. If your trading plan can be summarized by the statement I’ll look for good opportunities, and then I’ll take them, then you’re going to win some, lose more, win a few, lose more. You’re not going to know why. You’re just going to lose or win sporadically.

I have never met a successful trader – not once, anywhere – who had traded for more than 1 year successfully – that did not have a plan. Meaning, he/she had a plan that included:

1. Rules for entries and exits
2. Rules for taking profit
3. Rules for taking losses
4. Rules for bet/trade size
5. A description of the overall system

This is more important than I can communicate through words, so I am now sending ESP thoughts to your brain. Now do you feel how important I think it is? Your best stop is just a product and a decision that is part of an overall plan. Too often, and I felt this as well when I first started, we think that we can just look for good trade opportunities and take them. This usually ends up just being trades taken when the market moves real quick on the 1 or 5 minute chart. Stops end up as the afterthought, rather than the forethought.

This is really super duper important: you have to think about, and decide upon, your stops ahead of time. Before you take the trade. You need to have a system in place that tells you what your rules are for stops. Of course the rules can be flexible! Of course you can change your implementation of the rules as necessary! But you’ve got to at least have a tried and tested system in place as a starting point.

Big Idea 1: Get a Plan

Start today. If you don’t have a plan, and don’t know where to start, get a mentor that can help you get a plan. You can even buy some books on trading and start to work on your plan. It doesn’t have to be fancy. It just has to be well-thought out. Until you get a plan in place, you’re going to feel anxious about your trades. In fact, even after you get a plan, you’re going to feel anxious for a while, during the time that you learn to follow the plan and not go outside the boundaries of safe trades.

That’s about it. You can trade for a living. You don’t have to be smarter than anyone else, or go to Wall Street, or have a huge trading account. You just need to be determined, disciplined, and have a plan.

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Secrets Of The Forex Price Chart

Bulls live above the 200-day, bears live below

Are you flying with the birds or swimming with the fishes? The 200-day moving average divides the investing world in two. Bulls and greed live above the 200-day, while bears and fear live below. Sellers eat up rallies below this line, while buyers to come to the rescue above it.

The big move hides just beyond price congestion

Enter in mild times and exit in wild times. Don’t count on the agitated crowd for your trading signals. It’s usually too late for an easy profit by the time they act. Execute new trades in narrow bars at support or resistance whenever possible.

Big volume kills trends

Blow-offs take buyers and sellers out of the market. When volume peaks too sharply or quickly, it will short circuit movement in the prevailing direction. These climax events wash out the crowd as efficiently as a flat market.

Current price is the best indicator of future price

What does the latest number say about the market? The answer predicts the next number, up or down. But go ahead and add a few indicators anyway just to stay out of trouble.

Perfect patterns carry the greatest risk for failure

Demand warts and bruises on your trade setups. Market mechanics work to defeat the majority when everyone sees the same thing at the same time. Look closely for failure when perfection appears.

Trends rarely turn on a dime

Reversals build slowly. Investors are as stubborn as mules and take a lot of pain before they admit defeat. Short sellers are true disbelievers and won’t cover without a fight.

Some gaps never fill

The old traders’ wisdom is a lie. Exhaustion gaps get filled. Breakaway and continuation gaps may never fill. Trade in the direction of their support when price approaches for the first time.

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The Three Trendline Strategy

Newcomers to trading the foreign exchange currency markets do well to accept the observation of experienced seasoned traders that the idea of a perfect Forex trading tool is an illusion.

While no perfect Forex trading tool exists, using a combination of tools to identify a converging of favorable market factors can yield a majority of high probability trades over a period of time.

Trendlines certainly deserve close consideration and many successful traders add them to their collection of Forex trading tools.

It should be stated at the outset that trendlines by themselves do not provide a strong enough signal to warrant making a trade. They are a useful addition and provide confirmation of signals from other tools.

The Three Trendline Strategy

Consider these three main types of trendlines you need to know and use if you are going to make any sense of trendlines.

Trendlines are lines drawn across significant lows in an uptrend, and significant highs in a downtrend. The more candles to the left and right of the lowest candle in an uptrend or the highest candle in a downtrend make the low or high point more significant.

Short Term Trendlines

Draw these lines across the most recent two lows (for an uptrend) or highs (for a downtrend). These are best observed on a smaller time frame such as a 15 minute or 30 minute chart.

Medium Term Trendlines

These are best observed on a higher time frame such as a 60 minute chart. Again connect the nearest significant low to current price action to the previous significant low in an uptrend or the nearest significant high to current price action to the previous significant high in a downtrend.

Long Term Trendlines

Use higher time frames such as the 4 hour chart or the daily chart to draw long term trendlines using the same method described for Medium Term Trendlines.

The long term trendline can be a powerful Forex trading tool. Keep in mind that the daily chart is used prominently by traders of big institutions. Such traders probably do not engage in small moves on an intra day level. They are more concerned about taking a position on a currency pair.

The daily chart is consulted by them when making decisions. So by drawing a trendline on a daily chart you can present to yourself graphically just where price is and where it is likely to either possibly bounce and retrace or continue with the current momentum.

Using Trendlines As An Effective Forex Trading Tool

Trendlines on the short time frame merely give you a defined picture of current price action. These trendlines are broken often during the course of a day. It is probably not a good idea to enter trades based on trendline breaks from a small time frame chart. Their main use is to give you a clear, instantly recognizable graphical representation of current price behavior.

However, here is where trendlines can prove to be a useful Forex trading tool:

If you notice price coming back to test a trendline on the higher time frames, (anything over 30 minutes), look at other factors. For example:

• Draw in horizontal lines to mark key support and resistance using previous highs and lows.
• Draw Fibonacci retracement and extension levels.
• Calculate the daily pivot points and put them on your chart.
• Have the 200 EMA (Exponential Moving Average) shown on your charts.

Now, if price were to bounce or touch the trendline on the medium to higher time frames, that is, on the 60 minute, 4 hour, or even daily charts, does that price point also coincide with or match up with one of the other indicators mentioned above?

If for example the trendline intersects with a pivot point which is also a Fibonacci 50% or 62% retracement, or 127% or 162% extension, then you have a convergence of factors. If you entered a trade at that point there is a high probability you will catch at least 10 to 20 pips on the first move on the bounce.

Looking for such opportunities takes patience. They don't come up so often but when they do you can be ALMOST guaranteed a successful trade if you keep your first profit target to a reasonable level.

If trading multiple lots, then be sure to take your first profit at the 10 to 20 pip level and let one or two other lots run if price continues in the direction you anticipate. At the same time of course you would move up your stop to break even point after taking first profit so your trade can now run without risk.

Employ trendlines as a Forex trading tool with caution and discretion. Covering your charts with every trendline possible will only result in confusion and blurry analysis.

One or two trendlines at key or significant swing points, (price highs and lows) can give you a defined, clear picture of price action, which, when coupled with your other Forex trading tools, can result in profitable trades.

Source: http://www.realisticforex.com

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Trendlines Versus Horizontal Lines

In developing a personal Forex trading style it is likely a trader will experiment with numerous technical indicators over time but eventually end up with just a handful of favorites which are used on a daily basis.

The use of trendlines is taught in just about every training course out there and popular opinion seems to suggest they should take a reasonably prominent place in any successful Forex trading style. This article begs to differ. Yes, trendlines can be useful but in my opinion they are superseded by horizontal lines.

What is the difference?

Trendlines are simply lines drawn across the lows of bars or candles in an uptrend, or lines drawn across the highs of bars or candles in a downtrend.

One Forex trading style may use the Tom DeMark method of drawing trendlines which gets very specific by joining the most recent low with the previous lower low (looking left on the chart) and then extending the line forward (looking right on the chart) for an uptrend.

For a downtrend join the most recent high with the previous higher high (looking left on the chart) and then extending the line forward (looking right on the chart). These trendlines then give indications of a breakout once they are broken. Horizontal lines are simply lines drawn across highs and lows on a chart marking support and resistance.

Why are horizontal lines superior?

The ideal Forex trading style is simple and easy to use and it helps if the charts we are studying are clear and reasonably uncluttered. Drawing numerous trendlines can obscure what is really happening with price action. True, some traders just draw trendlines across main highs and lows and ignore the mini swings.

Nevertheless, trendlines have to be constantly re-drawn and updated as price action continues. On the other hand, just putting in a horizontal line on key levels of support and resistance is simple and easy to see. They have great significance on the higher time frames, especially the 4 hour or the daily charts.

Of particular value is marking the previous day's high and low and watching price action around those levels. It is possible to catch 10 to 20 pips often as price tests the previous day's high or low and pulls back.

Of course, the probability of a successful trade becomes higher if the previous day's high or low also coincides with other factors such as a Fibonacci level or pivot point.

Why are horizontal lines probably more significant than trendlines?

When developing your Forex trading style it is very important to look beyond candles. Trading is much more than that. The successful trader understands what is going on behind the scenes.

Candles and price action is simply an outward manifestation of what is happening across the desks of thousands of traders across the globe who deal with billions of dollars worth of flows and orders. A previous high or low in price action, especially on the higher time frame, means that the bulls or the bears won the battle in that trading session.

If a number of traders committed a large amount of equity to a currency at a certain price, then obviously that price point is going to be fiercely defended in the future by those traders. So horizontal lines drawn across levels of support and resistance mark very real points at which we can expect a reaction from price. Trendlines on the other hand tend to be more speculative in my opinion.

Watch price reaction at horizontal lines of support and resistance as opposed to trendlines and you will notice that price respects key levels of support and resistance more often than trendline levels.

Should trendlines be included in your Forex trading style?

That is an individual matter. They can certainly be helpful in offering confirmation of a trade after taking into consideration other factors.

But to trade on trendlines alone can be very risky. On the other hand, it is possible to trade almost entirely on what support and resistance tell you at certain times when key levels are being tested. Generally though, a successful Forex trading style will combine a number of factors.

My favorites in order of importance are:

• Support & Resistance levels on the higher time frames
• Fibonacci retracement and extension levels
• Pivot points
• Candle patterns
• 200 EMA (Exponential Moving Average)

If you are in the process of developing your own Forex trading style you may arrive at a different priority list.

Why not experiment with horizontal support and resistance lines and trendlines and decide for yourself which gives the most reliable indication of price movement?

Source: http://www.realisticforex.com

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Point Checklist For Using Trendlines

Forex trading education naturally falls into two parts:

First the easy part, learning technical indicators, how to use a trading platform, the terminology, etc.

Secondly Forex trading education must include information on the mindset of a successful trader and the disciplines that need to be learned in order to handle the emotional and mental demands of trading in the market place.

Here we provide a list of 7 guidelines for using trendlines as part of your Forex trading education using technical indicators.

Trendlines may be regarded by some as one of the weaker indicators although still valuable. They can be powerful when used in combination with other factors. That's why an effective Forex trading education doesn't rest on a single magic formula but rather involves an investment of time and energy as the new trader learns to combine the input from a number of tools to reach a clear decision.

When using trendlines to identify an optimum entry point for a high probability trade keep the following points in mind:

1. Trendlines on lower time frames such as 5 minute, 15 minute, or 30 minute, do not have much significance by themselves. Take more note of price reaction around trendlines on the higher time frames, specifically the 60 minute, 4 hour, and daily chart.

2. Trendlines on a daily chart carry a high significance as this is the chart many traders of large institutions use. They do not participate in intra day trading but rather look for position trades as they commit large sums of money to a transaction. The daily chart is often their point of reference.

3. Draw general trendlines across the significant lows in an uptrend or the significant highs in a downtrend and use them as a point of reference to show where support or resistance is likely to be found.

4. If you want to get more specific, use the Tom DeMark method of drawing trendlines. This technical advisor recommends using the current swing high or swing low, depending on the trend, and then connecting that to the previous swing high or low (to the left on a candlestick chart). The line is then extended out into the future. These trendlines can be constantly updated as new highs and lows are reached.

5. For trendlines to be effective indicators, they must be used in conjunction with other technical indicators. So if a trendline is crossed by a support/resistance line, or a pivot point, or a Fibonacci retracement or extension level, you now have a combination of factors indicating this could be a suitable entry point.

6. Add these two trendline methods to your Forex trading education:

• When price has an upward or downward momentum (as opposed to moving within a consolidation channel), look for times when price will come back to bounce the trendline before resuming the momentum.
• When price breaks a trendline, rather than enter a trade at that point, choose a more optimal entry point by waiting for price to return and test the back side of the trendline that has just been broken. This will not always happen and you risk missing being taken in. That's trading! But more often than not this will happen and you get an excellent entry point.

7. Do not use trendline breaks or bounces as an entry signal by themselves. They do not provide a strong enough signal. If you add this crucial piece of information to your Forex trading education you will minimize the number of trades you regret entering.

As part of your Forex trading education, use your demo account to experiment using trendlines.

Remember they have limitations. In themselves they can give a false signal. Used in combination with other technical indicators however, they form a more complete picture, giving you a clearly defined graphical representation of where price is and where it is likely to go.

Keeping the seven point checklist above in mind should help keep you out of troublesome trades when using trendlines!

Source: http://www.realisticforex.com

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How To Draw DeMark Trendlines

When searching for Forex information on the internet you are likely to find articles relating to trendlines and trendline analysis.

Tom DeMark is a specialist in the field of technical market analysis and his best-selling book "The New Science of Technical Analysis" released in 1994 spells out some innovative techniques when it comes to the use of trendlines.

Much Forex information on the internet is of a general nature, and many articles are written about Forex by individuals who are not traders themselves. Tom DeMark on the other hand has had a long career with institutions trading stocks, futures, currencies and options.

His guidelines on the use of trendlines are very specific and they can be helpful to the newer trader who is searching for reliable Forex information on how to use standard indicators.

Here is a brief step-by-step description of how to draw DeMark trendlines:

Note: The term swing high and swing low (also called cycle high and cycle low) refers to the following:

In An Uptrend: A swing high is the wick of a candle that is higher than the wick of the candle to the left and right.

In A Downtrend: A swing low is the wick of a candle that is lower than the wick of the candle to the left and right.

Obviously the more candles to the left and right that are higher in a swing low or lower in a swing high makes the swing or cycle more significant.

An uptrend is where price is making higher highs and higher lows. A downtrend is where price is making lower highs and lower lows.

Drawing DeMark Trendlines

Drawing Trendlines In An Uptrend

Examine the bottoms of the candles on your chart and identify the most recent candle wick that is lower than the candle wicks to the immediate right and left of it.

Look left on the chart, and identify the previous low candle that has candle wicks higher to the immediate right and left of it which is lower than the current low candle.

Now draw a line from the current lowest candle to the previous lowest candle (drawing from right to left).

Now take the end of the newly drawn line which stops at the current low candle and extend it forward some distance (drawing from the present position to the right).

Drawing Trendlines In A Downtrend

Examine the tops of the candles on your chart and identify the most recent candle wick that is higher than the candle wicks to the immediate right and left of it.

Look left on the chart, and identify the previous high candle that has candle wicks lower to the immediate right and left of it which is higher than the current high candle.

Now draw a line from the current highest candle to the previous highest candle (drawing from right to left).

Now take the end of the newly drawn line which stops at the current high candle and extend it forward some distance (drawing from the present position to the right).

You have now drawn a Tom DeMark trendline.

This can now be a reference point for future price action. It will often be observed that price will come and check this level. If it breaks through, it can mean a change in direction, the significance of which will depend on the time frame being used.

Trendlines drawn on 5 minute or 15 minute charts have much lesser significance than trendlines drawn on higher time frames such as the 1 hour, 4 hour, or daily.

Caution Required

Much Forex information extols the virtues of trendlines as an indicator of possible future price action.

Mr. DeMark certainly has made this a science and his detailed approach to drawing trendlines is certainly more accurate than just drawing general trendlines along the bottoms and tops of trends according to the way the eye sees.

However, trendlines in themselves do not indicate where high probability trades can be taken.

It is important to use a variety of indicators before pulling the trigger. Examining previous levels of support and resistance is probably far more significant in determining where price is likely to hesitate that watching trendlines.

However, they can be useful. If you find a key support or resistance level also coincides with a Fibonacci retracement or extension level which is also at an intersection with a trendline, then you have built a reasonably solid case for a trade.

Use this Forex information on DeMark trendlines wisely, with caution, and it can be another useful addition to the Forex day trader's toolkit!

Source: http://www.realisticforex.com

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Pivot Point Trading Strategy

Pivot point trading can greatly simplify Forex day trading.

Pivot points provide good reference points at which to enter or exit trades as well as give an indication of the market bias.

You can either go online and download a pivot point calculator or use the free one referenced in the resource box below.

Simply get the High, Low, Close, Open figures from the daily chart by checking the previous day's candle values and enter them into the calculator.

You can then draw horizontal lines on your chart marking the Central Pivot Point and then the other reference levels such as S1, S2, R1, R2 (S for support, R for resistance).

When pivot point trading it is also a good idea to put the mid reference points in also, M1, M2, M3, and M4 as price often will respect these levels.

The Indicators You Need For The Setup

It is good to have the 15 minute, 60 minute, and 4 hour charts displayed.

After marking the pivot point levels on your 15 minute chart, also show the following on the three time frames:

The 200 EMA (Exponential Moving Average)
Do Fibonacci calculations on the most significant highs and lows on the three time frames
Mark significant previous support and resistance on the 60 minute and 4 hour charts with a horizontal line

Time Of Day

Look for this setup around two time periods:

London Open (700 GMT)
London Close (1500 GMT)

The Asian session does not generally cause price to make new highs or lows. Trading orders and flows build up after the open of the European session in Frankfurt and take on new momentum once London opens an hour later.

Similarly, price action often slows considerably around the time of London closing.

Look For This Setup At London Open

Check to see if price is anywhere near M4 or M3 on the upside or M1 or M2 on the downside on your 15 minute chart.

Next consult your higher time frames, the 60 minute and 4 hour to see if any of those M levels coincide with a Fibonacci retracement or extension level, or the 200 EMA, or a previous support resistance line.

If you get a combination of those factors, there is a high probability price will test the M levels and then reverse and go in the opposite direction for the day.

Of course, nothing is guaranteed but the more factors you have coinciding at a specific level around a pivot point, the more likely price will react at that point.

Check to see where a 20-30 stop will put you and whether there are other levels of support and resistance nearby to offer protection and start taking profit as price approaches the other pivot levels either on the way up or on the way down.

Remember, pivot point trading suggests that when price is around M4 or M3 you are in a sell area and when price is around M1 or M2 you are in a buy area.

Look For This Setup At London Close

Now we come to the other end of the trading day which also lends itself to pivot point trading.

Often price will have done its run for the day by the time of London close and a retracement can be expected. However, you need to consider other factors.

Again check to see if price has reached a key level by the end of London close. This level could be around a pivot point which also coincides with your other indicators:

• 200 EMA
• Fibonacci retracement extension levels
• Previous strong support or resistance

Next check your Average True Range indicator for the last 5 or 10 days and see what kind of range price has been moving in. This will vary according to the currency pair. The EUR/USD cross for example often puts in between 76 and 100 pips per day.

Now check the range of the current day's trading. Has it equaled or exceeded the average range for the last few days?

If so, and if price is at a strategic pivot point which also matches with other indicators, you can enter a high probability trade and catch between 20 and 30 pips on the retracement.

These two pivot point trading strategies occur with surprising frequency a number of times a month.

Practice these methods, get your eyes used to looking for the combination factors surrounding pivot points, and trade with confidence.

Most definitely add pivot point trading to your list of trading strategies!

Source: http://www.realisticforex.com

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Pivot Point Guidelines For Success

What do we mean by pivot point trading?

It simply means that Forex traders take into account pivot points calculated from the previous day's trading range and use them as reference points to identify support and resistance levels.

Taking the high, low, close and open values of the previous day's price action, strategic levels can be identified which may or may not have an influence on price action. Pivot point trading puts emphasis on these levels, and uses them to guide entry and exit points for trades.

However, as with any technical indicator, there are limitations and pivot point trading, to be high probability, needs to stay within certain parameters. The following 7 guidelines can help pivot point trading be more profitable:

No. 1

Pivot points should not be used as a standalone indicator. Do not enter or exit trades purely on the basis of pivot points. Use them in conjunction with other indicators such as candle patterns, Fibonacci levels, MACD, and moving averages to identify and confirm key levels of support and resistance which may provide trading opportunities.

No. 2

While some traders living in various parts of the world may calculate their pivot points according to the time zone in which they live, a fairly safe standard for calculating the levels of pivot point trading is to use GMT (Greenwich Meantime).

Midnight GMT is a very quiet time in the market with very little volatility and provides a good opportunity to calculate more accurate pivot levels going from midnight GMT to midnight GMT the following day.

No. 3

It is good to understand what is going on behind the scenes when it comes to pivot point trading. Rather than just staring at candles on a chart, understand what they actually represent.

Thousands of traders around the world, some working for large institutions and handling millions or even billions of dollars worth of currency, are taking positions according to previously established highs and lows in the market.

Pivot points draw attention to these key levels which will often be strongly defended by traders who have a lot at stake. This is the reason pivot point trading can be so successful, once a trader understands underlying reasons for price action.

No. 4

It is good to calculate mid levels in addition to the S1, S2, R1, and R2 pivot levels. Sometimes there is a significant gap between these levels and calculating a mid point gives another point of reference. Price will often be seen respecting M1, M2, M3, or M4.

To calculate mid levels, simply subtract the level below from the level above and divide by 2. (see the resource box for a free pivot point calculator)

No. 5

Pivot point trading can be a useful strategy for entering and exiting trades at the right time. A pivot point can provide a key level of support or resistance where price is likely to bounce for a 10-20 pip profit.

Or in the case of a trend, price may retrace to a pivot level before continuing its run. The retracement point at the pivot level would be a good place to put an entry order to be taken in when price comes back to retest at the pivot level.

No. 6

The Euro - US dollar pair often puts in a daily average of between 75 and 100 pips. Watch for specific behavior around the time of the London market open. Price will often come back to test a level which is a pivot point and form a distinctive candle pattern such as tweezers, or a hanging man, and then reverse and go on its 75-100 pip run for the day.

If price comes back to the M1 level check your other indicators to see if they confirm this would be a good level to go long. Likewise, if price, just around London open, tests the M4 level, check your other indicators to see if this would be a good place to go short. You may be able to get a slice of the 75-100 pip run for the day.

No. 7

Pivot point trading helps mentally in establishing the buy zone and the sell zone. Traditionally, anything above the Central Pivot Point is a Sell area, and everything below the Central Pivot Point is a Buy area.

If you go contrary to that, make sure you double check your analysis and have very good reasons for doing otherwise.

Pivot point trading is just one of an arsenal of weapons available to Forex market participants. However, it must be stated that many successful traders use just a handful of tools that become their favorites. After all, too many indicators can lead to decision paralysis.

For many traders, pivot points are a key element in their overall trading strategy. Use the 7 guidelines above to use them safely and responsibly.

Source: http://www.realisticforex.com

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Top Forex Indicators You Need

When developing your own forex trading style, there is a danger in becoming fascinated with indicators.

The newer trader experiments with one, finds it doesn’t work so well, then switches to another, then another, etc.

The list below highlights 7 key indicators that can be woven into your forex trading style. You may not need to go any further than this. Stick with the 7, practice them, get to know them inside out, and get the satisfaction of developing your own successful forex trading style.

Candlesticks – watch for a hammer, doji, head and shoulders pattern, 1-2-3 formation, double top or bottom.

Trendlines – draw common sense trendlines across the highs in a downtrend or lows in an uptrend. Watch for price to break the trendline and come back and test it.

MACD – Watch for a difference between the highs and lows of MACD and price. When there is divergence watch closely for a good entry point once price has shifted in the direction of the divergence.

200 EMA – this indicator is an all time favorite for traders across the board. On higher time frames (1 hour, 4 hour, daily) take note whether price is above or below the 200 EMA to give you the sense of price direction.

Pivot points – take note of previous support and resistance lines as price will come back to retest these levels time and time again.

Fibonacci – learn how to use this tool well and take particular note of the 50 and 62 retracement levels, especially when they coincide with trendlines or previous support/resistance.

Price itself – let price prove to you where it wants to go by setting entry orders rather than market orders when entering a trade. By setting an entry order, price has to reach the target you specify before pulling you into the trade.

Source: http://www.realisticforex.com

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Using Support And Resistance

Why are support and resistance levels crucial when participating in the Forex day trading market?

Simply put, they represent key, strategic price points at which traders processed orders involving millions or even billions of dollars. No wonder price at times has a hard time getting past a previous high or low.

Those levels are being fiercely defended by traders who have large amounts of money at stake and who do not want to see price break those levels.

For this reason anyone who engages in Forex day trading should learn how to trade support and resistance.

The following checklist provides crucial guidelines:

1. Support and resistance levels are much more significant on the higher time frames. Pay particular attention to price highs and lows on the daily chart as this time frame is commonly used by big traders.

2. A price high or low has more significance when it has a number of candles either side of it which are lower (in the case of a price high) or higher (in the case of a price low).

3. Before you consider Forex day trading at a support or resistance level, see if there are more factors that would indicate this is a key price level.

For example, does a trendline intersect at the same point? Does the support or resistance line match up with a Fibonacci level, either a retracement or an extension? Does the support or resistance level coincide with a pivot point if you are in the practice (and it's a wise one) of calculating pivot levels when Forex day trading?

4. Has a key support resistance level been broken? Then look to see if price will come back to test that level. Remember, resistance once broken can become support in the future and support once broken can become resistance in the future.

These Forex day trading scenarios can present excellent trading opportunities as you put an entry order in at the key level and wait for price to come back and pull you in. Within a short time your dealing spread is covered and you are in profit.

5. The market spends most of its time in trading ranges or consolidation channels. You need to accept that this is a characteristic of Forex day trading and adjust your mindset accordingly. Identify the high and low of the trading channel and manage your trades accordingly.

6. After identifying a trading channel or range and you see a trading opportunity, set your entry level at the base of the channel if you are going long or at the top of the channel if you are going short.

Don't chase after price once it breaks out of the channel (although many who engage in Forex day trading do so). You will not get the optimal entry point. Waiting for price to take you in either at the top or bottom of the channel means you can have a smaller stop and your price target is closer.

7. Pay particular attention to the previous day's high and low. Price will often hesitate and retrace at these levels. If you are a Forex day trading scalper, you can often grab a nice pull back of 10 pips or more at these strategic levels.

Note: Although there are various ways to calculate the previous 24 hour period depending on where you live, using GMT as a standard is often beneficial. Midnight GMT is a time when the market is generally very quiet and unlikely to make new highs or lows.

Succeed Or Fail?

It is unlikely you will succeed at Forex day trading if you fail to understand or take into consideration support and resistance. This indicator is that crucial! Yes there may be fancy indicators out there with all the bells and whistles, but this simple indicator, marking where price reached a high or low during previous trading sessions, can be one of the most powerful and effective Forex day trading tools available.

Be sure you spend sufficient time studying it, examining your charts, marking off the key levels each time you begin a new Forex day trading session.

Source: http://www.realisticforex.com

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Simple 200 EMA Forex Strategy

Are you a relatively new trader looking for a solid forex strategy?

A challenge facing many new traders when developing their forex strategy is the ability to identify the overall trend for intra-day trading.

The 200 EMA (Exponential Moving Average) can solve the problem.

The 200 EMA is one of the most popular indicators of all time with Forex traders the world over, and for that reason alone is worth noting due to the psychological effect on the market place price can have when hovering around the 200 EMA.

To use this very powerful Forex strategy, create charts on 3 time frames:

• 4 hour
• 1 hour
• 15 minute

Now plot a 200 EMA indicator on each chart and, as a suggestion, color it red, for easy visual impact.

Preferably tile the 3 windows containing your 3 charts into a vertical fashion so you can see the 3 time frames next to each other. It will squeeze up the information on the charts somewhat but for the purpose of this strategy that doesn’t matter.

Now scroll through the various currency pairs you like to trade. If you prefer to trade only pairs with a smaller pip spread, they amount to about 9. They are:

• EUR/USD
• GBP/USD
• USD/CHF
• USD/JPY
• EUR/JPY
• USD/CAD
• AUD/USD
• NZD/USD
• EUR/CHF

Watch For This Setup

What you are looking for is any currency pair that bucks the 200 EMA on the 15 minute chart.

So for example, look at the EUR/USD pair and note the position of price relative to the 200 EMA on the 3 time frames.

If price is well above the 200 EMA on the 4 hour chart, well above the 200 EMA on the 1 hour chart, but BELOW the 200 EMA on the 15 minute chart, price is bucking the trend.

The overall trend is up, price has temporarily gone against the trend and is currently in a retracement.

Using the fundamental trading principle of buy the dips in an uptrend, sell the rallies in a downtrend, look for a suitable entry point.

In the example given above you would look for an opportunity to buy the EUR/USD, perhaps watching for a candle signal that price has exhausted it’s downward momentum, bucking the 15 minute chart 200 EMA and will soon resume it’s upward momentum.

An Easy Daily Exercise

This is an easy exercise and it can be done once or twice a day, taking just a few minutes.

Once you see price bucking the 200 EMA on the 15 minute chart, whereas it is on the opposite side on the 4 hour and 1 hour charts, sit up and take note. Watch carefully and grab the opportunity to get in and make some pips.

After a little practice you will see how extremely powerful this simple Forex strategy is - certainly deserving a place in your trading tool kit.

Source: http://www.realisticforex.com

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MACD Divergence As a Forex Signal

Some traders regard MACD divergence as a Forex signal to enter a high probability trade. They almost suggest you get straight in to a trade as soon as you see MACD divergence.

Is this Forex signal that reliable? To be fair, it certainly has a place in a successful trader's kit of strategies, but as with any Forex signal, there are certain precautions that have to be observed to make any trade high probability.

At this time there doesn't appear to be any Forex signal that offers anywhere near a 100% success rate.

So if you are tempted to trade on the basis of MACD divergence, what other factors should you keep in mind?

MACD Divergence Defined

First let's just spell out exactly what is meant by MACD divergence.

MACD (Moving Average Convergence Divergence) comes as a standard Forex signal on all the main charting packages. Some show MACD by itself with two lines, one a combination of a 12 and 26 Exponential Moving Average, and the other line based on a 9 Exponential Moving Average.

Some charting packages also include what is called a Histogram in the same charting area as MACD. The histogram merely represents in a different way what is happening between the two MACD lines as to market momentum. The wider the gap between the MACD lines, the higher or lower the height of the histogram bars.

To identify MACD divergence, simply draw a line across the highs if MACD is above the zero line, or draw a line across the lows if MACD is below the zero line.

Now go to the price action section of the chart, the candlesticks, and draw a line across the highs directly above where the line is drawn on the MACD highs, or draw a line across price lows directly above where the line is drawn on MACD lows.

If they are going in opposite directions you have MACD divergence. In other words, when MACD is making lower highs and lower lows but price is making higher highs and higher lows, this negative MACD divergence forms a Forex signal indicating price could well start to drop.

If MACD is making higher highs and higher lows but price is making lower highs and lower lows, this positive MACD divergence forms a Forex signal indicating price could well start to rise.

MACD Divergence Precautions

Be aware that MACD divergence on a smaller time frame is not so significant. When it is seen on a 15 minute chart it may or may not be very important.

If seen on a 60 minute, 4 hour, or daily chart, start doing more analysis.

If you see MACD divergence on two or more of the higher time frames, then definitely sit up and take notice and start looking for other factors to indicate when price may react to the divergence.

This brings us to a key point when trading MACD divergence as a Forex signal to enter a trade. On a higher time frame, MACD divergence can be a fairly reliable indicator of a change in price direction. However, the big question is: WHEN?

Many traders get caught out by entering a trade too soon when they see MACD divergence. In many cases, price has still got some muscle to continue in the current direction. The trader who has jumped in too soon can only stare at the screen in dismay as price shoots through his stop taking him out.

How Can This Scenario Be Avoided

Before pulling the trigger when you see MACD divergence on the higher time frames, be sure to look for other key Forex signals to confirm that the divergence has really kicked in.

For example, if you see a distinctive candle pattern such as a tweezer top or a hanging man on the higher time frame it may appear price has topped out and is now ready to move in the other direction.

If at the same time the distinctive candle pattern is at a key level of previous support or resistance, or at a pivot level, or a Fibonacci retracement or extension level, you have added reason to believe this could well be a turning point and put an entry order in at this level to get taken in.

At the same time, you will want to consult your trading calendar to make sure you are not entering a trade near a significant Fundamental Announcement. Even though the MACD divergence may kick in soon, the Fundamental Announcement could cause a major spike in price and take out your stop.

So in summary, is MACD divergence a high probability Forex signal?

Answer: By itself NO!

How can MACD divergence be used safely?

Answer: Check to see if MACD divergence is seen on one or more higher time frame charts such as the 60 minute, 4 hour, or daily.

Then look for other Forex signals such as candle patterns, support or resistance levels, or Fibonacci retracement extension levels.

In other words, use MACD divergence as a confirmation Forex signal that you are going in the right direction rather than a stand-alone Forex signal.

Source: http://www.realisticforex.com

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Using MACD As A Safety Indicator

How can you use MACD to your advantage?

If you want to be very cautious in your Forex strategy, going only for high probability trades, then pay attention to MACD on the 4 hour and 1 hour charts.

Some traders will only enter a trade when the 4 hour and 1 hour MACD’s are going in the same direction. This will mean a lot less trades but the ones you do take are likely to be profitable. (Agreement of the two MACD’s is used in conjunction with other indicators, not by itself.)

MACD on the 1 hour chart is particularly powerful. If you want to stay out of trouble and avoid trades you might later regret, NEVER trade against the direction of the 1 hour MACD. To do otherwise is not necessarily foolhardy if you know what you are doing.

But for the newer, less experienced trader, only trading long when MACD has crossed up, or short when MACD has crossed down on the hourly chart when your other favorite indicators line up, will make for a higher success rate with your Forex strategy. It will also save you much anxiety and heartache!

USD/CAD 1 Hour Chart

MACD is shown in red, black is the signal or trigger line MACD pointing down.

USD/CAD 4 Hour Chart

MACD is shown in red, black is the signal or trigger line MACD pointing down.

Source: http://realisticforex.com

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Dangerous Problems In Forex Trading

When describing the most crucial problems in Forex trading I was trying to show you the worse obstacles that are between you and your success.

Every problem explained below is either putting your future profits at risk or preventing you from being a successful trader. Read the entire article very carefully – I made every effort to create a comprehensive (and easy to follow) article.

The tips given below are a result of researches made by people with extensive knowledge and experience with teaching and coaching new traders. This publication is aimed at helping you in maximizing your long-term profits and to become a successful and confident trader.

But please, be aware that just reading will do nothing… Put those tips into effect … and observe the effect. Only reading will not do the trick. So be patient when work on improving your trading habits.

Modern knowledge regarding the reasons of success and failures in Forex trading and the path that could lead you straight to your success is truly incomplete. Due to the lack of extensive research and analysis, there are a lot of misunderstandings, misjudgments and myths within Forex traders’ community.

Those are extremely dangerous as they lead to wrong decisions and confusion. Many traders are experiencing emotional problems, loose their deposits or even ruin their life and the lives of their relatives. For others, their path to success is unnecessary long and hard. It is worth remembering that usually this is not beginners’ fault.

In addition, many “renowned” institutions and people that are considered as gurus in this market are benefiting from those situations. They earn on your bad emotions and your losses. This market is difficult enough: it is dominated by large banks and brokers equipped with highly efficient marketing tools based on latest developments regarding mental aspects of trading. And you are wrong if you ever start thinking that they are on your side in this game.

So what's the real problems?

1. Overtrading

Many retail traders with little capital often exceed the risk limits and open too big orders hoping that they could live by trading. This is sometimes a part of their trading plan actually… This is what we call overtrading – it is the simplest way to losses and/or burning down your account even amongst the most experienced traders.

Therefore if you eliminate the possibility of overtrading (i.e. by a proper construction of your trading plan) – you will minimize the possibility of experiencing losses. This is applicable throughout your entire career as a trader!

Overtrading has two aspects:

• Unjustifiable large amount of opening orders.
• Large number of hours in front of the screen.

As the research show, most of the problems in trading comes from those two reasons. The third reason is opening too large trades compared to the capital trader has got. I will talk about that later on.

Too many hours in front of the screen can weaken you intellectually (so your ability of proper analysis of the market and consciousness gets lowered drastically) and emotionally (when there is nothing going on, there is a pressure to do anything, even if it makes no sense).

High number of entries, especially made by beginners, create highly stressful situations, that result in impairment of concentration and proper analysis. Overtrading leads to both mental and emotional exhaustion, and the worst case scenario – it leads to a trauma.

The belief that emotions are a main source of problems in trading is... myth.

The whole thing is the other way around: overtrading causes emotions, and those lead to wrong decisions. After some time trader is trapped: wrong decisions cause emotions and those cause other wrong decisions. Losses are inevitable then. Emotions are a consequence of faults in trading, not the reason. If you want to eliminate emotions, eliminate possibilities of overtrading and you will eliminate the reason.

The second myth is a quite common idea that only losses cause bad emotions. That’s not true – emotions caused by high profits are even more dangerous. This is because euphoria blinds us, it makes us feel that we are invincible. The feeling itself is quite pleasant, but it makes us forget about our market analysis (well, we know everything about the market, right?) and we start opening too large positions.

Good decisions are being made when we are fresh and after a good night sleep, and the level of our emotions is low or moderate.

Recommendations:

The best learning process is steady and systematic development with no grave trauma (heavy losses) or euphoria (big profits). This is possible when you start trading with a micro account – when you encounter real trading situations, but neither profits nor losses cause heavy emotions. So try to keep it balanced: avoid standard lots so both your profits and losses are acceptable.

We all love to win, but in order to getting to your steady profits fast you have to stay away from high stake and high profits. Winning trades are far more dangerous: they infatuate (so they take away your perception and analytic approach).

Separate your trading and your training. When you learn new stuff your mind should be eager and open. High level of stress blocks your ability to learn. Emotions caused by unreal profits (or losses) handicap your capacity of proper analysis.

When you are emotional, you cannot stick to your trading plan and you are not disciplined. Therefore lack of discipline is a consequence of grave emotions, not the cause. When you are emotional, you cannot use the advantage your system gives you and this chaos is a straight path to failure.

If you noticed those issues in your trading you can do at least those three things:

• Stop trading for some time (a few days minimum),
• Lower your stakes down to a level that does not cause grave emotions,
• Use therapeutic ‘tools’ – relaxation and/or meditation.

 The best way is to use all three the same time.

“After a whole day, you just do not know what you are looking at any more, and you make mistakes. It is better to carefully select trades and wait patiently for a trade that you know “has your name on it.” People try to take every trade that comes along because the greatest fear in the market is that of missing a trade. The fear of missing a trade is far more powerful that the fear of losing money. Aspiring traders think that each particular trade might make them wealthy. So they take every trade in case it is “the one,” instead of carefully selecting the trade. Sitting and trading all day long, or trying to take every trade that comes along is also an almost guaranteed way to failure. I have not met many traders who can sit all day in front of a screen and still remain focused. Those who have studied such things agree that the less you trade the more money you make.” - Joe Ross in „Conversations with Forex Market Masters”

“There is only one signal during off hours – stay out.” Jimmy Young, trader with over 20 years of experience.

2. Undercapitalization

“One of the biggest problems we see is trading undercapitalized. Too many traders are in a great hurry to get into the markets and to get rich quick. They have bought the lie that they can make a lot of money starting with a small account.

Although it is possible, it is not realistic. In a hurry to make money trading, most traders begin trading one contract. This is almost a sure way to losing what little capital they have. Everything is riding on a single contract, so the trader is forced to stay in too long or to scalp for only a few pips or ticks.” - Joe Ross in, Conversations with Forex Market Masters”

Most of traders who start their trading adventure hope for high profits, but do not have the equity to stick to a proper money management rules. SL of 30-40 pips even with an account where 1pip = 1 dollar requires the account to be a few thousand dollars least. Most of the beginners do not have that money so they will not be able to learn anything. Risking even 10% of their deposit is more likely to lead them to heavy losses than heavy profits.

To earn in ‘normal life’ we graduate colleges and universities – the whole process takes at least a dozen years or so. But many people think that Forex is different and they can make huge cash by using a first ‘magic’ system they can get on eBay and with their first account.

Too small equity causes bad risk management. By the way it is worth saying that the best money management plan is one that suits both trader’s personality and his system. Common 1% or 2% of the capital might be too much in one’s early days.

When opening too big positions you are like a driver who drives shiny muscle car over 100mph through crooked streets of a city centre (yeah, that is over 160kmph if you’re using metric system).

Amongst the group of traders who we interviewed only one person ended up their first year in plus. The following story is a great example how proper conclusions drawn from your initial losses lead to profits.

“My problem was that I opened my first account with $2000 in it and I started to trade standard lots right away... Boy, what a mistake this was... but nobody cared to tell me that $2000 is not that much if you want to trade standard lots. I had my share of stress because one bad trade that cost me 30 pips wiped out $300 from my account right of the bat. That was scary. I can not complain about the winning part. Each trade on a plus looked really good too…. But that was not the right way to trade. We can have the best system in the world but we have take into consideration that the market doesn’t care what we have, it does its own thing and we need to be prepared for some surprises. This means, we can not put half of our trading funds on one trade.

As soon as I realized how big of an issue money management is I switched to mini lots right away. That took away a lot of my fear from trading. After I “calmed down” and started to get the pips that I wanted I slowly increased my funds and my position size.” - Monika Korzec in „Conversations with Forex Market Masters”

Recommendations:

If you think seriously about trading, follow a ‘normal path’:

Gather your capital so that you can start serious trading. Think that you would have to earn 10% a month, so save one thousand a month for your trading capital.

First things you have to do is learn the basics, be familiar with market moves and know what causes them, and know your emotions in those new situations. You may not believe it, but mental aspects are responsible for 60 to 80% of your success in trading. Treat trading as a business that requires knowledge gathering and serious investments.

Treat trading as a business that requires knowledge gathering and serious investments (think about it twice because it is that much important). After getting familiar with the platform, open a micro account [1 pips = 1 cent, so $200-300 should be enough] and start trading.

If you cannot manage to get profits with a micro account, you will not be able to get anything with a standard account as well. Bigger lots are not a proper way to get motivated. If trading micro lots is boring – you should know that you should be feeling like that! But if it is too big of a burden – maybe you do not have what it takes to be a trader and the best way is trying to realize yourself somewhere else.

Get familiar with a few systems that are based on different timeframes. The simpler they are – the better. They should not use more than three indicators. You might be surprised, but here in Forex trading slower means faster and less means more.

“Most beginners nowadays are over-leveraging, emotional and always looking for the Holy Grail that never exists. A trader does not need to have a big capital investment, but rather, he needs to know that for 2,000 dollars as principal capital, he should not risk more than 3% on a single trade. It is usually by over leveraging oneself that leads to margin calls, thus became emotional and act irrationally. Therefore, a trader should look to change his mindset within, not looking outside for solutions.” - Wilson Neo in „Conversations with Forex Market Masters”

“Don’t trade with what you can’t afford to loose an old cliché but very important and make sure you have enough to trade with in the first place. No business starts with such low funding that they can’t pay employees or other bills and if they do they don’t last long. If you cant afford a starting capital paper trade. Get some practice in while you save enough to start realistically trading with.” - Phil Newton ibid.

3. Not understanding the emotional side of trading

“It is said that the markets are driven by fear and greed. And that certainly is true. Fear causes traders to make mistakes. The number 1 fear is that of missing a trade, when it is much better to be selective in the trades you take and be willing to miss those trade which do not perfectly meet your trading rules. Greed causes you to stay in a trade too long. The result is that instead of taking profits when they are there, you wait and hope for more and end up losing what you could have had. You want to be paid to trade. That means taking money as soon as it is available.” - Joe Ross in, Conversations with Forex Market Masters”

It is obvious that emotions impair your concentration and ability to make proper decisions. However most of the traders, especially beginners, neglect them totally.

Apart from fear and greed we can distinguish many more:

Boredom leads to impatience and (especially when it comes to people that are used to action) feeling of emptiness and necessity of doing anything, which might cause unnecessary trades.

• Euphoria and excitement: cause overconfidence – which is the shortest way to overtrading.
• Frustration: might cause necessity of doing ‘anything’ and irrational trades that are not based on our system.
• Depression: especially caused by losses – as above.
• Revenge: After a loss or a series of losses trading plan tends not to be used anymore and traders
• start typical ‘revenge trading’.

Low self-esteem, feeling that you are ‘not worth it’ - can cause revenge trading in order to show it to oneself and to the others. Result: irrational trading.

Every single one described above affects one’s ability to make rational decisions. It is said that we make over 80% of our choices basing to our emotions, and our mind just seeks justifications afterwards. If so, than the inability to understand one’s emotions is the reason of over 80% of failures.

It sometimes happen that emotions constantly affect traders’ decisions – then trading becomes a torture and the results are wore and worse. Shall this happen (and it could happen on every level) use techniques that lower or even totally erase your emotions.

Emotions are lowered by relaxation and meditation. Doing sports helps as well. You can always use techniques based on complete dissociation from emotions.

Emotions are raised in many different situations:

• Contact with brokers’ ads and ads of systems that promise you enormous profits,
• Trading with money that you cannot lose,
• Opening too big order compared to your capital,
• Too many unjustified entries,

Profits and losses

Emotions impair your ability to concentrate and focus but they are not the main cause of problems and losses. Contrary to what the trading society thinks, emotions are a result of three main issues:

• Breaking one’s trading rules (especially overtrading)
• System not matching trader’s personality and temper,
• Lack of knowledge of the system.

The first and last issue was covered above – I would like to just add that serious lowering the level of your emotions should happen when you start to understand and ‘feel’ your system. Usually this is the effect of hundreds if not thousands hours before your computer screen [„quality screen time”].

If you understand your system and the market you trade, the process becomes simple and bad emotions do not occur. There are number of systems out there and every trader should find his own – one that suits his personality, temper and risk tolerance.

Someone who is an action-loving type of person can fell horrible when using a long-term system, and a person who is more calm can feel tortured using a scalping system with TP of a few pips only.

It is quite common to describe emotions as a reason of losses, but – as it was covered above – it is the other way around. Fighting just the emotions is more like symptomatic treatment - not fighting the real cause. Working with your emotions will never replace a true experience in using a good and backtested system.

Recommendations:

Test your system very, very carefully. First back-test it on a demo account, then test it on a demo account, and then live on a micro account. Fear will disappear when you master your trading system – but it will come no sooner than after a few months. And if you are not willing to put that much effort in it, then you will become like those 95% retail traders that lose.

Be aware that your emotions will be affecting your trading – you have to know how they are created and how they affect you. Do not create situations that might cause bad emotions. They are often caused by too many opened positions, trading regardless of your system (because the market is moving), big profits and big losses.
Get accustomed to your emotions, starting with lowest orders possible and gradually making them bigger and bigger.

Get familiar with working-with-your-mind techniques. Half of the traders we interviewed meditate on a regular basis. If your trading is constantly affected by bad emotions (this can happen on any level of experience), use techniques that can ‘erase’ your emotions totally.

Lead a healthy life: your mind needs rest and your body needs sports! Fitness, gym or martial arts can help you maintain your psychical balance and get rid of adrenaline that is created during trading.

If your self-esteem depends on your trading results, it is like you signed a blank cheque in the name of the market! It is the worst-case scenario and should be avoided at any cost.

“Rule 5: Do not be impatient and force trades to happen.” - Cardinal rules of trading according to Dr. Jeff Wilde

“The toughest thing I learned in the Forex market was patience. Invariably, as soon as you think you have a good trade set up and execute the order the market unexpectedly goes against you almost immediately and without confidence I found myself closing many good positions in losses.

It literally took years to trust my decision-making and stick to the trade regardless of the volatility in the market that can shake your confidence watching her trade go against you.” - Don Steinitz

“I think the biggest mistakes that I have made over the years is “jumping” into trades trying to catch the ride. When we as traders see the markets start to rock n roll it is easy for us to say, “I WANT IN” when we should say, “CAUTION”.” - Steve DeWitt

4. Lack of a trading plan or not following one

“Before I get into any trade I know what I am going to risk, and I know what my profit targets are. That way I can determine a satisfying risk/reward ratio.” - Dr. Jeff Wilde

Why trading plan is important?

The reason is really simple: trading plan helps you in making decisions during moments of stress and uncertainty. That is why it is extremely important for beginners. Lack of trading plan means the necessity of analysis and making decisions when many things are happening at once. Beginners are not ready for those situations so it is obvious that they would make wrong moves that lead them to losses.

The purpose of a trading plan is to help a trader to identify a high probability entry points and then manage those opened trades until closure. So if you do not have a trading plan it is really hard (especially when you are a newbie to Forex trading) to stay disciplined enough to trade a certain system. Entries and exits tend to be chaotic then and they result in losing your deposit. Traders without a plan are hunted by fear, greed, hesitation, doubts, chaos and – in the end – losses.

A well-prepared plan helps you in getting rid of your doubts and hesitations and lets you daunt your impatience and greed. Most traders are not aware that in order to succeed we need two trading plans instead of one.

Those are:

Strategic trading plan, and Tactical trading plan [rules of opening positions and closing positions as well as money and risk management].

You can find description of those two trading plans below.

Strategic trading plan consists of:

What long term goals (within one, two and three years) do we want to achieve?
What financial results we want to have?
How can we do that?

Strategic trading plan can also include our learning plans and description of investments we want to make:

• Learning process (examples of possible goals):
• Finding a mentor to learn a certain system inside out,
• Buying a few eBooks and learning systems they describe,
• Taking part in seminars and/or conferences,
• Reading the most important books on currency trading.
• Investments (examples of possible investments):
• Initial capital,
• Computer,
• Internet connections (main and backup one),
• Indicators,
• Extra software,
• Seminars,
• eBooks,
• etc.

Now let's try to be realistic: When starting with a relatively small account we do not have big chances to become millionaires within a few months. If you managed to gather $2.000, and your annual target is $50.000, well, let's say it is not rational at all.

I truly understand that every single one of us traders wish to start earning as soon as possible... but a wish of earning millions with just $2K is as likely as winning Formula 1 twelve months after getting a driving license.

Tactical trading plan elements (examples):

• Money management techniques
• Reward to risk ratio
• Entry points according to your system
• Exceptions
• Exit points according to your system
• Rules of placing Stop Loss
• Position management
• Risk diversification methods 

 It is also worth keeping a trading journal:

Apart from having a trading plan it is really worth keeping a trading journal where we write down every opened positions (including those opened not according to one's plan). It is really useful to include what made you open your position and what was the effect.

“I kept a trading journal initially that went into detail regarding all the factors that went into why I took the trade and the end result. It was really helpful as it helped me uncover recurring mistakes I was making.

For example, I realized that about 25% of the time I was taking trades that I shouldn’t have and was basically jumping the gun due to impatience and forcing trades that hadn’t setup properly yet.” - Dr. Jeff Wilde

Recommendations:

Treat currency trading as a business – i.e. an activity that needs investment, learning and planning your success.

Think long-term. Try to establish what part will Forex play in your life in two or three years. Be extremely careful and thorough when writing down your trading plan.

Learn how to follow your plan automatically. Provided you have properly tested your system and covered position management – stop hesitating and focus on methodical and systematic following your plan.

You can strengthen your determination in sticking with your plan. Write down how much you lost because of not following your plan, write down how much more you can lose, and finally write down how your life might look like when you follow your MM rules (for example: I will become successful within three to four years and I will be able to provide for my family with my Forex trading).

Keep your trading journal and write down every single trade you make (entries and exits and all other activities, including moving SL and TP – and reasons why you make those changes).

“Write a plan. Simple solution but hard if you do not know what your going to do. Start small and pick a pattern that you are drawn to. For me it was patterns and look at how you are going to trade that pattern. Like any business plan you can make this as detailed or as simple as you like. I firmly believe you can use three basic questions. You will need to look at entry patterns exit pattern and money/trade management. Know where you are going to enter the market, exit the market and how you intend on managing the trade.” - Phil Newton

“But even if a trader has a system that he or she likes and knows the rules – there are a lot of the hours they are sitting in front of their computer and nothing is happening. They want to trade so much, that they would either ignore the rules of their system or they would start trading a little bit of this system and taking other pieces of that system. They are trying to make something happen even though their system tells them not to.

The bottom line is: they have to follow their system and if it is not telling them to place an order – they have to be really patient and do nothing.” - Dr. Jeff Wilde

5. Incorrect system and improper training

The key factor is to find a system that will give you serious advantage on the market and that you will feel good with. Both those factors are important.

It is quite typical that beginners tend to choose systems based on ads that focus on stunning profits those systems would make.

As you may assume, most of those systems are far from perfection. I do not want do cover the elements that a profitable system should have – you can find this information yourself with a little bit of effort. I want to describe here three less known but even more important factors that a success of a system you use depend on.

It could happen that a system that others use with great success would not be profitable when you are using it. Therefore:

• A system has to be adapted to your temper and risk tolerance,
• Training and testing a system should be a long process,
• You have to know that every system consists of a „discretionary part” that might not be included in description / manual you received. 

All three above are extremely important to all traders who decided to learn trading on their own. During your first period of time with trading your training process plays the most important part. However it will not help your learning curve when you focus on fast profits with yet another “brilliant system”.

System vs. your temper and risk tolerance

When you overstep your risk tolerance, emotions will arise and your learning process will get slower. Each and every one of us has his temper. Some like fast sport cars, others prefer steady family vans. It is just the same with systems.

Depending on your temper, resistance to stress and risk – some systems will be better and some will be worse for you.

Generally speaking, all the systems can be divided into four wide categories:

• longterm – position stays open longer than a week,
• mid term – position stays open up to a few days,
• short term [intraday] – opening and closing happens during one day,
• scalpers – positions stay open for a few minutes.

Please notice that scalpers often give a few dozens signals during one session. If you decide to use a scalping methods, you have to be able to make fast decisions during stressful situations. Some can do that, some can't.

On the other hand a long-term system would generate just a few entries during a month so you can spend a lot of time doing market analysis, entry analysis, determining proper lot size and finding a correct TP. In this time frame analysis is a slow process and people who like action might feel like tortured when trading this system. Those people prefer fast entries and even quicker exits and do not feel well with a system that forces you to wait for you signal for a up to a few days.

Duration of training

Let's start with driving a car. Do you remember how hard it was to coordinate your moves – to shift, use the clutch and accelerate while watching the road at the same time? On top of that you were not sure who has the right of way so your decisions were very careful. But after some time you made most of those moves automatically and you could even chat with your passengers.

What does this have to do with trading systems? A lot!

Please notice that you gain your experience over time. Your moves and reactions tend to be automatic, just because you have been in similar situations thousands times and you instinctively know how to asses those conditions.

So when a newbie comes, your answer to his questions would be simple: do this and that. But what is simple to you, might be difficult or even incomprehensible for him. In the beginning, trading with any system might cause you to feel anxious or uncomfortable. You cannot watch the market, indicators, make decisions regarding entries, exits, moving SL in profit in the same time. This would come but after some time.

Proper training takes patience and hours spent in front of your computer screen. But you should do it on demo or on a micro account!

“Discretionary part of a system” – they do not speak about it, but they should.

Please notice that when you start trading with a system created by someone else you have to learn everything from the beginning.

This also means that you cannot properly assess the market and evaluate what your indicators tell you. It takes a lot of practice, just as it is with driving. And of course people that create and describe systems would omit those parts that are “obvious”, “easy” or “simple” for them.

And here comes the first obstacle: some things are not simple for you at all! You still don't know how to react. It is surprising that when I was analyzing systems described as “100% mechanical” I would always find a part that was obvious for the creator but it was not for an inexperienced reader.

So to sum it all up: in order to know the system inside out you have to practice a lot and not to become discouraged by initial failures. You have the right to make them! It is also ok if some parts of the picture are missing – that will come in time.

You have also be aware that it is not reasonable to use a system that was not tested with a real account.

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