Most Profitable Chart Patterns

Technical Chart Patterns,

Most profitable chart patterns are caused by the effects of support and resistance. Double and triple tops are the result of a strong area of resistance lasting, likewise double and triple bottoms are the effect of a strong area of support holding for a long period of time. A head and shoulders reversal pattern occurs when the price briefly rises above an area of resistance, falls back to the previous area of support, and then fails to rally back to it's last high meaning the most likely place for the price to go is down since it couldn't rally above the last area of resistance; and an inverse head and shoulders pattern is the same thing in reverse. Round tops and bottoms are the result of gradually rising support followed by gradually falling resistance, or vice versa. And triangles, wedges, flags and pennants are simply just the combination of one support and one resistance line. In order to properly understand chart patterns, why they work, and exactly what they tell us you need to understand support and resistance. It's also important to trade using a sensible time frame and keep the patterns you find on the charts in perspective.

Triangles & Wedges,

A triangle is the result of one support line and one resistance line converging. Triangles typically form over several months and usually end with a sharp and sudden breakout. The direction the breakout is likely to take depends upon the type of triangle. Broadly speaking, there are three types of triangles in technical analysis, symmetrical triangles, ascending triangles and descending triangles.

A symmetrical triangle pattern is the result of rising support and falling resistance, out of all the three types of triangles is it is most difficult to predict which way a symmetrical triangle will break.

An ascending triangle pattern is the result of rising support and flat resistance showing on the trading chart. An ascending triangle is generally considered to be a bullish pattern as it usually breaks out towards the upside. It indicates that buyers are buying at increasingly higher prices; meaning that it's likely that the buyers will eventually take the price past the area where the sellers are causing resistance. When the resistance the sellers are creating has been taken out the triangle will usually end in a violent breakout.

A descending triangle pattern is the result of falling resistance and flat support showing on the trading chart. It is generally considered to be a bearish pattern since it usually breaks out on the downside. It indicates that the sellers are selling at lower and lower prices; meaning it's likely that the sellers will eventually drive the price below the flat area of resistance where the buyers are providing support. Like the ascending triangle, descending triangles usually end in sharp breakouts.

Flags & Pennants,

Flags and pennants are similar to triangles and wedges in structure; the difference between them being the type of patterns they are and the time frames that they form on. Flags and pennants are continuation patterns; they form after a large move as a result of the market temporarily consolidating before it moves again (usually) in the same direction. Flags and pennants typically form over a time period of around a day to several weeks, unlike triangles that usually take several months to form. When the support and resistance lines run in parallel the consolidation pattern is known as a flag, when the support and resistance lines are converging the consolidation pattern is known as a pennant.

A Flag: Notice the price consolidating between two parallel lines before continuing in the same direction





Pennants: Notice how the price consolidating between converging support & resistance lines before continuing in the same direction

Head and shoulders,

The head and shoulders pattern is considered by many to be the most reliable reversal pattern; a head and shoulders chart pattern unfolds in three stages –

1. The price rises, peaks, and then declines.
2. The price rises again, surpasses the former peak, and then declines again.
3. The price rises once more but fails to reach the heights that it rose to on the 2nd peak.

With the price failing to rally above it's last peak the most likely place the price will go next is down -

Double and Triple Tops & Bottoms,

Double and triple bottoms are bullish patterns; they are the result of a strong area of support and signal that the price is going up since it failed to fall though the support. Double and triple tops are the same thing in reverse, they are bearish patterns resulting from strong resistance and signal that the price is going down since it has failed to breakthrough the resistance. The larger the time frame of the chart these patterns appear on the stronger the support/resistance is and the more reliable the pattern.

An example of a double top - the price can't breakthrough the resistance so it falls

Round Tops & Bottoms,

Round tops occur when the trend is slowly changing direction, they are bearish chart patterns that usually form over a time period ranging from several weeks to several months. Round bottoms are the same thing in reverse, bullish patterns that occur when the trend slowly changes from bearish to bullish. They do not typically end with the violent breakouts that tend to occur with head and a shoulders and inverse head and shoulders patterns.

Summary,

Profitable chart patterns occur because of the effect of suppot ans resistance. Strong areas of support and resistance will show on the trading charts and take the form of trade-able and easily recognisable patterns. If you understand support and resistance.You will understand why the patterns appears on the charts in the way that they do.

The MACD INDICATOR

The MACD Indicator: A Great Secondary Tool

The Moving Average Convergence Divergence (MACD) indicator has the past few years become one of the more popular computer-generated technical indicators.
The MACD, developed by Gerald Appel, is both a trend follower and a market momentum indicator (an oscillator). The MACD is the difference between a fast exponential moving average and a slow exponential moving average. An exponential moving average is a weighted moving average that usually assigns a greater weight to more recent price action.
The name “Moving Average Convergence Divergence” originated from the fact that the fast exponential moving average is continually converging toward or diverging away from the slow exponential moving average. A third, dotted exponential moving average of the MACD (the "trigger" or the signal line) is then plotted on top of the MACD.

Parameters:
Mov1: The time period for the first exponential moving average. The default value is usually 12, referring to 12 bars of whatever timeframe plotted on the chart. (This is the fast moving average.)
Mov2: The time period for the subtracted exponential moving average. The default value is usually 26, referring to 26 bars. (This is the slow moving average.)
Trigger: The period of 9 bars for the signal line representing an additional exponential moving average.
The MACD study can be interpreted like any other trend-following analysis: One line crossing another indicates either a buy or sell signal. When the MACD crosses above the signal line, an uptrend may be starting, suggesting a buy. Conversely, the crossing below the signal line may indicate a downtrend and a sell signal. The crossover signals are more reliable when applied to weekly charts, though this indicator may be applied to daily charts for short-term trading.
The MACD can signal overbought and oversold trends, if analyzed as an oscillator that fluctuates above and below a zero line. The market is oversold (buy signal) when both lines are below zero, and it is overbought (sell signal) when the two lines are above the zero line.
The MACD can also help identify divergences between the indicator and price activity, which may signal trend reversals or trend losing momentum. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. This can be an early signal of a downtrend losing momentum. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these signals are most serious when they occur at relatively overbought/oversold levels. Weekly charts are more reliable than daily for divergence analysis with the MACD indicator.
For more details on the MACD, Appel has a book in print, entitled: "The Moving Average Convergence-Divergence Trading Method."
As with most other computer-generated technical indicators, the MACD is a "secondary" indicator in my trading toolbox. It is not as important as my "primary" technical indicators, such as trend lines, chart gaps, chart patterns and fundamental analysis. I use the MACD to help me confirm signals that my primary indicators may be sending.



Regards,


Puneet Bohra

HOW TO TRADE THE STOCK MARKET USING THE MAJOR CANDLESTICK SIGNALS

The Major Signals

DOJI  Recognition: The open and close are the same or very close to the same.

Pattern Psychology: The Bulls and the Bears are conflicting. This is an alert to investors to take heed for possible trend reversal.

BULLISH ENGULFING Recognition: The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.

Pattern Psychology: This pattern suggests the Bulls are stepping in with force, suggesting prices will move up.

BEARISH ENGULFING

Recognition: The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.

Pattern Psychology: This shows the Bears are overwhelming the Bulls, suggesting prices will move down.

HAMMERS and HANGING-MAN

Recognition: The lower shadow (or tail) should be at least two times the length of the body. The color of the body is not important although a black body has slightly more Bearish indications and a white body has slightly more Bullish indications.

Pattern Psychology: This pattern at the bottom of a down trend is called a Hammer. This pattern at the top of an uptrend is called a Hanging-Man

PIERCING PATTERN

Recognition: A two candle pattern, the body of the first candle is black and the body of the second candle is white. The white day opens lower, under the trading range of the previous day. The price closes above the 50% level of the black body.

Pattern Psychology: After a strong downtrend, the atmosphere is Bearish but before the end of the day the Bulls step in and price closes near the high of the day.

DARK CLOUD

Recognition: A two candle pattern, the body of the first candle is white and the body of the second candle is black. The black day opens higher, above the trading range of the previous day. The price closes below the 50% level of the white body.

Pattern Psychology: After a strong uptrend, the atmosphere is Bullish but before the end of the day the Bears step in and price closes near the low of the day.

BULLISH HARAMI

Recognition: A two candle pattern forming in a down trending price pattern. The body of the first candle is the same color as the current trend and should be a long black candle. The body of the second candle is white and opens and closes within the body of previous day's candle.

Pattern Psychology: After a strong downtrend the Bulls step in and open the price higher than the previous day's close. This concerns the Bears and the shorts start covering their postions. A strong day after that would convince everybody that the trend may be in a reversal.

BEARISH HARAMI

Recognition: A two candle pattern forming in an uptrending price pattern. The body of the first candle is the same color as the current trend and should be a long white candle. The body of the second candle is black and opens and closes within the body of the previous day's candle.

Pattern Psychology: After a strong uptrend the Bears step in and open the price lower than the previous day's close. The price finishes lower for the day and the Bulls are concerned and begin taking their profits.

MORNING STAR

Recognition: A three candle pattern at the bottom of a downtrend.The body of the first candle is black, confirming the current downtrend. The second candle is an indecisive formation. The third candle is white and should close at least halfway up the black candle.

Pattern Psychology: After an apparant downtrend the Bulls step in and open the price higher than the previous day's close. The price finishes higher for the day and the Bears are concerned and begin covering their short positions.

EVENING STAR

Recognition: A three candle pattern at the top of an uptrend. The body of the first candle is white, confirming the current uptrend. The second candle is an indecisive formation. The third candle is black and should close at least halfway down the white candle.

Pattern Psychology: After an apparant uptrend the Bears step in and open the price lower than the previous day's open. The price finishes lower for the day and the Bulls are concerned and begin selling to take their profits.

Kicker Signals
Bearish and Bullish

Recognition: The first day's open and the second day's open are the same BUT the price movement is in opposite directions.

Pattern Psychology: The Kicker Signal demonstrates a dramatic change in investor sentiment. The longer the candles, the more dramatic the price reversal.

SHOOTING STAR

Recognition: One candle pattern appearing in an uptrend. The shadow (or tail) should be at least two times the length of the body. The color of the body is not important, although a black body has slightly more Bearish indications.

Pattern Psychology: After a strong uptrend the Bulls appear to still be in control with price opening higher, but by the end of the day the Bears step in and take the price back down to the lower end of the trading range. Lower trading the next day reinforces the probability of a pullback.

Inverted Hammer

Recognition: The upper shadow should be at least two times the length of the body. The real body is at the lower end of the trading range. There should be no lower shadow or a very small lower shadow.

Pattern Psychology: After a downtrend has been in effect, the atmosphere is Bearish. The price opens and trades lower but before the end of the day, The Bulls step in and take the price back up. A higher open or a white candle the next day reinforces buying.

Using Multiple Time Frame

Looking at multiple time frames can give you a better idea of what is happening with a stock. For swing trading, we can break this down into 4 time periods: The daily, weekly, 60 minute, and 5 minute time frames.

Looking at a stock through different time frames can be confusing if you are a new trader. Why? Because each time frame looks different! A stock may look great on the daily chart, but look horrible on a 5 minute chart.

I am going to try and simply it on this page but if looking at all these multiple time frames is confusing the heck out of you, then STOP. Just stick with the daily chart and the hourly (60 minute) chart. You'll do just fine.

The Daily Chart: Your Main Charting Workspace

This is where you will spend the majority of your time as a swing trader. When you run your scans, you are running them off of the daily chart. This is where you will seek to find trading opportunities.

Your daily chart should go back 5 to 7 months or longer. You want it to show enough data so that you can find support and resistance points. Remember that each candle represents one day of trading.

Here is an example using QQQQ.

Obviously, your chart will be much bigger than this. Make it fill up your entire screen. The bigger the better.

You still would like to get an idea what the longer term trend looks like. This is where the weekly chart comes in.

The Weekly Chart: Birds Eye View

Think of the weekly chart as the time frame that allows you to step back and get a look at the longer term trend. You can only fit so much data on the daily chart so it is hard to see what is really going on with a stock.

On the weekly chart, you want to see that the stock is in an uptrend and if there are any significant chart patterns. Many investors and institutional traders use this time frame to make buy and sell decisions. So ask yourself, "If I were them, would I want to buy the stock now?"

Here is an example using the same chart (QQQQ):

We can see from this time frame that QQQQ has formed a double bottom! We couldn't see that on the daily chart because there wasn't enough data. But, by looking at the weekly chart, we may be quite a bit more bullish now that we know that it has formed this pattern.

In this time frame, you can go back two or three years (each candle represents one week of trading). There really isn't any reason to go back further than that for swing trading. And, you don't need to spend a whole lot of time in this time frame.

After all, you are a swing trader that only holds a stock typically for a few days.

The 60 Minute Chart: Binocular View

Think of the 60 minute chart (hourly) like you were getting out of pair of binoculars and analyzing what is going on with the individual candles on the daily chart. When you buy pullbacks off the daily with consecutive lower highs (long positions), you will see that the stock is in a downtrend on the 60 minute chart.

You are looking for a break of that trend line in this time frame.

When you say, "I'll buy when the stock trades over the previous high.", what you are really doing is buying that trend line break on the 60 minute chart.

Here is an example using QQQQ again:

Your hourly chart should go back 15 to 20 days (each candle represents one hour of trading). You can see that by analyzing this time frame, it is easier to see (and possibly anticipate) a trend line break. And sometimes, you will see a stock bottoming out in this time frame that may not notice on the daily chart. After Now it is time for your entry...

The 5 Minute Chart: Microscope View

This is where we will get our entry. So far, we have found a great setup on the daily chart. We checked the weekly for chart patterns and to make sure that the stock is in an uptrend. We zoomed in using the 60 minute chart and watched for a break of that trend line.

We have already made our decision that we are going to buy the stock.

The five minute time frame is used to buy the stock at the best possible price. You really don't need to spend a whole lot of time analyzing this chart. Just look for the stock pull back to a support area (on the long side) to get your entry price. Simple.

You only need to look at the 5 minute chart with the current days data (each candle represents five minutes of trading).

There is one other time frame that I should mention. That is the 15 minute chart. Why would you look at this time frame? Because sometimes, the day traders will make the 5 minute chart look sloppy! Using the 15 minute chart can smooth out the whipsaws that show up on the 5 minute chart.

You may even decide to use the 15 minute chart instead of the 5 minute chart.

Trading Tips

• Each time frame affects the other. A news event affects the intra day (5 minute) chart. This affects the hourly chart, which affects the daily chart, which affects the weekly chart.
• You may be able get a better entry with a tighter stop loss order using the 60 minute chart rather than the daily chart.
• Use the 200 SMA in all time frames - even on intra day charts. You'll be surprised to see how stocks react when they get close to this moving average!

Analyzing different multiple time frames can improve your success as a swing trader. However, you will rarely find a stock the looks absolutely perfect on the weekly, daily, and intra day charts. Your main goal is to identify support and resistance areas that could affect the stock in that time frame.

The important thing to remember is to pick your main time period then look at a time frame above it and a time frame below it. The lower time frame tells you what is happening now and the higher time frame tells you what could happen in the future.

How To Use ADX Indicators

The ADX indicator measures the strength of a trend and can be useful to determine if a trend is strong or weak. High readings indicate a strong trend and low readings indicate a weak trend.

When this indicator is showing a low reading then a trading range is likely to develop. Avoid stocks with low readings! You want to be in stocks that have high readings.

This indicator stands for Average Directional Index. On some charting packages there are two other lines on the chart, +DI and -DI (the DI part stands for Directional Indicator). Ignore these lines. Trying to trade according to these two lines is a great way to lose money!

The only thing that we are concerned with is the ADX itself.

Note: This indicator measures strong or weak trends. This can be either a strong uptrend or a strong downtrend. It does not tell you if the trend is up or down, it just tells you how strong the current trend is!

Let's look at a chart:

In the chart above, the ADX indicator is the thick black line (arrow). The other lines are the +DI and -DI (ignore these). The highlighted areas show how this indicator identifies trading ranges. ADX is showing a low reading and the stock is chopping around sideways.

Now look at what happens when the indicator gets into higher territory. A strong trend develops! These are the type of stocks that you want to trade.

On the right side of the indicator panel you will see a scale from 0 to 100 (only 0 through 80 are marked). Here are my guidelines for using the scale:

ADX Indicator Scale

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks!

Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.

When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading!

You won't see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

Tips

The only thing I use the ADX for is an additional filter in my scans, so that I can find stocks that are in strong trends. I do not even have the ADX indicator on the charts that I look at when I am looking for setups. Since the ADX is already factored into the scans, I don't need it added to the chart itself.

I don't pay any attention to the rising and falling of the ADX indicator. Stocks can go up for long periods of time even though the ADX may be falling (indicating that the trend is getting weak). The ideal scenario is that the ADX is rising, but I don't find it necessary to take a trade.

I don't use any technical indicators on my charts. I found out that technical indicators just clouded my judgement. One technical indicator may indicate a buy and one may indicate a sell. Needless to say, this can be very confusing and it just takes you attention away from the only thing that matters - PRICE.

So what is the ADX indicator good for?

This indicator is best used for screening stocks and writing scans. By adding this indicator to your scanning software, you can eliminate all of the stocks that are in trading ranges. You can then set up your scan to find only those stocks that are in strong up trends or strong down trends.

The ADX indicator does not give buy or sell signals. It does, however, give you some perspective on where the stock is in the trend. Low readings and you have a trading range or the beginning of a trend. Extremely high readings tell you that the trend will likely come to an end.

Practical Forex Trading Course

A Few WORDS ABOUT THE TREND

We think that most of us heard such a saying as “the trend is my friend”. Many of us also had met in Internet and books different opinions as to the sensee of the above saying..

Well, what is the real meaning of it infact?

The real deep meaning and idea of this saying is a simple and clear demand:Always Trade in the direction of the current trend and ignore trading signals directed against the flow of current trend.

Friendly trend will remain friendly generally, while the trader treats him like a friend , not doing any thing against the desire and will of his friend/trend. Do you know friends who would not be disturbed or irritated by your doings against their desire, understanding and will ? Nobody likes such things.

But nevertheless, many of us starting examining charts/tickers etc absolutely forget this simple rule and try to catch the high or low peaks and/or to trade against the trend. This means, that the trader lacks the main thing - discipline. It's very interesting, that the looser, while considering and investigating his own mistakes, often does not see his actual mistake and culprit - trading against the trend.

How can we define the trend ? Very simply - with the help of combination of four Simple Moving Averages (MA). For example, let us take combination of 5/20/40/60 МА.

Usually current trend is defined by looking at Daily chart and this is right. But the traders with small cash amounts may define trend at 4-hour chart and 1-hour chart. As it often happens that in the interests of relatively quick trading the trend may be defined using only 1-hour chart. But we shouldn't forget about the Daily chart, coz if the hourly signal coincides with the daily trend, then there appears a brilliant possibility for a mighty movement along the trend.

But let us return to the above mentioned combination of MAs. So, if МА 40 is above МА60, then the trend is upward and each time when MA5 crosses MA20 upward (that is in compliance with the trend direction), we enter the market. But when MA5 crosses MA20 downward, we use this signal only for closing of previously opened positions.

And vice versa, if МА40 is under МА60, then the trend is downward and now we enter the market only when MA5 crosses MA20 downward, and we use upward crosses of MA5 and MA20 only for closing opened earlier positions. SIMPLE??

Look at the above Chart. The red dots in there at the above chart denote the crosses of MA40 and MA60. Blue and red lines show the places for openeing positions in the trend direction.

I know of traders, who, in the situation alike trying to catch the price peak, opened SELL positions near the blue lines. If the trader opens positions without minimum analysis at least for definition of the current trend, then he would better go to casino and gamble off, where one can always trying to guess right, but never can make a prognosis. There exists an opinion that MAs are lagging behind as an indicator. It’s true, sometimes, but as a trend indicator, they are very good.

Here МА5 - green, МА20 – red. Red dot - place of closing position ( MA5 crosses MA20 downward). Blue dot - place of opening position in the trend direction (MA5 crosses MA20 upwards ).

We have the same at this chart - red dots - places of closing positions, blue dot - place of opening position in the direction of the current trend.

But WHERE should we place a stop-loss ?

If we enter the market just after the cross of M40 and MA60, then the best place for stop would be 2-4 pips beyond the closest peak directed opposite to our market entrance direction. If you agree, of course, with the size of the stop-loss, or if your collateral permits such stop. But if we opened position some time after MA40 and MA60 had been crossed, then the best place would be 2-4 pips beyond MA60, then, a bit worse, but still ok, beyond MA40 and the weakest variant is beyond MA20.

It’s only natural that the combinations of meanings for MAs could be whatever the trader would want , cause nobody can prevent him from performing experiments. Here are some examples of four simple MA combinations : 10/20/60/80 or 8/12/24/48 or you may even use Fibonacci numbers like 8/13/34/55 or 13/21/55/89 etc.

The main idea in the combination of four MA is that the pair with big numbers defines the existence of the current trend and the pair with small numbers permits us to effect relatively quick trades.

Here is one more example of trading with the trend. Upward cross of MA40/60 is designated by two blue dots. Red dots are denoting the places of positions closing after MA5/20 were crossed downward. One blue dot shows the place where the position in the direction of the current trend was opened again after MA5/20 had crossed upwards.

The next chart is the same as above, but along with the aim of comparison it has another combination of four Simple Moving Averages - MA8/13/34/55.

I understand perfectly that all stated above is not a brand new concept or something. But looking at newbies I noted that disregarding the current trendis one of the most often met mistake, which can lead to potential heavy losses. Therefore, the aim of the above material is to remind and emphasise once again about the necessity for checking the trend direction before entering the market.

Good luck!

FOREX BASICS

Introduction

Foreign Exchange
The simultaneous transaction of one currency for another.
Foreign Exchange Market
An informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the 'interbank market'. The foreign exchange market has no central clearing house or exchange and is considered an over-the-counter (OTC) market.
Spot Market
The market for buying and selling currencies at the current market rate.
Rollover
A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
Exchange Rate
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
Currency Pair
The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.
Base Currency
The first currency in the pair. Also the currency your account is denominated in.
Counter Currency
The second currency in the pair. Also known as the terms currency.
ISO Currency Codes
USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar
For a full list, see ISO Currency Codes
Currency Pair Terminology
EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"
FCM
Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept monies from clients to trade them.
Market Maker
A market maker provides liquidity for a particular currency pair by standing ready to buy or sell that currency by displaying a bid and offer price. Market makers earn their commission from the spread between the bid and offer price.
Forex ECN Broker
ECN is an acronym for Electronic Communications Network. A Forex ECN does not operate a dealing desk, but instead provides a marketplace where multiple market makers, banks and traders can enter competing bids and offers into the platform either inside or outside the spread, allowing traders to trade on those prices. Orders are matched to the best available bid/offer price for a small fee or commission.
Dealing Desk
A dealing desk provides prices and executes trades.
NDD
An acronym for 'No Dealing Desk'. A no dealing desk broker acts as an agent, matching up orders to one or more liquidity providers connected to their platform.
Counterparty
One of the participants in a transaction.
Sell Quote / Bid Price
The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200.
Buy Quote / Offer Price
The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203.
Pip
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.
Pip Value
The value of a pip. Pip value can be fixed or variable depending on the currency pair and base currency of your account. e.g. The pip value for EURUSD is always US$10 for standard lots and US$1 for mini-lots. A simple way of calculating pip value is as follows: Divide 1 pip by the exchange rate and multiply it by the lot size to get the base currency pip value. To convert it to your account currency, multiply it by the applicable exchange rate. For example;
EURUSD = 0.0001 / 1.30000 = €0.0000769 * 100,000 = €7.69 * EUR/USD 1.30000 = US$10.00 pip value (fixed)
USDJPY = 0.01 / 120.00 = US$0.0000833 * 100,000 = US$8.33 pip value (variable)
Lot
The standard unit size of a transaction. Typically, one "standard" lot is equal to 100,000 units of the base currency, or 10,000 units if it's a "mini" lot, and even 1,000 units if it's a "micro" lot. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit!
Spread
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Standard Account
Trading with standard lot sizes, generally 100,000 units of the base currency.
Mini Account
Trading with mini lot sizes, generally 10,000 units of the base currency.
Micro Account
Trading with micro lot sizes, generally 1,000 units of the base currency.
Margin
The deposit required to open or maintain a position. A 1% margin requirement allows you to control a $100,000 position with a $1,000 margin deposit.
Leverage
The extent to which you are using borrowed funds to gear your account. Increasing your leverage magnifies both gains and losses. To calculate leverage used, divide total open positions by account equity to get the leverage ratio. e.g. If a trader has $1,000 in his account and opens a $100,000 position, he is leveraging his account by 100 times, i.e. 100:1 leverage. If he opens a $200,000 position with $1,000 in his account, he is leveraging his account by 200 times, i.e. 200:1 leverage.
Manual Execution
An order which is executed by dealer intervention.
Automatic Execution
The order is executed by the broker without dealer intervention or involvement.
Slippage
The difference between the order price and the executed price.
Drawdown
The extent to which equity is lost in a trading account from a trade or series of trades, measured from peak to subsequent trough, most commonly in percentage terms.
Support
Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.
Resistance
Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.

Common Order Types

Market Order
An order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a specified price level.
Stop-Loss Order
An order to restrict losses at a specified price level.
Limit Entry Order
An order to buy below the market or sell above the market at a specified level, believing that the price will reverse direction from that point.
Stop-Entry Order
An order to buy above the market or sell below the market at a specified level, believing that the price will continue in the same direction.
OCO Order
One Cancels Other. An order whereby if one is executed, the other is cancelled.
GTC Order
Good Till Cancelled. An order stays in the market until it is either filled or cancelled.

Common Trade Types

Long Position
A position in which the trader attempts to profit from an increase in price. i.e. Buy low, sell high.
Short Position
A position in which the trader attempts to profit from a decrease in price. i.e. Sell high, buy low.

Common Trading Styles

Technical Analysis
A style of trading that involves analysing price charts for technical patterns of behaviour.
Fundamental Analysis
A style of trading that involves analysing the macroeconomic factors of an economy underpinning the value of a currency and placing trades that support the trader's outlook.
Trend Trading
A style of trading that attempts to profit from riding short, medium or long term trends in price.
Range Trading
A style of trading that attempts to profit from buying technical levels of support and selling technical levels of resistance. The upper level of resistance and lower level of support defines the range.
News Trading
A style of trading whereby a trader attempts to profit from fundamental news announcements on a country's economy that may affect the value of a currency, usually seeking short term profit immediately after the announcement is released.
Scalping
A style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.
Day Trading
A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.
Swing Trading
A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.
Carry Trading
A position whereby the trader attempts to profit from holding a currency with a higher interest rate and shorting a currency with a lower interest rate.
Position Trading
A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.
Discretionary Trading
A style of trading that involves the human decision making process for every trade.
Automated Trading
A style of trading that involves neither human decision making or involvement, but uses a pre-programmed strategy based on technical or fundamental analysis that automatically places trades via automated trade execution software.

Example Trade

Assume you have a trading account at a broker that requires a 1% margin deposit for every trade. The current quote for EUR/USD is 1.3225/28 and you want to place a market order to buy 1 standard lot of 100,000 Euros at 1.3228, for a total value of US$132,280 (100,000 * $1.3228). The broker requires you to deposit 1% of the total, or $1322.80 to open the trade. At the same time you place a take-profit order at 1.3278, 50 pips above your order price. In taking this trade you expect the Euro to strengthen against the U.S. dollar.
As you expected, the Euro strengthens against the U.S. dollar and you take your profit at 1.3278, closing out the trade. As each pip is worth US$10, your total profit for this trade is $500, for a total return of 38%.

Principals Of Trading Pyschology

 In the interim, here are the five principles that pertain specifically to trading psychology and in future I will also give  five principles for trading the markets.

Principle #1: Trading is a performance activityLike the playing of a concert instrument or the playing of a sport, trading entails the application of knowledge and skills to real time performances and this is the core idea behind my most recent book.  Success at trading, as with other performances, depends upon a developmental process in which intensive, structured practice and experience over an extended time yield competence and expertise. Many trading problems are attributable to attempts to succeed at trading prior to undergoing this learning process. My research suggests that professional traders account for well over three-quarters of all share and futures contract volume. It is impossible to sustain success against these professionals without honing one's performance--and by making sure that you don't lose your capital in the learning process. Confidence in one's trading comes from the mastery conferred by one's learning and development, not from psychological exercises or insights.

Principle #2: Success in trading is a function of talents and skillsTrading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one's level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one's talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.

Principle #3: The core skill of trading is pattern recognitionWhether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading--technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile--are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals.

Principle #4: Much pattern recognition is based on implicit learning 
Implicit learning occurs when people are repeatedly exposed to complex patterns and eventually internalize those, even though they cannot verbalize the rules underlying those patterns. This is how children learn language and grammar, and it is how we learn to navigate our way through complex social interactions. Implicit learning manifests itself as a "feel" for a performance activity and facilitates a rapidity of pattern recognition that would not be possible through ordinary analysis. Even system developers, who rely upon explicit signals for trading, report that their frequent exposure to data gives them a feel for which variables will be promising and which will not during their testing. Research tells us that implicit learning only occurs after we have undergone thousands of learning trials. This is why trading competence--like competence at other performance activities such as piloting a fighter jet and chess--requires considerable practice and exposure to realistic scenarios. Without such immersive exposure, traders never truly internalize the patterns in their markets and time frames.

Principle #5: Emotional, cognitive, and physical factors disrupt access to patterns we have acquired implicitly
Once a performer has developed skills and moved along the path toward competence and expertise, psychology becomes important in sustaining consistency of performance. Many performance disruptions are caused when shifts in our cognitive, emotional, and/or physical states obscure the felt tendencies and intuitions that lie at the heart of implicit learning. This most commonly occurs as a result of performance anxiety--our fears about the outcome of our performance interfere with the access to the knowledge and skills needed to facilitate that performance. Such performance disruptions also commonly occur when traders trade positions that are too large for their accounts and/or do not maintain sound risk management with their positions. The large P/L swings cause shifts in emotional states that interfere with the (implicit) processing of market data. Cognitive, behavioral, and biofeedback methods can be very useful in teaching traders skills for maintaining the "Yoda state" of calm concentration needed to access implicit knowledge.

 Training yourself to proficiency is the path to a positive pyschology

Regards,

Puneet Bohra

Trend Is Your Friend Till It Ends

The Trend is your Friend

TRADERS’ BIGGEST PROBLEM

Trading is an great way to make a living and/or accumulate large sums of wealth. As a trader you alone are responsible for all your decisions that you may take to make profits and/or losses in the course of your trading career.

As a trader you alone will be responsible for all or any loss that you may make and on the other hand you do not have to thank anyone for your profits. You are the boss and you are not obligated to anyone expect yourself. 

However there is a problem that most traders do not understand and that is that most of the time the market does not move in trends. The market only trends only 30-50% of the time. The rest of the time the market is sleeping or it does not have a discernable trend from which traders can make money. Professional traders make most of their profits in a trending market.

By following trends over different time frames, traders can increase their profit making opportunity in trending markets and stay away from markets when they are not trending.

The Trend is your Friend


TREND AND TRADING RANGE
Traders try to profit from changes in prices: Buy low and sell high or sell short high and cover low. Even a quick look at a chart reveals that markets spend most of their time in trading ranges. They spend less time in trends.

A trend exits when prices keep rising or falling over time. In an uptrend, each rally reaches a higher high than the preceding rally and each decline stops at a higher level than the preceding decline. In a downtrend each decline falls to a lower low than the preceding decline and each rally stops at a lower level than the preceding decline and each rally stops at a lower level than the preceding rally. In trading range most rallies stop at about the same high and declines peter out at about the low.

A trader needs to identify trends and trading ranges. It is easier to trade during trends than in trading ranges.


PSYCHOLOGY OF TRENDS AND TRADING RANGE

An uptrend emerges when bulls are stronger than bears and their buying forces prices up. If bears manage to push prices down, bulls return in force, break the decline, and force prices to a new high. Downtrends occur when bears are stronger and their selling pushes markets down. When a flurry of buying lifts prices, bears sell short into that rally, stop it, and send prices to new lows.

When bulls or bears are equally strong or weak, prices stay in a trading range. When bulls manage to push prices up, bears sell short into that rally and prices fall. Bargain hunters step in and break the decline, bears cover shorts, their buying fuels a minor rally, and the cycle repeats.

Prices in trading ranges go nowhere, just as crowds spend most of their time in aimless mulling. Markets spend most of their time in trading ranges than trends because aimlessness is more common among people than purposeful action. When a crowd becomes agitated or excited, it surges and creates a trend.


THE HARD RIGHT EDGE

Identifying trends and trading ranges is one of the hardest tasks in technical analysis. It is easy to find them in the middle of the chart, but the closer you get to the right edge, the harder it gets.

Trends and trading ranges clearly stand out on old charts. Experts show those charts on seminars and make it seem easy to catch trends. Trouble is your broker does not allow you to trade in the middle of the chart. He says you must make your trading decisions at the hard right edge of the chart!

The past is fixed and easy to analyze. The future is fluid and uncertain. By the time you identify a trend, a good chunk of it is already gone. Nobody rings a bell when a trend dissolves into a trading range. By the time you recognize the change, you will lose some money trying to trade as if the market was still trending.

Most people cannot accept uncertainty. They have a strong emotional need to be right. They hang on to losing positions, waiting for the market to turn and make them whole. Trying to be right in the market is very expensive. Professional traders get out of losing trades fast. When the market deviates from your analysis, you have to cut losses without fuss or emotions.


THREE IMPORTANT TRENDS
You may be asking yourself the question, "What is a trend and how long does it last?" There are countless numbers of trends, but before the advent of intraday charts, there were three generally accepted durations: primary, intermediate and short-term.


The main or primary trend, is often referred to as a bull or bear market. Bulls go up and bears go down. They typically last about nine months to two years with bear market troughs separated by just under four years. These trends revolve around the business cycle and tend to repeat whether the weak phase of the cycle is an actual recession, or if there is no recession and just slow growth.

Primary Trend

Primary trends are not straight-line affairs, but are a series of rallies and reactions. These series of rallies and reactions are known as intermediate or medium term trends.

The intermediate or medium term trend can vary in length from as little as six weeks to as much as nine months, or the length of a very short primary trend.

Intermediate trends typically develop as a result of changing perceptions concerning economic, financial, or political events. It is important to have some understanding of the direction of the main or primary trend because rallies in bull markets are strong and reactions are weak. On the other hand, reactions in bear markets are strong and rallies are short, sharp, and generally, unpredictable.

If you have a fix on the underlying primary trend, you will be better prepared for the nature of the intermediate rallies and the reactions that will unfold.

In turn, intermediate trends can be broken down into short-term trends, which last from as little as two weeks to as much as five or six weeks.
Market Cycle Model

As an investor, it is best to accumulate when the primary trend is in the early stages of reversing from down to up, and liquidate when the trend is reversing from up to down. Second, as traders, we are better off if we position ourselves with the long side in a bull market since that is when short-term uptrends tend to have the greatest magnitude. By the same token, it does not usually pay to short in a bull market because declines can be quite brief and reversals to the upside unexpectedly sharp. If you are going to make a mistake, it is more likely to come from a counter-cyclical trade.


If you're an intraday trader, you may think all of this does not apply to you, but really, it does. It is important to remember that even on intraday charts, the predominant trend determines the magnitude and duration of the shorter moves. You may not feel a three-hour rally is closely related to a two-year primary bull market move, but it is just as related as a five or six-day trend.

Charles Dow, the author of the venerable Dow theory, stated at the turn of the century that the stock market had three trends. The long term trend lasted several years, the intermediate trend lasted several months and anything shorter than that was a minor trend. Robert Rhea, the great market technician of the 1930s, compared the three market trends to a tide, a wave and a ripple. He believed that traders should trade in the direction of the market tide and take advantage of the waves and the ripples to time your entry and exit.

CONFLICTING TIMEFRAMESMost traders ignore the fact that markets usually are both in a trend and in a trading range at the same time! They pick one time frame such as daily or hourly and look for trades on the daily charts. With their attention fixed on daily or hourly charts, trends from other time frames, such as weekly or 10 minute trend keep sneaking up on them and wrecking havoc with their plans.

Markets exist in several time frames simultaneously. They exist on a 10 minute chart, an hourly chart, a daily chart, a weekly chart, and any other chart. Traders often feel confused when they look at charts in different time frames and they see the markets going in several directions at once. The market may look for a buy on a daily chart and a sell on the weekly chart, and vice versa. The signals in different time frames of the same market often contradict one another. Which of them will you follow? Most traders pick one time frame and close their eyes to others – until a sudden move outside of “their” time frame hits them.

A FACTOR OF FIVE

When you are in doubt of a trend, step back and examine the charts in a timeframe that is larger than the one you are trying to trade. A factor of 5 links all timeframes. If you start with the weekly charts and proceed to the dailies, you will notice that there are five trading days to a week. As your timeframe narrows, you will look at hourly charts – and there are approximately 5 to 6 trading hours to a trading day. Intra day traders can proceed even further and look at 10 minute charts, followed by 2 minute charts. All are related by a factor of five. The proper way to analyze any market is to analyze it in at least two time frames. If you analyze daily charts, you must first examine the weekly charts and so on. This search for greater perspective is one of the key principles of the Traders Edge Multiple Time Frame Trading System.

METHOD AND TECHNIQUES

There is no single magic method to identifying trends and trading ranges. There are several methods and it pays to combine them. When they confirm one another, their message is reinforced. When they contradict one another, it is better to pass up the trade.

1. Analyze the pattern of highs and lows. When rallies keep reaching higher levels and declines keep stopping at higher levels they identify an uptrend. The pattern of lower lows and lower highs identifies a downtrend, and the pattern of irregular highs and lows points to a trading range.
    
2. Draw an uptrendline connecting significant recent lows and a downtrendline connecting significant recent highs. The slope of the latest trendline identifies the current trend A significant high or low on a daily chart is the highest high or lowest low for at least a week. As you study charts, you become better at identifying those points. Technical analysis is partly a science and partly an art.
    
3. The direction of a slope of a moving average identifies the trend. If a moving average has not reached a new high or low in a month, then the market is in a trading range.
    
4. Several market indicators, such as MACD and the Directional system help identify trends. The Directional system is especially good at catching early stages of new trends.

CONCLUSION

When you trade in the direction of this long a trend, you are truly following the markets rather than predicting them. However trading with the trend is hard to do because a logical give-up exit point will be farther away, potentially causing a larger loss if you are wrong. This is a good example of why so few traders are successful. They can't bring themselves to trade in a psychologically difficult way.



Regards,

Puneet Bohra