Five Simple Rules for Trading Successfully

Trading the forex can be one of the greatest, most exciting experiences that anyone can have, or one of the most nerve-wracking, depending on your level of expertise. It is also a known fact that foreign exchange trading can reap real results for your bottom line, but it can also completely deplete your funds. The main aim of trading foreign exchange is to maximize your earnings in a short time. There are so many ways in which you can benefit from trading and so many reasons why you should really do it, as it provides a fundamental approach to earning whether the market is up or down. For a beginning trader or any other trader for that matter, there are ways in which you can structure your trades and approach it from an organized angle. Not everyone will be able to trade successfully at first, but with lessons and actual experience it will get better over time. Many times, it is through trial and error that you realize just what it is that needs to be done to be successful. A basic understanding of charts, analyses and trading platforms will come into play later on as you become a more seasoned trader. Below are 5 simple rules that you can follow to get the maximum results from your trading.

1. You have to first ask yourself if trading is really what you want to do and why. Even if your answer is to make money, which is an obvious answer, you want to make sure that you don’t bite off more than you can chew. You have to ensure that it is something you will enjoy enough to stick with it, even if your earnings, at first, is not as much as you want it to be. You have to have realistic expectations, based on your capability as a trader. Many will say, or you will read of people who say they earn exorbitant amounts from trading. If you are a seasoned trader who has a huge margin or enough money to place on each trade then you will make money. The more money you trade, the more you stand to earn.

2. A strategy is important for any aspiring or seasoned trader, they have to decide beforehand, which currency pairs to buy or sell, how and where to set their stops, when to enter the market and what is their target. Most importantly, they have to decide how much to risk on each trade. The markets are volatile, you can lose your money as fast as you can earn it. Sticking to your strategy can help you to see results. It does not help to try a new strategy each time you trade. With everything that you do, it is good to be disciplined, trading is no different, switching gears can only harm your trading in the end.

3. Ascertaining what markets to trade in is equally important. Currently, there are four Foreign Exchange markets that you can trade in. New York, Tokyo, Sydney and London. New York market is opened at 8:00 am and closes at 5:00 pm, Tokyo is opened at 7:00 pm and closes at 4:00 am, London at 3:00 am and closes at 12:00 noon and Sydney opens at 5:00 am and closes at 2:00 am. Some sessions will overlap, thus providing an opportunity to make gains as currency pairs are more during the two market sessions. With each market, there are good and bad, but while the New York markets may be ideal for one person, the Sydney markets may be better for another, depending on their location and times they make available for trading. As a trader, being aware of your goals, available funds, personality type and lifestyle, as well as deciding how much risk and leverage to take on can help you to determine which markets to trade in.

4. Develop a plan and literally set it in stone, this goes back to the point about having discipline and sticking to your strategy. Decide on the amount you want to trade with and ensure that you don’t get tempted to go over budget as this sometimes happen. Whether or not you have made a lot on a particular trade, don’t be tempted to go back in, as the market can shift. Even with fundamental or technical analysis, both have the potential of failing if you are not a professional.

5. Learn about the different terms on a trading platform, terms such as stop-loss, limit orders, when to take profits and how to set your margins. This will minimize the stress of worrying and watching the currency pairs as they move. These pairs can move up as you watch your money appreciate in value then decline right before your eyes, but if your margin is sufficient, then it can ultimately go back up afterwards. Last but not least, when you use a trading platform, always pay attention to the disclaimer.

Introduction to Technical Analysis

Traders are constantly searching for different trading systems, refreshing ideas, and new innovations to better refine their trading plans. By investigating the works of the forefathers of technical analysis, Traders can gain an immense knowledge of the workings of the financial markets. Technical analysis is based on three basic premises. First, the market is a discounting mechanism, which means that every fact or information pertaining to the market is already been discounted in the price since there are individuals and groups with large interests and pockets, who are armed with the latest research and findings, and who can afford to stay on top of the latest developments in the market. Second, technical analysis involves the study of mass psychology and the repetition of price patterns or formations. Since crowds behave similarly, price patterns will repeat again and again. Third, markets are either consolidating or trending. When the market is trending, the odds are that the market will continue to trend. The forefathers of technical analysis wrote extensively about technical set ups relating to the markets and noted their own observation pertaining to the mental and psychological aspects of trading as well. Having the trading plan and technical set ups account for nearly ten percent of your success as a trader. Your ability to make timely trade executions and to stay head and shoulders above the crowd accounts for about 90 percent of your success as a trader. Charles Dow, a prolific author and a journalist pioneered the art of technical analysis. He wrote his own observations in a series of editorials and articles in the Wall Street Journal around 1901-1903. Robert Rhea, William Hamilton, and Samuel A. Nelson compiled and formalized Dow work into a body of theories. Each of these authors wrote books in his turn. Samuel Nilson wrote ABC of stock speculation. For example, among the basic tenets of the Dow Theory is that there will always be three different price fluctuations in the market. The primary, the secondary, and the minor trend, which is respectively synonymous to saying daily, weekly, and yearly fluctuations. Successful traders include more than one time frame in their analyses to have a full picture of the whole structure of the market. The hourly chart can be used in conjunction with the daily chart. The daily chart can be used in conjunction with the weekly chart. Equally, Charles Baucker, Richard Wyckoff, Ralph Nelson Elliott made significant contributions to the art of technical analysis. Richard Schabacker, The father of the art of technical analysis in principle, pioneered the concept of chart patterns. He introduced terms such as head and shoulders, triangles, flags. He is also the first individual to use trendlines to define support and resistance levels. Richard Wyckoff coined the concept of testing, and examined meticulously market actions and reactions. He observed and looked for nuances in chart patterns to analyze how a specific price pattern may emerge. For instance, he looked at how the market shook bulls (buyers) before a major rally. Elliott is credited with the concept of waves and that, not only charts, but also waves form patterns, which will repeat themselves again and again. For instance, he introduced the concept of impulse wave which tend to happen in the direction of the trend.

MOMENTUM INDICATORS

Momentum indicators, also called oscillators, are used in technical analysis to measure the velocity of price changes (momentum) both up and down. Every momentum indicator is an oscillator as it oscillates between two extreme levels. These extremes are commonly known as overbought and oversold levels. When an oscillator reaches the upper extreme level, it is said to be overbought. When an oscillator reaches the lower extreme level, this condition is known as oversold. The horizontal line in between these extremes is referred to as the equilibrium line. The Relative Strength Index (RSI), the moving average convergence/divergence (MACD), and the stochastic index are widely used momentum indicators.

RELATIVE STRENGTH INDEX (RSI)

Momentum oscillator developed by J.Welles Wilder in the late 1970s and discussed in his book, New Concepts in Technical Trading Systems. RSI measures the relative strength of the present price movement as increasing from 0 to 100. There are many variations of RSI in use today although Wilder emphasized using a 14 period and setting the significant levels of RSI at 30 for oversold (signaling upturn) and 70 for overbought (signaling downturn). The averages of up days and down days for 14 day periods are plotted. If the financial instrument makes a new high but the RSI does not move beyond its previous high, this divergence suggests reversal. When RSI bounces down and falls below its most recent trough that signals a price reversal.

STOCHASTIC INDEX

Oscillator which measures overbought and oversold conditions in a financial instrument based on moving averages and relative strength concepts. In its simplest form, the stochastic index is expressed as a percentage of the difference between the low and the high price of a financial instrument during the stochastic chosen period. For instance, if the stochastic period is 14days and the high in that period was 50 and the low 40, the difference would be 10. If the price at the time of the calculation of the stochastic index was 40, the stochastic reading would zero. At a price of 50, the stochastic would be 100. At 45, the stochastic would be 50. The stochastic index normally plots a 5 day moving average of the stochastic. Lines representing the 25 percent and 75 percent levels refer to oversold and overbought conditions respectively. If the stochastic index falls below the 25 percent line, that suggests an oversold condition. When the stochastic index rises above the 75 percent line that indicates an overbought condition. An upward reversal through the 25 percent line is a positive breakout and a downward reversal through the 75 percent line is a negative breakout, indicating new uptrend and downtrends respectively.

MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)

Oscillator developed by Gerald Appel which measures overbought and oversold conditions. MACD, pronounced MACD, makes use of three exponential moving averages a short one, a long one, and a third, which is the moving average of the difference between the other two and represents a signal line on the MACD graph. (MACD is typically shown as a histogram, which plots the difference between the signal line and the MACD line. Trend reversals are signaled by the convergence and divergence of these moving averages. When the histogram crosses the zero line upward, that suggests a positive breakout (a buy signal). If the histogram crosses the zero (equilibrium line downward (a sell signal), that indicates a negative breakout. One of the most popular MACD indicators in use is the 8/17/9 MACD. On a daily MACD, the short moving average would be 8 days, the long one 17 days, and signal line 9 days. On a weekly MACD, the same applies but those same numbers would refer to weeks rather than days. Again, we suggest you to trade with virtual money for as long as possible, before trading your own funds. We will continue this practice of sending educational e-mails in order to help you obtain further knowledge about various financial markets.

Range Break Out Part 1.

Range Break Outs form the basis of my core trading. Generally speaking I call most consolidation patterns a range whether it is a triangle in one of its many guise's, a head and shoulder pattern, and so on. The point is to identify a period on the chart when price is contracting which then should lead to a period of expansion
By keeping it simple and not trying to figure out what the pattern is called I can reduce the thinking time significantly and the actual time involved whilst trading as a pattern develop and progresses through its various stages of development as one pattern develops into another and different (text book) rule sets need to be applied. What I am therefore interested in is where are the consolidation patterns extreme levels of support and resistance. This way I can treat them all in the same way and not have to worry about what it is called, has it broken a trend line? Is it a genuine break of the pattern? This list of questions can go on and on depending on the pattern and how price action develops.The two range patterns that I distinguish between are; Intraday or overnight ranges Swing or Longer term ranges The only notable difference between the two set ups is the way I identify a target. Once the range has been identified I can then think about how best to go about trading it. Generally speaking the move into the range dictate the most likely direction of the break out move, 65% of the time it is a continuation pattern 35% of the time it is a reversal pattern. With this figure in mind, if the move into the range is up I will be looking for reversals off the low (more on this later) and break outs of the high of the range. Rules for trading the range once identified. Trade the first pullback after the break out of the established range. Stop loss goes past the event that caused me to get into the trade Targets for intraday trades are based on an average days movement Targets for swing trading (longer term) ranges are the height of the pattern added to the break out point.
Range consideration Ideally the overnight range should have developed near the previous days high or low for higher probability trade set ups. If the overnight range is in the middle of the previous days high low range then this becomes a lower probability set up. (usually price will be consolidating in the bigger picture) If price is in the middle of a larger range then it is also not the best location to look for a trading opportunity. Waiting for price to be at the range highs or lows and assess for reversals or breaks is the highest probability option. Intraday example Looking at a quick example, once the overnight range has been identified and in an "ideal" location I am now waiting for the pattern to "break out" of its consolidation.