Seeing a simple breakout may convince you to place a trade, but how do you know if a breakout is really a breakout? Here’s one way you can jump into a trade and not get caught off-guard.
Developing a consistent approach to identifying and trading breakouts that continue in an uptrend after a trade has been placed is a common challenge faced by active traders. Traders may often enter a position based on a simple breakout above new highs, which subsequently consolidates or pulls back, causing stop losses. Trading breakouts based on simple price action or candlestick patterns alone runs the risk of buying near a pivot or exhaustion area. Similarly, relying too heavily on complex lagging indicators like moving average convergence/divergence (MACD) crossovers, relative strength index (RSI), or stochastics can generate false positive entry signals and lead to overtrading weak signals.
Continue reading Swing Trading With Momentum On Your Side By Ken Calhoun
Much forex trading by speculators is based on technical analysis. In this third part of an article series on trading forex, we’ll look at what technical tools you should focus on.
Earlier in this series, I mentioned that forex trading is in many ways simpler than equity trading, since there are far fewer currency pairs than there are stocks. It is also important to understand that currency prices move differently. While a stock can climb or fall within a huge range — to pick an infamous example, Enron peaked at $90.56 per share in August 2000 and fell to $0.26 by November 30, 2001 just before its bankruptcy filing — currencies, by comparison, tend to move within a relatively narrow band or channel. This is because each currency represents buying power in its home country, which will only vary so much within the global economy, and because central banks intervene to affect valuation in the event their currency becomes too strong or too weak.
Continue reading Trading Forex: Charting Your Way By Imran Mukati
White noise, pink noise — does it make a difference? It sure does, and here is how you can use noise theory to create an indicator with zero lag that works both as a countertrend oscillator and as a trend identifier. Noise spectra are often described by color. Just like white light, white noise contains all frequency components having equal power. When I surveyed analysts’ description of market data, it led me to the conclusion that they describe it as pink noise. Pink noise is noise with memory, and I use this noise-with-memory concept to derive a market data synthesizer.
Here’s What I Did To Make It Useful
I turned the data synthesizer inside out to derive a white spectrum from the observed data. While simple, it is profound, because whitening the data negates the phenomenon I have called spectral dilation. Just because the derived white noise spectrum has uniform amplitude at all frequences, it does not preclude the waveform from containing information. I then show how to extract the information in the waveform using a SuperSmoother filter. Since the derived waveform has a uniform power density at all frequencies, a range of optimum indicators can be created. These optimum indicators can be used on intraday data, in short-term trading strategies, and in longer-term trend followers.
Continue reading Whiter is Brighter By John F. Ehlers
Forex, foreign exchange, FX — they all refer to the trading of, or exchange of, one foreign currency for another. While the practice began simply as one of many routine banking mechanisms, it has recently evolved into a speculative market — that is, some people and institutions trade currencies strictly to make money.
The advenT Of fOrex markeTs
From the 19th century until World War I, the economically developed nations of the world adhered to the gold standard. To simplify a complicated issue, a nation’s wealth depended on how much gold it possessed, because the currency of any nation on the gold standard had a set value relative to gold. The British pound, for example, was fixed at the equivalent of 113.00 grains of pure gold, while the US dollar was fixed at 23.22 grains. This meant that a nation could only issue the total amount of currency that it could back with its gold reserves. In practice, some nations held a combination of gold and other currencies also backed by gold, but the end result was the same — a limit on its total currency in circulation. You may have already realized that such limits on a country’s currency also limit its government spending. This is precisely why World War I caused a breakdown in the gold standard system.
Continue reading Trading Forex: Understanding the Basics By Imran Mukati
In this second of a two-part series on managing risk, we look at how to overcome the disadvantages of diversification. (Read Part 1)
In part 1, it became clear that we need to bring profits and total return into the equation to evaluate the effects of diversification. However, it’s necessary to look beyond its common risk-lowering incentive and gain a more holistic view of diversification. While the advantages on the risk side are beneficial to all traders, from expert to layman, you mustn’t be blind to the disadvantages, mostly on the profit side. Diversification will spread risk, and hence lower it, but at the cost of averaging your returns. Let’s see if we can put this knowledge into practice.
Continue reading Fine-Tuning Your Risks By Dirk Vandycke
Although diversification is a popular method of managing risk when it comes to financial investments, it is often undifferentiated. Here in this first part of a two-part series, we’ll take an in-depth look at the concept and determine if it is indeed a good way to manage risk.
When you go back in history, you’ll find that human beings have been groomed not to take chances in physically hostile environments. We are genetically tuned to fear risk. Uncertainty means risk and implies lack of control, and it is this lack of control that makes it difficult to trade the markets. But there’s no reason to fear risk in the markets — well, perhaps there is but it’s far less than we subconsciously believe. Without uncertainty, the financial markets wouldn’t exist and the positive aspect to risk is that it equals opportunity. Instead of fearing risk, perhaps we should try to respect it, get to know it, and try to contain it.
We all know that we shouldn’t put all our eggs in one basket. In order to reduce our risk, we should diversify our assets. But does that really work? Let’s find out.
Continue reading Rethinking Diversification By Dirk Vandycke
They’re the life of the party—simple, elegant, and add so much value. Here’s how you can turn each candle bar into a set of three numbers so you can identify patterns and determine the strength of their predictive power.
Candlesticks are the epitome of information packaging. A candlestick can represent price action—the hem & haw of buyers vs. sellers for a minute, a day, or a year. They tell which party won in the end, which parties began their fight in the beginning, how high the buyers pressed the sellers, how low the sellers drove the buyers (Figure 1). Candles are a simple, elegant device yet they convey so much information.
Continue reading Candlesticks, Condensed By Dave Cline
In this article, We’ll look at some of the more common chart patterns, moving averages, indicators, and Elliott wave theory. I’ll continue examining technical analysis by looking at some other tools that can be useful when trading the forex markets.
Double Tops & Bottoms
The first patterns I’ll consider are double tops & double bottoms (Figures 1a & 1b). These patterns share similar characteristics with the head & shoulders pattern. The double top is a bearish signal, formed when a currency pair hits a resistance level, fails to break through, and attempts to break it again. After the second failure, the price falls. The point to which the price falls between these two peaks is the neckline. While it might look like a support line, it really isn’t much of one—something that becomes clear after the currency falls from its second peak and blows right through the neckline.
Continue reading Trading Forex: More On Charting By Imran Mukati
Do exhaustion gaps really fade? Here’s a study that creates and tests an exhaustion gap prediction technique using two measurable factors: stock trend and gap size.
A price gap is a price range in which no trading takes place. An upside price gap occurs when today’s price range is above yesterday’s high price. A downside price gap occurs when today’s price range is below yesterday’s low price. It is easy to spot price gaps on bar charts. According to the statistics from this study, the typical US stock generates 18 price gaps on average, annually. The average gap sizes are 1.62% for upside gaps and 1.72% for downside gaps.
Continue reading Gap Trading By Kevin Luo
It is well known that as soon as the markets open, there’s a significant amount of trading activity, much of which is strong breakout patterns. How do you identify which of these patterns are strong enough to continue and generate successful trades? Find out here.
Many of the strongest breakout trade entries can be found using specific chart patterns that you can see during the first hour of each trading day. When you’re looking for successful breakout trades, it helps to visually scan for these technical trade setups during the market open for potential swing and intraday trades. One reason these patterns work so well is because institutional traders enter high-volume “market on open” client orders during the first few minutes of each trading session, which leads to rapid breakouts that you can capitalize on. Since your goal is to avoid false breakouts and instead enter trades that keep going in your favor, your ability to spot these useful technical momentum patterns is a valuable strategy. In this article, I’ll show you top first-hour breakout patterns to be on the lookout for when entering your trades.
Continue reading Trading First-Hour Breakouts By Ken Calhoun