When is a pattern not a pattern?

A guide to avoid loss making trades

When is a pattern not a pattern?

The easy answer to the question is �when it�s not a pattern�. And that really is the real crux of the issue� Let me explain.

Let�s take a look at one of the most simple patterns in technical analysis, the Double Top (Bottom).

This is the hourly chart of Dollar-Swissie in a run up from the 1.0883 low which found a high at 1.1324. Following this it pulled back lower and then attempted to move back to the high once again. However, it failed just 6 points from that high and then declined quite sharply.

In this process it formed what we call a �Double Top.� This is a classic reversal pattern that through measurements will provide a minimum target in the reversal. Basically, by taking the number of points from the peaks and the intervening corrective low it is then possible to project lower from that trough to generate the minimum target.

In this example the pattern has worked perfectly. What is more, the Rapid RSI below has formed what is a bearish divergence. This is recognized by higher price peaks from the intermediate peak towards the left center of the chart to the eventual 1.1324 high. However, over this period the RSI has not made new highs � but the RSI makes a lower high at the 1.1324 high which represents a slowing in the underlying momentum of the trend.

A combination of this bearish divergence and a subsequent break of a trend support line and failure on the retest of the trend line sets up a stronger reversal which meets the minimum target perfectly.

OK, this is simple, let�s look at another example:

Here we see exactly the same thing happening in the hourly Euro chart. Price has rallied strongly with Rapid RSI forming a high at 1.4751 and then on the pullback lower braches a trend support line. Following the initial decline price rallies back towards the 1.4751 high but fails on the retest of the trend line.

This looks positive. Measuring the points between the twin highs and the intervening trough, from the current price there appears to be 300 points profit.

So if I take a trade of �1mn I can make �30,000 profit and buy a new car�

Well, this is what then happened.

Ah� the Euro actually continued rallying.

So why did the Double Top pattern fail?

As I said, because it wasn�t a double top pattern�

It is vital to understand that a double top only becomes a double top when the intervening trough is breached. (And a double bottom only becomes a double bottom when the intervening peak is breached.)

Clearly this didn�t occur here.

This is very simply explained by examining the definition of an uptrend � which occurs when both highs are moving higher while lows are also moving higher.

If we want to be safe in identifying double tops (or bottoms) we should also satisfy the requirement that the sequence of higher lows is broken � which would be when the intervening trough is breached.

Therefore, avoid this simple error which many still fall into by ensuring that the intervening trough (or peak in a double bottom) is broken to confirm a breakdown of the trend.

Gook luck !

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FREE FOREX SIGNAL

Free Forex Signal, 30 December 2008
Update every day at 01.30 am GMT ( 08.30 WIB )

Today update 02.00 am GMT

All Pair � Stop loss 35 Pips

EUR/USD
Pivot : 1.4065
Avg. Daily Range : 313 point
BUY at 1.4134 Exit Target 20 pips
SELL at 1.4020 Exit Target 20 pips

GBP/USD
Pivot : 1.4514
Avg.Daily range : 347 point
BUY at 1.4529 Exit Target 25 pips
SELL at 1.4436 Exit Target 25 pips
Note : GBP/USD Stop Loss 40 Pips

USD/JPY
Pivot : 90.38
Avg.Daily range : 125 point
BUY at 90.81 Exit Target 20 pips
SELL at 90.34 Exit Target 20 pips

AUD/USD
Pivot : 0.6882
Avg.Daily range : 136 Point
BUY at 0.6902 Exit Target 20 pips
SELL at 0.6861 Exit Target 20 pips

Free Forex Signal � Click here�; USD/CHF, USD/CAD, GOLD

Tag TAGS ; Free Forex Signal FOREX SIGNAL Forex Signal Indicator

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FREE FOREX SIGNAL

Free Forex Signal, 29 December 2008
Update every day at 01.30 am GMT ( 08.30 WIB )

Today update 04.30 am GMT

All Pair � Stop loss 35 Pips

EUR/USD
Pivot : 1.4040
Avg. Daily Range : 217 point
BUY at 1.4169 Exit Target 15 pips
SELL at 1.4095 Exit Target 20 pips

GBP/USD
Pivot : 1.4649
Avg.Daily range : 296 point
BUY at 1.4732 Exit Target 25 pips
SELL at 1.4672 Exit Target 25 pips
Note : GBP/ USD Stop Loss 40 PIPS

USD/JPY
Pivot : 90.69
Avg.Daily range : 118 point
BUY at 90.78 Exit Target 15 pips
SELL at 90.48 Exit Target 20 pips

AUD/USD
Pivot : 0.6828
Avg.Daily range : 127 Point
BUY at 0.6881 Exit Target 15 pips
SELL at 0.6830 Exit Target 20 pips

Free Forex Signal � Click here�; USD/CHF, USD/CAD, GOLD


Tag TAGS ; Free Forex Signal FOREX SIGNAL Forex Signal Indicator

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Forex Trading system ; Picking Tops and Bottoms

Here is one very nice and accurate trading system that could make your Forex trading entirely about hitting the right spots.
Trading setup:
Time frames: 5, 15, 30 minutes, 1 hour, 3 hour and 1 day � just one chart at the time will be used.
In case you do not have the exact time frames, simply substitute them with the closest ones. For example, 15 min can be changed to 10 min, 3 hour can be changed to 4 hour etc.
20 EMA and 40 EMA on all time frames
ADX 14 for all time frames.
Currency pairs: any.
The idea behind this Forex method is that ADX helps to measure the strength of the trend while 20 EMA acts as a flexible support-resistance line.
Trading rules:
Our first goal is to find the chart with ADX being over 30 mark, which will indicate a strong trend. We start with a daily chart and continue the search moving downwards (3 hour, 1 hour, 30 min, 15 min, 5 min) until we find the chart with ADX being currently over 30.
Note: In case several time frames meet requirements for ADX, we opt for the highest time frame. That's why we start with the highest frame first.
Having chosen the time frame, we are ready to trade the first bounce off of the 20 EMA. We set a limit order close to 20 EMA accordingly: in a downtrend we expect the price to touch 20 EMA from below, then reverse and move down, in an uptrend � from above, reverse and move up.
Always make sure that at the moment of entry you are using the highest time frame with ADX currently over 30. Only then you can expect the price to obey 20 EMA.
That's it.
Initial Stop loss order is placed above (when short) / below (long) the 40 EMA.
Important note: once in the trade stay with the time frame used for entry.
Risks: looking at the charts traders will find that at times the price reverses exactly at 20 EMA, but sometimes it moves even further before making a u-turn. Always be ready to leave some room for the price to make this turn, that's why we suggest using 40 EMA for stops.

Exit rules:
Option 1: Use Bollinger Band with settings (18, 2) for all time frames. Set a profit target at the outside band. Move your profit target as the Band expands or narrows.
Option 2: For traders familiar with Fibonacci tool, profit target can be set to 1.618 expansion level. AB Swing for Fibonacci should be found from the earlier price moves and the actual point of entry should be considered as point C or a retracement.
Option 3: Once the price clearly moves in your favor move the stop below/above (Long/Short trading) the previous price bar. Adjust the stop with each new price bar. Trade until stopped.
Also exit always if ADX goes below 30 on the time frame which was used for entry.
That�s it. Test it and see that it works remarkably well.
P.S. Accuracy of this strategy is quite difficult to backtest/visualize using historical data. If you decide to do so, make sure you do it right and know what time frame should have been chosen for trading at any given time. The easiest way to analyze current strategy performance is by running it in real time.

tag TAG Tag Forex FOREX Trading System INDICATOR

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Forex ; the current Trend Line Trading Strategy.

I have been demoing a simple trading strategy for a week (29th September-3rd of October 2008) and achieved almost 200% return on investment in a week with $5000 account and I would like to share it and it would be great to have many involved in testing this strategy out.
I am calling this a Trend Line Trading Strategy and it is based on:
Following the trend.
Heard & read that before a million times? Lol� I cant blame you. But maybe you can learn something extra here.
Do yourself a favour and take a look at a chart and see if you can identify a trend. Is there a main established trend? It is important that you identify the main trend & once that is identified, your trading decisions are based in the direction of the main trend. There are exceptions where you can go against the main trend, but I wont touch on that here. KISS� KEEP IT SIMPLE & SIMPLE.
TIMEFRAMES:
Timeframes suitable for these strategies are the daily, 4h, 1hr, 30mins.
INDICATOR:
I use only 1 Metatrader4 indicator called Swing ZZ(zz for zigzag). It is freely available in the net, just google it and you can download it. Thanks to the programmer who wrote it. This indicator is helpful simply because you can identify previous swing highs and lows which act as resistance & support levels and I think it is a handy tool to use in this strategy.
So lets get started shall we? I call this trendline trading strategy because it involves drawing trend lines using the swing highs and lows of the Swing ZZ indicator.
SHORT ENTRY RULES:
(a) look at the timeframe you wish to use and identify the main trend. Get the big picture first, that is very important. For me, when I want to trade on the hourly chart, I first check the daily chart and also like to see what is happening in the 4hr chart as well to see if I can spot an obvious trend or channel or congestion happening in the daily and the 4hour charts. I stay out if there is congestion until breakout of the congestion happens and a trend is established. I draw trendlines in the daily or on the 4rhly charts chart then switch to the 1hr timeframe. I identify trends in the hourly and draw trendline(s) as well.
(b) I place a sell stop order, at least 5pips below the LOW of the candle that touches or intersects the trendline. The trendline can be the daily, 4hrly or the 1hr trendline. You must place your order when that candle closes. Why 5 pips? I don�t know, 5 seems like a good number to me� I have five fingers on each arm and similarly for the legs, so 5 is a number I was born with� Put 10 pips if you want. Note you must wait for price to approach a trendline or very near to the trendline before you place your sell stop order.
(c) I prefer to place my stop loss at least 5 pips above the most recent swing high. You should set your stop loss according to your money management calculations and risk tolerance.
(d) I set my profit target just WITHIN the level of previous swing low.
(e) Trade management: as trade moves in my favour, I move my stop loss to at least 5 pips ABOVE each lower subsequent peaks (lower swing highs).
LONG ENTRY RULES:
Just do the exact opposite of short entry.
(1) Set your buy stop order 5 pips ABOVE the high of the candle that intersects the trendline when that candle CLOSES.
(2) I set my stop loss just below the recent low.
(3) I place my profit target WITHIN the level of the previous high.
(4) As trade moves in my favour I move stop loss to at least 5 pips just UNDER each higher subsequent higher swing lows that form.
SHORT ENTRY EXAMPLE:
The attached is 4hr USD/JPY chart showing short trades that could have been taken and would have been very profitable using this strategy.

LONG ENTRY EXAMPLE:
Attached is USD/CAD daily chart and possible trade entries are shown to give you a visual understanding of how to identify potential trade setup and take them.

I have tried 1 min timeframe, 5 min timeframe and 15mins but towards the end, have tended more toward using larger timeframes like the 4hr, 1hr & 30min timeframe so that I don�t stay glued to the computer all day long.

---- by ; Myronn / Fx strtgy rvld 

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Forex ; Neat entry RSI and Full Stochastic

Current strategy has won the hearts of many Forex traders. And why not when it has a great winning potential.
Strategy requirements/setup:
Time frame: daily
Currency pair: any
Trading setup: SMA 150,
RSI (3) with horizontal lines at 80 and 20,
Full Stochastic (6, 3, 3) with horizontal lines at 70 and 30.
Trading rules:
Entry for uptrend: when the price is above 150 SMA look for RSI to plunge below 20. Then look at Stochastic - once the Stochastic lines crossover occur and it is (must be) below 30 - enter Long with a new price bar.
If at least one of the conditions is not met - stay out.
Opposite for downtrend: when the price is below 150 SMA wait for the RSI to go above 80. Then if shortly after you see a Stochastic lines crossover above 70 - enter Short.
Protective stop is placed at the moment of entry and is adjusted to the most recent swing high/low.
Profits are going to be taken next way:
Option 1 - using Stochastic - with the first Stochastic lines cross above 70 (for uptrend) / below 30 (for downtrend).
Option 2 - using a trailing stop - for an uptrend a trailing stop is activated for the first time when Stochastic reaches 70. A trailing stop is placed below the previous bar's lowest price and is moved with each new price bar.

This strategy allows to accurately pin-point good entries with sound money management - risks/protective stops are very tight and potential profits are high.
Current trading strategy can be improved when it comes to defining the best exits. For example, once in trade traders may also try applying Fibonacci studying to the most recent swings. This way they can predict short-term retracements and make sure they will not be pulled out of the trade early and will continue pursuing profit targets at Fibonacci extension levels.

---- by ; Edward revy/Fx strgy rvl -------

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Forex ; Trailing Stops

Now that we have taken the necessary precautions to avoid catastrophic losses by using disciplined money management stops, it is appropriate to concentrate on strategies that are designed to accumulate and retain profits in the market. When properly implemented these strategies are intended to accomplish two important goals in trade management: they should allow profits to run, while at the same time they should protect open trade profits.

While their application is extremely wide, we do not believe that trailing stops are appropriate in all trading circumstances. Most of the trailing exits we will describe are specifically designed to allow profits to run indefinitely. Therefore they are best used with trend following type systems. In counter-trend trading, more aggressive exits are more suitable. The ?when you?ve got a profit, take it? philosophy works best when you are trading counter-trend, since the anticipated amount of profits is limited. However, to take quick profits in a trend is usually an exercise in frustration: we exit the market with a small profit only to watch the huge trend continue to move in our direction for days or months after our untimely exit. We therefore recommend using different exit strategies based on the underlying market condition. We will discuss the more aggressive exits later; for now we will concentrate on exits designed to accumulate large profits over time.

A thorough understanding of trailing stops is critical for trend-following traders. This is because trend following is typically associated with a lower percentage of profitable trades; which makes it particularly important to capture as much profit as possible when those large but infrequent trends occur. Typical trend followers make most of their profits by capturing only a few infrequent but very large trends, while managing to cut losses effectively during the more frequent sideways markets.

The rationale behind the use of the trailing stop is based on the anticipation of occasional extremely large trends and the possibilities of capturing substantial profits during these major trends. If the entry is timely and the market continues to trend in the direction of the trade, trailing stops are an excellent exit strategy that can enable us to capture a significant portion of that trend.

The trailing stops we will describe in this and following articles have similar characteristics that are important to understand as we use them to design our trading systems. Effective trailing stops can significantly increase the net profits gained in a trend-following system by allowing us to maximize and capture large profitable trades. The ratio of the average winning trade to the average losing trade is usually improved substantially by the use of trailing stops. However there are some negative characteristics of these stops. The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into losers. Also, occasional large retracements in open trade profits can make the use of these stops quite difficult psychologically. No trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.

The Channel Exit

The simplest process for following a trend is to establish a stop that continuously moves in the direction of the trend using recent highest high or lowest low prices. For example, to follow prices in an uptrend, a stop may be placed at the lowest low of the last few bars; for a downtrend, the stop is placed at the highest high of the last few bars. The number of bars used to calculate the highest high or lowest low price depends on the room we wish to give the trade. The more bars back we use to set the stop, the more room we give the trade and consequently the larger the retracement of profits before the stop is triggered. Using a very recent high or low point enables us to take a quick exit on the trade.

This type of trailing stop is commonly referred to as a ?Channel Exit?. The ?channel? name comes from the appearance of a channel formed from using the highest high of X bars and the lowest low of X bars for short and long exits respectively. The name also derives from the popular entry strategy that uses these same points to enter trades on breakouts. Since we are focusing on exits and will be using only one boundary of the channel, the term ?channel? may be a slight misnomer, but we will continue to refer to these trailing exits by their commonly used name.

For most of our examples we will assume that we are working with daily bars but we could be working with bars of any magnitude depending on the type of system we are designing. A channel exit is extremely versatile and can work equally well with weekly bars or five-minute bars. Also keep in mind that any examples referring to long trades can be equally applicable to short trades.

The implementation of a channel exit is very simple. Suppose we have decided to use a 20-day channel exit for a long trade. For each day in the trade, we would determine the lowest low price of the last 20 days and place our exit stop at that point. Many traders may place their stops a few points nearer or further than the actual low price depending on their preferences. As the prices move in the direction of the trade, the lowest price of the last twenty days continually moves up, thus ?trailing? under the trade and serving to protect some of the profits accumulated. It is important to note that the channel stop moves only in the direction of the trade but never reverses direction. When prices fall back through the lowest low price of the last twenty days, the trade is exited using a sell stop order.

The first and obvious question to answer about channel exits is how many bars to use to pick the exit point. For example, should we set our stop at the lowest low of 5 days or the lowest low of 20 days, or some other number of days? The answer depends on the objectives of our system. A clearly stated set of objectives for the system is always very helpful at these important decision points. Do we want a long-term system with slow exits or do we want a short-term system with quicker exits? A longer channel length will usually allow more profits to accumulate over a long run if there are big trends. A shorter channel will usually capture more profits if there are smaller trends. In our research, we have found that long-term systems generally work well with a trailing exit at the lowest low or the highest high of the last 20 days or more. For intermediate term systems, use the lowest or highest price of between 5 to 20 days. For short-term systems, the lowest or highest price of between 1 to 5 days is usually optimal.

Trailing stops with a long-term channel accumulate the largest open profits if there is a sustained trend. However this method will also give back the largest amount of open profits when the stop is eventually triggered. Using a shorter channel can create a closer stop in order to preserve more open trade profits. As can be expected, the closer stop often does not allow profits to accumulate as nicely as the longer channel, and often causes us to be prematurely stopped out of a large trend. However, we have noticed that a very short channel length of between 1 to 3 bars is still highly effective in trailing a profitable trade in a runaway trend. The best type of channel exit to use in a runaway trend is a very short channel, for example 3 bars in length. We have observed that this exit in a strong trend often keeps us in a trade until we are close to the end of the trend.

It appears that there is a conflict of exit objectives here. A longer channel length will capture more profit but give back a large proportion of that profit; a shorter channel length will capture less profit, but protect more of what it has captured. How can we resolve this issue and create an exit that can both accumulate large profits, as well as protect these profits closely? A very effective exit technique calls for a long-term channel to be implemented at the beginning of the trade with the length of the channel gradually shortened as larger profits are accumulated. Once the trade is significantly profitable, or in a strongly trending move, the goal is to have a very short channel that gives back very little of the large open profit.

Here is an example of how this method might be implemented. At the beginning of a long trade, after setting our previously described money management stop to avoid any catastrophic losses, we will trail a stop at the lowest low of the last 20 days. This 20-day channel stop is usually far enough from the trade to avoid needless whipsaws and keep us in the trade long enough to begin accumulating some worthwhile profits. At some pre-determined level of profitability, which can be based on a multiple of the average true-range or some specific dollar amount of open profit, the channel length can be shortened to take us out of the trade at the lowest low of 10 days. If we are fortunate enough to reach another higher level of profitability, like 5 average true ranges of profit or some other large dollar amount, we can shorten the channel further so that we will exit at the lowest low of 5 days. At the highest level of profitability, perhaps a very rare occurrence, we might even be able to place our exit stop at the previous day?s low to protect the great profit we have accumulated. As you can see, this strategy allows plenty of room for profits to accumulate at the beginning of a trade and then tightens up the stops as profits are accumulated. The larger the profits, the tighter our exit stop. The more we have, the less we want to give back.

There is another way of improving the channel exit that is worthwhile to discuss: this is to contract (or expand) the traditional channels using the height of the channel, or some multiple of the average true range. How this might work is as follows: Supposing you are working with a 20-day channel exit. First you calculate the height of the channel, as measured by the distance between the highest 20-day high and the lowest 20-day low. Then you contract the channel by increasing the lowest low value and decreasing the highest high value previously obtained to determine the exit points. For instance, in a long trade, you could increase the lowest low price by 5% of the channel height or 5% of the average true range, and use that adjusted price as your exit stop. This creates a slightly tighter stop than the conventional channel. More importantly, it allows you to execute your trade before the multitude of stops that are already placed in the market at the 20-day low.

The last point can be considered an important disadvantage of the channel exit. The channel breakout methods are popular enough to cause a large number of entry and exit stops to be placed at previous lowest low and highest high prices. This can cause a significant amount of slippage when attempting to implement these techniques in your own trading. The method of adjusting the actual lowest low or highest high price by a percentage of the overall channel height or the average true range is one possible way to move your stops away from the stops placed by the general public and thereby achieve better executions on your exits.

---- by ; Chuck LeBeau -------

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Diversifying Fx Trading Strategies

The critical difference between who will win and who will lose in the business of Forex market trading is learning how to manage your money. For example, if 100 Forex traders begin trading by using a system with 60% of winning odds, only about 5 of those traders would see a profit by the end of the year. Despite those 60% winning odds, only 95% of those Forex traders will lose because of poor money management skills. When entering a trading system one must have great money management skills in order to succeed. Traders enter the Forex system to make a profit, after all, not to lose money.

The amount of money you will put on a trade and the risks you are willing to accept for that trade is money management. It is very important to understand the concept of managing money and to understand the difference between managing money and trading decisions, in order to diversify your Forex trading strategies. There are a number of different strategies that can be employed that will aspire to preserve your balance from any high-risk liabilities.

To begin with an understanding of the �core equity� is a necessity. Basically the core equity illustrates the starting balance of the account and what amounts are in the open positions. Your money management will greatly depend on this equity so it�s very important to understand the meaning of core equity. For instance, if you have an open account with a balance of $5,000 and you enter a trade with $1,000 your core equity will be $4,000. If you enter another trade for another $1,000 then your core equity would be $3,000.

From the outset, it�s best to diversify trades by using several different currencies. By only trading one currency pair, you will generate very few entry signals. For example, if you have an account balance of $100,000 and have an open position for $10,000 then that makes your core equity $90,000. If you choose to enter on a second position, then calculate the 1% risk from your core equity, but not your starting account balance. This would mean that the second trade would not exceed $900. Then if you decide to enter a third position, with a core equity of $80,000 then the risk from that trade should not surpass $800. The key is to diversify the lots between all currencies that have a low correlation.

For example, if you want to trade EUR/USD and GBP/USD with a $10,000 (1% risk) standard position size in money management, then it would be safe to trade $5,000 in each EUR/USD and GBP/USD. This way, you will only be risking 0.5% on each position.

When trying to diversify your Forex trading strategies, it�s very important to understand the strategies of the Martingale and the Anti-Martingale. The Martingale rule means:
increasing your risks when you�re losing. Gamblers worldwide who claim that one should increase the size of a trade even when one is losing have adopted this strategy. Basically, gamblers use the rule in the following way: bet $20, if you lose bet $40, if you loose bet $80, if you lose bet $160, if you lose bet $320, etc.

The strategy is to assume that if you lose more than four times, then the chances to win become bigger and as you add more money, you will be able to recover from your loss. Although there are many people who choose to use this strategy, the truth is, the odds are still the same 50/50 regardless of the previous losses. Even if you lose five times in a row, the odds for your sixth bet, and even for those there after, are still 50/50. This is a common mistake made by those who are new to the trading business.

For instance, if a trader started with a $10,000 balance and lost four trades of $1,000 a piece for a total of $4,000 then the traders remaining balance would be $6,000. If the trader thinks there is a higher chance of winning the fifth trade and increases the size of the position four times, enough to recover from the loss, then if the fifth trade loses the trader will be down to $2,000. A loss like this can never be recovered back to the $10,000 starting balance. No experienced trader would use such a risky gambling tactic as the result is negative - losing all the money in a short period of time.

---- by David Mclauchlan --------

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Overbought and Oversold RSI Readings

One classic interpretation of momentum indicators is that of overbought and oversold. Normally these are quite good signals when used within a consolidating market although mere oversold or overbought readings should not be used to buy or sell (respectively) without other forms of analysis and preferably in shorter term time frame charts.

However, these overbought and oversold extremes can be useful within trends also. In this type of interpretation it is vital that only trades in the direction of the trend be taken.

First we should remind ourselves of the definition of a trend.

Uptrend: is a sequence of higher highs and higher lows
Frequently, though not always, a trend support line can be drawn across the lows

Downtrend: is a sequence of lower lows and lower highs
Frequently, though not always, a trend resistance line can be drawn across the highs

A good reversal signal at the end of a trend may well be the break back below the support line in an uptrend or above the resistance line in a downtrend. In addition, to confirm the reversal completely a break of the last major swing low in an uptrend or the last swing high in a downtrend will also cause the uptrend to be complete.

The following chart is that of the daily Euro-Dollar chart which clearly has shown a strong and persistent uptrend over the course of both last year and this year. Note how all the major lows remained above the previous low in the move and this was accompanied by higher highs in all cases. Very clearly this can be described as a major uptrend.

Below the chart I have added Rapid RSI. I choose this form of RSI since it is more volatile and reaches overbought and oversold extremes more frequently than the traditional Welles-Wilder formula.
What can we deduce from the chart?

Well, at the left of the chart price was actually seeing a sideways trading range. Both overbought and oversold provided good signals. At these extreme readings, if the 4-hour and hourly charts also showed reversal signals they would have been worth following.

What I do want to point out is that overbought readings of RSI in an uptrend need not necessarily mean that the price is actually overbought. Unless they are accompanied by bearish divergences I tend to look at overbought readings as actually meaning �the market is still bullish.�

This does not always mean that price will continue higher and in most cases there is a pullback, but note how on those occasions that when RSI reached oversold while price has not penetrated the last low point, then it actually provides an excellent buying signal.

You will still need to confirm those oversold signals in the shorter time-frame charts, and it may well be worth combining these signals with the support and resistance supplied by an analytical forecaster. However, very clearly the mere fact that in an uptrend, following a price high that is marked as overbought by RSI, the move to oversold can be an excellent signal to take advantage of the next leg higher.


Now, we have just seen RSI move to overbought at the 1.4966 high. There is one difference however which is that this overbought level has produced a bearish divergence and at a time when price is poised just above a support line that has run from the 1.3359 corrective low. Breach will suggest the trend is complete and take price down towards the 1.40-1.41 area. This should cause a correction as the market remains very bearish Dollars but the technicals are suggesting that a new high in the Euro will not be seen.

The use of (Rapid) RSI in this manner does highlight an alternative method of using overbought and oversold extremes to great effect.

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Forex ; Stop Loss Strategies

Here's a problem faced by many (including myself) new traders who are working with limited funds

The first problem is that you cannot afford large losses of fifty or one hundred pips because after ten or so losers your account has been decimated.

But that sets up the flip side and the second problem, which is getting stopped out of trades because the Stop Losses are too tight. Talk about a Catch-22!

It's heartbreaking getting stopped out of a trade and then watching it reverse and turn into a winner after you've been clobbered...and here's the danger for new traders

After getting frustrated this way a few times you set wider stops and lose larger sums of money.

So, what to do?
I have had good success, suffered smaller losses and stayed in more winners by employing Bollinger, 8sma and 21 sma.
Choose any pair, open a one hour chart and study how the price behaves. If the price is not going to pass through both averages and head to the opposite Bollinger Band (or close to it), it will often bounce off either the 8 or the 21. Sometimes it will pass through one of the averages and then bounce off the other.
Try setting your stops on the opposite moving average of your trade +10 pips. (Keep an eye on support and resistance levels too!) The thing is you have to monitor this and adjust the stop as the trade progresses, but the bottom line is that you can set wider stops with confidence. Other times, you can set tighter stops and not risk as much of your account balance.

--- by pzalvo / FxStrtgRvl ------

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