FOREX TRADING FORBEGINNERSTutorialfromComparic.com
2017
Formorestrategiesandinformationvisit:http://comparic.com
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INDEXPart1.....................................................................................................................................................4HowcanIstartForextrading?..........................................................................................................................................7Practiceforextrading–demoaccounts........................................................................................................................9Howtolearntotradeforex............................................................................................................................................12Forextradingquestions–ourForextips....................................................................................................................18TradingplaninForexTrading.........................................................................................................................................26
Part2.Forextradingtoolsandstrategies....................................................................................28Whichtradingtoolisbestforyou?..............................................................................................................................28Whichstrategyisrightforyou?.....................................................................................................................................29PivotPoints...........................................................................................................................................................................30
StrategybasedonPivots.................................................................................................................................................32PivotPointstradeexamples..........................................................................................................................................33
Fibonaccitradingtools......................................................................................................................................................37PopularFibonaccitools...................................................................................................................................................37SetupinMetatrader.........................................................................................................................................................40FibonaccitradinginForex..............................................................................................................................................45HowtotradewithFibonacci?.......................................................................................................................................48Fibonaccitradeexamples...............................................................................................................................................49
Trailingstop..........................................................................................................................................................................52Howtousetrailingstoploss.........................................................................................................................................52Bestsettingsfortrailingstoploss...............................................................................................................................53Timeframefortrailingstoploss..................................................................................................................................54Strategyfortrailingstoploss........................................................................................................................................54Tradeexamples...................................................................................................................................................................56
Movingaveragesinforextrading(andnotonlyFX)...............................................................................................58Movingaverageasatrenddetector..........................................................................................................................60Movingaverageasasupportorresistance............................................................................................................62Howmanyaveragesshouldyouuse?........................................................................................................................63Rainbowchart.....................................................................................................................................................................64GMMA....................................................................................................................................................................................72
Part3.Moneyandpositionmanagement...................................................................................77Howtosetstoplossinforextrading...........................................................................................................................77TradepartialcloseinMetatrader.................................................................................................................................85Whentotakeprofit...........................................................................................................................................................90Tradingjournal....................................................................................................................................................................97
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This isaforextradingguideforbeginners. I trytoanswerallquestionsaboutForextrading.Ifyouarenewtotradingoryoutradedstocksandwanttolearnmoreabout
Forextrading,thenthisguideisforyou.
ThegoalofthisguideistogiveyoupracticeknowledgesoyoucanunderstandForextradingbasicsandtradebyyourself.Ifyoudon’tunderstandsometerms,gotosites
likeInvestopedia,theycoveredalltermslikemargin,pipandmanyothers.
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PART1.
Howtounderstandforextrading
Whenyoutradestocks,youcanselecthowmanystocksyouwanttobuyorsell(ifyouplantogoshort).WithForexyouaretradingacurrency.Youcan’tselectthatyouwant
tosell7523euros.Startingpointis1lotwhichis100,000unitsofbasecurrency.
1lotforEUR/USD=100,000euros2lotsforEUR/USD=200,000euros0.1lotforEUR/USD=10,000euros
Thatwayyoucandecidehowmuchbasecurrencyyouwanttoinvest.
Ofcourse,youdonothavetohaveallthatmoneyinyouraccount.Thankstoleverage
youhaveonlysplitofthatamount.
InForex,minimalmovementisonepip.Forstandardbasic1lot(100,000units)move
of1pipisequalto10$change.
WhypeoplearelosingmoneyinForex
Itisbecausetheydonotunderstandleverage.Itisverypowerful,yetverydangerous
perkthatyougetwhenyoudecidetotradeForex.
Withonly fewhundreddollars youcanopenpositionswhichareasbigas100,000dollarsoreurosand larger.Whenyouare right inyour trade, thenyoumakegood
money.Whenyouarewrong…well,youcanbeoutoffundsverysoon.
Thatiswhynewtradersshouldstartfromlowersizes–microlotsorevennanolots.Thisissimilartostockmarket.It isabadideatostartinvestinginstockmarketandlearnhowtoinvestwithreal100,000or500,000$.Therisk istoobig. It iseasierto
learnonsmallercapital.SameiswithForex.
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Startsmall–Nano,microlots
Youwon’tgetrichfastbytradingmicroandnanolots,butthankstothemyouwillstayinthegameandyouwillhaveopportunitytolearnfromlivetrading.ThereasonwhysomanytraderslosealltheirmoneyintheForexisbecause:
• theirtradingcapitalistoosmall• theyopentoobigpositions,becausetheydonotunderstandleverage
Soyeah,itislikeinmanyadsyoucouldseeinthepast–“youcanopenaccountwithjust100$.Leverageeven1:500”.Intheend,youneedoneorfewpositionsof1lotsizetoblowupyouraccount.
Youshouldrememberthat1lotisabaseforcalculatingsizeofyourposition.
1lot=100,000unitsofacurrency
InMetaTrader4itwillbeonselectlistlike:
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IfyouopenshortonEUR/USDofsize2lotsyouwillbeshorting200,000euros.Onepipwillbearound20$.Magicofleverage(andthecursesametime…).
Therearealsosmallerbasesizeslike:
1minilot(0.1)=10,000unitsofbasecurrency
Ifyouopen longpositiononEUR/USDofsize0.1thenyouwillbe longwith10.000euro.
InMetaTrader4itwillbeasVolumelistlike:
• 0.1(oneminilot)• 0.2(twominilots)• 0.3…
Onepipwillbeherearound1euro.
1microlot(0.01)=1000unitsofbasecurrency
InMetaTrader4itwillbeasVolumelistlike:
• 0.01(onemicrolot)• 0.02(twomicrolots)• 0.03(threemicrolots)• …
Goinglongwith0.01lotonEUR/USDmeansthatyouarelong1000euros.Onepipisherearound0.1euro.
1nanolot(0.001)=100unitsofbasecurrency
InMetaTrader4itwillbeonselectlistlike:
• 0.001(onenanolot)• 0.002(twonanolots)• …
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Noteverybrokeroffertradesizesassmallasnanolotsormicrolots.Youshouldcheckitfirstintheoffer.
Tradingsizesaresimple.Firstyoumaygetconfused,becauseitisdifferentthantradesizes in stock trading. Try to do some operations on demo account, try differentpositionsizesandyouwillunderstandquicklywhatitisallaboutwithnano,micro,miniandfulllots.
HowcanIstartForextrading?
Ok,youwanttobecomeacurrencytrader.You’vereadaboutpips,leverageandallthatForextrading.Itistimetostartpractice.Youareinluck,todayitisveryeasyto
startForextrading.
SelectaForexBroker
Tostarttradingforex,youneedaForexbroker.Therearemanybrokersandfornewtraderitmaybehardtochoosethebestone.Remember,mostofthemofferademoaccount, where you can test their trading platform. You can start with our Forexbrokerssection.
Usually,registrationisquick,youneedonlysomerecentbillstoproveyouraddressisvalid.That’sit.
IfyoulookatForexbrokeroffer,makesurethatheallowstotradewithlowersizessuchasnanooratleastmicro.
Installtradingsoftware
OK,withselectedbrokeryouneedtoinstalltradingsoftware.ThiswillbeMetaTrader4platformorothercustomplatformfrombroker.
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Some brokers use their own trading platform like eTorro. Of course every customplatformisbestintheworld;).Therearebrokerswhoonlyhavetheirownplatformand theydonotofferMetatraderplatform. Idon’t knowwhy,but someverywell-knownbransmissMT4inoffer.
The big advantageofMetatrader is that youhavemany custom indicators, expertadvisors.ItisagoodplatformoverallandIrecommendbrokerswhoofferMT4.
TradingfromMac
MetaTrader is aWindows application. If youhave aMac computerwithMacOSXsystem,thenyoumustusesoftwarelikeWinetorunMetaTrader4.SomebrokerslikeXMorHotForexofferMetatraderforMacOsXandtheyworkverygood.Youdon’tneedwine,setupisveryquick.ItestedMetatraderplatformsfromXMandHotForexonmyMacandtheyworkedfine.
BelowscreenofdemoMT4platformfromXM,runningonMACOSX:
It'sallthesameasonWindowsmachine.
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FundyourForexaccount
Whenyouhaveregisteredanaccount,youcanaddfunds.Itisveryeasy.Youcanstartwith few hundred dollars onmini account.Minimum amount is different for eachbroker.
Testplatformondemo
Beforeyoudecidetoopenrealaccount,testaplatformondemo(especiallyifyouarenewtoForextrading).Youwillhavesomevirtual10kor100ktoplaywithondemo.Testhoworderplacingworks,howtoplacestop lossetc.Youdonotwantto learnthesethingswithyourrealcash.
Practiceforextrading–demoaccounts
ItishardtomakeprofitinForexthatiswhypracticeissoimportant.Youhavenow
manyoptionstopracticeyourtradingskillsandlearntotrade.
OK,butwhatisbest?Doyouneedtradingsimulator?Papertradingisagoodwayto
start–notrealpaperbutwithhelpofdemoaccountofcourse.
Wetalkaboutpapertradingwhenyouaretradingwithvirtualmoney.Yearsbeforesimulatorsyousimplyputtradesonapieceofpaper.Whenyoufeltreadytotradeonreal account, youmade a switch. In 1930’s it wasn’t that easy to open brokerageaccount,besidesfeesforopeningandclosingtradeswerealsohigh.Papertradesweregoodsolution–youcouldlearnhowtotradewithoutlosingrealmoney.
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DemotradinginForex
Nowwhenwe are talking about paper trading,wemean tradingon simulators.Ofcourse,youcanusepencilandpaper,buttradingonsimulatorismuchbetterwaytogo.Youcaneasilyopenademoaccountandgetaccesstotradingplatformsoyoucantestit.Yourdemoaccountisfundedwithvirtualmoneyandyoucanplaceorders.
ThemainadvantagesofForexdemotrading
• youdonotputatriskrealmoney–yourslosesandgainsarevirtual,sothereisnoriskthatyouwillloseallyoutradingcapital
• youcantestyourtradingsystemanddifferenttradingstrategies• youcanseehowtouseleverage• ifyouareusingmechanicalsystem,youcantestitinpractice
Themaindisadvantagesofdemotrading
• youdonotputatriskrealmoney–youreactdifferentwhenitisrealmoneyyouarelosing
• youmaketradesthatyounormallywouldn’tmakewithrealmoney
Ispapertradingagoodwaytolearnhowtotrade?Generally,yes.IftradingForexissomethingnewforyouoryouwanttotesttotallynewstrategythenyes,itisok.
IwouldsaythatdemotradingisveryimportantwhenyouwanttostarttradeonForex.Asyouknow,oncurrencymarketweuseleverage.Therearedifferentpositionsizes.Thebasiconeis1lot.Youcanopenpositionasbigascouplelots(forexample5lots),orpositionsmallerthen1lot–thiswillbemicrolotornanolot.Ifitsoundsnotfamiliar,thenyouhavetotestitondemoaccount.Thingis,withleverageitisveryeasytoblewwholeaccountinmattersoffewminutes.Itiscrucialtomasterhowtomanagepositionsizeandunderstandwellhowitworks.Leveragecanbeyourbestfriendortheworstenemy.
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Whenyouarebuildingmechanicaltradingsystem,thenit isalsogreatpossibilitytotestitondemoaccount.Soagain,demotradinginthatcaseisnotthatbad.
Inalongterm,demotradingisnotthewaytolearnhowtotrade.Youshouldswitchtorealaccountwithsmallfunds.Why?Becauseof…
Tradingandpsychology
When you are on demo and you switch to real money trading, you will noticedifference.Nowyoucare.Whenyouarelosingmoney,youfeelfear.Youhesitatetocloselosingposition“becauseitmayturnaround”(yeah,italwaysdoes;)).Whenyourtradeisinprofit,youaregreedy.Youhesitatetocloseposition,becauseitmaygoevenhigher.Hell,thismaybeatradeofyourlife.
Thiskindofemotionsoccursonlywhenyouaretradingwithrealmoney.Youwilllearnovertimethatmostofyourlosescomefromnotfollowingtradingplanandallowingemotionstoplaytoobigroleinyourdecisionmakingprocess.
Youarenotabletoswitchoffyouremotions.Ontheotherhand,youmustbeawareofthemandnotallowtotakecontrol.Thatiswhyyouneedtohaveyourtradingplanonpaper.Writedownasmanythingsyoucaninyourtradingplan–thatwayyouwillminimizeimpactofemotionsinyourtrading.
Ok,solet’sseewheredemotradingisintradereducationprocess.
Demotradingintraderlearningprocess
1.Opendemoaccount2.Buildstrategyandtradingplan3.Testdifferentpositionsizes–addtotradingplansizeofpositions.Testdifferentcurrencypairs,differenttimeframes.4.Testyourtradingplan–setgoalssuchasdonotlosemoneyinnext3monthsetc.
Whenyouareprofitableondemo…
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5.Openrealaccount6.Fundaccountwithmoneyyoucanaffordtolose7.Setrealisticgoalsandtradeaccordingtoyourtradingplan8.Tradesmallerpositions!
Whenyouareprofitable…9.Increasepositionsize
Howtolearntotradeforex
We'velearnedaboutforextradingbasics,aboutdemotrading.Questionstillstands–how to learn to trade forex? There are few steps you can take to learn it. Below I
mentionedmostimportantones.
Findamentor
It is not an easy task to find mentor. In most cases, there are no ads or otherinformationaboutmentoringpossibility.Initiativeshouldbeonyourside.Ifyoufollowtraderyoulike,thenyoucanaskhimaboutmentoring.Somewillsaynobecauseoflackoftime.Othersdonotliketomentorbecausenoteveryonehasteachingskills.Still,findingamentoristhefastestwaytolearntotradeForex.Withmentor,youwill
avoidmanymistakesandsometimessavemanyyearsoftrialanderrors.
Twoimportantthingstoremember.Donotapproachmentorifyoudon'thavebasicknowledgeabouttrading. It isnotaroleformentortoguideyouthroughthebasic
stuff.Youwantmentortoteachyouhowtotradesuccessfully,nottoteachbasics.
Anotherthingtoremember.Checkdifferentstylesoftrading.Decidewhichonesuitsyoubest.Doyouliketechnicalanalysismore?Thenlookformentorswhotrademainly
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withTA.Youhaveajobandyouwanttolearnaboutlongtermtrading?Thendonot
lookforhelpfromdaytraders,justgoandlookforotherlong-terminvestors.
Learntotradeondemo
Beforeyoumovetotradingwithmoneystartwithdemo.Playwithdifferentcurrencies,instruments.Understandwhat leverage isallabout.Seehowspread isdifferent for
differentforexpairs.Testdifferenttradingstrategies.
Readtradingbooks(notonlyaboutforex)
Ofcourse,practiceismostimportantbutbookswillgiveyounewideashowyoucan
tradeforex.
Therearesomanybooksabouttrading,thatitishardtorecommendonlyfew.
Oneimportantthingsaboutbooks.Readingmoretradingbooksdoesnotmakeyouabettertrader.Itcangiveyousomeideas,youcanlearnsomethingnewbutyoumustpracticethisinlivemarket.Justaquickreminder,becauseImetmanyaspiringtraderswhowerereadingtoomuchandtradingtoolittle;).
Candlestickpatterns
Norevolutionhere.JapaneseCandlestickChartingTechniquesbySteveNisonisstillagoodchoice.
Chartpatterns
IrecommendbooksfromThomasBulkowskilikeGettingStartedinChartPatterns.Hedidasolidstudyaboutchartpatternsandincludedhowoftenyoucanprofitwiththem.
Multipletimeframes
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http://www.technicalanalysisbook.com/ I recommend Technical Analysis Book byBrianShannon(fromalphatrends.net).Heisastocktraderbutknowledgefromthisbookisuniversal.ItwillgiveyouideashowtouseandtrademultipletimeframesandIcansayfrommyexperience–thisiscrucial.
Tradingpsychology
Goodtradingsystemisnotenoughtostayprofitable.Traderpsychologyanddisciplineisakeyfactortosuccess.Therearemanybooksaboutthattopic,butyoucanstartwithTradingZonebyMarkDouglas.
PivotPoints
IusepivotpointsondailybasisandIwrotesomearticlesaboutthem.Ifyouwanttolearnmore,IcanrecommendtwobooksaboutPivotPoints.
Ifyouaretotallynewtothetopic,CandlestickandPivotPointTradingTriggersbyJohnL.Personisagoodchoice.Youcanlearnherehowpivotworks,howtousethemandseesomesetupsexamples.
FormoreadvancedstuffaboutPivots,IrecommendSecretsofaPivotBossbyFrankOchoa. One of best trading books. Not a cheap one, but worth its price. Lot ofknowledgeandtradingideas.
Fibonacci
Asyouknow,IamabigFibonaccifan.Iwritealotaboutthattopic,butifyouwanttoreadabookaboutFibonacci,thenthereisonepositionIcanrecommend.ItisFibonacciTrading. Master Price Advantage by Carolyn Boroden. It is a good introduction tovariousFibotools.
Ichimoku
TherearefewbooksaboutIchimokuKinkoHyo.Ireadthemall,butIcanrecommendonlyIchimokuChartsbyElliottNicolle.IuseIchimokuonlyasadditionalindicator,butitisstillimportantone.EspeciallyinForex.
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Readblogs
Therearemanygoodtradingblogswhichyoucanfollow.Belowfewofmyfavorites:
http://comparic.com–yournumberonesourceforForexknowledge
http://alphatrends.net/blog/–mostlyaboutstocksandsomecontentispremiumonly.Still,greatfreevideosummariesofmarket.
http://thepatternsite.com/Blog.html–blogfromThomasBulkowski.OK,itlookslikeitwasstartedinthe90’sandisratheraboutstocks.Still,agreatsourcefornewtraderstolearnmoreaboutpricepatternsandhowtosetupatrade.
http://www.babypips.com/blogs – great site for new traders. Lots of resources,trainingmaterials. Even complicated things arewell explained. I like articles abouttradingsystems–youcanlearnherehowyoucancomeupwithatradingsystemandhowtotestit.
http://www.theforexguy.com/–lotsofgood,educationalmaterials.Especiallygreatsiteifyouwanttolearnmoreabouttradingforexwithpriceaction.
http://www.forexcrunch.com/–oneofthebestblogs/portalsaboutFX.Lotsofnewsandgoodeducationalarticles.
http://www.newtraderu.com/–Stevewritesininterestingwayabouttrading.Youcanfindheremany trading tips andmaterialsnotonly about technicalsbut alsoabouttradingpsychologyandriskmanagement.Steveisalsoveryactiveontwitter.
https://wwww.dailyfx.com/ - it isamixof forexportalandblog.Youwill findherenewssection,butalsogoodeducationalarticles.
https://www.youtube.com/user/DailyFXNews–Dailyfx.comhasalsoagreatYouTubechannel,whereyoucanwatchdailyanalysisfromtheirexperts.
http://www.forexlive.com/–ifyoulookformostimportant,shortforexnews’sthenthisisagreatsite.Also,activeontwitter.
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Watchwebinars
Youcanfindmanygreatwebinarswhicharefree.Fxstreet.comisagoodexample,youcanalsofindwebinarsorganizedbybrokers.Someareabouttechnicalanalysis,someaboutpsychology, fundamentals. Theyare runbydifferent traders. They showyou
screensoitisveryeasytoseehowothersaretrading,whatismostimportantforthem.
What’smore,youhavechatwindow.Inmostcases,youcanaskquestionsduringa
webinarorthereisdedicatedQ&Asessionrightafterwebinarsfinish.
Gotocourses
Yes,manyForextradersarelosingmoney.Brokersknowthat.Thatismainreasonwhytheyorganizefreetradingcourses(onlineandstationary).Oftentheyhirewellknown
traderswhoteachyouabouttrading.
Ofcourse,noteverycourseisfree.Sometimesyoucanfindgoodtradingcoursewhichcostsquitealot.Decisionisyours.Icansayfrommyperspectivethatyoucanlearnalotduringsuchcourses.Iattendedfewofthem,eachwas2-dayslong.Imustsay–thiswasaknowledgebasedontradingexperienceandithelpedmetojumpintoanother
level.
Followothertradersontwitter/fb
Socialmediaaregreat.Thereissomuchvaluableinformationhere,betterthancats:)
Lookfortradersviahashtagsandothersearchterms.
Twitterisagreatapp.Mostpeoplefollowherecelebrities,butyoucanfindalsomanygreat specialists. Traders too. They share their quick thoughts about market,
sometimestheytwitsomechartorinterestinglink.
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Which forex trader you should follow? You can start with this listhttps://www.newtraderu.com/2015/12/13/best-25-traders-follow-twitter-2015/ andseewhichyoulikemost.Myfavorites?Dante,alphatrendsandStewie.
Forums
I do not read any forex forums. I used to, but for me there is toomuch bullshit.Thousandsofsystems,manyargues…Itisnotforme,butifitisyourthingthengoandcheckhttp://www.forexfactory.com/forum.php.
Whatisthemainpointofallthissources?
Thereisnoonereadytogotradingsystem.Youmustbuildtradingsystembyyourself.Yourtradingstylewillchangeovertheyears.Tobesuccessfulyoushouldlearnfromothers, seewhat they are doing. Thatway you can improve your systemand your
approachtotrading.
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Forextradingquestions–ourForextips
Nakedtradingandpriceaction
Youmusttryitatleastonce.Asstatedbefore,mostindicatorsarecalculatedbasedonprice.Yet,stillmanytraderscan’treadasinglethingfromachart.Itisallbecausetheyrelaysoheavyonindicatorsanddonotputenoughattentiontopriceitself.
Goalhere is to removeall indicators, allmovingaverages andother indicator fromchart.Youwantcharttobenaked.Thiswayyoucanseeclearlypriceactionandmakedecisionsbasedonpriceitself.
Ihavereadabouttraderwhousesindicatorsandothertools.Everyfewweeksheturnsthemoffandtradeonlybasedonpriceaction.
Whyisthatimportant?Thankstonakedtradingyouwilllearnmuchfasteraboutpriceaction.Therearemomentswhenitiscrucial.Youwillgetfirstsignalsfrompriceandthen, later, from indicators. Therefore, it is important to knowhow to spot signalswhichpricegivesyou.
Fundamentalvstechnicalanalysis
Itisapersonalchoice.
Onlyoneadvicehere.Donotignoretheotherside.Ifsomeonesaysthatheistechnicaltraderanddonotlookatfundamentalsandnews,thenheisnotsomeoneyouwanttofollow
Therearesomanyevidencesthatnewscanmovethemarket.Manybigplayerssimplyclosealltradesbeforeimportantnews,becausemarketcanbeunpredictable.
Imostlyusetechnicalanalysis,butIalwaysstartthedayfromcheckingnewsscheduleforcurrentday.
Goodsourcefornewsanddata?http://www.forexfactory.com.
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Avoidmagictradingsystems!
WhenyoubrowseInternetlookingforinfoaboutForex,mostlikelyyouwillseeadsorreviewsofsomesuperautomatictradingsystems.Inadescription,youwillseelistoftradesmadeonhistoricaldataeven10yearsback:
Looksgreat.Where is a catch?These systemsareoptimized forhistoricaldata.Onmanytimes,youwillseethatpossibledrawdownisverybig.Itisbecauseauthorsuseverywidestoplosses.Thiswaymanytradesareclosedeventuallywithprofit,butwhensomethinggoeswrong,youendupwithhugeloss.
Anotherwaytoconthesystemistooptimizerobotforhistoricaldata.Whenyouputthatsamerobotinreallivetradingresultsarenotsogreatanymore.
Thereisnomagicautomatedsystemfor99$or999$.Forgetaboutit.Workhard,learn,trade.
Forexmajorcurrencypairs
Youcanseea lotofpairs inyourbrokersoffer,butfourofthemaremostpopular.Traderscallthemmajors:
• EUR/USD:TheeuroandtheU.S.dollar.
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• USD/JPY:TheU.S.dollarandtheJapaneseyen.• GBP/USD:TheBritishpoundsterlingandtheU.S.dollar.• USD/CHF:TheU.S.dollarandtheSwissfranc.
Whichpairisbesttotrade?
Ithinkthatitisbesttostartwithmajors,becauseyouhavetherethelowestspreadsand best liquidity. Maybe without USD/CHF, because after Swiss central bankinterventionsitisnotgoodpairtotrade.
EUR/USDisstillagoodpairtotrade;itisgreatbothonlowertimeframesandonbiggerones.
IalsorecommendtocheckYenpairs,especiallyGBP/JPY.Hereyoucanfindmanygoodtrendmoves,evenonlowertimeframes.Onchartbelowthereis1-hourGBP/JPYchart.Ittookonlycoupleofdaysforthispairtomovemorethan1300pipsup.
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OtherYenpairsarealsonicetotrade.
Now,becauseofBrexititisgoodtokeepcloseeyeonGBPpairs.Poundisgenerallygettingweakerandweakeracrosstheboard.Thankstothatwecanseeheresomestrongmovesbothdownandstrongcorrectionsup.
Itisnotrecommendedtotradeonexoticpairs.Therearetworeasonsforthat:
- Highspreads–costsoftradingherecanbeveryhigh- Liquidityisnotthatgoodasonmajorpairs
Unlessyouhavesomelong-termapproach;maybeyouareresidentofthatcountry.Butsticktothemostpopularpairs.
Howmanypairsshouldyoutrade?
Asanewtrader,youshouldstartwithonepair.Why?Twoormorepairsarehardtofollow.Rememberthatyoushouldchecksituationonfewtimeframestotakeatrade.Withtwoormorepairsyouwillstruggletofollowpriceactions.Selectonepair.Itisenough.
Everypairhasitsowncharacteristic.Ifyoujumpbetweenpairs,youwon’tnoticethis.Also, it is importanttochecksituationonhighertimeframes.Whenyoudothatonmanytradingpairs,itishardtofollowpriceactionfornewtraders.
DoIneed10displays?
You probably saw photos of trade stations where traders have 4, 6 or evenmoredisplays.Itisnotnecessary;youcaneasilystartwithyourcurrentsetup.
Sowhytradersusesomanydisplays?Coupleofreasons.Theyfollowactiononmanypairs.Theyalsofollownews,checkimportantlevelsonothertimeframes.Simply,itismucheasiertodoallthatwithfewdisplays.
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Butifyoustarttrading,don’tworryaboutthat.
Ifyouwanttohavemorethanonemonitor,itisnotthatcostly.YoucanbuyaPCwithgraphiccardwhichhastwoslotsfordisplaysoryoucanuseSLItechnology(morethanonegraphiccardinonecomputer).Displaysarealsonotexpensive.Youcanbuya24inchdisplay foraround150–200$;32 inchdisplaysarealsorathercheapandcostaround400$.
HowmuchmoneydoIneedtostartforextrading
This is one ofmost popular questions about Forex trading – howmuchmoney is
enoughtostarttrading.IwilltrytoanswerthisasgoodasIcan.
Remember,youcanopentradingaccountwithaslittleas100$(orevenlessinsomecases).Isitenoughtotrade?Technically,yes.Withthatmoney,youcanplacetradesifbrokerhasnanoormicrolotsinhisoffer.Sothereyougo,100$isenoughtotrade
forex.
Butisitenoughifyouareseriousabouttrading?No.
No,youwon’tearnbig$inayear,startingwith300$.Fewhundredbucksareokforstart in learningprocess.Youcanplaywiththatmoney,makesomemistakes, learnnewthings,growasayoungtrader.
Whenyoulearnhowtotrade,usemoneyyoucanaffordtolose.Thatisveryimportant.Nevertradewithmoneyyoucan’tlose.Thisisbrutalgame.Savesomemoneyforyourtradingaccount.
Peopleseeallthatadverts,readaboutleverageandthinkthattheydonotneedthatmuchcapital.Thatisahugemistake.
Tradingfulltimeisdifferent.Youneedsolidcapitalbecausewiththatcapitalyoucanmake profits. So howmuch do you need? Depends from trader, but 10,000$ is aminimuminmyopinion.Optimalamountforstartisinrange10,000–50,000$.The
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amount isstronglyconnectedtoyourtradingsystem(howyouhandlerisk level,doyoutradeshorttermorlongterm,andmanyotherthings).
When you follow, the path described above (demo -> real with small capital andmicro/nano)andyoucanmakemoney,youwillbeabletocounthowmuchmoneyyouneedtothinkaboutgoingfulltime.
IlikethequotefromAlexanderElder.Hesaidthatyoucanstartthinkingabouttradingasfulltimecareerwhenyoumakemoremoneyinamonthfromtradingthenfromyourdayjob.Simpleasthat.
Rememberthatyouneedcapitalforstartbecauseyoumustfollowsomeriskratiorules(definedbyyou).Youcanfollowruletonotrisk1%or0.5%capitalatcurrenttime.Trytousethatinrealmoneytradingandyouwillunderstandquicklywhyyouneedallthatmoneyforstart.
Timeframe
Anotherbigquestion–whichtimeframeisthebest?Again,itdependsfromtradingstyles,butIcangiveyoufewtips.
Thelowertimeframe,themoreautomatictradingyouwillsee.Ontimeframes,suchlowas1minutethereisnotimetothinkslowlyandanalyzeyourdecisiontwice.Whenprice hit some important level, youmay see strong countermove from that point(because of orders from robots).Generally,Idonottradelowerthan5mintimeframe.
Whenyouare lookingforswingtrades,thenyoushould lookathighertimeframessuchas1hour+.
Ofcourse,youdonotlookonlyatonetimeframe.Youshouldcheckhighertimeframestoknowwhatisgoingon.
Onlowertimeframeitmaylooklikethereisadowntrend,buthighertimeframesmaysuggestthatmaintrendisup.
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ButIhaveajob…
OK,itisnotlikethereisonlyoneproperwaytotradeForex.Ifyoustartyourtradingadventure,youprobablydonothavetimetolookawholedayatchart.Isthereanotherwaytodoit?Yes.Youcanswitchtohighertimeframesuchas1hour,4hourorsimplystartwithEODtrading.EOD–EndofDayTradingistradingwhereyoubaseyourtradingdecisionsondailychart.Ofcourse,youhavepositionopen for fewdays,your stoplossesarewider,butalsothereisachancetogetabiggermovefromstrongerswingmove.
Willyourstrategyworkonlowertimeframes?Yes.Donotworryaboutthat.Inmostcasesyourstrategywillbeperfectlyfineonlowertimeframes.Youmayneedtomodifyitandrebuildmoreorless,butitshouldbeasolidstrategytomoveontotradeonlowertimeframes.
There is a great article about EOD trading by Forex Guy. You can read it here athttp://www.theforexguy.com/forex-end-of-day-trading/.
Howmuchdoforextradersmakeaday
This is a commonquestion.Peoplewant to knowhowmuchmoney canyoumaketradingForex.Thepopularbelieveisthatyoucangetrichsofasthere.Thatismore
complicatedthanthat.
IthinkthattherearetwothingsthatcreatefakerealityofForextrading:
1) DemocontestsTherearealotofdemocontestsoutthere.Youcanwinsomeniceprizes.Problemisthattheyusually lastforefewweeks/othershortperiod.Asaresult, it issimplyagamblingcontest,notatradingcontest.Forgetmoneymanagement,strategy…Towinherepeoplestartmultipleaccountsandtradewithhighestleveragepossible.Itisnotthewaytheywouldtradewithrealmoneyondailybasis.
2) Realresultswithonlypercentagereturns
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Thatisinterestingthing.OnceIhadanaccountatverywell-knownFXbroker.Therewasnocontest,justamotivationalnewsletteronceeachmonthwithbestresultsoftheirclients.OK,notabadthing–theywereshowingthatpeoplearemakingmoney.Thing is, results were presented only in percentage gains. That’s it. Basically thisnumbers tellyounothing.Even if somebodyearned1000%hemightsimplyplacedsomegamblingtradeonhis100$accountandheearnedwithluckyshot.
Thebigpicturehereisveryunclear.Thatisanatureofthisbusiness–brokerswantmoreclientssotheydowhattheydo.PeopleknowthatmanypeoplelosemoneyonForex,andyettheythinkthattheyarebetterthantherest.Intheirmind,theycansee
millionstheycanmakehere.
If you want to have overview how traders are doing in contests, head tohttp://www.myfxbook.com/contests. You can find here both demo and real Forex
contests.Ontheright,youhaveanalysiswithmoredataabouteachcontest.
IencourageyoutofollowsometradersonTwitterorsimplytocheckreal-moneyForexcontests.Youwillseetotallydifferentsideoftrading.Iknowtraders(whotradeforaliving)whosometimesplaceonly5to10tradesperweek.Thereareweeksthatthisislessthen5trades.Theyarewatchingchartsalldaylong,buttheywaitfortheirbestsetups.Numberoftradesdependsfromtradingstylebutstill–itisadifferentstory
whenyouareriskingyourrealmoney.
Thereisnospecificanswer–howmuchmoneydoForextradermake.Onethingwecanbesure–thesearenotamountslikeindemotrading.
Isdaytradingforyou-tradingforexforaliving
Manynewtradersthinkthattheyshouldbedaytradingtomakesomeseriousmoney.Thatisamistake.Thereisnothingwrongwithdaytrading,butnowyouhavemanypossibilitiestotradeonhighertimeframes.Youhavependingorders,youcaneasilysetstoplossandprofittargetorsettrailingstoploss.Thankstothatitiseasytomanage
yourpositions,evenifyouhavetobeawayfromcomputerforsometime.
There is also one addition fact, important for new Forex traders. There are biggerchancesthatyouwilllosemoneyonlowertimeframethanonhighertimeframe.It
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shouldbeasolidargumentfornewtraderstostarttradingForexonhighertimeframeslike1-houror4-hours.Theyhavemuchbiggerchancesheretostayinthegameandto
makesomeprofit.
Onlowertimeframeyoucanmeetsooftensuddenchangesinprice.What’smore,algotradingistakingnowbigpartinpricemovements.Youhavetobeinfrontofyour
screenallthetimetofollowactionandreactintime.Itisveryhard.
Aspointedbefore,youcanmakegoodprofitonhighertimeframesandyoudonot
havetofollowpriceactionforthewholeday.
Also,tradingonhighertimeframeisapasstodaydaytrading.Youshouldprovetoyourself that you canmakemoney on higher frame, that you can trade. Youmustcollectenoughtradingcapital.Youcan’tjustjumpinandstartdaytradingwhenyouarenotanexperiencedtraderandjusthopethatyoucanmakeit.Numbersareagainst
yousoyoumustbeprepared.
Stressisanotherimportantfactor.Whenyouaredaytrading,youopenlargerpositions
forshortertimeofperiod.Itisnotforeveryone.
TradingplaninForexTrading
Youmusthaveone.Simpleasthat.Ofcourse,thereisawholelearningprocessandyouwill be testing different Forex trading strategies. Eventually you should decide
whatworksbestforyouandexplorethatpart.
Yourgoalistocreatetradingplan.Youshouldwritedownthingslike:
- whichcurrencypairyoutrade- whichtimeframesyoutrade- whenyouenteratrade(basedonwhatstrategy/signals)- whenyouexitatrade(basedonwhatstrategy/signals)- stoplosses–whatisyourriskpertrade- takingprofitsandmoneymanagement
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Ifyoudonothavethingslikethiswrittendown,thenyouwillbechanginglotofthingsatonce.Thatwayyouwillneverfindoutwhatyouaredoingwrong.Imentionedearlierthattherearetraderswhocanwatchpriceactionandwaitfor1or2traderswhichfitentryconditionsfromtheirtradingplan.Thankstothefactthattheyhaveastrategy,
theyknowwhattheyarewaitingfor.
Whenyoudonothavethatkindofinformation(fromyourtradingplan)thenyouact
basedonahunchoremotions.Thatisnotawayhowyouwanttotrade.
AsIsaid,whenyoustarttolearnhowtotradeForex,itisnormalthatyouwillbetestingdifferentsystemsandstrategies.Intheend,youshouldchooseoneandtakeyourtimetomasterit.Andtradingplancanhelpinthatalot.
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PART 2. FOREX TRADING TOOLS ANDSTRATEGIES
Inthispartofguide,wewilllookintodifferenttradingtoolsandstrategies.Ofcoursethisisstillmorelikeoverviewbecausetopicitselfisverywide.Iwantyoutoseethat
thereisachoicetomake.
Whichtradingtoolisbestforyou?
Therearemanytools likeoscillators,averagesandothers.Commonmistakeamongnewtradersistomixeverythingup.Theyfeelmorecomfortablewhentherearemoretoolsonchart.Thiswayitishardtolearnwithonespecifictool.Becauseyouhaveso
manytoolsonchartyouwillactondifferentsignals.
Yes,someindicatorsworkgreattogetherbutyoushouldknowwhatareyoulooking
for.Thismaybeveryconfusing.Resultisalwaysthesame–noprogress.
Trytostartwithfewaveragesandoneoscillator(ifyouplantousethattools).Trade
withthatsetupforsometime–atleastforfewweeks.Trytooptimizeparameters.
Onemorething,readaboutyourtradingtools.Whatisformulabehindthem,howtheywork.Sometimesyoucanseescreenwith2or3oscillatorswhicharebasicallyverylike
eachother.Thereisnopointinthat.Trytounderstandhowyourindicatorworks.
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Whichstrategyisrightforyou?
Therearemanyapproacheshere.Sometradersprefertofollowtrendonlongertimeframes.Othersliketoopenpositionsmoreoften–theyareswingtrading.Addtothat
possibilitytotradefundamental,towriteyourowntradingrobotortradenaked.
Thatisagoodthing.Butwhataboutbeststrategyfornewtraders?Iwouldsaythatitshouldbeastrategythatallowsyoutotradeonhighertimeframesandprofitonlongermoves. It doesn’t have to be trend following strategy, it can be also swing trading
strategy.
Iwroteaboutitbefore,butImentionitagain.Mostnewtradersthinkthattheymusttradeonlowertimeframestomakemoney.Forthemtheselowtimeframesarelikedeepdangerouswaterfornewdiver.Thisisaplacewheresometimesmorethanhalfoftradesisdonebyrobots.WehavealsoHighFrequencyTrading.Andbiggestofall-
risktoovertrade.
Onhighertimeframethereismoretimetoanalyzecurrentsituation,tocheckothertimeframes.Whenyoucatchagoodmove,youcanmakesometimesverylargeprofit.Tomakemoneyonlowertimeframeyoumustinvestwithhighleverage.Andfornew
tradershighleverageisakiller.
Whatsettingsarebestformystochastic/macd/rsi/otheroneurusd/gbpjpy/other?
Please,don’taskthatquestion.Therearesomanydifferentsetups.Eachcurrencyhas
itsowncharacteristic.Eachtimeframeisdifferent.
Justusepricehistory.Withthatyoucanselectthebestsettingsforyourtools.
Mostcommonmistake–invisiblepriceaction
Themostimportantthingtorememberisthatallisbasedonprice.Ifyouaddtomanyindicators,averagesandothertoolsthenyoumaymissimportantpriceaction.Thatiswhyitisgoodtotradeonnakedchart–atleastfromtimetotime.Thankstothatyou
willbemoreawareofpricemovements.
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PivotPoints
Inmyopiniononeofthemostimportanttoolforyourtrading.
Whatisonthechart
Wehavefewhorizontallines:
Pivotline–thisisthemiddleline
R1,R2,R3…-resistancelines,abovePivotline
S1,S2,S3…-supportlines,belowPivotline
WecancalculatemorehigherlevelslikeS4,R4andsoonbutinpracticeyouwillneed
onlylevels1,2and3.
Theselinesarecalculatedbasedonpreviousperiod(tobespecificinformulawecan
findhigh,low,close).Becauseofthatwehave:
1-hourPivotPoints–calculatedonhigh,low,closeofprevioushour
4-hourPivotPoints–calculatedonhigh,low,closeofprevious4hours
DailyPivotPoints–calculatedonhigh,low,closeofpreviousday
WeeklyPivotPoints–calculatedonhigh,low,closeofpreviousweek
MonthlyPivotPoints–calculatedonhigh,low,closeofpreviousmonth
YearlyPivotPoints–calculatedonhigh,low,closeofpreviousyear
Asyoucanexpect,Rlinesworkasresistanceforprice,Slinesassupport.Ideahereisthatpricetendtomovearoundpivotline.Eveninanuptrend,afterhittingaresistance
wecanexpectacorrectiondowntothepivotline.
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Likeintheexamplebelow.Pricewasmovingaroundpivotline(blackline).ThenwesawastrongmovedowntotheS2area.Thenapullbackandagainmovearoundpivotline.Whenthereisnocleartrendinplace,wecanseesuchbehaviorwherepivotline
iscenterforpriceaction.
WhichPivotsarebestforyou?
Soweknowthattherearedaily,weekly,monthly…Whichoneisbestforyou?Dependsfromyourmaintimeframeandtradingstyle.ThemostpopularareofcoursedailyPivotPoints.YouhavetotestitbyyourselfwhichPivotsworksbestforyourtrading.Asa
littlehelp,wecantryseparatethemlikethis:
1h,4hPivots–suitableforlowestTFs
DailyPivotpoints–suitableforTFfrom1mto1h
Weeklypivots–suitableforFTlike4h,daily
Monthly–suitableforTFlike4h,daily,weekly
Yearly–suitableforTFlikeweekly,monthly
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StrategybasedonPivots
YoucanbuildyourmaintradingstrategybasedonPivotsoryoucanusethemasan
additiontootherstrategy.
Fewimportantnotesaboutpivots.
WhenpriceisbelowPivotline,thislinemayactasaresistance.Similarsituationwith
priceabovePivot,itwillworkassupport.
Mostimportantaresecondlines.So,inotherwords,thereisabigchancethatthemaintargetforcurrentmovewillbeS2orR2.Thesearelevelswheretradersliketotakeprofits.Becauseofthatyoucanexpectcorrectionmovefromtheselines.
R3,S3.TherearetimeswhentrendisverystrongandpricemoveuptotheR3ordowntotheS3line.Inthatcase,youshouldtakeprofitatS3orR3.Donothopeformovetocontinue.InmostcasesitwillendatS3orR3.Ofcourse,youcanclosepartofyourpositionat3rdlineandlettherestroll.Still,frommyexperienceIcantellthatitisvery
unusualforpricetomovehigherthanR3lineorlowerthanS3line.
Pivotsfromhighertimeframe.Therearetimeswhenitisgoodtochecksituationforhighertimeframes.Iliketoopenseparatechartforthat.TherearesituationswhenlinesfromtwodifferentPivotsareneartoeachother.ForexamplewemayhavedailyR2nearweeklyR1.Thisisveryimportantinformationforusbecauseweknowwhere
isthestrongsupportandwhereweshouldtakeprofits.
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PivotPointstradeexamples
USD/JPYH1,weeklypivots
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ThisisanhourlychartofUSD/JPYwithweeklyPivotpoints.Trendisup.PriceisabovePivot line.Aftera rangemove therewasabreakabove trend lineandyoucanseestrongmoveup.ItendedexactlyatR3level.Itisararesituation.InmostcasesyouwillseethatpricerespectresistancelinesatR1andR2.Sometimesthereisnewsorsome
otherreasonforthatkindofstrongmove.
GBP/JPY5mdailyPivotlines
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OnchartabovewehaveGBP/JPY,5mchartwithdailyPivotlines.Itisaninteresting
situation.ForthefirstpartofadaypricewasabovePivotlinewhichworkedassupport.
Latersituationchanged.Pivotstoppedtoworkassupport,therewasalsoaresistancefrommovingaverage.Suddenly,GBP/JPYtanked.Wecanseethatitwentstraightto
theS2line.
Thatchartshowswhyitisimportanttosettakeprofitorders.ItwasonlyamomentwhenpricewasatS2lineandtherewasastrongbounceback.Youwouldnotbeable
tocloseitmanually.
EUR/USD,4hmonthlyPivotPoints
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LastexampleisEUR/USD,4hchartwithmonthlyPivotPoints.Itisrarewhenyoucheckmonthlypivotlines,butasyoucanseetheyalsowork.InthiscasePivotlineworkedas
aresistance,latermoveupendedatmonthlyR2.
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Fibonaccitradingtools
TherearemanytoolsbasedonFibonaccinumbers.Belowshortoverview.
PopularFibonaccitools
Fibonacciretracement
Fibonacci retracement is the most popular tool used by traders who are trading withFibonacci.Ithelpsyoutopredictwherecorrectionmightend.
DoyourememberhowinthebeginningofthisarticleIwroteaboutnatureoftrends?Whenprice is inanuptrend, there isasequenceofhigherhighs,but there isalsoasequenceofhigherlows,orsimplycorrections.Thisissomethingnaturalforuptrend–pricemoveup,upandsuddenlyitisfallingdown.Thatiscorrectionanditisagoodthing,becauseitletyoutoenterpositionforbetterprice.
Fibonacci retracement helps you to find places where correction might stop. With thatknowledgeyoucanplantoenterapositionfromthereinadirectionofmaintrend.
Fibonacciexpansion
Youcanalsopredictwheretherewillbethenexthighorlow.YoucandothiswithFibonacciexpansion.Todothatyouneedtofindthreepoints.AandBfrommainswing(lowandhigh)and point C where correction ended (similar points as you would be looking to drawretracement levelsbuthereyouhave toknow/decidewherecorrectionended).With thatpointsyouareabletodrawFibonacciexpansionandinresultyouhavefewprojectionswheremightbenexthigh/low.Therearemorelevels,butstandardare61.8%,100%and161.8%.
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Thereisalsoextensionbasedonlyontwopoints(AandB),whichalsogivesprojectionlevels,butlet’sdonotcomplicatethingstoomuch.
Fibonaccitimezones
Interestingtoolwhichyoudrawhorizontally.Thereismanywaysyoucandrawit–fromhightohigh,hightolow,lowtohigh…Inaresultyouhaveverticallines,whichrepresentstimewhentheremightbeendofmoveorsomechangeofdirection.
Fibonacciarc
Itisanothertoolwhichrepresentsareasofsupport/resistance,butinanotherway.YoudrawFibonacciarcfromhightoloworlowtohigh.Asaresultyoucanseethreecurves38.2%,50%and61.8%whichrepresentspossibleplacewherepriceactionmightstop/reverse.
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Fibonacciarcexample
FibonacciFan
Withthistoolyougetthreediagonallines.EachoneofthemrepresentsFibonacciratioandwhen price is getting close to this lines, you know that thismight be area of support orresistance.Youdrawatrendlinebetweenlowandhightogetthislines.
Actually,thistoolisprettyhandy.Trytoexerciseonhistoricaldata,ortestitinyourtrading.Itisallaboutselectingrightlowandhighandyouwillgetgoodresults.
Fibonaccifanexample
TherearesomeothertoolsbasedonFibonaccinumbers,butthesearemostknown.Ifyouareconfusedrightnowandyoudonotknowwhichoneyoushoulduse,thenletmegiveyousmalladvice. Start from Fibonacci retracement and master using it. Then add to your toolboxFibonacciexpansion–itisimportanttool,becauseitletyoupredictthebestpointstocloseposition.
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MostpopularcombinationisFibonacciExtension+FibonacciRetracement:
FibonacciExtension–theyworkaspossibletargetforthemove(takeprofitarea)
FibonacciRetracement–theyworkassupportduringacorrection
SetupinMetatrader
Nowlet’shavealookhowtosetupFibonaccisoyouhavemostpopularlevelsinplace.
Belowyoucanfindinstructionswithmostpopularsetup.
WherecanyoufindFibonacciRetracementinMetaTrader4?
GototopbarandfindFibonacciRetracementicon:
OryoucangotothetopmenuandselectInsert->Fibonacci->Retracement:
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HowtochangeFibonacciretracementandextensionlevels?WhenyouhaveselectedFibonaccitooldescribedinpoint1.,drawitonachart.Now,
doubleclickonthelinethatgoesfrom0to100%:
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Andclickmouserightbutton.Next,selectFiboproperties:
Fibonacciretracementandextensionlevelslist
InFiboproperties,gotothesecondtab.Youwillfindthereatablewithtwocolumns:
LevelandDescription:
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Probably youwill see some default values. You can edit fields and add new ones.
Correctthelistinthesecondtabsoitlookslikelistbelow:
Level Description0 0.00.236 23.60.382 38.20.5 50.00.618 61.80.786 78.61 100-0.27 127-0.382 138.2-0.618 161.8-1 200
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ThesearelevelsthatIuseinmydailytrading.Sure,youcancustomizethislistsoitfityourtradingstyle.Youcanaddlevels like261.8,150etc. Inmyexperience,youare
goodtogowiththelistIprovidedabove:
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FibonaccitradinginForex
TodrawFibonacci,weneedtoselectaswingmove.Additionally,wehavetotrytodothatintherightdirection.Thatiswhyitiscrucialtounderstandpricebehavior,trends,swings.
Let’s start from tricky question and basics of price behavior. Inwhich direction, can pricemove?Youprobablywouldanswer:upanddown.Thatiscorrectanswer,onlythatthereisone“but”.Whatifthereisnomaintrend?Ifthereisnostrongtrend,pricewillprobablymovesideways.Statisticssaysthatpriceisabout30%oftimeintrendandrestofthistimeismovinginrange.Whymovinginrangeissobadthing?Becausethereisnocleardirectionandpricemoveupanddownsoitisveryhardtomakemoneyinthatkindofmovement.Justlookatchartbelow,isitsomethingyouwouldliketotrade?
sidewaymoveexample
Ithinkso.Whatwewanttotradeistrendingmarket.Goingintotrenddirectionincreasesyourchancesofsuccess.Lookatthisbeautifultrendbelow.Isn’t itsomethingyouwouldliketotrade?Ontheshortsideofcourse!
downtrendexample
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WewanttouseFibonaccitechniqueinthatkindofmarket.BeforeIgofurtherandexplainmoreaboutthis,thereisanotherimportantthingyoumustlearn.
Howtorecognizetrend?
Youshouldbeabletoeasyrecognizeifthereisatrendinplaceornot.Sometimesitishardbecauseofthe“noise”,buttherearesometipsyoucanuse.
Lookforhigherhighsandhigherlows,ifyouarelookingforuptrend.Ihaveprobablyshowedyou this charts before, but this is important. On chart below you can see an example ofuptrend.Youcanseethateveryhighishigherthanthepreviousone,andeverylowishigherthanpreviouslow.
higherhighsequence
Whenyoucanfindtheseelementsonchart,thenyouhaveidentifiedanuptrend.
Indowntrendyoushould look for lower lowsand lowerhighs.Each low is lower than thepreviousone,andeachhighislowerthanprevioushigh.Justlikeonchartbelow:
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lowerlowsequence
Ifyouareabletoidentifylowerlowssequence,thanyouhavefoundadowntrendandyoucanplantoentershortposition.
Inrangemarketthereisnosequence,thereforethereisnotrend.
Youcanalsousesimplertoolstodefinetrend.Mostpopularmovingaverageisagoodchoice.Letssayyouareusing200simplemovingaverage.Whenmovingaverageisrisingandpriceisabovethatline,thanthereisastrongchancethattrendisup.Iftrendisdown,pricewillbeunder200SMA.Ofcoursethismethoddoesnotmakeyou100%sure,butthechancesaregood.
200SMAasahelpintrendidentyfying
So,whatreallyFibonaccitradingis?
Now,whenyouknowwhatkindoftrendsthereareandhowtorecognizethecurrenttrend,wecanmovetoanswerthequestionfromtitle.WhatisFibonaccitradingabout?
Fibonaccitradingisatechnique,whereyouareusingtoolsbasedonFibonaccinumberstopredictpossibleturningpoints(ifyouwanttoreadwhatitisFibonaccinumber,justgohere).
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TherearemanytoolswhichyoucanusefortradingwithFibonacci.Eachofthemdoadifferentjob.Somearemoreimportant,someless.Lestreviewthemquickly.
HowtotradewithFibonacci?
Nowyouknowwhatdoes itmeanFibonaccitrading,andwhatkindsofFibonaccitoolswehave (plentyof them!).There isonemore importantquestiontoanswer.Howshouldyoutradewiththesetools?
Notice that all this tools give you a potential level of support/resistance or potential exitpoints.Thisisveryvaluableinformation!Buthowtouseitforyourbenefits?Ofcourse,Iamnotabletoansweryouinfewwords,butIcangiveyousomeadvicewhatshouldyoudo.
Youshouldbuildtradingplan.ThemaincoreofyourtradingplanwillbeFibonaccitools.AsIwrotebefore,firstincludeFibonacciretracementandextensiontoyourplan.Next,youneedsomesignalswhichhelpyoutoenterandexitpositions.Thelogichereisthatwhenpriceisinuptrendandcorrectionoccur,youdrawretracementlevels.Whenpriceisnearoneofthem,youdonotknowwhichonewillbeasupport.Thatisok,becauseyoudefineyourownsignalandwhenpricereturntomoveupfromcorrection,yougetyoursignal.Itmightbesomethingsimplelikemovingaveragescrossoverorsignalfromsomeoscillator.
Samewithclosingposition.Youshoulddefineonwhichsignalyouwillexityourposition.Itwillbeprobablynearoneofexpansionlevels,soyouwillbereadytoact.
The last,very importantpartofyourtradingplan ismoneymanagement.Youshouldkeepyourlossessmall.Itisveryimportanttotradesmartandnottorisktoomuch.
Some of this information are not very specific, but the whole topic about trading withFibonacciisverywide.Intheend,itisaboutpractice,practice,practice.Youshouldbetestingnewideasandgettingexperience.TradingwithFibonacciisgreat,becauseyouhavepossiblesupportandresistancelevelsandevenexitpoints.Ofcourse,theyareonlypossiblelevels,butonmanytimestheyworkexcellent.Youneedtobuildyourwholetradingplanaroundtheselevels, so around Fibonacci tools. Add to this entry and exit signals and proper moneymanagementsystemandyouareongreatwaytosuccessintrading.
ABCDandFibonaccitrading
TherearemoreadvancedtechniquestotradewithFibonacci,butyoushouldstartwithABCD.Thisissimpleyetpowerfulapproach.Inshort,welookforaswing.BasedonthatswingwedrawourFibonaccilines(AandB).Next,wewaitforacorrectiontoretracement–C.AfterthatweopenatradeandwaitforcontinuationmovetowardsD(whichisanextensionline).
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Lookatsomeexamplesbelow,itshouldbeclear.
Fibonaccitradeexamples
GBP/JPY1hourchart
HerewehaveexampleofGBP/JPY.Wecanseethatafterstrongmovedown(fromAtoB)therewasacorrectionup.ThiswasagoodmomenttodrawFibonaccilinesandwaitforsignaltogo short.Correctionendedat78.6%andafter that therewere signals fromMACDandStochastic.Thisshorttradeworkedwell.Moveendedat138.2FibonacciextensionanditwasourDpoint.
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EUR/USD30m
InthisEUR/USDexampletimeframeis30m.WeareinanuptrendandafterstrongmovetotheBtherewasacorrection.Itwasratherdeep,downtothe78.6retracementline(ourCpoint).NextEUR/USDreturnedtotheuptrend.Wesawsomesignalstogolong.Thiswasastrongmoveup,withshortstopat161.8%extensionline.Eventuallymoveendedat200%extensionline,thiswasourDpoint.
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DAX15m
Thisis15mchartofDAX.Itisagoodexample,becauseitshowshowuniversalFibonacci
toolsare.Theyworkwithcurrency,withcommodities,stocks,indices…
Onthechart,wecan’tseetheleftside–therewasanuptrendmovebefore.Itended,pricewentdownbelowaverages.TherewasacorrectiontotheC(50%retracement).Fromtheresomemoveintherangeandstrongmovedowntothe200%extensionline
(D).
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Trailingstop
TrailingstopisanothergreattoolwhichcanhelpinyourForextrading.Itissimple,but
canhelpyoutocatchbigmoves.
Thereare few typesof trailing stop losses. Sometimes theyarebuilt in the tradingplatform. You can’t find them inMetatrader so youmust download and install it.
Searchforchandeliermt4trailingstoplossandyoushouldfindthebestversion.
Howtousetrailingstoploss
Ideabehindtrailingstoplossisverysimple.Ifpriceisabovetrailingline,youshouldbe
long.
Ifitisbelowtrailingline,youshouldbeshort.Simpleasthat.
Themainadvantageoftrailingstoplossisthatitallowsyoutostayinthetrendand
takebigprofitofthat.
Exampleaboveshowsratherwellhowitworks.Itworksasstopline.Youcanseethat
whenmoveupendedandpriceclosedbelowblueline,itwastimetoclosetrade.
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Bestsettingsfortrailingstoploss
Itisacommonquestion–bestsettingsfortrailingstoploss.Youshouldworkitoutbyyourself.Onesettingsmayworkgreatonspecificcurrencyandtimeframebuttheycanbeoutofplaceonanother.Thatiswhyitisbesttotestsettingsonpricehistory.YoucanplaywithLengthandATRPeriodbut it isKvparameterwhich interestyou
most.
Itisnotalwaysthateasy
Trailingstoplossiseasytouse,buttherearethingsyoushouldrememberabout.Itworksgreatwhentrendisstrong.Therearetimeswheremovesarestrongorwhen
thereisnospecificdirection.
When there is a rangemove, youcaneasilyovertradeand losemoney. So,weare
talkingaboutsituationslikethis:
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Timeframefortrailingstoploss
Timeframedependsfromyourtradingstyle,butyoucantrytrailingstoplossontimeframeslike15m,30m,1h.Trendsherecanlastforsometimeandprofitmaybegood.Ifyougolowerwithtrailingstoplike1m,5mitismuchharder–mainlybecauserapid
moves.
Strategyfortrailingstoploss
Youcanuseonlytrailingstoplossbutitworksbestwhenyoujoinitwithothertools.Asalways,youwanttotradeinthedirectionofcurrenttrend.Thatiswhyitisoktojointrailingstoplosswithaverages.Thankstothatyoucanfilterfalsesignals,likeinexamplebelow.Aftermovedowntherewasachangeintrailingstoplossandsignaltogolong.Asyoucansee,pricewasthenbelowaverage.Thatmeansthatitwasbestto
waitforbreakaboveit.Itdidn’thappen.Itwasafalsesignalafterall.
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Tradeexamples
GBP/JPY,30m
First,therewasasignaltogolongandstrongmoveup.Whenmoveended,priceclosedbelowblueline,itwassignaltoclose.Next,pricewasbelowredline(signaltogoshort)but it was above moving average. It was best to wait for another confirmation.Eventually,pricebrokebelowthataverage,butnoticethatitwasstillabovesupportline.Itisimportanttodrawsupport/resistancelinesbecausetheyhelpustomake
tradingdecision.
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USD/JPY,4h
Thisisagoodexamplethatsometimestrailingstoplosscanhelpyoutocatchreallybig
moves.Ifyouarealongtermtrader,youcaneasilyuseitinyourstrategy.
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Movingaveragesinforextrading(andnotonlyFX)
That is a common problem among investors. They are looking for best working movingaverages.Butdoyouknowtherearefewwaysyoucanusemovingaverageinyourtradingplan?
Domovingaveragescrossoversworks?
TaketennewtradersandtellthemtocreatetradingsystemandIamsurethatmorethan70%of themwill usemoving average crossovers as apart of their system. It is not a surprise.Movingaveragesareoneoftheoldesttechnicalindicators.Theyareinusesince20’sofXXcenturysoalmost100years.Ofcourse,over timepeople findmoresophisticatedwaysofusingthem.Also,wehavemanymoretypesofaverages,buttheconceptsbehindcreatingthemarestillsimilar.
Butdotheywork?
Fromthebeginningofusingma’stradersweretryingtofindprofitablecrossoversignals.YoumaybefamiliarwithconceptsuchasGoldenCrossandDeathCross.Butthereisnoonesimpleanswer to the question.When there is a strong trend then signals frommoving averagecrossoversworkgreat:
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strongdowntrendandgoodsellsignalsfromaveragecrossovers
When there isnocleardirection– themarket ismoving sidewaysorwhat’sworse isverychoppy,thenqualityofbuyandsellsignalsfrommovingaveragesisverylow:
nocleartrendandmanyfalsesignalsfromcrossovers
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Soitdependsmorefromthewayyouaregoingtouseaverages–doesyourtradingplantakessuchascenariointoanaccount?
Butwait,thereisanotherwayofusingmovingaverages
Istartedfromcrossoverstopicbecausemanynewtradersthinkthatthisisthemainwayofusingthem.Theyarewrong.Belowyoucanfindfewexampleshowyoucanuseaveragesindifferentways.
Movingaverageasatrenddetector
Yousimplytakelongertimeframeandobservewherethepriceis.So,intheexamplebelowwearelookingat200movingaverage.Whenpriceisabovethataveragethenthatisasignalforusthattheoveralltrendisup:
priceabove200movingaverage
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Whenpriceissittingbackbelowaverageformostofthetime,thenit’ssignthatsellersarestrongernow:
pricebelow200movingaverage
Whatisthedirectionofaverage?
Youshouldalsopayattentionatwhatdirectionmovingaverageispointing.Ifit’spointingup,thentherearebetterchancesthattrendupwillcontinue.
Whenit’spointingdownthenitispossible,thatthereisacorrectiontakingaplaceordowntrendwillcontinuetoexpand.
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Ispricecrossingthroughmovingaverage?
This is also a valid signal.When price formost of the timewas right below average andsuddenlyiscrossingthroughtotheothersidethanitisasignthatoverallsentimentmaybechanginglikeintheexamplebelow:
pricecrossingthroughaverage
Movingaverageasasupportorresistance
Thatisaveryimportantfunction.Someaveragesarecommonlyusedbytraders,forexample50,100or200averages.Theyareverypopularandwhenpriceismovingnearthemthenyoucanexpectreaction.Ifpricewasmostofthetimeaboveaverage,itispossiblethattherewillbesupport.Checktheexamplebelow:
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supportat50,100and200averages
On theotherhand, if theprice isbelowaveragesand ismoving closer to them, then it ispossiblethataverageswillworkasaresistancearea.
Asyoualreadyknow,knowledgeaboutpossiblesupportandresistanceareasisveryworthy.Youcanwritethisintoyourtradingplanandclosetradesatbettermoments.
Howmanyaveragesshouldyouuse?
Itdependsstronglyfromtraderandtradingstyle.Forbeginners,Isuggesttoputonchartatleastoneaveragefromeachgroup.Wecandivideaveragesinthreemaingroups:
• Short-termgroup–averagesfromaround1to20.Theyarehelpfulwhenyouwanttocheckthecurrentshort-termtrend.
• Mediumtermgroup–withaveragesfromaround20to50.• Longtermgroup–averagesfromperiodfrom50up.Withlongtermaveragesyoucan
seebetterthebiggerpicture.
Periodsmaybedifferentforsometraders.Thevaluesfromabovearetheretogiveyousomeideaaboutscopeofeachgroup.So,youjustwanttohaveoneaveragefromshort-termgroup,onefrommediumandonefromlongtermgroup.Youmaycreatesetlike:
• 10,50,200• 5,33,100• 7,21,200• anyothercombination
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Ithinkthatthegoodstartistouse13,50and200movingaverage.
13,55,and200movingaveragesoneur/usdchart
Testitandseewhichoneisthebestforyourtradingplan.
Othertoolsbasedonaverages
There are many trading strategies based on averages. Most popular use of averages areRainbowMovingAveragesandGMMA.Let’shaveacloserlook.
Rainbowchart
Rainbowchartisverypopular;youcanfinditinmanytradingplatforms.IfthereisnoRainbowchart,thenyoucanbuilditbyyourself.
How?Rainbowisusuallyconstructedfrommovingaverageswithperiodrange2–200.Itmaybesomethinglikeaverages2,3,4,5,6,7,8,9,10,11,12,13,14,15…andsoon.Foraveragesfromhighergroupsdistanceiswider,thatiswhyinlastgroupwehave125,130,135…Orifyouneednumbersforallrainbowaverages,hereyougo:
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2,3,4,5,6,7,8,9,10,11,12,13,14,15–1stgroup
17,19,21,23,25,27,29,31,33,35,37,39,41–2ndgroup
44,47,40,53,56,59,62,65,68,71,74–3rdgroup
78,82,86,90,94,98,102,106,110,114,118,122–4thgroup
125,130,135,140,145,150,155,160,165,170,175,180,185,190,195,200–5thgroup
Usuallytheyaredividedinto4or5groups.Youmayhaveforexamplegroupslike:
Averages2to15–redcolorAverages17to41–yellowcolorAverages44to74–greencolorAverages78to122–bluecolorAverages125to200–violetcolor
Oryoucanusedifferentcolors,theyarehereonlytoseparatevisuallyeachgroup.
Youcanusetypeofaverageswhichisbestforyou.Iuseinmostcasesexponentialaveragesorlinearweightedaverages.
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TheideabehindRainbow
Youcanseethatthisisasimpletool.Ithelpsyoutocheckcurrentsituation.Obviously,thisisatoolfortraderswhowanttotradewithtrends.WithRainbowtool,theyseecurrenttrend.Also,thereisaninformationaboutsupportandresistanceareas.WideRainbowmeansthatsupport/resistanceisstrong,narrowthatitmaybeweak.
Rangemoves
Likeothertoolswhichhelpwithcatchingtrendsanditisgreatwiththat.Asalways,problemiswithrangemoves.Thereisabigriskthatyouwillovertradewhenthereisnocleartrendinplace.InsituationslikethisyouwillnoticethatRainbowisnarrowanditischangingdirectionsalot.Likeintheexamplebelow:
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YoucanseerightawaythatRainbowisratherflatandpriceismovingupanddown.Thingwithrangemovesisthatitisratherhardtospottheminthebeginning.Afterawhile,likeinchartaboveyouknowthatyouaredealingwithrangemove.Beforethatitisnotsoobvious.
It comes with practice. Check higher time frames, use trend lines so you have betterunderstandingofcurrentsituation.
Rainbowand…
Frommy experience with Rainbow tool I can tell that it is best to join them with otherindicators.ForexampleyoumaybuildyourstrategyaroundRainbowandMACD,youcanaddalsoPivotlines.BelowyoucanseeRainbowwithtwoIchimokuKijunSenlines(Kijunsetto26and60)andPivotpoints.
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YoucanmixRainbowwithothertradingtoolsyoulikemost.Overall,inmyopinionRainbowcanbeverypowerfulwhenjoinedwithothertoolswithgoodtradingstrategy.
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Rainbowtradeexamples
EUR/USD,H1
Onthis1-hourEUR/USDchartwecanseerainbowaverages,twoKijunSenlines(26,60)andMACDoscillator.
Afterlonguptrend,therewasastrongmovedown.Wasitachangeintrend?Wecanseethatlongestaveragesgropup(violet)isstillwideinthisplace,likeothergroups.Thisisnotagoodplacetogoshort.Youcanclosepositionherebutitlooksliketrendisup.SituationlikethisisnotrareandwithhelpofRainbowyoucantradeinrightdirectionandyoucanavoidtradingagainstmaintrend.
LaterwecanseethatblueKijunlinecrossedagainwithsecondKijunandEUR/USDmovedhigher–thiswasagoodpointtogolongagain.
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GBP/JPY,30m
Onthis30mGBP/JPYchartwehaveRainbow,twoKijunlines,dailyPivotsandoscillators.
Youcanseethatbreakbelowsupportwasastartforastrongmovedown.Youcouldenteratthebreak(becauseearliertrendwasalsodownanditwasacorrectionup)orwaitforreenterlater.ThisisagoodexamplethatRainbowistrendindicator(weknowhowstrongistrend,direction)andlongerKijunlineisourtrailingstoplossline.Thankstothatyoucanmaximizeprofitsfromyourtrades,becauseyouwillstayintradeaslongaspossible.
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AUD/NZD,H4
We have here 4h chart of AUD/NZD. Earlier trend was down. Then it looked only like acorrectionmovebutwecanseethatpricefailedtoclosebelowKijunlines.Also,Rainbowlinesweregettingmorenarrow.Itcouldbeastartofarangemovebutitturnedouttobeastartofmoveup.
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GMMA
GMMAisanothertoolbasedonmovingaverages.ItwasintroducedbyAustraliantraderDarylGuppy.HeisusingitinstockmarketbutitworksgreatinForex.LikeRainbowitisbesttojoinGMMAwithothertools.
ConstructionofGMMA
Wehavetwogroupsofmovingaverages:
3,5,8,10,12,15–thisgrouprepresentsshorttermtraders
30,35,40,45,50,55,60–thisgrouprepresentslongtermtraders
YoucanbuildinbyyourselfinMetatrader.IusedMAincolorindicatorwhichyoucaneasilyinstallinyourMT4platform.Itallowsyoutohave3colorsforeachaverage;differentformoveup,movedownandrangemove.Inthechartaboveyoucanseethatduringacorrectionmovecolorschangedtoblueandlightblue,thenafterawhilebacktobrownandred.
Youcanusetypeofaverageswhichisbestforyou.Iuseinmostcasesexponentialaveragesorlinearweightedaverages.
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MaingoalofGMMA–howtouseit
Whenpricemoves,wehavemaintrendandshorttermmoves(correction).Longtermtraderswanttoprofitfromthemaintrend.Shorttermtraderswanttoprofitfromthisshortmoves.Eachgrouphasdifferentgoals,butwhenyoujointhistwogroupstogetheryoucanseewhatisgoingonrightnowwiththemarket.
Youcanuseittodecideabouttradedirection.Wheneachgroupis,wideandseparatedfromeachother,trendisstrong.Ifnot,itispossiblygoodideatowaitforsituationtobeclear.Moreintradeexamples.
ProblemswithGMMA
Like Rainbow, GMMA is great in trendingmarkets but can be dangerouswhenmarket ismovinginarange.Therearesignalsthatwemighthavearangemarket–averageswillbeclose to each other; short term group will oscillate around long term group. Like in theexample:
Itisagoodtocheckothertimeframes,drawsupportandresistancelines,uselongeraverages(200periodlong)soyoucanavoidtradinginsuchmarketconditions.
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Tradeexamples
GBP/USD,15m
Wehavehere15mchartofGBP/USD. It isasimpleexamplehowyoucanjoinGMMAandtrendlinesandbreakoutstrategy.Ofcourse,herewehaveonlyoneline,buttherearemorecomplexpatterns.Logicisthesame–youdrawtrendlinesandwaitforabreakout.ThankstotheGMMAlines,youplaceatradeaccordingtothedirectionofmaintrend.
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DAX,30m
Onthis30mDAXchartwe joinedGMMAwithFibonnaciRetracementandExtension lines.GMMAlinesworkverywellwithFibonacci.Theyhelpyoutoseethedirectionofmove.Also,itiseasiertospotacorrection.
Inthisexamplepriceafterswingmovetherewasacorrectiondowntothe50%retracementline.Afterthatwesawacontinuationmoveuptothe161.8%extensionline.Easyandclearsetupwhichyoucouldexecutewithhelpoftrendlinesoryourfavoriteoscillator.
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USD/JPY,H4
Onchart4-hourUSD/JPYwithGMMA,MACDandweeklyPivotPoints.ThisisexamplehowyoucanmixGMMAwithdifferenttools.WithhelpofPivotPoints,wecantakeprofitwhenpriceisgettingclosertooneofSlines.HereitwentdowntoS3andlatertoS2line.Gmmahelpsyoutotradeindirectionoftrend,PivotPointstotakeprofitsatbestplaces.
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PART3.MONEYANDPOSITIONMANAGEMENT
Howtosetstoplossinforextrading
Thisisthemostcommonproblemamongtraders.Howtosetstoplosstoprotectpositionbutnottobestoppedouttoosoon?ThegoodnewsisthatsettingstoplosseswithFibonaccitradingtoolsiseasier.Inthisarticleyoucanreadaboutbasicsofsettingstoplossesandsomemoreadvancedtips.
Shouldyouusestoplossorders?
LatelyI’vereadfewopinionsthatusingstoplossesisbad.Iamnotgoingtofightwitheverybodyhere.Ifsomeprotraderthinksthatstoplossesarenotnecessarythenitishischoice.Ifhemakesmoney,thatisgood.Butifyouareanewinvestor,strugglingtocloseayearwithaprofit,thanusingstoplossesisnecessary.
Let’ssayitclearandloud:stoplossesarenotperfect.Itisnotsomethingthatwillmakeyourichorprofitabletrader.Itisalsonotsomething100%accurate.Yousetyourstoplossesandyourstoplossesareasgoodasgoodtraderyouare.
Whystoplossesaregood?
Stoplossesaregoodbecausetheyprotectyoufromyourgridandimpulsivedecisions.Howmanytimeshaveyouwaitedtoolongtoclosethelosingtrade?Youwerehopingthatthisisonlyacorrectionandinaminutebuyerswillcomeback.
Emotionsareyourworstadvisor.Youcannotturnthemofftotally,butyoucanworkonminimalizingtheirimpactonyourtrading.Stoplossorderisoneofthetoolswhichmayhelpyoutoachievethat.
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Theideaofstoploss
The ideaof good stop loss placing is to help you keep your losses small and avoidemotionstakingcontroloveryourdecisions.Thiswayyoucanhavethreelosingtradesinarow,butyourlosstogetherfromthesethreetradeswon’tbesuchabig.Thenexttrademaybemuchmoreprofitable.
Let’slookatexample.
Johnwantstobuy200sharesofYYYCompanyat12$.Heiswillingtorisk1.2$oneachshare.Hehasagood
feelingaboutthiscompanyandhistradingplangiveshimagreenlight.Heboughtitandtwodayslaterhewas
stoppedout.Hislostwas1.2$x200shares=240$.
Nextdayhedecidestoenterothertrade.TherewasabreakoutonVVVchart.Hebuys80sharesat20$andset
hisstoploss1.5$lower.Inthebeginningitlooksgood,butsuddenlythereisarumoraboutYYYproblemsand
sharesstarttofall.Hewasstoppedout.Hislossis1.5$x80shares=120$.
He is nothappyabout that, buthe is lookingatotheropportunities.Hehas fewpossible candidates, buthe
decidedtowaitforanotherconfirmationfromhistradingplan.FewdayslaterthereisaconfirmationsignalonHHHCompany’schart.Hebuys50sharesfor42$andsetshisstopat38.5$.Thereisnottoomuchactionnextdays, but eventually stock starts to move up.
InnextfewweeksHHHgoesupto52$andJohndecidetoclosethetrade,becausethereisastrongresistance
nearthatlevel.Heclosespositionat52$andhisprofitis50sharesx(52$-42$)=500$.
Onprevioustwotradeshehaslost360$,sohisprofitis500$-360$=140$.Ok,heisnotreach,butitisnotsobad.Butwhatifhislossesfromprevioustradeswerebigger?Thenhestillwouldbetryingtoearnbackhismoney.
Exampleissimple,butIhopethatyougetthemainidea.Thatisalifeofinvestors.Youwillbestoppedout.Yourgoalistolookforprofitabletradesandthankstothemearnmoneyforprofitandtocoveryourlosses.
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Risk/ratioreward
There is a very popular goal to keep your risk/reward ratio at 1:2 or even 1:3proportions. Thatmeans that trader iswilling to risk forexample2$per shareandexpecttoearn4$pershare(1:2)or6$(1:3).
Iftherisk/rewardratioisaround1:1,theydonotenteratradebecauseitisnotworththatrisk.
Risk/rewarddescriptionisagoodtopicforanotherarticle.Fornowlet’sstaywiththeriskpart.Experiencedtraders,whoarelookingforgoodopportunities,knowwheretoputstop.Theydonotenteratradeandthenwonder:“Hmm,maybeherewillbeagoodplaceforstoploss”.Theybasicallyknowthatwhentheythinkaboutenteringatrade,becausetheyarelookingforgoodrisk/rewardratio.Keepthatinmind.
Whentosetstoplosses?
Thebestpracticeistosetstoplossinthesametimeyouareplacingyourorder.Youshouldknowinadvancewhereyouwanttosetyourstoploss.Whenyouareplacingyourorder,yousetstoplossrightway.Why?BecauselateryouareprobablygoingtohesitatetoplaceSL.Youmightalsoplaceitinawrongplace,becauseofemotions.
Whereshouldyousetstoploss?
Itishardtoanswerinfewwords,buttherearesomegoodrulesyoucanfollow.Beforewereviewthem,let’slearnmoreabouttwomostcommonmistakes.
Mistake1:Placingstoptootight.
Whenstoplossissettootightthenthereisastrongchancethatyouwillbestoppedatfirstbiggermoveorstophunt.Marketsareveryvolatiletodayanditiseasytobestopped out when your stop is too close.I’venoticedthatthishappenstotraderswhodonotwanttolosetoomuchmoney.Becausestoplossisveryneartheentrypoint,whenitgetstriggered,lossonaccount
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issmall.Themainproblemisthattightstoplossesgettriggeredveryoften.Soonyouhavedozensofsmalllosseswhichaltogetherareonehugelossonyouraccount.
Mistake2:Placingstoptoowide.
Nobodylikestobestoppedoutfromatrade.Sometradersplacetheirstoplossesverywidetoavoidthat.Theydonotwanttobecaughtduringstophuntingorcorrection.Wide stop losses are triggered rarely, but when it happens – loss is very big.Onsomeoccasionthatworks,butonmanytimestheyareeventuallystoppedoutandlossfromthatisverybig.
Sowhatistheanswerhere?Youhavetofindsomethinginthemiddle!Ok,Iknowthatthisisnottheanswer;).
Startfromlookingcloselyatpriceaction.Ifyouhavereadmyothersarticles,yousawthe next chart, but this is an answer for your problem.Iassumethatyouaretryingtoinvestinatrendingmarket.Whenthereisnotrend,youdonottrade.Whatweknowisthatinanuptrendwehaveasequenceofhigherhighsandhigherlows,justlikeonthechart.Ifthetrendisstrongandhealthy,youcaneasilyseethatsequencejustlookingattheprice.Whenthereissomethingwrongwithtrend,pricehasproblemtomakenexthigh–signthatcorrectionispossible.
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Settingstoplossbelowlastlow
Withallthatinformationyoucanplaceyourstopbelowlastsignificantlow,whenyouare ina longposition.When trend ishealthy,youshouldmakeyourmoney.Whentrendisveryweak,youwillbestoppedout.It isagoodthingbecauseprobablythepricewillgoevenlowerthanyourstoploss.
Italsoworksinadowntrend.Youaresimplylookingtoplaceyourstoplossabovelasthigh.
Placingastoplossinadowntrend
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Lookatthelogichere.Ifpriceinadowntrendwillmanagetobreakaboverecenthigh,thenthereisastrongchancethatbuyersaretryingtotakeoverthecontrol.Youdonotwanttobeshort inthatsituation.Youwanttocloseyourpositionand lookforotheropportunities.
Raisingstoploss
Iamahugefanofthatmethod,yetmanypeopledonotuseit.Itisverysimple,soinyournexttradestrytouseit.
Howdoesitwork?Youplaceyourstoplosswhenyouareopeningatrade.Onsomeoccasionsyouwillbestoppedoutprettyfast.Othertimestradewillgoasyouwantedto.That isgood,butwhatdoyoudowhenyourtrade isprofitable? Itstillcanturnaroundandtriggeryourstoplossandfromprofitabletradeyouwillendwithaloss.Thatwasmymistakeactually formanyyears. Ihadsomanyprofitabletrades forawhile,butIwasclosingitwithloss.
Nowwhenmytradeisprofitable,Iamsimplyraisingmystoplosstotheentrypoint.Thiswayevenifpriceisgoingtoturnagainstmyposition,Idonotloseasingledollar.Whentoraisestoptoentrypoint?Notassoonasyourtradeisprofitable.Justwaitsometimeandseehowthingsare.Youhavetoworkoutyourownsystem.Iusuallywaituntilpriceisatleasttwiceasfarfromentrypointasmystoplossis.Soinatradewhereentrypositionwasat20andstoplosssetat18(2$lowerfromentryprice),Iraisestoplossto20assoonaspricewillgoupto24$(twiceasstoplossso2×2$=4$).SometimesIraiseitearlier–itreallydependsfromsituation.
Whenthepriceisstillgoingup,Iamraisingmystopevenfurther.Why?Toprotectmyprofit.Ifpricewillfailtoreachmytarget,Istillbooksomeprofitfromthattrade.Itiscalledtrailingstop,becauseyourstoplossispracticallyfollowingthepriceallthetime.Whenpricegoesup,soisyourstoploss.Ofcourseifpriceinanuptrendisdown,youarenotloweringyourstop.Therearemanymethodsofusingtrailingstoploss.Youcanwatchthismoviebelowtoseehowsometradersareusingthistechnique.
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1%rule
Sometradersareusing2%rule,butthis isnotthemost importantthingaboutthatrule.1%rulemeansthatyoucanriskonly1%ofyourtradingcapitalonanysingletrade.
Forexample,whenyourtradingaccountis20000$,thanyoucanrisk20000$*1%=200$onanysingletrade.
Yes,youcanriskonly200$pertrade.Manytradersdonothavebigenoughaccounts,sotheyaresimplyjustignoringthisrule.Thetruthis,thisisagreatrule,whichhelpsyoutosurvive.Evenifyouwillhave20losingtradesinarow,youstillhavemorethanhalfofmoneyonyouraccount.Withoutthatrule,youwouldbeprobablylookingformoneyforyournextaccount.
Itisverywidetopic;Iamgoingtowriteaboutthisinseparatearticle.Itisyourdecisiontousethisruleornot.IamusingthisruleandIcansaythatonmanytimesitsavedmyaccount.Jointhisrulewithgoodstoplossplacingandyouwillbesomuchbettertrader.
StoplosseswithFibonaccitrading
WhenyouaretradingwithFibonaccinumbers,itiseasytousestoplosses.
WhenIamlookingtoenteralongposition,Iwaitforacorrectiontotheretracementline.WhenIenteraftersomeconfirmationsignal,mystoplosswouldusuallygobelow61.8%or78%line:
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Settingstoplossbelow78%retracementline
Whenpricewillclosebelowthoselines,thenIdonotwanttobeinthattradebecausepriceshouldgoupfromtheselevels,notbelowthem.
WhenIgolongonbreakout,thenmystoplossgoesbelowthenearestretracementline:
SettingstoplosswithFibonacciretracement(afterbreakout)
Why?BecauseIassumethattrendisstrongenoughthatlasthighwasbroken,sopriceshouldgoup.Whenitdoesnot,thenprobablythereissomethingwrongwiththetrendorthisisafalsebreakout.Itakeasmalllossandwaitforanothersetup.
Conclusion
Stoplossplacingisanimportanttopic.Manytradershavedifferentwaysofdoingthat.Youshouldworkonyourtradingplanandpracticedifferentwaysofplacingstoplosses.Itcomeswithtime,butitisworthittopractice.StoplosscanbeagreattoolinyourtradingandIhopethatI’vemanagedtoshowyouthatinmyarticle.
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TradepartialcloseinMetatrader
Noteveryoneknowsthatyoucanclosepartofatradeandlettheotherpartkeeponrunning. I use this approach inMetatrader. If you use other trading software, you
shouldcheckmanual.
Sohowtoclosepartofthetrade?Itissimple.First,fromopentradesselecttradeyou
wanttomodify.RightclickonitandclickModifyorDeleteOrder:
Nextyouwillseepopupwithoptions.MakesurethatTypeissettoMarketExecution.InVolumelineselectsizeofpositionyouwanttoclose.YoucanseeintheexamplethatIhave2.0lotsopenonGermany30IndexCashandIwanttoclosehalfofitsoIset
volumeto1.0.Next,clickyellowClosebuttonatthebottom.
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Thiswayyoucanclosepartofyourtradeandlefttheotherpartopen.
Whyyoushouldusepartialclose?
Everyexperiencedtraderwilltellyouthatprofitonyouropenpositionisonlyvirtual.OnlywhenyoucloseatradeandbookprofitthenyoucansaythatyoumadeXdollarson that trade. There aremany situationswhenmarket can turn around in split ofseconds.Ifyoutradelongerthanfewmonths,thenyouprobablysawflashcrashesorsomeotherstrongmoves.Ifmarketgoesagainstyoufromnicetemporaryprofityou
canhavealoss.
Withpartialcloseyoucanhavebettercontrolwithmoneymanagementandposition
sizing.Next,Ishowyousomeexampleswhenyoucanusepartialclose.
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Partialcloseandstoploss
Whenyouclosepartofyourtradethenyouhavesomepartleftopen.So,youbooksomeprofit,butwhataboutthisopenpart?Whereisyourstoploss?Itisalwaysagoodideatomoveyourstoplosstotheentrypoint.Thatwayifsomethinggoeswrongwith
thatopenpartthenyouwon’tlosemoney.
Whenyoucanusepartialclose?
Ofcourse,inmostcasesitwillbewhenyouareprofitable.Youarenotsureifthisisanendofamovebutyouwanttobooksomeprofit.
There aremany situationswhen you can close part of your trade. Some examples
below.
Longtermtrading
Inlongtermtradingyoukeepyourtradeopensolongasyoucan.
Youmayseesignalsthattrendisgettingweaker.Maybepricehasproblemswithsomeresistanceareaandthereisarangemove.Orpriceisapproachingveryimportantlevel.Whenyouhaveniceprofitonyourcurrenttradeitisagoodideatoclosepartofit.You
canalwaysreentertradeoncorrectionmove.
Resistanceareasandtrendreversals
Thereare levelswhicharevery important for traders. Itmaybesomepivot lineorresistancelinebasedonpricehistory.Let’ssaythattradersarelong.Whentradeisin
profit,theysettakeprofit(TP)orderonR2line.
Wealsohavetradingrobots.ProgrammersknowthataroundR2linewecanexpectsomesell-offbecauseofTPorders.Theyprogramrobotstogoshortfromthatlevelfor
shorttimeofperiod.
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Thiswaywecanseesomerapidpriceactionsnearimportantlevels.
Ifweareinprofitandseethatpriceisgettingclosertosucharea,wecanclosepartof
tradehere.
Fewtargets
WhatiftrendisstrongandpricecangotoR3line?WhenweusePivotswehavefewsupportandresistancelines.SamethingwithFibonacci–therearefewextensionlines
wheretraderscanclosetheirtrades.Inthesecases,wecanusepartialclose.
Let’schecktheexamplechartbelowanddiscussthissituation.
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On chart, you can see Fibonacci retracement and extension lines. We open shortposition,2lotsonEUR/USD.Everythinggoeswell,thereisastrongmovedown.Weknowfromourexperiencethat161.8%isoftentargetforTPorders.Still,moveisstrongandwehaveanothergoodtargetat200%extensionline.Thebestwaytohandlethissituationistoclosepartoftradeat161.8%extension.Next,wemovestoplosstotheentrypoint–thatwayevenifpricesuddenlygobackwewon’tloseanymoney.Last
thingtodoistosettakeprofittargetfor200%extensionline.
Ofcourse,youcantradewithothersystem.IuseFibonacci inexamplebutyoucanhavefewtargetsbasedontrendlinesorPivotlinesorsomeothertradingtechnique.Themostimportantthingheretorememberisthatyoucanmanageyourtrade.Withpartialcloseyoucanprotectyourprofit.Whenyouchangeyourstoplosstotheentrypoint,youmakesurethatyouwon’tlosemoney.Andpartofthetradewhichisleft
open–sometimesitwillworkout,sometimesnot.
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Whentotakeprofit
Takingprofitsisveryimportant:)Thisisamomentwhenyoubookyourprofits.Closinga tradewillbedifferent forevery strategy. In thispart Iwill share some important
thoughtsbasedonmyexperience.
SignalsfromMa’s/Oscillatorsarenotsogreat
Icanstillseepeopletradingwithsignalsfrommovingaveragesoroscillators.That’snotthatbadthing.Iusethemtoo,mainlytodecidetoenteratrade.Buttheylagandthatisabadthingwhenyouwanttoclosetradeatbestpossibleplace.Asmentionedbefore,wecanseestrongmovesaround important levels– tradersknowverywellwherearetheseareasforcurrentdayorweek.Ontopofthatwehavealgotrading.
Whenyouarewaitingforaclosesignalfromoscillator,prosarealreadyoutoftrade.
Ontheexamplebelowyoucansee5mchartofEUR/USD.MoveupwasstrongbutitendedatR1line(red).IfyoulookcloselyyoucanspotlongshadowsoncandlesnearR1line.Pricetriedtomovehigherbutthiswasastrongresistancearea.Wecanassumethattradersusedthisleveltoclosetradesandbookprofits.IfyouwantedtocloselongtradebasedonMACD(orotheroscillator,MACDisonlyasanexamplehere)thenyouwouldbesolatewithyourdecisions.Samesituationiswithmovingaverages,lookhow
lateaveragecrosswas.
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Pivotpointsareveryimportant
IwrotemoreaboutPivotpointsearlierinthisguide.Youcanbuildthewholetradingstrategy around Pivot points. You can also use other strategy but still use them to
decidewhentocloseatrade.
ThegreatthingaboutPivotpoints isthatwehavemanytypesofPPbasedontime
frame.Sowehave:
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Lowerthandaily–forexamplehourly,4handsoon.
Daily–Pivot line,supportandresistancelinesarebasedonpreviousdayhigh, low,close
Weekly-Pivotline,supportandresistancelinesarebasedonpreviousweekhigh,low,close
Monthlypivots-Pivotline,supportandresistancelinesarebasedonpreviousmonth
high,low,close
Yearly-Pivotline,supportandresistancelinesarebasedonpreviousyearhigh,low,close
ThankstothateveryonecanselectthebestPivotsfortheirstrategy.Youtradelongterm? Then weekly or monthly pivots will be a good addition to your trading.
Daytrader?ThenyouhavedailyPivotsandlower.
HowtousePivotpointstocloseatrade
Themiddlelineispivot.Abovepivotwehaveresistancelines,belowaresupportlines.Inmostcases,wewanttohaveonchartlinesfrom1to3soS1,S2,S3,R1,R2,R3.You
cancalculatemorelevelslikeR4,R5,S4,S5butitisveryraretousethem.
Themostimportantlinesare2s–R2,S2.Ofcourse,pricecanstopatanylevel,butmanytraderswillconfirmthatonmanytimesR2andS2linesaretargetsfortraders.ThatiswhywhenpriceisnearS2orR2itisagoodideatocloseatradeortoclosepart
oftrade.
Sometimestrendwillbestrongandpricecanmovethroughsecondlinetothethirdline(S3orR3.Icantellfrommyexperience–inthatsituationsettakeprofittargetat
thirdline.Whenitishit,closetradeandendtrading:).
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IhadtimeswhenitlookedlikeArmageddon–trenddownwassostrong.IsawthattherewasS3was inplacebut I ignored itandkeptpositionopen,hopingformovedown.InmostcasesS3worked,pricewentbackabovethatlevel.SimilarstorywithR3
line.
Itisveryrareforpricetomovebehindthirdline–ofcoursetheremaybesomepoliticaloreconomicnews.Inthatcasepriceignoreimportantlevelsbecausewehavemassorders.Buttheseareexceptions.TrustmewhenIsayfrommyexperiencethatS3/R3
lineisyourlasttargetwhenyoushouldhaveprofitwhichisgoodenough.
Let’schecksomeexamples:
Onchartbelowwehave1-hourGBP/JPYwithweeklyPivotPoints.Youcanseethatuptrendwasstrong,buttwoweeks inarowmoveendedatR3 line.Even instrongtrendR3/S3linearerespected,traderswanttocashprofitandinsituationslikethis
theydoitatthirdline.Thereisnohopingformoreorsomewishfulthinking.
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Nextwehave5mDAX.MovedownwasrapidbutitstoppedrightatS2line.IfyouhadPivot lineson your chart youwould know that you should look for exit from short
aroundthatarea.
Fibonacciworksgreattoo
Fibonacciextensionlinesaregreatwhenitcomestosetprofittarget.
Thereisonedisadvantagewiththismethod.YoushouldknowhowtodrawFibonaccilinesonchart.WithPivots there isadifferentstory– linesarecalculatedbasedonformulasothereisnoguessing.OntheotherhandtradingwithFibonacciisnotthat
hardsoitisgoodtolearnhowtousethem.
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WithFibonacciwehave:
ABmove–thisisamovewhichisusedtocalculateextensions
Extensionpointsabove/belowBpoint–possibleexitlevels
WithPivotswehadS2/R2linesasmostpossibletargets.WithFiboextensionsthislevelis161.8%.Onmanytimesthiswillbetargetfortraders.Ifpricegoeshigherwehave200%andthen227%,238.2%andsoon…Butyouaremostinterestedinlevels
lowersthan200%.
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Tosumup,extensionsare:
127%
138.2%
161.8%
200%
Sometimestradersliketouse150%extension
YoucanalsolookforareaswhereyouhaveFiboextensionandotherlinelikepivotorsupport/resistance.Thatwayitiseasiertoselectwheretoclosetrade.
Don’tforgetaboutsupport/resistancelines
Tradersknowwhereimportantsupportandresistancelines.Youshouldknowthattoo.Itisbesttoswitchtohighertimeframeandtherelookformostimportantlevels.Whyisthissoimportant?Theselineswillbeprofittargetsforthemsoyoushouldbeawareof most important areas. That way you won’t be surprised with sudden direction
change.
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Tradingjournal
Wetalkedaboutstoploss,takingprofit.Thereisonemoreimportantthingweshouldtalkaboutwhenitcomestopositionmanagement.Yes,tradingjournal.Yousee,thisguideshouldhelpyoutolearnhowtotradeForex.Youshouldknowyourmistakesandlearnfromthem.
Mybiggestmistakeinfirstyearsoftradingwasnottorunatradingjournal.Istartedfewtimes,butIwastoolazytokeepitrunning.Intheend,Istruggledtobeprofitable.
Then I started journal in form of spreadsheet. It was ok. Beside info such as entry, exit,profit/lossithasinformationabouttradingsignals.But…Iamnotstrictmechanicaltrader.Iusetradingsignals,butIalsoanalyzethecurrentmarketsituation,highertimeframesandmanyotherthings.
Thereisbetterwaytorunyourtradingdiary.
Writeitdowninanotebook.
IsawontwitterthatfewoftraderswhichIfollowdothat.Theykeepdiaryinformofnotebook.Theydescribetrade,whatwasthecurrentsituation,howdiditlookfromtechnicalanalysisperspective.Latertheywritehowitended.Ortheysimplywritenewthingstheyhavelearned.
Ibelievethisisthebestwaytodoit.Thankstothatdescriptionyoucanalsowritewhatyouwere thinking,whatwas themainmotivation to take the trade. Later it is easier to spotmistakesyouaredoinginyourdecisionprocess.
Another important tool you can use is MyFXBool. I recommend running normal tradingjournal,butalsokeeptrackoftradeswithMyFXBook.
MyFXBookiseasytouse.TheywholeideaisthatitconnectswithyourMetatraderplatform.ThenthankstotheMT4publishingoptionsMyFXBookcanreceiveyourtradesandresults.That’sallgoingoninthebackground.
Whenyoulogin,youhavesomuchvaluabledata.Notonlyobviouslikegainforthewholetime,eachweek,month.Youcanalsoseewhatisyouraverageprofit,loss,numberofshortswon,longswonandmanyothers.Thankstothatyoucanseeclearlyyourresults.