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Trending Days in Currency Trading

Over the past two days I’ve been explaining “trading days” in the foreign currency exchange. Today I’m going to explain the procedure for attempting currency trading on “trending days.”

Trending days, in contrast, are characterized by the following external events and conditions:

1. A fundamental announcement is released during the session.
2. Price movement is aggressive (fast).
3. Market movement (volatility) during the session creates large trading ranges of 120 to 300 pips.
4. Prices don’t close near the session’s opening price.
5. Price movement during the session creates an uptrend or a downtrend.

Currency Trading on a Trending Day

If you plan to day trade currencies on the trending day, cancel and replace on a 30-minute forex chart. There are two currency trading strategies on a trending day: the first is to trade the straddle (when the session’s fundamental announcement is preceded by consolidation).

The second is to trade a convergence (when the session’s fundamental announcement is not preceded by consolidation). Refer to our earlier discussion of trading the straddle for the why’s and how’s of that type of trade.

Trading a convergence on a trending day is similar to trading a convergence on a trading day (except that you will not see the formation of a bell curve on a trending day).

Begin at the anticipated release of the fundamental announcement – that’s where you will expect that market to break into a downtrend or an uptrend. Look for consolidation to make sure that you should not be trading a straddle – if there is no consolidation, you’ll trade the convergence. Draw your inner, outer, and long-term outer trendlines.

Next set your Fibonacci lines based on the latest price swing. Based on your trendlines and your Fibonacci numbers, do you see a possible convergence? If equity management allows, trade the convergence in the direction of the trend.

If the fundamental announcement reverses the current trend, your losses will be confined to the distance between your entry and  stop loss order. In addition to using the trendline and Fibonacci numbers to set up your trade, you can also use your technical indicators (MA crossover, MACD, etc.) to help you anticipate the market’s movement.

Rules for Currency Trading on a Trending Day

The general rules for currency trading a convergence on a trending day are:

1. Locate the point at which the fundamental announcement will be released. Plan to create your market order 15 minutes prior to the fundamental announcement.
2. If there is a fundamental announcement planned for the trading session, but the market is not in consolidation prior to that announcement, you’ll trade a convergence (if the market is in consolidation prior to the announcement, you’ll trade a straddle, described earlier).
3. Find and draw all your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
4. Locate the price at which you anticipate the market will bounce (at the trendline and/or one of the Fibonacci numbers). If the anticipated trendline bounce and Fibonacci bounce are located at the same price, you will trade a convergence. 15 minutes before the fundamental announcement is released, place an order to buy or sell the convergence in the direction of the trend.
5. Find the last level of support or resistance to determine where to place your stop loss order.
6. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
7. Create a trading plan. Trade the plan.

By understanding the market’s likely movement on a currency trading day and on a trending day, you can prepare yourself to make more solid, predictable trades.

The principles you use to make your trades are largely the same no matter what kind of session you’re in (e.g. trading a trendline bounce, Fibonacci bounce, a convergence, a candle formation, or technical indicator) but having an idea of whether the market is going to move slowly, closing near the open or move aggressively downward or upward can help you immensely in making consistently profitable trades.

Posted in Fundamental Announcements

Trading Forex on a Trading Day

Yesterday you were introduced to the concept of forex trading and trending days, Today you’re going to learn how forex trading on trading days works.

The best chart for trading forex on a trading day on is a 15-minute or 30-minute chart.

When trading forex on a trading day, your best bet is to trade the formation of an upper bell curve or a lower bell curve.  You will find additional security in that trade if you look for a convergence (a price where more than one indicator signals a buy or a sell).  First, draw all of your trendlines.

Second, set your Fibonacci lines from the last swing.  Try to imagine the market forming an upper (lower) bell curve – if it did, would it be at a convergence price?  If so, prepare to trade that convergence.

For example, you draw your trendlines and find, based on your outer trendline that the market is in an overall uptrend.  You will then be looking for a lower bell curve to form.

Find the market’s last up swing and, from there, draw your Fibonacci number lines.  You can anticipate that the retracement of that up swing (the left side of the lower bell curve) will bounce at the .382, .618, or .786.

Say that you find the .786 is at the outer trendline – you have just found a convergence (there are two educated reasons for the market to bounce at this price).  You now have two good reasons to believe that the market will bounce, forming the tip of the lower bell curve, at the .786 (also the outer trendline).

Create a market order to buy at the .786 (also the outer trendline and the tip of the lower bell curve) and anticipate the market to carry you to near the session’s opening price (on this type of trade you should expect a 60-90 pip profit).

You have just traded a convergence that offered you three educated reasons to buy: a .786 Fibonacci line, an outer trendline, and a lower bell curve on a trading day.  Remember to trade in the direction of the trend!  Do not sell at the beginning of the lower bell curve, planning to get out at the tip; instead, buy at the tip of the bell curve, where you have two other good reasons to buy, trading in the direction of the overall uptrend.

Rules for Trading on a Trading Day

As always, there are several general rules for trading forex on a trading day:

1. Check to ensure that no fundamental announcements will be released during this trading session.
2. Draw a horizontal line at the opening price of the session – you can expect the market to close near that price.
3. Find and draw all of your trendlines. In order to trade the bell curve in the direction of the trend, you need to accurately understand what that direction is.
4. Look at the price where the market opens and anticipate a 60 to 90 pip move upward or downward from that price.  Look for a .618 or .786 Fibonacci trendline convergence as an upper or lower bell curve forms.  If you find a convergence price, set up a trade there, planning to buy or sell at the tip of the bell curve.
5. Locate all of your levels of resistance and support.  Set your stop loss at the last level of resistance (support).
6. Practice sound money management.  If the trade presents too much risk for you, don’t trade.
7. Create a trading plan.  Trade the plan.  Traders get in big trouble when they become emotionally invested in a particular trade and so hang on too long to a losing trade.  Even if you follow all of the trading rules and trade all of your indicators correctly, you will lose on some trades, just as any business takes losses as well as profits.  By sticking to your trading plan you will maximize your profits and minimize your losses.

Now that you know how trading forex works on a trading day, tomorrow I’ll show you the procedure for trading forex on a trending day.

Posted in Fundamental Announcements

8 Rules For Successfully Trading Candlestick Formations

The last 4 blog posts have taught some of the major candle patterns worth knowing as a forex trader.  And with 8 posts in the past week about candlesticks, we’re almost ready to move on to support and resistance.

As a wrap up for now (there’s more to learn about japanese candlesticks later), I want to give you some rules for trading candlestick formations.

No matter what forex candlestick formation or other indicator you are basing your trade on, you should follow several rules to ensure that you are making sound judgments when you are trading, that you are trading based on educated reasons and always while practicing sound equity management.

These rules apply specifically if you are trading a morning star , evening star , tweezer top , or tweezer bottom candlestick pattern:

1. Find all of your support and resistance lines.
2. Find and draw all of your trendlines.
3. Find a convergence (a location where there is more than one reason for the market to bounce, such as a trendline or a Fibonacci sequence).
4. Trade in the direction of the trend (“the trend is your friend”).
5. Wait to trade until the market bounces at the convergence to make your trade.
6. Buy at the opening of the next candle after the morning star or tweezer bottom has fully formed. Sell at the opening of the next candle after the evening star or tweezer top has fully formed.
7. Set your protective stop loss order at the last level or resistance (if you are trading an evening star or a tweezer top) or at the last level of support (if you are trading a morning star or tweezer bottom).
8. Do not trade morning stars (evening stars) or tweezer tops (tweezer bottoms) if prices are in consolidation (the rapid forex blog will discuss this in more detail in future blog posts).

In my next blog post, I’m going to start explaining support and resistance (this is the real meat-and-potatoes of forex trading).

Posted in Japanese Candlesticks, Technical Analysis