Post of the Day - Page 14

Richard Krivo · #**196** (**permalink**) 04-23-2009, 10:23 PM

Student’s question:

As the SMA 200 shows a uptrend market, I will
1. Wait until the pair pulls back to the support line
2. Observe the formation of the candlestick that touches the support line
3. Fine tune with an uptrend in the 4 hour chart (for further confirmation)
4. Place a LONG position upon the formation of a new candlestick (5pm EST) after candlestick/s before it confirms a reversal (long wick, bullish engulfing etc).
5. Place a stop order 10 pips below the support line (to cater if the trend breaks)
6. Place a limit of at least 1 : 2 of the risk : reward ratio.

Question: A candlestick in a daily chart carries a higher number of pips compared to a 4 hour chart. To avoid higher risks, is it better to place a position using the 4 hour chart or the daily chart?

Power Course Instructor’s Response:

You are doing this just fine...well done.

My only concern would be the 10 pip stop that you mention. On any time frame chart, Daily, 4 hour or 1 hour, it is quite possible for price action to easily "wick" 10 pips or more below a trendline and then close above the trendline and move quite a distance in your intended direction...to the upside in this instance. Based on the Daily chart that you post, even a stop of 20-40 pips would provide a favorable risk reward ratio for the trade.

Regarding the second aspect of the question…

Using a 4 hour chart or a 1 hour chart will offer more favorable (less deep) stops in most instances. Depending on account size, since we do not want to risk more than 5% of our account at any one time, the Daily chart could be used for trend determination

Richard Krivo · #**197** (**permalink**) 04-27-2009, 01:26 AM

Student’s Question:

Hi, what makes the eur/gbp, gbp/usd, eur/usd currencies move in the Asian market?

Power Course Instructor’s Response:

The Forex market is a 24 hour market. So, even though certain markets are closed, their currency is still traded by the markets that are open. Traders in Tokyo for example can be buying and selling GBP and USD.

Below is a breakdown of the hours of the major world markets...

The trading day commences in Sydney, Australia at 5:00 PM EDT. Two hours later, at 7:00 PM EST, Tokyo then opens. Next, Singapore and Hong Kong open at 9:00 PM EST, followed by the European markets in Frankfurt (2:00 AM EST) and then London (3:00 AM EST). By 4:00 AM EST the European markets are in full swing, and Asia has concluded their trading day. The US markets open first in New York around 8:00 AM EST Monday as Europe winds down. By 5:00 PM EST Sydney is ready to re-open.

While spot FX trades just about everywhere, the three main markets of Tokyo, London, and New York are the most influential since they represent almost 70% of the world’s FX volume. Foreign exchange activity does not flow evenly, and throughout the course of the international trading day, there certain markets are characterized by very heavy trading activity in some (or all) currency pairs, and other periods are characterized by light activity in some (or all) currency pairs. Foreign exchange activity tends to be the most active when markets overlap, particularly the U.S. markets and the major European markets i.e. when it is the morning in New York and the afternoon in London. Below, the major characteristics of the three main markets are outlined:

Tokyo: 7:00pm EST – 3:00am EST / Avg. Daily Volume $150bn
Approximately 10% of all FX trading volume takes place during the Tokyo session. Trading can be relatively thin and hedge funds and banks have been known to use the Tokyo lunch hour to run important stop and option barrier levels. Yen, Kiwi, and Aussie pairs tend to be the biggest movers during Tokyo hours as other currencies are quite thin and usually do not move.

London: 3:00am EST to 11:00am EST / Avg. Daily Volume $570bn
London is by far the most important and influential FX market on the planet, with approximately 30% of all transactions. Most big bank’s dealing desks are run out of London and the market is responsible for roughly 28% of total spot volume. London tends to be the most orderly market due to the large liquidity and ease of completing transactions. Most large market participants use London hours to complete serious FX deals.

New York: 8:00am EST – 4:00pm EST / Avg. Daily Volume $330bn
New York is the second most important market in FX, with approximately 16% of market volume. New York trading is very liquid and is responsible for over 14 % of world FX volume. In the United States spot market, the majority of deals are executed between 8 AM and 12:00 PM, when European traders are still active.

Richard Krivo · #**198** (**permalink**) 04-28-2009, 03:33 AM

Student’s Question:

Every so often a “closed candle” is mentioned. What exactly is that?

Power Course Instructor’s Response:

Each chart has its own time frame be it Daily, 4 hour, 1 hour, 30 minutes and so forth. Each individual candle on any chart represents the time frame of that chart. So a candle on a Daily chart represents one day, 24 hours of trading time. Each candle on a 30 minute chart, for example, represents 30 minutes of trading time.

At the end of the candle’s duration, let’s say 30 minutes, that 30 minute candle is considered to be “closed” and a new candle immediately opens. It is at that point that we would be able to use that just closed candle as part of our analysis. Until a candle is closed, we really do not know what kind of a candle it will ultimately turn out to be so we cannot base any trading decisions on an “open” candle…that is, one that is not closed.

Take a look at the chart below for a visual on this…

The last candle on the right side of this Daily chart, the one that is yellow in color, is open. As is mentioned, when it closes it may be below the trendline indicating a break and an opportunity to short the pair. Or, it may close above the trendline indicating that the trendline is still intact.

Richard Krivo · #**199** (**permalink**) 04-29-2009, 03:27 AM

Student’s Question:

What’s the difference between a Simple Moving Average and an Exponential Moving Average? Thanks!

Power Course Instructor’s Response:

A Simple Moving Average (SMA) weights each candle and its corresponding high, low, open and close information equally…none is given more significance than any other in the equation.

In an Exponential Moving Average (EMA) more weight is given to the latest data. This type of moving average will react faster to recent price changes.

To see how these differences appear on a chart, take a look at the 4 hour chart of the EURGBP posted below.

The 50 period SMA is in black and the 50 period EMA is in green

Richard Krivo · #**200** (**permalink**) 04-30-2009, 10:10 PM

Student’s Question:

Sell USD/CAD 1.2444…make sense?

Power Course Instructor’s Response:

In a move to the downside, a trader would draw the Fib line from the Swing high to the Swing low and then look for a retracement to occur to one of the Fib levels. In the case on your chart, price action wicked above the 61.8% level twice…we like to see two tests of a Fib level if possible. When that second candle that wicked above the 61.8% level without closing above it closes, a short position can be taken at the open of the next candle.

So, when we take our short position, the stop would go above the highest wick penetration of that level...see the chart below for a visual.

Richard Krivo · #**201** (**permalink**) 05-03-2009, 07:34 PM

Student’s Question:

Hi. Could you show me some practical strategies to do that 'let profits run and well as limit losses'.

Power Course Instructor’s Response:

Certainly…

In my opinion, the best way to accomplish what you ask is to use a 1:2 Risk Reward Ratio on all of the trades. For example, if a 50 pip stop is set, look for that trade to be able to achieve a realistic limit of 100 pips…risking 50 to gain 100…1:2.

By implementing this tactic, your winning trades will always gain double the amount a losing trade lost. A trader need be correct only 50% of the time to be profitable using that scenario.

Another tactic would be trading multiple lots. When the trade reaches a predetermined level of profitability, close out half the lots and move the stop to breakeven on the remainder. If the trade continues in your favor, the stop can be adjusted as needed to secure additional pips. On the other hand, if the second part of the trade retraces, the worst that can happen is a breakeven stopout on that portion of the trade but the pips from closing out the first portion of the trade have already been secured.

Richard Krivo · #**202** (**permalink**) 05-04-2009, 10:07 PM

Student’s Question:
Would you show some of the major candlestick patterns on an actual chart? Thanks!!

Power Course Instructor’s Response:

Take a look at the chart below for several examples of some of the more frequently occurring individual candles as well as patterns.

Richard Krivo · #**203** (**permalink**) 05-05-2009, 10:07 PM

Student’s Question:

I’m confused. What does making “higher highs and higher lows” mean?

Power Course Instructor’s Response:

Yes…it can be a bit confusing at the outset.

Take a look at the chart below and look at the uptrends shown in green. As a pair trades to the upside, as price action moves up and retraces, moves up and retraces or pullsback, and continues to do so, each high will be higher than the one before it and each low will be higher than the one that occurred just prior. There may some minor exceptions as the move/trend continues, but, overall, that is how it builds.

Lower lows and lower highs would be what a trader would see as a downtrend continues.

Also, on the chart below, there are two examples of the pair trading in a range.

Richard Krivo · #**204** (**permalink**) 05-06-2009, 09:20 PM

Student’s Question:

What does a “sideways market” look like on a chart?

Power Course Instructor’s Response:

Take a look at the chart below for a visual…

When the pair has been regularly trading between the same level of support and the same level of resistance for a period of time and not establishing new highs or lows, the market is said to be moving “sideways”.

On the chart below, the Support and Resistance levels are clear and, as price oscillates between them, they are moving in a sideways fashion. Another term for this would be a Range and range trading is a widely used trading strategy.

Simply stated, in a range a trader would buy the pair at support with a stop just below the support line and “ride” the trade up to resistance which is the top of the range. The long (buy) trade would then be closed and a short (sell) position with a stop just above resistance would be established when price action broke below resistance. Then that short trade would be in place until support was hit and then that position would be closed.

Richard Krivo · #**205** (**permalink**) 05-07-2009, 05:59 PM

Student’s Question:

I’d appreciate a quick review of Fib line basics…confused…thanks.

Power Course Instructor’s Response:

Sure…

We put Fib levels on a chart so a basic determination can be made as to the point which a currency pair is likely to retrace after a strong move.

Take a look at the chart below. A bullish move is shown on the chart so the Fib line would be drawn from the bottom of the move to the top of the move…the opposite would be true in a move to the downside. Having done this, the three major Fib levels will be appear on the chart. A trader will then wait to see if one of the levels holds. Should one hold, a long position can be taken (back in the direction of the original move) with a stop below the lowest wick that penetrated the Fib level that held.

Richard Krivo · #**206** (**permalink**) 05-11-2009, 10:19 PM

Student’s Question:

Would you agree that this NZDUSD chart has a down trend with a range bound market?

Power Course Instructor’s Response:

I can see how you made the downtrend determination simply be looking at the chart from the left to the right. In doing that alone, you would be correct.

However, there are a few considerations...

The pair has been building higher highs and higher lows since around the beginning of March and it has recently closed and is trading above the 200 SMA. Both of these would be indicative of an uptrend.

In this scenario, we would wait for price action to trade down to trendline support and, if a candle does not close below support, we could take a long position with a stop just below support.

Although the pair, from right to left on the chart, is indeed going down, these other contingencies must be taken into account for a valid assessment.

Take a look at the chart below as an example...

Richard Krivo · #**207** (**permalink**) 05-12-2009, 10:27 PM

Student’s Question:

I am looking at a lot of Daily charts and getting confused. How can you tell the trend on a chart when they appear to be transitioning?

Power Course Instructor’s Response:

Good question…

I have posted two Daily charts of the NZDJPY below…each shows a different technique. Feel free to combine them or use them independently of one another.

The first chart has a 200 period Moving Average placed on it…the green line. As a general rule, if price action is below the 200 MA the pair is considered to be in a downtrend and if price action is above the 200 MA the pair is considered to be in an uptrend.

The above being said, let’s expand a bit. If the pair is trading below the 200 MA BUT is moving closer and closer to 200 MA, building higher highs and higher lows in the process, the downtrend is weakening and the pair is coming ever closer to being in an uptrend. If price action is above the 200 MA but is building lower highs and lower lows and is closing in on the 200 MA from above, the uptrend is weakening and is moving closer and closer to being in a downtrend…it truly is a matter of degrees.

The second chart was put together by another course instructor and quite graphically depicts a trend change by showing a downtrend turning into an uptrend. Continual lower lows and lower highs represent a downtrend while higher highs and higher lows exemplify an uptrend. While they are transitioning one into the other, you are correct, it can be a challenging call to make.

Richard Krivo · #**208** (**permalink**) 05-13-2009, 08:03 PM

Student’s Question:

I have heard the term “confirmational indicators” mentioned. What are they and if you could show an example that would be great! Thanks.

Power Course Instructor’s Response:

Think of using an additional indicator or two on a chart as like going to a different doctor to obtain a second opinion. You are not too sure or clear about what you see on the chart and you simply want to double check before committing (or not committing) to the trade.

Take a look at the chart below for a visual…

A candle has closed below trendline support on this 4 hour chart and while this is a very bearish sign, you would like to back it up with some additional confirmation. As we look at the MACD and the RSI indicators on the bottom of the chart we can see that both of them are showing very bearish signals as well and that would confirm our initial thought about this pair.

Richard Krivo · #**209** (**permalink**) 05-14-2009, 10:23 PM

Student’s Question:

I would say this is an example of the USD/CAD in a range bound trade.

Power Course Instructor’s Response:

I can definitely see how you interpreted these channel lines as being a range...price is moving between the "range" created by the two channel lines.

However, since the pair has been building lower highs and lower lows, we would say that it is in a downtrend.

When a pair is trading in a range, it does not make new highs or lows...it remains in a horizontal range as you would view it on a chart. It will trade between the same levels of support and resistance for a period of time. See the chart below for an example...

Richard Krivo · #**210** (**permalink**) 05-18-2009, 10:15 PM

Student’s Question:
Hi, I placed a few trades yesterday, USD/CAD, GBP/JPY, GBP/USD and AUD/USD. I was up by 300 pips at one point but now am down by a total of 90 pips. I was wondering if I could run the AUD/USD chart by you to find out what I did wrong as its quite frustrating.

I had a look at the dailyfx chart briefly for the AUD/USD and went short, as indicated in the first chart. Here is the chart at present (the 2nd chart)
I opened at 0.76208 and stop was at 0.77271
This is 107 pips so my limit was 214 pips from entry at 0.74068
At one point I was up 107.5 pips so moved my stop to 0.75991 to breakeven
Although the candle is bullish the overall trend is down.

When I looked at close it had reached my stop and closed with a profit of around 7 pips.
What should I have done here, how come it jumped from 107 pips at one point to fall by 100 pips to close near the stop?

Did I read the dailyfx chart properly, even if I had the overall trend is on the down?

Many thanks.

Power Course Instructor’s Response:

Indeed...that can be quite frustrating.

Two things come to mind...

First: If the trade was to short (sell) the AUDUSD, the trade would have been against the prevailing trend. Trading in the direction of the trend on Daily chart will be the higher probability trade. While there are pips that can be made going against the trend, they have a higher risk associated with them.

Take a look at the chart below for a visual...

The pair has been making higher highs and higher lows (this defines an uptrend) since about the second week of March and it has broken above the 200 SMA (green line) which is also a bullish sign.

In an uptrend such as this, we would wait for a pullback to occur and then buy the pair back in the direction of the trend. (It appears as though you may have traded the pullback and then gotten caught when the pair reversed back in the direction of the trend.)

Second: Good job on moving the stop to breakeven.
Something else to try is at a certain level of profitability...say 50, 75, 100 pips, for example...close out a portion of the trade, half the lots. By doing that you lock in at least a portion of the the profit and if the trade does retrace dramatically, you will have a bit more profit to show for you efforts.