Post of the Day - Page 18

Richard Krivo · #**256** (**permalink**) 07-06-2009, 10:20 PM

Student’s Question:

What does the term “Fading a Move” mean? Thanks.

Power Course Instructor’s Response:

Take a look at the chart below…

After a major move has taken place, there is the very strong likelihood that the pair will retrace to some greater or lesser degree. “Fading the Move” refers to trading against that initial move to the upside in the case of the chart below. (A trader would fade the move in the opposite direction if the initial move was to the downside.)

Oftentimes the fading strategy is employed by fundamental traders after a news announcement that strongly moves a currency pair in one direction or the other. The thought process is that after that initial surge, the pullback/retracement will occur and they will be ready to “fade the move”.

Richard Krivo · #**257** (**permalink**) 07-07-2009, 10:02 PM

Student’s Question:

We hear about double tops and bottoms. I know I have seen triple tops and bottoms on the charts. Is there any special significance to them? Thanks.

Power Course Instructor’s Response:

On the chart below, examples of a double bottom along with a triple top and a triple bottom can be seen.

The way a double top/bottom would be traded is that when the second test of support/resistance takes place and is respected (by that I mean the body of the candle does not close below support or above resistance) the trade can be taken short with a stop above resistance in the case of a double top and can be taken long with a stop below support in the case of a double bottom.

Notice on each example below, after the second test, in each case, price action moved enough to generate a profitable trade.

Now, in the case of a triple top/bottom, price action comes back to test the S/R level for a third time. Should that level hold for the third time, in the two examples shown below, a fairly dramatic move occurs in the opposite direction…a strong bullish move after a triple bottom and a strong bearish move after a triple top. The third test would be traded just as the second test was traded. Enter on the open of the next candle after the test with a stop below support in the case of a bottom or a stop above resistance in the case of a top.

While moves of this magnitude on this one hour chart will not always be the case, if a Support or Resistance level holds through the third test, we can be fairly certain that it represents some pretty formidable strength.

Richard Krivo · #**258** (**permalink**) 07-08-2009, 07:50 PM

Student’s Question:

When a currency pair is in a trend, either up or down, what is a strategy that a trader could use? Thanks

Power Course Instructor’s Response:

A very straightforward trading plan in an uptrend would be to buy at support or buy a breakout above resistance…see the chart below for a visual.

Keep in mind that when a currency pair is in an uptrend, the higher probability trades will be in the direction of that bullish trend.

With that in mind, a trader could wait for a pullback to the support line and, provided that a candle does not close below that support line, a long position (buy) can be taken with a stop below the support line.

Should price action break above resistance and a candle close above that resistance line, then a long position can be taken at that point. The conservative stop would go below support while a more aggressive stop could be placed below the lowest level of price action running along the resistance line.

Also on the chart below, notice how MACD and the RSI indicators can provide insight as to timing an entry into the direction of the trend.

In a downtrend the process would be reversed. We would short at resistance and short a break below support.

Richard Krivo · #**259** (**permalink**) 07-09-2009, 10:15 PM

Student’s Question:

Can candlestick patterns be used as conformational indicators?

Power Course Instructor’s Response:

Sure…

Take a look at the chart below…

We see a very well established trendline in place for about 4 months. A break of trendline support occurs when the bearish candle closes below the trendline. That in itself is significant. However, the pattern of which that candle is a part is an Evening Star. Since an Evening Star is a bearish signal, this would lend even more significance to the break of support.

Richard Krivo · #**260** (**permalink**) 07-13-2009, 06:57 PM

Student’s Question:

Would you clarify for me where the trendlines go…below or above the candles? Thanks.

Power Course Instructor’s Response:

Sure…

Where the trendlines go will depend on the trend of the pair. See the chart below for an example…

Notice how in an uptrend (the green lines) the trendlines go below the candles or below price action. In each case where price retraces and comes back to the trendline, a trader can open a new or an additional long (buy) position.

Conversely, in a downtrend (the red line), the trendline goes above the candles or above price action. In this case, the trader would wait for price to retrace to the trendline and then would initiate a short (sell) position.

Richard Krivo · #**261** (**permalink**) 07-14-2009, 08:00 PM

Student’s Question:

I have read a bit about candlesticks and what they mean but could you go over what the bodies and the wicks signify? Thanks.

Power Course Instructor’s Response:

Take a look at the diagram below and that will shed quite a bit of light on what you are asking.

Keep in mind that each candle represents the timeframe of the chart that you are using. So, if you are looking at a 4 hour chart, each candle on that chart represents how that pair traded over the 4 hour period covered by that candle…the high, low, open and close of price during that 4 hour period. If you are looking at a Daily chart, each candle represents one 24 hour period running from 5 PM Eastern (New York) time on one day to 5 PM Eastern time the next day. On a 1 hour chart each candle represents 1 hour in the trading history of the pair and so forth through the various chart time frames.

Richard Krivo · #**262** (**permalink**) 07-15-2009, 08:07 PM

Student’s Question:

What exactly is a “false” breakout? Thanks.

Power Course Instructor’s Response:

Take a look at the first chart below…

In order for a breakout to occur, a range must first be present. As we can see, price action moves within the range for several months and then begins to build a series of higher highs and lows. This time (around the end of November) instead of retracing as resistance is approached, a candle trades right through it and closes well above the top of the range.

Looking at MACD, we can see that this breakout will quite likely be sustained as the indicator is giving a very bullish signal.

On the second chart, however, we can see where price action has “wicked” above the top of the range but the candle did not close above the top of the range represented by resistance. For the time that price was trading above the top of the range, traders may have believed that this indeed was a breakout. The “breakout”, however turned out to be false. This is why it is critical not to base any trading decisions on an open candle. We must wait for the candle to close otherwise we do not truly know what configuration it will ultimately take on.

On the right hand side of the chart we can see where a candle closed below support then a doji forms and then, potentially, price action might close back within the range. Should that in fact occur, this also could be termed a “false” breakout since there was no follow through after the initial breakout as was noted on the first chart.

sivamarkandu · #**263** (**permalink**) 07-16-2009, 06:52 AM

Hi Richard,
After extended decline, for example, Can we make a buy trade at the second bottom, if the pair forms W Bottom, assuming the indicators support it? Or should we wait for a confimred uptrend?

thanks

Siva

Richard Krivo · #**264** (**permalink**) 07-16-2009, 07:59 PM

Quote:

Originally Posted by sivamarkandu

Hi Richard,
After extended decline, for example, Can we make a buy trade at the second bottom, if the pair forms W Bottom, assuming the indicators support it? Or should we wait for a confimred uptrend?

thanks

Siva

Hello Siva...

Regarding a double bottom...yes, a buy could be made after the second bottom occurs. If price respects the level of the first bottom, when the next candle opens, a long position could be taken with a stop below the lowest penetration of the pattern. We could wait for a confirmed uptrend but then the pattern would not be in play anymore. One of the advantages of the trading bottoms and tops is that we can enter a position with a pretty fair risk reward ratio in place.

Usually a double bottom will occur at the end of a downtrend and a double top will occur at end of an uptrend.

Richard Krivo · #**265** (**permalink**) 07-16-2009, 08:03 PM

Student’s Question:

What is the purpose of the Fibonacci Tool and how do you use it? Thanks.

Power Course Instructor’s Response:

The purpose of the Fibonacci Retracement Tool is to be able to make a determination as to how far a currency pair is likely to retrace after a strong move in either direction. This is helpful since it will allow us to make an entry decision so we know when to enter (or re-enter) a trade when the overall trend once again comes into play.

Take a look at the chart below…

On this chart we see a long bullish trend running from the lower left to the upper right of the chart. We would draw the Fib line from the “Swing Low” (the lowest point of the move) to the “Swing High” (the highest point of the move). Our Fibonacci Tool then puts the Fib Levels on our chart. If we are using the Fib Tool in a downtrend, we would do the opposite of the above.

As is noted on the chart, when the pair retraces, it will likely retrace to one of these three levels: 38.2%, 50.0% or 61.8%. We would put the tool to use in a trading scenario by waiting until price action trades to one of those levels and then shows a “bottoming” pattern…some long wicks or a Morning Star pattern would be a couple of examples.

We could then take a long (buy) position back in the direction of the overall trend.

sivamarkandu · #**266** (**permalink**) 07-16-2009, 08:06 PM

Quote:

Originally Posted by Richard Krivo

Hello Siva...

Regarding a double bottom...yes, a buy could be made after the second bottom occurs. If price respects the level of the first bottom, when the next candle opens, a long position could be taken with a stop below the lowest penetration of the pattern. We could wait for a confirmed uptrend but then the pattern would not be in play anymore. One of the advantages of the trading bottoms and tops is that we can enter a position with a pretty fair risk reward ratio in place.

Usually a double bottom will occur at the end of a downtrend and a double top will occur at end of an uptrend.

Thanks a lot Richard

Siva

Richard Krivo · #**267** (**permalink**) 07-17-2009, 07:37 AM

Quote:

Originally Posted by sivamarkandu

Thanks a lot Richard

Siva

My pleasure...

sivamarkandu · #**268** (**permalink**) 07-20-2009, 03:58 PM

Hi Richard,
Taking profit, should we apply 2:1 or 3:1 win/loss ratio all the time? Or, Are there rules to apply when I come across a powerful move?

thanks

Siva

Richard Krivo · #**269** (**permalink**) 07-20-2009, 07:20 PM

Quote:

Originally Posted by sivamarkandu

Hi Richard,
Taking profit, should we apply 2:1 or 3:1 win/loss ratio all the time? Or, Are there rules to apply when I come across a powerful move?

thanks

Siva

Hello Siva...

A trader should always have, at minimum, a 1:2 Risk Reward Ratio in place on each trade. Implementing that discipline, a trader need only be correct in 50% of their trades to be profitable.

When analyzing the trade, however, and the trader notes that the pair has quite a bit of "room to move" after their entry before the next level of significant support/resistance, then a 1:3 or greater Risk Reward Ratio can be put in place.

You may find the response below to be relevant as well...

Richard Krivo · #**270** (**permalink**) 07-20-2009, 07:22 PM

Student’s Question:

I am in a pretty good trade but how do you know when to pull out of the trade and take profit?

Power Course Instructor’s Response:

One of the best and most straightforward ways is based on a 1:2 Risk Reward Ratio. Let's say a trader has a 50 pip stop on the trade. They double the stop, so in this case that would be 100, and then set the limit at 100 pips above the entry if they were going long. Conversely, the limit would be 100 pips below the entry if they were going short.

Beyond that, a trader can check to see where the next significant level of support or resistance is on the chart. Then, as that level is approached, a trader could close out all or a portion of their positions at that point. On the positions they chose to leave open, the stops could be adjusted to breakeven or beyond depending on how far the trade had moved in their favor.