Post of the Day - Page 4 - DailyFX Forex Forum

Richard Krivo · #46 (**permalink**) 11-10-2008, 06:26 PM

Student's Question:

So I have a question about the rule that you dont trade against the trend. But the trends seem to differ in a daily chart and in say 60 or 30 min charts. How do you know what trend/timeframe to use?

Power Course Instructor's Response:

Good question...

Formally it is called Multiple Time Frame Analysis. The objective is to have the trader look at the same currency pair from several different perspectives...time frames.

Every time you place a trade, this should be a part of your analytical process as it will provide more data on which you can base your trading decisions.

Think of a combination lock...all of the tumblers have to be in alignment before the lock will function. Using this example for currency trading, the more the charts are in alignment, the greater the pair is likely to move.

For example, a pair may be in a strong uptrend on a Daily chart but when you look at a 4 Hour chart it is moving to the downside...retracing. On a 1 Hour chart you see that it is just finishing its retracement and going back in the direction of the trend on the Daily chart...the direction that you ultimately want to trade. As soon as both the 1 Hour and the 4 Hour are going in the direction of the trend shown on the Daily chart, that is a strong entry signal and a higher probability trade.

Had a trader gone long based on merely the Daily chart, they might find themselves in the middle of a 50, 100, 200 pip retracement. But, by checking the other time frames, they learn how the entry into this trade needs to be "fine tuned" by waiting for the charts to be in alignment.

fiestachild · #47 (**permalink**) 11-10-2008, 07:28 PM

I have had some success trading using a comnbination of Bollinger Bands and slow stochastics. i often have second thoughts when stochastics are overbought or oversold but RSI or another oscilator are not showing the same. Am I looking at too many indicators or should I be waiting for all of the "stars to align"?

Richard Krivo · #48 (**permalink**) 11-11-2008, 01:56 PM

Quote:

Originally Posted by fiestachild

I have had some success trading using a comnbination of Bollinger Bands and slow stochastics. i often have second thoughts when stochastics are overbought or oversold but RSI or another oscilator are not showing the same. Am I looking at too many indicators or should I be waiting for all of the "stars to align"?

If something is working for you, stick with it. That would be my first thought. Generally, 1 or 2 indicators that you really understand and feel comfortable using would be the way to go...too many can lead to confusion and indecision.

Keep in mind that a currency pair can be in overbought or oversold territory and can continue deeper into that territory. Overbought or oversold does not necessarily mean that price action is about reverse.

Using the Multiple Time Frame strategy, the charts can all be in "alignment" and then a trader can utilize an indicator to enter the trade at the optimum momentum level.

Richard Krivo · #49 (**permalink**) 11-11-2008, 08:25 PM

Student’s Question:

Ok, I now have attached my picture of the daily USD/CHF chart. You can see the rising trend of the pair over the last several months. It seems to have been traveling in a pretty decent channel over that time and now looks to be forming a bit of a wedge. I notice that both the RSI and MACD are negatively diverging at this point and the pair looks set for a fall. Do you believe I am accurately interpreting what the charts and indicators are telling me?

Power Course Instructor’s Response:

I would agree with your interpretations of the charts...divergence is definitely present.

Negative divergence is when the market makes a higher high but the indicator does not. In this instance, one should look for possible selling pressure.

Positive divergence is when the market makes a lower low but the indicator does not. In this instance, one should look for possible buying interest.

The above being said, keep in mind that the trend on this USDCHF pair is still bullish...to the upside. So, should a retracement occur, we would be waiting to identify an entry to take a long position...perhaps on a retouch of the trendline in red on the chart below.

Richard Krivo · #50 (**permalink**) 11-12-2008, 06:46 PM

Student’s Question:

I hope I am doing this right?

Power Course Instructor’s Response:

You have the right idea...

Just keep in mind, that when we discuss support and resistance, think of a room with a floor and a ceiling.

The FLOOR is SUPPORT and the CEILING is RESISTANCE. A large ball bouncing between the FLOOR and the CEILING represents PRICE.

When PRICE (BALL) hits the FLOOR (SUPPORT) it bounces UP. When PRICE (BALL) hit the CEILING (RESISTANCE) it bounces DOWN.

When the PRICE (BALL) breaks through the CEILING(RESISTANCE); the old CEILING (RESISTANCE) becomes the new FLOOR.

See the charts below for a visual...

Richard Krivo · #51 (**permalink**) 11-13-2008, 07:49 PM

Student’s Question:

I used Moving Averages in this chart for a trade. Would this be correct?

Power Course Instructor’s Response:

You have a good understanding of how to use Moving Averages in trading.

Moving Averages can be employed in trading in a variety of ways and you have chosen two of the more widely used applications. Two the trades you circle on the chart are based on crossovers. The idea here is that as faster MAs crossover the slower MAs, at the point of the cross, a position can be taken in the direction of the cross. (Naturally trading in the direction of the trend, which you have done here, will offer higher probability entries.)

You are using the 10 EMA (Exponential Moving Average), 20 and 50 EMA’s. The 10 EMA would be the “fastest” since it is based on a shorter time frame than the other two so it is more sensitive to changes in price and will move ahead of the other two.

Also, as the MAs cross one another and begin to fan out and move away from each other, that indicates a move that is gaining in momentum.

Another technique that you have employed here is using one of the MAs, the 50 in this case, as a resistance level. As price action has tested this resistance level several times and retreated each time, this was taken as an opportunity to short the pair again…good work.

Richard Krivo · #52 (**permalink**) 11-14-2008, 04:06 PM

Student’s Question:

Here's a doji from the EUR/GBP pair back on October 1. The idea is to get in just above the doji and place a stop 10-15 pips higher right? Is it smarter to go ahead and place a limit so you can automatically take a win if the price drops enough or try and watch for an out indicator? I can see where it would be too enticing to sit and watch to see how much you gain if the play pays off.

Power Course Instructor’s Response:

Ideally, we want to determine the direction that the pair is trading on the Daily chart. Once that is determined, we want to look for trading entry opportunities in that direction as those will be the higher probability trades.

A doji indicates the potential for price action to change direction. Since the overall trend on the EURGBP pair is bullish (see the chart below) we would look for entries to the upside.

It is preferable to put both a stop and a limit on a trade so as to be able to determine a risk/reward ratio of 1:2. Also, for the reasons you mentioned, it is best for most traders, especially new ones, to have a target at which point they know they will exit.

I would encourage you not to expand the chart very much as it does not provide a good overview of how the pair is moving in its trading cycle. The chart you posted is an expanded version of the one posted below. A trader can tell at a glance which chart provides the most data about the pair.

A good rule of thumb is to have at the very least 50 candles on a chart.

Richard Krivo · #53 (**permalink**) 11-17-2008, 07:42 PM

Student’s Question:

So if I see this close above support and start trending back up I would react by buying? Then setting a stop order at the lowest wick point of the candle that bounced off of the support line? Please excuse the tongue twisting method, sometimes its hard to make things clear in type.

Power Course Instructor’s Response:

No problem...

We only want to take a trade when we have a valid selling opportunity.

The number one objective in a downtrend is to only take short positions since they will have the higher probability of being successful. In a short position, the stop will be above resistance or above the wick of the last candle.

See the chart below for a visual...

KP FX Trader · #54 (**permalink**) 11-18-2008, 11:24 AM

You mentioned trading short the break of support with a stop just inside support. That offers a smaller risk. Another method would be placing the stop outside resistance (quite wide). How would you suggest a trader determine which method to use? I suppose its personal preference and money mgmt. Which approach is more likely to yield success?

On another subject. What do higher lows and lower highs indicate in a trending pair? Consolidation? Range?

Richard Krivo · #55 (**permalink**) 11-18-2008, 01:56 PM

Quote:

Originally Posted by KP FX Trader

You mentioned trading short the break of support with a stop just inside support. That offers a smaller risk. Another method would be placing the stop outside resistance (quite wide). How would you suggest a trader determine which method to use? I suppose its personal preference and money mgmt. Which approach is more likely to yield success?

On another subject. What do higher lows and lower highs indicate in a trending pair? Consolidation? Range?

You are correct when you say a big part in how a trader trades this scenario will depend on personal preference and account size (aka money management). Personally I would not be comfortable with a stop at resistance after support was broken...I feel it would negatively compromise the Risk Reward Ratio. On the chart in question, setting a stop above resistance would be at about 1.6000. With current price action on the chart at 1.4836 and a break below support even lower, that could be a stop of about 1500 pips...to deep for my trading and style of money management. The closer your entry can be relative to your stop, the more solid your Risk Reward Ratio will be.

Higher lows and lower highs sounds like consolidation and as though a triangle might be forming.

KP FX Trader · #56 (**permalink**) 11-18-2008, 04:00 PM

Hi, I was reviewing the above strategy from the Intermediate course. It is stated to exit on the opposite signal. Would that be a candle close higher than the previous 10 candles? If it was a short sell. Or does it mean if a candle closes higher than the one we entered on?

Richard Krivo · #57 (**permalink**) 11-18-2008, 07:34 PM

Student’s Question:

How is this for an example of using a trendline in trading?

Power Course Instructor’s Response:

You definitely have the right idea here...buy on a pullback to the trendline. Should a candle close below the trendline, it could indicate a change of direction...well done.

However, the fact that the trendline has already been compromised (see the chart below) invalidates it. We cannot not trust it as a level of support since it has previously broken down.

We need to see two points which can be connected and the third instance in which that line is respected is the point at which we would take the trade with a stop below the trendline.

Thomas Long · #58 (**permalink**) 11-19-2008, 02:51 PM

Quote:

Originally Posted by KP FX Trader

Hi, I was reviewing the above strategy from the Intermediate course. It is stated to exit on the opposite signal. Would that be a candle close higher than the previous 10 candles? If it was a short sell. Or does it mean if a candle closes higher than the one we entered on?

Since this is proprietary information, I am not able to go into detail in this public forum. However, I will say that this strategy uses the 10 candle sequence for entries and exits.

Richard Krivo · #59 (**permalink**) 11-19-2008, 07:20 PM

Student’s Question:

Daily downtrend. Breaks thru 38.2% comes close to 50% and continues back down. Does the circle represent a good signal? Bearish Engulfing signal?

Power Course Instructor’s Response:

Yes. The area within the black circle is a solid entry signal in the direction of the overall trend on the pair...nice job. Placing a stop above the topmost wick or just above the 61.8% Fib level will complete the job.

The bearish engulfing candle, however, is the one that is marked in red.

Richard Krivo · #60 (**permalink**) 11-20-2008, 07:22 PM

Student’s Question:

Please can you show me "Bullish" or "Bearish Engulfing" patterns in the context of chart!

Power Course Instructor’s Response:

When one candle completely “engulfs” the prior candle, it is indicative of a change in direction of the previous price action. A bullish engulfing candle, therefore, indicates a potential move to the upside while a bearish engulfing candle indicates a potential move to the downside.

Here are some examples on the chart below...