Could you explain more precisely the meaning and recommended action of the term "cover on a bounce"?

Bollinger bands are very useful in determining price direction. You will notice that whenever the bands tighten, price explode out in a direction that is pretty much determined by the attitude of the 200 EMA

If you contact FXCM directly, they would be happy to send you an email with the terms used in the news headlines at DailyFX+.

If a trader has sold a currency pair at 1.2500 and the market trades down to as low as 1.2400 and starts to move up. Buying back that short position at 1.2450 to close out the trade is considered "covering on a bounce". Basically it is getting out of your short position on a bounce up off of a support level.

Written by Thomas Long, FX Power Course Instructor

Question: What technical indicator will tell you that a top or bottom is in place?

Answer: None….technical indicators cannot predict the future. They may show changing momentum, but that does not mean a top or a bottom is in place.

Question: What can you use to help you identify a potential top or a bottom in the market?

Answer: An economic calendar.

Why? It is the fundamentals of the market that determine the tops and the bottoms while the technicals show us how we get between those two points. Major tops and bottoms are typically a result of a changing interest rate environment and have nothing to do with the status of Stochastics, RSI, MACD etc.

This is one of the reasons that most professional traders use both fundamental and technical analysis in their trading approach. They follow any event that influences interest rates as they know that higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value. So they will check out an economic calendar at least once a week to be aware of what is being released during the week so they can be prepared. But you don’t have to be an economic expert to be successful at trading. You can let the analysts at DailyFX and DailyFX+ handle that for you. Each week you will see reports on what scheduled news events can cause volatility in the market. The DailyFX analysts will also offer an educated guess on how the market might react to that event. You can also go to the economic calendar at http://www.dailyfx.com/calendar/ to see what will be released yourself. Below is an example of what you will find on the calendar which lists only US releases. If you are not sure the significance of any of these events, follow the analysts at DailyFX and DailyFX+ and they can help you understand, which can lead to better trading results.

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Written by Thomas Long, FX Power Course Instructor

Trading the financial markets is one of the most competitive fields in existence today. I recently received an email from an FX Power Course graduate who was doing all the things necessary to become a profitable trader. He was showing the right amount of patience in waiting for the solid setups. The risk:reward ratio used was acceptable for his style of trading and all of the trades were in the direction of the daily trend. He was keeping a log of his thoughts as he entered and exited a trade and was also just trading one mini lot at a time. So after six months of trading, he emailed to say that he was frustrated in that he was only a breakeven trader. In response, I emailed back congratulating him on his excellent results. After six months of live trading, this trader had not made any money and I was congratulating him. What was I thinking? I think that in any field it takes time to become a professional. Nobody would think that you could become a professional golfer or a doctor after six months of preparation and trading is no different. It is difficult to become a consistently profitable trader and most new traders will quit before they reach that status. Whether they quit because of a lack of interest, running out of money to play with or just that they didn’t realize how much work it was to become a trader, you have to pay proper respect to what it is you are trying to do. You are competing against traders who have been profitable for years and work all day to maintain their edge. Becoming profitable is achievable, but we have to earn that right. We want to start out easy by getting a feel for trading and that means practicing in a demo account first. However, the real lessons start when you open a live account and begin to trade you own money. When there is real money on the line, a 10 pip move against you feels different than it would in a demo account. This is why we should start out small, trading one mini lot at a time until we feel comfortable about what we are doing. With time, you will find that trading with real money becomes easier. Then after six months of live trading, if you find yourself at breakeven, pat yourself on the back as you are on your way to being a profitable trader.

Written by Thomas Long, FX Power Course Instructor


In the FX Power Courses we identify buying opportunities as a pullback down to support when the market is in an uptrend. We also identify a rally up to resistance while the market is in a downtrend as a good selling opportunity. We also show how trendlines can be used effectively to identify potential support and resistance. To draw a trendline on a chart, you need to connect two lows in an uptrend or two highs in a downtrend. By connecting those two points and drawing the trendline out to where the market is currently trading, we are projecting a potential area of support or resistance. If the market moves to test the trendline once again, many traders will enter into the trade as close to the trendline as possible and place their initial protective stop below that trendline. This allows you to keep your risk fairly small and increase the size of your potential profit. We can see on the example below how the market moved down to test support at point #3, reversed and continued to move up. If you placed your stop about 50 pips below your entry, you give the market room to breathe along with a chance to earn three to four times that risk in profit. This means traders would only have to be right one out of three trades to be consistently profitable. That is what professionals look for as the base of a solid trading approach. The key is going to be having the patience and discipline necessary to wait for the solid setups and not hesitating to open the trade as the market tests the trendline. But as always, remember to only trade in the direction of the trend on the daily chart. That will increase your chance of success.

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Written by Thomas Long, FX Power Course Instructor

The use of support and resistance is valuable to those who want to project possible future reversals in the market. Last week we looked at connecting two points on a chart to project a possible future reversal point to enter into a trade. But you can also duplicate a trendline to form a channel which could give you an exit point for your trade. In the chart below, we connected the two points below the market and drew the line out to the end of the chart. Since the market is in an uptrend, we could look to buy on the third test of that support line. By copying or duplicating that trendline and placing at the highest point above the market, we also see potential resistance which could provide a good exit on our buying opportunity. There are many ways to play this with one being to buy two lots at support and then to exit one of those lots at resistance and hold onto the other on a possible breakout up through resistance. If the market then moves back down to support instead of moving up through resistance, you could always buy another lot and continue to exit one at resistance and continue to hold the second lot to be in on a possible breakout. Even if the market does not break out up through resistance, by placing your protective stop below support, which is rising with the channel, you also are protecting any gains you may have on the second lot. By simply duplicating a trendline, we can frame the market movement in a way which makes it easier to identify trading opportunities and that can lead to better trading results.

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Written by Thomas Long, FX Power Course Instructor

There are two main types of traders in the financial markets…discretionary traders and system traders. A discretionary trader will apply any approach that they see fit for the current market conditions while a system trader will use a defined set of rules to identify trading opportunities. I think new traders should learn as much as possible about fundamental and technical analysis, but should be thinking about developing a set of rules to determine when to trade. The advantage of system trading over discretionary trading is that emotions do not have the same influence over the decisions that systems traders make, since the rules for entry and exit are clear. Discretionary traders will react to the current market conditions, but may rarely react the same for two trades in a row, increasing the chance of poor decisions by the less experienced traders. Also, the systems trader can go back to see if the rules they intend to use in their trading decisions are good enough to result in profitable trading over a series of trades. If it does, then the systems trader just has to make sure that they take the trades that their system identifies and make sure that they execute according to the rules. This can lead to consistent results and make it easier to take trades even after a few losses in a row. After all, you have historical results to back up your trading decisions. I think that the rules should cover at least a few key points to include these:

1. Determine whether you are looking for a buy or a sell.
2. Find your entry.
3. Identify your initial risk.
4. Find your exit.

In the FX Power Courses, we recommend trading in the direction of the trend on the daily chart and to use a risk:reward ratio of at least 1:2 on your trades. If you are risking 50 pips on a trade, then look for at least 100 pips in profit. This way, you only have to win about 40% of your trades to be profitable. But I think that if a trader uses the daily chart to identify the trend and then moves down to the 4-hour or hourly chart to find their entry and exit, a 50% win ratio is attainable. If you win more when you are right than you lose when you are wrong, this can lead to consistently profitable results. Next week we will take a look at different ways to identify the direction of the trend.

Written by Thomas Long, FX Power Course Instructor

As one of the FX Power Course instructors, I get to talk to new and experienced traders on a daily basis. Many times these traders talk about trading systems they wrote themselves that worked for awhile and then mysteriously stopped working. They assumed that there was something wrong with their system, so they moved onto another approach. But the problem may not have been the system, but rather that the market environment had changed and the trader did not recognize it. This happens quite often and is one of the main reasons that good trading systems get tossed aside. So to keep this from frequently happening, the first rule of any trading system should be one of the oldest pieces of advice from many experienced traders. Always trade in the direction of the trend. If the market is in an uptrend, only look for buying opportunities and if the market is in a downtrend, then only look for selling opportunities. This would seem as obvious as knowing that walking downhill is easier than walking uphill, but yet traders get so caught up in looking for that perfect entry, that they forget to take a step back and take a look at the big picture, which is the direction of the trend. Quite often the best approach in trend analysis is to create a daily chart of the EUR/USD with one year of trading activity and make a note of your opinion of the trend. You then work your way through all of the other currency pairs to do the same. You can then compare to see which pairs are in the strongest uptrends and strongest downtrends. These would be the currency pairs to use when looking for a trade. You should be very picky as your trading results will depend on your choices. Since you also have a directional bias based on the direction of the trend, the process of finding a trading opportunity becomes a little easier. For those of you who like to quantify your choices, we have posted a daily chart of the EUR/USD with three months of trading activity. Also plotted on the chart is the most popular of all technical indicators, a 200-day Simple Moving Average. Note that all of the candles are above the moving average. This is an example of an uptrend. If all of the candles were below the moving average, then this would be a downtrend. If candles were both above and below the moving average, we would consider the trend weak and not trade that particular currency pair. You can use any moving average value on any time frame chart, but the technical analysis on the longer-term charts are more reliable, with the daily chart being the best. But by quantifying it like this, we are each able to find what combination works best for our own system. That is what using a system is all about. Next week we will look at the activity within a trending move to find a trading opportunity.

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Written by Thomas Long, FX Power Course Instructor

In our quest to develop a trading approach, a couple of weeks ago we decided that these were the keys points to include in our strategy:

1. Determine whether you are looking for a buy or a sell.
2. Find your entry.
3. Identify your initial risk.
4. Find your exit.

Last week we looked at how to satisfy the first rule in that we would look at the daily chart with one year of activity to find the strongest trends to trade. After having worked through a couple of dozen daily charts, I see the AUD/NZD to be in a strong uptrend. The chart posted first is the daily chart of the AUD/NZD and you can see that this market is moving straight up and has been for all of 2008. This is our first step in identifying the pair to trade and since it is in an uptrend, we will only look for buys and ignore all sell setups. Entries should be one of two situations for trend traders, we should look to buy a pullback down to support when the market is in an uptrend or look to sell a rally up to resistance when the market is in a downtrend. You could just look for these setups on the daily chart, but if we move down to a 4-hour chart, we can find more trading opportunities with lower risk. The key is going to be to only look for buys because the daily chart shows a strong uptrend. This increases our chance of success and puts us in a position to be in on some of the big moves that the FX markets are known for. So we are looking to buy on a pullback down to support. But what really does that mean if you don’t know how to identify support? This is where the use of technical indicators can come into play. On the 4-hour chart below the daily chart, I have plotted a Slow Stochastics indicator with values of 15,5,5. The idea here is that you buy when the Slow Stochastics moves below 20 and then crosses over and moves up above 20. If we were looking for a sell, we would look for a move and a crossover above 80. I have circled those moves from below 20 to above 20 on the chart and you can see where they can help traders better time their entry. Technical indicators do not predict the future and can only show us changing momentum. But when that momentum changes at support when the market is in an uptrend, we have a classic buying opportunity. There are many other examples of how to use technical indicators to time your entry in earlier lessons posted in this forum, to include MACD and RSI. It really doesn’t matter which indicator you use as they are all just really fancy moving averages. I always recommend that traders use one or two that they find easy to use as that is what will make them effective. But once again the key is to try to quantify your entry so you are being consistent in the trades you choose. That is how you can see consistent results in your trading. Next week we will start on the subject of money management and how we can fine tune our approach to help us increase our chance of being consistently profitable.

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Fundamental analysis involves examining the movement of currencies in relation to international political and economic events, present and past. This technique requires a lot of data and much more than forex basics to make sense out of it. Fundamental analysis does not help with entry or exit points either. These days, most forex trading education websites seem to advocate technical analysis over fundamental analysis. Technical analysis takes actual currency fluctuation into account as opposed to the forces that affect currency rates. Nevertheless, some traders choose to combine both techniques.

"The covering of a short position after it has reached and bounced off a level of support. This strategy waits for the price to move to a support level, instead of selling before, to see if the level will hold (because the trader will benefit if it doesn't hold). Once the security bounces it is clear the security will have trouble moving down further so the trade covers their short position."

Cover On A Bounce

you can go to the link to take a closer look.

if you still have any problem with understanding or need a graphic example. Please just shot me an e-mail! I will be more than happy to make one for you.

"covering on a bounce". Basically it is getting out of your short position on a bounce up off of a support level.


does that mean to go SHORT and TAKE PROFIT when it hit the support level?

It could....but you have to keep in mind that markets very rarely move straight up or straight down...although that would be nice. If you sold at 1.2500 and the market moves down to 1.2400 and then begins to rally, traders have a decision to make. They can either set a price where they will get out, say at the 1.2450 level (which is the cover on a bounce), or they can stay in the trade as long as it stays below the 1.2500 level. These traders are looking for more than 100 pips on the trade and are willing to stay in the trade as it moves against them in anticipation of a bigger move in their direction later on.

Written by Thomas Long, FX Power Course Instructor

In our quest to develop a trading approach, a few of weeks ago we decided that these were the keys points to include in our strategy:

1. Determine whether you are looking for a buy or a sell.
2. Find your entry.
3. Identify your initial risk.
4. Find your exit.

We have gone through how to determine whether we are buying or selling and also how to identify our entry. This week, let’s take a closer look at our entry and where we should place our initial protective stop. When we are using technical indicators such as the Slow Stochastics to better time our entry, we want to make sure that the market has bounced off of support before entering into our buy. This way we are entering as the market is rising instead of falling which increases our chance of success on a buy. So our trade is identified as the Slow Stochastics (Slow K on the chart) moved below 20, then crosses up over the signal line (Slow D) and then closes above the 20 level. It is important to wait for that candle to close to confirm that the Slow K line did indeed close above 20. We then buy at the open of the next candle. But before that we also want to identify our risk on the trade. At this point, if the market were to trade down below the recent low of the reversal, I would consider my interpretation of the mood of the market wrong and would want to be out of my trade. This market shows an entry of 1.2663, with a stop placement below the 1.2606 low. So I am buying at 1.2663 and at the same time, placing my protective stop at 1.2605. Some traders may want more cushion below that low and I could see placing the stop at the 1.2599 level to take advantage of the natural support that an even number like 1.2600 might provide. But I usually consider a move through support as a move through support and do not want to be in the trade any longer. So, I now know my risk is 58 pips. If trading in a mini account, the value of one pip on the AUD/NZD is 74 cents (US), so my risk on the trade is $42.92 per mini lot. If I have a $2000 account balance and want to keep my total risk on the trade to less than 5% of my account balance, I can open up two mini lots. That would be a total risk on the trade to me of $85.84. We get this by multiplying our $2000 account balance by .05 (5%), which is 100. So we do not want to risk more than $100 on the trade. This should be done before you enter into the trade, so you know how many lots you can open. So we have identified that we want to buy since the daily chart shows an uptrend. We want to buy pullbacks off of highs down to a support level and we have used Slow Stochastics to help us time our entry. We also know that we should always trade with a protective stop in the market and we identified where that stop should be and how to calculate our risk on the trade in pips and also in a dollar amount. Next week we will look at how to exit our trade.

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