Trading the Forex Market

 

Forex trading has become very popular over the last couple of years, but do not be fooled into thinking that popularity has anything to do with simplicity.

Let’s be clear here.  Forex trading became popular because:

1) You can open an account for much less money than an equities or futures account.

2) You will not be hindered by Day-Trading rules and

3) You can trade the forex markets virtually 24 hours a day.

The end result of all this is that you have a lot of inexperienced traders trading a very difficult market.

Why are the forex markets so difficult?  Because, they spend most of their time going nowhere.  They wiggle up and down triggering random Buy and Sell signals that usually don’t follow through, but do manage to whipsaw many traders into extinction.

Here are some forex trading hints:

Trading Hint #1

Forex  Trading - Scheduled Events

 

In Forex Trading, news event are the fuel that moves the market.  While most stock and futures traders try to trade the charts exclusively, to do so is folly if you are trading forex.  For one thing, with most currency pairs trading 24 hours, and mostly going nowhere, you can get whipsawed to death while waiting for a nice move.

 

Trading news events can also be quite frustrating, as you never know when the next market moving news event will occur, but one way to overcome that is to trade scheduled news events like interest rate meetings and economic releases  If you go to:

 

http://www.forexnews.com/GlobalCalendar/default.asp

 

You can find a weekly calendar of scheduled economic events.  One way to trade these events is by using a one minute chart for entry and then managing your trade on a three or five-minute chart.

 

Here are some example of trading scheduled news events for the week ending 8/4/2006.

 

For our first example we're going to trade the Chicago PMI report to be released at 10:00 Eastern Time on 7/31.

 

Let's look at GBP/USD

 

 

First we look at a one minute chart to try to figure out which way, if any, the report is going to move the market.  In this case the initial movement is upward, indicated by that long positive bar at 10:00 AM. and the Exhaustion Buy Signal a few minutes later.  Please note that we don't have wait for an official signal,  just a pronounced move one way or the other so we can make a reasonable assumption as to how the report is effecting the market.  (Sometimes the movement will start just before the official release time.) 

 

At this point we open a long position at 665.

 

 

We now switch to a longer term chart (in this case a 3 minute chart) to manage our trade, and wind up exiting following the next Exhaustion Signal at 685.

 

 

Next we'll try to trade the UK July Manufacturing report scheduled to be released at 4:30 A.M. Eastern Time on 8/1.  The one minute chart suggest this report may have a positive effect on the market, and we enter a long trade at 670.

 

 

Now we switch to the three minute chart to manage our trade.  The move we're looking for doesn't materialize, and we exit this trade at 670 for a breakeven trade.

 

 

 

Also on 8/1, to be released at 8:30 A.M. is June Personal Income and Personal Spending.  This report appears to be pushing the market down, and we are able to go short at 675.

 

 

Now we switch to the three minute chart to manage our trade. Again the move is short-lived and we exit this trade at 655.

 

 

 

One of the most important reports, the U.S. July Employment Report is scheduled to be released at 8:30 A.M. Eastern Time on August 4.  That early breakout may be pre-mature, but reports often seem to get leaked a few seconds early, so we take the 950 long entry.  Be aware that pre-mature entries can go against you, so be prepared for a quick exit and a sizeable loss if that should happen.

 

 

 

Now we switch to the three minute chart to manage our trade.  In this case the early signal was an accurate precursor of things to come and we exit at 052 for a nice gain.

 

When you have the opportunity to schedule your trades it give you an advantage that you shouldn't pass up.  Not all trades are winners (of course), and some trades will reverse on you or fizzle out early, but scheduling some of your trades is a way of being proactive in your trade selection, as opposed to staring at a chart waiting for something to happen.

 

You can use these same methods to trade unscheduled news events, but you must be sure you have a timely news feed, and you should have some notion of whether a particular news event is noteworthy enough to move the market you are trading.  Our next Trading Hint will be on trading unscheduled news events.

 

If you are not a forex trader, and want to see what all the fuss is about, you can open up a FREE Practice Account at:

 

http://www.decisionbar.com/fxcm/fxcm_account.htm

 

 

Trading Hint #2

Forex  Trading - Technical Trading

 

The key to technically trading the forex markets is confirmation.  Every trade must be confirmed, and it most cases, double-confirmed.

I am going to show you a method and a strategy for profiting from the forex markets.  While you will be able to use the method, you will likely have to modify the strategy to fit the currency pair and time frame you are trading as well as your own trading style.  In learning this method, you will learn more about trading the forex markets than 99% of the traders you will be competing with.

Three caveats:

1- This is just an exercise.  The setting used may or may not be effective for the currency pair, time frame, and conditions you are trading.

2- It is beyond the scope of this manual to teach the basics of forex trading.  Ask your broker or buy one of the many good books on the subject available from your local book store.

3- You simply must use trailing stops to succeed at forex trading.  These stops will often be “mental” stops, but you must always have a pre-set price for exiting a trade if it moves against you.

If you don’t know how to implement trailing stops, I suggest you get one of many books on trading at your local bookstore. 

 

The Method

For our example we are trading a 10-minute chart of GBP/USD.  We are going to analyze all of the signals given for GPB/USD for a period of over 24 hours.  We will require confirmation of all trades from both a five-minute chart of GBP/USD, and our Generic Risk Oscillator, applied to the 5-minute chart.  The Strategy Indicators are set at 20/20 for both charts.  Each chart posted "overlaps" the time period of the previous chart.

Here is the basic strategy we will use to trade the 10 minute chart.

1) A signal on the 10-minute chart must be confirmed by the five minute chart on the bar the signal is given.  In other words, if the 10-minute chart gives a Buy signal, the five-minute chart must also either show a Buy signal, or a Buy signal must be the current, primary signal.

2) A signal on the 10-minute chart must be confirmed by the Risk Oscillator showing a significant bias in the direction of the trade.  For this exercise, we will require a reading of +1.0 or greater to confirm a Long trade, and a reading of -1.0 or less to confirm a Short trade.  This reading must occur on the exact bar that the signal is given. 

The Short signal at point A is confirmed by the five-minute chart, which issued a Short signal one bar back, and the Risk Oscillator, which shows a reading of -1.0, so we start by entering a Short trade at Point A.  We don't have to confirm  the Short signal at Point B, because we are already in a Short trade.

A Long Failure signal is given at point C.  The signal is confirmed by both the five-minute chart and the Risk Oscillator.  If our trailing stop from the previous Short trade has not yet triggered, we cover our Short trade and enter a Long Trade.  If the trailing stop had previously been triggered we now open a Long position. 

We don't have to confirm  the Long signal at Point D, because we are already in a Long trade.  At point E a Short trade is confirmed by both the five-minute chart and the Risk Oscillator.   If our trailing stop from the previous Long trade has not yet triggered, we cover our Long trade and enter a Short Trade.  If the trailing stop had previously been triggered we now open a Short position. 

A Long Failure signal is given at point F.  The signal is confirmed by both the five-minute chart and the Risk Oscillator.  If our trailing stop from the previous Short trade has not yet triggered, we cover our Short trade and enter a Long Trade.  If the trailing stop had previously been triggered we now open a Long position. 

We don't have to confirm  the Long signal at Point G, because we are already in a Long trade. 

That Short Exhaustion signal at point H is not confirmed by the Risk Oscillator, so, if our trailing stop hasn't been hit. our choice at point H is to go to Cash or Hold Long and see if our trailing stop gets triggered.  What you do is up to you.

The next signal at point I is a confirmed Long Breakout, so we either go Long or Hold Long, depending on our position when the signal was given.  The short signal at point J is not confirmed by the Risk Oscillator, so we either close our Long Position and go to Cash or Hold Long and see if our stop gets triggered.

All of a sudden at confirmed point K we find ourselves in dangerous territory.  The upper and lower pivots have moved close together, increasing the chances we will get whipsawed.  In situations like this you can do one of four things.

1) Take the trade.

2) Stand aside for a while until some volatility returns.

3) Only play signals that are confirmed by a subsequent bar trading above the high of a Long signal bar or below the low of  Short signal bar (add an additional confirmation).

4) Only play Breakout and Breakdown signals that are confirmed by a subsequent bar trading above the high of a Long signal bar or below the low of  Short signal bar.

Again this is up to you and your trading style.

Since we're just tracking signals here, we'll note that the Short Failure at point L was a confirmed signal but the Long Breakout at point M was unconfirmed by the five-minute chart whose last primary signal was short.

Following the unconfirmed signal at point M, a Short Exhaustion Signal at point N was also unconfirmed, and a Long Failure signal at point O was unconfirmed.

At point P the Short Breakdown signal at Point was confirmed, but didn't follow through, but the Long Exhaustion at point Q was confirmed and seemed to suggest that the market was coming back to life.  The Long Breakout at Point R did not require confirmation as we were already in a long trade.

As it turned out, we followed GPB continually from 12:10 pm on 2/27/2006 until 5:10 am on 3/1/2006, and encountered many of the situations you will come up against in forex trading.

You can use the same methods for any currency pair and any time frame.  All that will change is the indicators settings, the exact time interval of the shorter period confirmation chart and the minimum reading required for confirmation by the Risk Oscillator.  You will need to create and test a trading strategy for each currency pair you are trading.

In this case our Confirmation Chart was a five Minute chart and our Primary Chart was a 10 Minute chart.  It is not necessary to keep that exact ratio.  You might try confirming a five minute chart with a two minute chart, or even a Daily chart with an Hourly chart.

You can also try applying the Risk Oscillator to the Primary Chart instead of the Confirmation Chart and, of course, you can adjust the settings of the Strategy Indicators and the Risk Oscillator.  (Keep in mind that if you increase the weight of the time series oscillator component to 2 and the MACD component to 2, you will likely have to increase the minimum reading required for confirmation by the Risk Oscillator.  I usually require a +2.0 to confirm a Long Trade and a -2.0 to confirm a short trade if I use those settings.)

The forex market is an ever-changing entity.  Be sure to test whatever set-up you use for effectiveness before risking your money.  Also, don't be afraid to "think out of the box" when creating your strategy.

The combination of MCFX and the DecisionBar indicators are all the tools you need to profit from the forex markets.

We wish you good luck and good trading.

The Staff at DecisionBar Trading Software

 

 

Disclaimer: Investment in forex, stocks, options or futures involves a high degree of risk and is not suitable for everyone. Your investment may fall as well as rise, you may lose all your original investment and you may also have to pay more on the original amount invested. Consult your broker or advisor prior to making any investment decisions.  Past or simulated performance is not a guide to future performance.