We are pleased to introduce the following series of articles that will discuss various aspects of the forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen.

“EUR Fundamentals – IFO”

Within the Euro-Zone a great amount of focus is placed in the German economy as it represents one of the more influential components of the continent. For that reason it is important for Forex traders to track the progress of the German economy looking for any changes in the trend. One of the most highly watched economic data sets in Germany is known as the IFO business sentiment survey. Conducted on a monthly basis, the IFO polls German businesses in regards to their expectations for the next 6-months as well as the current climate.

On September 26, 2011’ the IFO Business Climate was reported at 107.5 from a reading of 108.7 the prior month, while the Current Situation (Assessment) was released at 117.9 vs. the prior month’s report of 118.1. Generally speaking over time, as the IFO figures rise this tends to bode well for European equity markets such as the DAX (Germany) and the CAC (France).

Furthermore the IFO tends to enjoy a positive correlation to the EUR currency, (EUR/USD shown below). Of course when trading currency (pairs) we must consider both sides of the trade and the fundamental forces that compel each currency within the pair. For that reason traders often times will pair the EUR against a lower yielding currency such as the USD or JPY due to the fact that if the EUR appreciates based on improving economic conditions, traders may also be prone to sell-short a lower yielding currency that is typically held as a means of safety. Conversely, if the IFO were to show a steady decline as it has over the past few months, traders selling-short the EUR may be more likely to also buy a lower yielding currency such as the USD or JPY as they represent a relatively greater amount of safety.

Of course there are many components and economic data sets, which help to illustrate the true strength or weakness of the Euro-zone continent. However the IFO does play an important rose in the analysis of one of the most dominant countries that share the EUR currency. As trends in the Forex market and Marco-economic conditions tend to be very long lasting, traders should do their best to always trade in the same direction as the underlying trend. Based on the most recent IFO report, this may indicate the EUR may see lower prices in it’s medium-term future, perhaps at least until the IFO shows clear signs of a change.

We wish you the best of luck in all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen.

-9/1/2011

Common Chart Patterns

One of the most commonly used forms of technical analysis is the study of patterns that emerge on long and short-term charts. These chart patterns are typically constructed through the use of trend-lines. Support is drawn by connecting at least 2-significant low points on the chart while Resistance is drawn by connecting at least 2-significant highs. The resulting pattern can tell us a lot about the market’s trend and direction and ultimately the likelihood of future prices.

A Trending Channel occurs when either the buyers or sellers are able to impose a significant amount of influence causing the market to accomplish new highs or new lows over a given period of time. In an up-trending market support should be drawn first, while in a downtrend, resistance should be the primary line. However often times the support and resistance lines will emerge in a parallel fashion providing us with an extra level of confirmation that we have in fact drawn the chart correctly. In the following (down) trend, traders opt to enter a position to sell-short due to the fact that the long-term direction is to the downside. These trades should be opened as close as possible to resistance with protective stops placed above resistance at a point on the chart where we believe ‘the market should not test’. In an up-trending channel, only orders to buy should be placed, as close as possible to support.

When neither the buyers nor the sellers have a dominant force in the market, range-bound patterns typically occur. Often times these range bound markets take the shape of a Triangle consolidation pattern. Support and resistance are drawn in the same fashion by connecting significant highs and lows, but the difference lies in the trade selection. Due to the fact that the market does not indicate a direction, traders may utilize a simple ‘buy low, sell high’ approach, with the expectation the market will not break out of this pattern but rather return towards the center.

Another chart variation known as a Flag & Pennant occurs when the market enjoys a fast move either to the upside or downside and is followed by a near horizontal consolidation pattern. During the period of consolidation, traders may also utilize a ‘buy low, sell high’ approach as in the aforementioned triangle pattern, however it is important to note that Flag & Pennant patterns are known to eventually ‘breakout’ in the same direction as the underlying trend, in this case to the upside. Within every chart pattern, traders should always make note of the longer-term trend and this is holds true in Flag & Pennants. Traders with a longer-term outlook may choose to initiate a position within the ‘pennant’ with the anticipation of an eventual breakout, in the same direction as the overall trend and preceding ‘flag’.

A somewhat more complex but equally common pattern is known as the head and shoulders. This pattern is basically a ‘triple top’, where the center high point extends higher than the first or third. The pattern begins as the market establishes a significant high (1^st shoulder) and then retraces to a degree. During the market’s second rally, higher highs are achieved (head) as the market subsequently returns back to the downside. The pattern is then verified as the market rallies a third time, but is unable to retest the previous highs (of the head) and usually comes very close to the highs of the first shoulder. Drawing a horizontal (or sometimes diagonal) line connecting the highs of the two shoulders establishes the ‘neckline’. As head and shoulder patterns are known to be indicators of a market reversal, traders may opt to ‘sell-short’ near the highs of the second shoulder, with protective stops placed near the highs of the head. This pattern may also occur in an inverse fashion where the head rests at the bottom of the chart, and is referred to as an ‘inverse or upside down’ head and shoulders.

In short, chart patterns are used to frame the market’s trading activity into discernable patterns that are easily recognized. They simply illustrate the tendency of the market and the trend and direction if any. To increase the accuracy of trades placed, chart patterns can be used in conjunction with an oscillator indicator that measures the relative strength of the market, such as the RSI, MACD, or Stochastic indicator. Of course there are many other important aspects to speculating in the financial markets such as managing risk as well as the analysis of the underlying fundamental forces, which drive a market. But chart patterns can be easily applied to serve the novice to advanced trader.

We wish you the best of luck with all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the Forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen

- 8/25/2011

Fibonacci

When studying the charts financial markets can be classified into two basic conditions, range-bound and trending. A range-bound market occurs when there is a relative state of equilibrium where neither the buyers nor sellers have a distinct influence to the market. In a range bound market traders may adopt a simple ‘buy low, sell high’ approach with the anticipation the market will not accomplish new significant high or low prices. On the other hand, in a trending market either the buyers or sellers will have a noticeable influence, as the charts are able to accomplish new high or low prices on a regular basis. In a trending market it is advisable to always trade in the same direction as the underlying trend hence; the trend is your friend. When a trend does exist the Fibonacci tool can aid traders in identifying the ideal price to enter a new position.

In a trend to the upside, we should do our best to only ‘go long’ (buy) when the market retraces off of it’s recent highs while still maintaining it’s current long-term upward channel. Within a long-term trend, the market will experience smaller ‘impulse’ movements that will accomplish new highs/lows, in the primary direction of the overall trend. Once a trend is identified, the first step is to identify the start and end of the most recent impulse movement to the upside.

 In an up-trending market, the start of the impulse will be found at the bottom of the chart and the end of impulse at the top. We may now draw the Fibonacci tool starting at the beginning (bottom) of the trend (step 1) and extend the Fibonacci tool to the end (top) of the impulse (step 2). Once the Fibonacci lines are drawn, a number of horizontal lines will emerge. These lines represent the Fibonacci retracement levels where future higher support may now be expected to occur. 

The common Fibonacci retracement levels are as follows:

38.2%

50%

61.8% 

Less common but also important Fibonacci retracement levels also may include:

23.6%

78.6%

To better explain the rational behind the application of the Fibonacci tool, we can discuss a fictitious stock currently trading at $10/share. As a new impulse move begins, the stock then travels from $10 to $20 / share, representing a $10 appreciation in the price. At this point the market then begins to retrace as we may now apply the Fibonacci tool. Based on the $10 increase in price, we may now expect the market to retrace a percentage of that former impulse move.  

As 38.2% of $10 is $3.82, we may anticipate a retracement of $3.82 from the new $20 high; or $16.18 which may now represent our new higher support level and the appropriate price to enter a new trade. Of course we will not know before hand which Fibonacci level will in fact represent our new higher support, but the common Fibonacci levels due provide us with a number of specific price levels where we may look for additional signs of a possible reversal; back to the upside.

The same rules apply in a downtrending market, only with the anticipation of lower prices in the future. Therefore the impulse move will naturally begin at the top of the chart and the end of the impulse at the bottom. Once the market has in fact accomplished a significant move lower and then begins to retrace, we may now draw the Fibonacci lines to anticipate a new lower resistance level, where trades to “sell-short” can be placed ultimately with the expectation the market will eventually accomplish even lower low prices.

The Fibonacci tool offers a number of unique benefits as follows. This approach ensures that we identify the direction of the overall trend and only open trades in the same direction as that underlying trend, and wait for substantial retracements which in turn can provide us with a better risk / reward scenario and over the long run give us the chance to capitalize on the long-term movements within the marketplace.

We wish you the best of luck in all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the Forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen. – 8/16/2011

Stochastic Oscillator

 Due to the tremendous volume that passes through the Forex market on a daily basis, currency (pairs) normally move in relatively small increments and tend to remain within a ‘trading range’ a majority of the time. For this reason Forex traders have found success in placing trades with the anticipation the market once reaching an ‘Overbought’ or ‘Oversold’ condition will once again return to the center; regress to the mean. There are a number of tools that are designed to isolate these extreme market conditions, such as the Stochastic Oscillator.

 The Stochastic Oscillator measures a securities current price in respect to it’s recent highs and lows over a set period of time, on a scale of 0 – 100. Indications greater than ‘ 80’ are considered to be ‘Overbought’ while levels below ‘20’ are considered to be ‘Oversold’. All indications between 20 & 80 are considered relatively normal and therefore no trade signal is implied. A ‘buy signal’ is generated when both Stochastic lines cross below ‘20’ and then shows signs of a reversal as the lines cross one another while remaining below the 20 level. To wait for further confirmation, traders may even choose to wait for both Stochastic lines to ‘cross back above’ 20.

 Conversely, signals to ‘sell short’ occur when both stochastic lines cross above ‘80’ and then cross over one another, while above 80. Looking for additional confirmation, traders may even choose to wait for both lines to cross back below ‘80’. It is important to note that the Stochastic Oscillator is best used to isolate extreme market conditions, where a reversal to the center is most likely, therefore traders should do their best to ignore all indications while the Stochastic lines are between the 20 and 80 levels.

To better refine the use of the Stochastic Oscillator there are a number of other tools that can be applied to help isolate the trade scenarios with the best probability of success.

Time of day:  As the Stochastic Oscillator is used to anticipate market reversals; we should also consider the time of day. Generally speaking the market tends to enjoy a greater degree of volatility and momentum during the ‘active’ hours, which are typically the first few hours of each respective trading session. During these hours equity and bond markets open as key economic data is released, and the market has the best chance to develop a trend and ‘breakout’ to new highs or lows. During these active hours traders should refrain from ‘picking tops or bottoms’ as the market has the best chance to achieve even higher high prices or lower lows. However once the first few active hours have passed, we may then apply the Stochastic Oscillator in the anticipation of a reversal.

Calendar: Just as markets tend to develop strong trends during the active hours, on a macro level financial markets also have the tendency to become more volatile during specific times of the year. This can be the result of fundamental changes within the economy; large moves in related markets such as stocks, bonds, and commodities, and during quarterly corporate earnings season(s). During these times of the year traders should also avoid trying to ‘pick tops and bottoms’ as market have the tendency to achieve new highs and lows.

The Stochastic Oscillator is best suited for quiet market conditions where the probabilities of a ‘breakout’ are low, and there is a strong chance the market will once again regress to the mean. Through the application of this technical indicator in conjunction with other tools such as trend lines, Fibonacci levels, and careful analysis of the underlying fundamental trends, the Stochastic Oscillator can provide us the best probabilities of success and give our trading accounts the best chance of growth over time.

We wish you the best of luck in all your trading endeavors. 

Sincerely,

Adam Rosen

Adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen.

- 7/20/2011

Bollinger Bands

 The Bollinger Bands offer a unique view in the study of technical analysis as it pertains to financial markets, as they can be used as a gauge of market condition as well as a tool to forecast probable trade scenarios. The Bollinger Bands are comprised of three lines, with the center set at a 20-period simple moving average. The upper and lower lines are simply that same moving average extended 2-standard deviations above and below the average price. As a result the ‘spread’ or difference between the upper and lower bands tend to oscillate based on the market’s current state of volatility.

In the first chart the Dow Jones Industrial Average enjoyed a state of relatively low volatility for the better part of 2011’, and as a result the lower and upper bands drew closer together and towards the center if it’s range. Conversely as the Dow rapidly plunged to new lows and volatility increased exponentially the Bollinger Bands expanded far above and below the center moving average.

The Bollinger Bands can also be used to gauge the market’s current state; whether it is a ‘range-bound’ or ‘trending’ condition. A range-bound condition such as the current trading activity found in the EUR/USD chart (above) shows a market without a clear direction, as a range bound market has the tendency to oscillate between the lower and upper bands, crossing above and below the center moving average quite often. On the other hand and ‘trending’ market has the tendency to accomplish ‘new highs’ or ‘new lows’ on a consistent basis. From Feb-April of this year, the EUR/USD enjoyed a strong trend to the upside, which can be detected as in a trend; the market has the tendency to remain on one side of the center moving average.

Planning the Trade: Our first step in planning the trade is to identify the current state of the market. Range bound markets can be identified as those where the market’s price action tends to oscillate between the upper and lower band, crossing above and below the center moving average. In this case a trader may adopt a simple buy low, sell high approach with the anticipation that the market will eventually regress towards the mean. In a trending market condition, the price action tends to remain on one side of the center moving average and either the upper or lower band. In this case when a trend exists, it is important to only place a trade in the same direction as the underlying trend hence; the trend is your friend. A trader in this situation would choose to enter the market as it returns close to the center moving average with the anticipation the market will resume in it’s current long-term trend and retest either the upper or lower band.

 Regardless of the financial instrument, the Bollinger Bands can prove to offer traders a valuable insight as to the probable future direction and state of the market and in turn help us identify those trades with the highest probability of success and help our trading accounts grow over the long-run.

We wish you the best of luck in all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen.

- 8/2/2011

An important area in the study of technical analysis or ‘reading the charts’ is anticipating whether the market is most likely to continue in it’s current trend (the trend is your friend) or reverse course. Often times these reversals occur as the market tests and fails to break above / below a certain price level at least twice; also known as a double top / bottom. On the other hand, those who believe the market will in fact achieve new high/low prices may choose to wait for that eventual breakout. Generally speaking, these technical breakouts will be accompanied by a high degree of volume, often times as a result of the news release or economic event. However with that said, there are a number of other tools within our arsenal that can be used to help identify the probability of a breakout or reversal, such as the MACD.

The MACD (Moving Average Convergence Divergence) indicator uses the 12 & 26-period moving averages along with a 9-period moving average often plotted as a signal line. There are a number of different ways this indicator can be applied to the charts, including the following fairly straightforward approach. In order to properly interpret the MACD indicator we must discuss two simple conditions; Convergence and & Divergence.

Convergence: Convergence occurs when there is agreement between the market’s price action and the indicator applied, in this case the MACD. The following (daily) chart shows the USD/CHF, which continues to enjoy a steady trend to the downside. At one point the USD/CHF reaches a critical level and temporary reverses course back to the upside. Upon the second test of this price level notice the position of the MACD (Histogram) indicator below. While the market tested the same price level, the MACD was able to accomplish a ‘lower-low’ illustrating that the momentum was clearly to the downside. As the market and MACD were both able to subsequently accomplish a ‘new low’ this agreement (Convergence) between the candlestick and MACD forecasted the likelihood the market would in fact continue lower in the same direction as its long-term trend.

Divergence: In this next example the AUD/USD (daily) chart accomplished a significant ‘high’, reversed course to the downside, and then re-challenged the same price level another time. In this case notice the position of the MACD histogram. Despite the fact that the AUD/USD was actually able to accomplish slightly ‘higher-highs’, the MACD during the same period of time was not able to register similar highs, and in fact failed to even come close to it’s former ‘swing-high’. This disagreement (Divergence) between the market’s price action and the MACD demonstrated that the strength of the internal trend had to an extent faded and the likelihood of a reversal was imminent.

Placing the trade: We may anticipate the appropriate trade by watching the MACD as the market tests significant high or low prices. These indications take on an additional level of significance when they occur on longer-term charts such as daily or weekly charts, however the same approach can be applied to shorter-term time frames. During those times when the market tests a significant high/low, and the MACD shows ‘Divergence’ or disagreement between the MACD and price action, a trader may choose to enter a position in the opposite direction of the immediate trend, with the anticipation of a likely reversal, with protective stops placed above those swing highs, or below the recent swing lows. It is important to mention that often times the market may be able to achieve slightly new highs or lows before this reversal occurs, as which we can see in the aforementioned AUD/USD chart.

On the other hand, during those times when the market and MACD are able to accomplish new highs/lows simultaneously, a trader may choose to ‘buy the breakout or sell the breakdown’ with the expectation of a continuation in the same direction of the underlying trend. The MACD like any indicator can serve us well but should be used with other sources of confirmation such as making note of the economic calendar, time of trading session, as well as significant support and resistance levels. However the simplicity of the MACD can help us ensure we stand the best chance to remain on the right side of the trade, and by doing so, give our trading accounts the best chance of growth over the long-run.

We wish you the best of luck in all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

We are pleased to introduce the following series of articles that will discuss various aspects of the forex market, with the use of technical analysis (chart reading) and fundamental analysis (economic data). We will begin with simple concepts and move to more advanced areas of interest over time. Our goal is to apply these lessons to current market conditions so that we may anticipate future probable market conditions and the appropriate trades. We sincerely appreciate any comments / feedback. We wish you the very best of luck in all your trading endeavors.

Adam Rosen.

- 7/20/2011

Due to the enormous volume the forex market typically enjoys, traders often times employ a ‘buy low, sell high’ approach with the anticipation the market will revert to the mean; In other words, what has come down will eventually go up, and what has gone up will eventually go down. With this ‘regression to the mean’ approach in mind, traders will commonly employ the use of an oscillator which is simply a technical indicator that measures the market’s up vs. down movement. In particular the RSI (Relative Strength Index) is a popular choice. The RSI measures the market’s ‘Relative Strength’ on a scale of 0-100. Indications > 50 are considered to show a strong market, while those < 50 are considered to be weak.

Buy Signal: Implementing the RSI we hope to capture ‘extreme’ market conditions when an ‘Over-Bought’ or ‘Over-Sold’ environment exists. Using the RSI, a signal to ‘go-long’ or buy the market occurs when the RSI crosses below and back above ’30’. With that said it is important to note that when the RSI initially crosses below 30, this does not indicate the trader should buy. In fact when the RSI does cross below the ‘30’ (Over-Sold) level for the first time, often times we will see the market accomplish lower prices. However when the market has achieved it’s near-term bottom an is more likely to reverse back to the upside, we should be on the lookout for the RSI line to cross back above 30.

Sell Signal: Conversely after a period of time that the market has achieved a significant move to the upside, we may anticipate a reversal lower back towards the center. Using the RSI traders will search for those instances when the RSI crosses above and back below 70. Just as in the prior example, as the RSI initially crosses into an Over Sold (or Over Bought) condition, this does not automatically give us the signal to place a trade. In fact often times when the RSI crosses above 70 for the first time, the market may in fact achieve higher prices before eventually reversing lower. The Sell Signal we should look for is the moment the RSI crosses above and back below 70.

Refining our trading: The RSI like most technical indicators has a very singular purpose: to analyze the market from a very specific and narrow point of view. The RSI like any technical indicator is not designed to be used on it’s own but rather in conjunction with a variety of other analytical tools within our arsenal. There are a number of additional steps we can take to help identify which trade signals should be taken and which should be disregard (which we will cover in much greater detail in our subsequent publications). This may include:

Time of day: There are certain times of each trading session when the market is more or less likely to ‘break-out’ to new highs or lows. The RSI can be used to anticipate reversals during those times when the market is less likely to achieve new highs or lows.

News Events: The release of news events especially those which are a surprise to the market have a greater tendency to send the market to new lofty prices and therefore implementing the RSI to anticipate the market will not break to new highs or lows may not be advisable.

Market Condition: As shown in the chart below, the RSI may not reach the 30/70 (Oversold/Overbought) conditions during extreme range bound (quiet) market conditions. However with that said if we anticipate these quiet market conditions on a long-term chart (such as the daily chart below), traders might choose to look for RSI trade signals on a shorter-term time frame chart.

We have certainly not discussed every facet or possible application of the RSI indicator but rather we hope to illustrate a simple and straightforward approach in which this oscillator can be used. As always before committing live capital to any trading system, it is always in our best interest to formulate a trading plan, and then test that plan on a demo (practice) account, and search for that methodology that produces the most profitable and consistent results over a significant period of time.

We wish you the best of luck in all your trading endeavors.

Sincerely,

Adam Rosen

adam@4Xlounge.com

Adam Rosen. – 7/11/2011

Moving Averages:

   When analyzing and speculating in the financial markets, sometimes keeping our approach as simple and logical as possible can produce the best results. One of the easiest and commonly used technical indicators is the Simple Moving Average. Moving averages perform just the function the name implies; calculating the average price of the market over a given period of time. A 20-period moving average displays the average price over the past 20-candlesticks, as a 90-period moving average displays the 90-previous candles average price. Which MA (moving average) is best? We will tackle that question below.

   However it is also crucial to point out that MA’s are best applied to ‘trending’ market conditions. When the market has a trend, it has the tendency to achieve ‘higher highs’ or ‘lower lows’ over a given period of time, and the market has a definite direction. Note: the following USD/CHF (daily) chart shows a clear trend as it has continued to accomplish new lows over a considerable period of time. When a trend exists, the market’s trading activity tends to remain on one side of the MA. In a downtrend, the candlesticks remain below the MA In an up-trend; the candlesticks remain above the MA.

   On the other hand, when the market has established a ‘range-bound’ state and is unable to accomplish new highs or lows, the candlesticks have the tendency to consistently cross above and below a given MA. The AUD/USD (daily) chart below shows a typical range bound market condition, and for that reason, a MA should not be applied to this chart. In other words, MA’s are best suited for trending markets.

Which moving average is best? 

   For the purpose of simple market analysis, traders refer to certain moving averages, such as the 20, 50, 90, & 200-period(s), perhaps due to the self-furfilling prophecy that if we believe most (other) traders will react to the 90-moving average, we should follow suit. However for our purposes we are going to find the MA that ‘best fits our charts’ which in turn will help identify the next possible trade. ‘Our goal is the find the MA that the candlesticks were recently able to touch, but not cross over’.

Too Long! 

   Below, a 40-period MA (moving average) was applied to the GBP/CHF (daily) chart. Notice on the top-left hand corner of the chart, the candlestick was not able to touch the MA due to the fact that this MA is ‘too long’, and must be shortened. Where a 40-MA is considered to be ‘too long’ a 20-MA would be considered shorter as it calculates a smaller amount of trading activity. 

Too Short!

  Where the 40-MA was ‘too long’ we have now applied a shorter MA to the same chart; in this case the 20-MA was used. Notice how the MA has now moved closer to the candlesticks as it simply averages a smaller amount of candlesticks. In fact the candlesticks now are able to cross above and back below this MA indicating the MA is now in fact ‘too short’. We are searching for that MA where the market’s recent swing high was able to simply touch but not cross over the (MA) line. It is important that we identify the MA that most closely fits the market’s trading activity because this line will be used to identify the next trade; i.e. the (next) time the market is able to re-test this MA.

Just Right!

   As the 40-MA was too long and the 20-MA was too short we continue to search for that particular line that fits the market just right. In this case the 31-period MA proved to be the line that best ‘fit’ the market’s trend. Notice on the top-left hand corner of the chart, the candlestick’s swing high was able to touch but not cross above the MA, which tells us that particular setting best reflects the degree of decline over time. At this point we can now search for the next trade. Simply put, we may now wait for the market to ‘(re)-test and fail to break above that MA, at which time we will sell-short with the anticipation the market will eventually continue lower’.

 The GBP/CHF did in fact give us the chance to sell-short again, in two separate instances following the initial test. In addition we can go back a re-examine the two previous charts with the following in mind: In the case where the MA was too long, the market was not able to re-test the MA and our trade would have never been triggered. In the example where the MA was too short, the market crossed well above that MA, which in turn may have triggered a stop-loss order. The 31-period MA proved to be ‘just right’ as the market was able to subsequently test but not cross above that MA providing us with the chance to re-enter the trade without generating stop-loss.

Managing the Trade

   Once the trade is taken, there are a variety of ways we can set and adjust our protective stops and limit (profit) orders. Due to the fact that each trade is opened with the anticipation the current trend will continue to develop (in the same direction) and the market ‘should not’ cross above the MA, the protective stop orders should initially be placed on the other side of that MA and above / below the recent swing highs / lows. Once the trade begins to move in our favor, those protective stop orders can ‘trail’ the market always remaining on the other side of the MA. This approach can prove to be especially useful for those (long-term) traders who anticipate this trend may continue for quite some time. Partial profits can also be taken as the market moves away from that MA, which by nature represents the mean or average market price. More advanced methods of taking profits will be discussed in a subsequent trading article that tackles the Bollinger Bands.

   All in all, the moving averages can act as a useful tool when navigating financial markets with a definite trend and direction. Often times keeping it simple is the best policy, and moving averages can serve us well within our arsenal of technical analysis.

We wish you the best of luck in all your trading endeavors.

-Adam Rosen

adam@4Xlounge.com

The Forex Market – Trend lines:

   A ‘Trend’ occurs in the financial markets as an overwhelming number of buyers outnumber the sellers, or sellers outnumber buyers. These trends can be identified on a short and long-term basis, and those trends that occur in the forex market are typically the result of the underlying economic factors that exist in a given country. As economic conditions tend to change very slowly over great periods of time, those trends in the forex market also tend to be very long lasting. With that said, we should do our best to trade in the same direction of that trend, when one does exist. Simply put, “The trend is your friend”.

   Trend lines are one of the most widely used indicators that identify the current market condition. If the market is moving to the upside, we may begin by drawing ‘Support’ by simply connecting at least 2-significant lows’. In a trend to the downside, we begin by drawing ‘Resistance’ by connecting at least 2-significant highs. Support and Resistance lines often times emerge in a parallel fashion, demonstrating the consistent historical behavior of buyers and sellers.  

The preceding GBP/CHF (daily) chart shows a consistent trend to the downside. When a trend does exist, we should make every effort to trade only in the same direction as that underlying trend. Therefore, traders may look to ‘sell-short’ with the anticipation the market will continue to behave as it has so far, and continue lower. Ideally a position would be opened the next time the market tests and fails to break above its Resistance (upper trend line). 

   When the buyers and sellers exert a relatively even amount of influence a trend does not exist and the market tends to remain in a ‘Trading Range’. The following Gold (daily) chart demonstrates a typical ‘Range Bound’ condition, as the buyers and sellers have demonstrated a fairly equal amount of influence to the market. Support and Resistance lines are drawn in the same fashion – connecting significant highs and lows. Here traders will use a simple ‘Buy low, sell high’ approach with the anticipation the market will remain within this ‘consolidation pattern’.

These range bound markets are easily explained in the forex market, as the buyers (and sellers) tend to take equal positions in both currencies within the pair. For example, the CAD/JPY (daily chart) has formed a range bound pattern as those who take a position in the CAD match a relatively equal amount of traders that establish a position in the JPY. These range bound patterns often times take the form of ‘triangles’ as the Resistance line slopes lower, and Support moves higher.

Taking this a step further it is crucial to understand that ‘within every trend, there is a smaller range bound pattern and within every range, there is a smaller trend’. Notice how the obvious range bound (triangle) pattern contains a (downward) trend that eventually reversed course to the upside creating yet another smaller trend. Since a trading range or trend can be identified on virtually any chart, it is important that we maintain a consistent approach when studying the markets, such as the ‘daily’ charts discussed here.

In another example the USD/CHF has continued to trend lower for a number of years now, enticing traders to sell-short with the anticipation of lower lows in the days and months to come. In particular, notice how this solid trend to the downside is actually made up of many smaller range-bound patterns. A trader with a very long-term outlook may choose to simply take a ‘short’ position near resistance and hold on to this trade for weeks, months, or perhaps several years. On the other hand, those with a shorter-term time horizon may choose to ‘trade the range’ employing a ‘buy low, sell high’ strategy within these smaller range bound patterns.

A third more advanced option is also at our disposal; Given the fact that the market has demonstrated an overwhelming tendency to move lower, we may choose to only look for trades to sell-short even within a range bound pattern. This multi-year (down) trend is actually comprised of 6-range patterns, all of which eventually ‘broke’ to the downside. For those individuals who only look for ‘short’ trades, have a higher probability of success by honoring the longer-term dominant trend, even when searching for short-term trades.

   In short, using Support / Resistance trend lines can serve us in a number of ways. They help identify the market condition, (trend or range-bound), and the direction of any trend that may currently exist. But moreover trend lines also aid us in identifying the approximate price where a position should be taken, where protective stop orders should be placed, and what profits we may expect in the future. Implement trend lines into your own trading arsenal, as they will serve you well.

Adam Rosen

adam@4Xlounge.com