What Statistics Are Important in Forex?

When you are testing a Forex system or method, you are testing it to see if it can provide consistent, repeatable profits. The only way for you to see this objectively is through statistical evidence. There is a tendency for new traders to assume that there is one all important statistic which they should work on, but this isn’t a re`listic way of going about developing a system that works. Many people think that if they create a Forex system with a high win percentage, for example, they will be profitable. But what if your losses are all huge and your wins are tiny? You might still have a losing system.

The best approach is to cultivate a number of Forex statistics which provide you with important information about your trading. Well-gathered statistical evidence will not only demonstrate to you whether a system is profitable, but give you information which you can use to improve that system. Here are some important statistics to focus on during your Forex backtests and demo tests.

• Win/loss ratio (or win percentage). Obviously you want to get a high percentage of wins and a low percentage of losses. This is one of the most important things you can aim for, but as mentioned already, it isn’t everything.
• Size of wins and losses. You want larger wins and smaller losses if possible.
• Net pips. How many pips have you made, total, over the course of the Forex test?
• Number of breakeven Forex trades. How many trades did you break even on? The reason this is important to calculate is because you will usually lose a little money on breakeven trades since you must still pay the spread for the trade. You will need to add up the costs of your breakeven trades and subtract that cost from your net profit. It can be significant if you have a lot of breakeven trades.
• Worst losing streak. How many losses in a row did you incur during your worst losing streak?
• Average number of winning trades per day/week/month/year. If you’re eventually going to trade for a living you need to get some feel for how much money your system might actually make you in a given real life time period.
• Number of winning/losing trades for various types of Forex trades. If your method involves multiple entry methods, tally up data on every single one of them. You may also want to take notes on context. You may discover a price pattern or indicator which works great in one context works poorly in another. You can then make the adjustment to your next test.
• SOL Quotient. This term comes from well known Forex trader Rob Booker. Your SOL Quotient = your net profit/maximum loss. The resulting number is how many of your worst losing trades you’d be able to withstand in a row before blowing your net profit. Naturally you want this to be a large number.

You can profit with any one of these statistics being poor — if the others make up for it. There is no one golden statistic which determines statistics — but taken together these statistics can help you to succeed at Forex. If you are using MetaTrader platform to backtest or demo test your trading strategy, you can then use a report analysis tool to get all these important statistics.

If you want to share your opinion on the importance of various FX trading statistics, please use the commentary form below to post it.

GMSForex signals and robots.

Learning how to trade forex is a long and hard task. It is one of the most difficult things in the world. There are sites like this blog that help with the technical analysis aspect of trading, but there is more then one way to make money. GMSForex offers some alternatives and software solutions that may make things a little easier for the common man. There are plenty of forex signals providers that have good performance. Another popular trend that has emerged lately is forex robot trading. These are programs that are designed to trade the markets based on certain predetermined parameters/algorithms. Over the past couple of years forex robots have become very popular, if you search Google you will come up with plenty of interesting choice. Trading programs are a great alternatives for people who have a full-time job and are too busy to spend time learning to trade. So if you have no tome to learn to trade yourself, you can either subscribe to forex signals or use a forex robot. Simple!

What Is Moving Average?

One type of indicator which you'll see time and again as you are learning about Forex is the moving average (MA). Moving averages are lagging indicators—this means they don't predict price direction, but rather are calculated from past prices. There are four popularly used types of moving averages: Simple, Exponential, Weighted, and Smoothed. You will rarely see Weighted moving averages used in Forex, but we'll go over them anyway. Most traders prefer to stick with Simple and Exponential moving averages. The default is to calculate moving averages using closing prices, but you can also choose to calculate using High, Low, Open, Median, Typical, and Weighted prices. You'll be able to choose how to calculate your moving averages in your charting platform, unless you wish to calculate them manually.

Let's start with simple moving averages (SMA). A simple moving average is calculated by adding up the most recent N number of prices and then dividing that sum by N. What is "N"? It's called a period of moving average and you can set it in your charting software. It can take any positive integer value from 1 to infinity. It indicates how many days (or hours, or weeks, or any other chosen periods of time) you’ll be adding up. The general formula for calculating the simple moving average for a given moment of time is:



For example, you chose 5 as the number of days (period), and the Close prices for those are (from oldest to most recent): 1.3345, 1.3348, 1.3350, 1.3374 and 1.3325. Then the simple moving average can be calculated as:

SMA = (1.3325 + 1.3374 + 1.3350 + 1.3348 + 1.3345) / 5 = 1.33484

With an exponential moving average (EMA), the calculation is more or less the same, but the difference is that exponentially less weight is given to the older data. This is done to reduce lag. Here's a general formula to calculate the EMA:



Which means that the EMA for today is calculated based on the EMA value yesterday, today's price and the special multiplier α, which can be anything from 0 to 1 (the higher it is, the sharper is the exponential decline of the weight of the older data). In Forex, α for exponential moving averages is usually calculated as 2 / (N + 1), where N is the period of the MA.

For example, we have the same data and period as in the above example for SMA. Let's calculate α:

α = 2 / (5 + 1) = ~0.33

The EMA of the first day is considered equal to the price of that day:

EMA₁ = 1.3345

EMA₂ = 1.3345 + 0.33 × (1.3348 - 1.3345) = 1.3346

EMA₃ = 1.3346 + 0.33 × (1.3350 - 1.3346) = 1.33473

EMA₄ = 1.33473 + 0.33 × (1.3374 - 1.33473) = 1.33561

EMA₅ = 1.33561 + 0.33 × (1.3325 - 1.33561) = 1.33458

As you see, it's quite different from the result obtained using the simple moving average calculation.

A weighted moving average (WMA) is similar, except that in the case of an EMA, the weight given to each older point of data decreases exponentially. In the case of a weighted moving average, the weight decreases incrementally. In general case the WMA is calculated as follows:



If, for example, we choose the same data and period as in the examples above, we'll get the following result for the weighted moving average:

WMA = (5 × 1.3325 + 4 × 1.3374 + 3 × 1.3350 + 2 × 1.3348 + 1 × 1.3345) / (5 + 4 + 3 + 2 + 1) = 1.33475

Once again, the result is somewhat different from both SMA and EMA.

A smoothed moving average (SMMA) is like a mix of a simple moving average and an exponential moving average. In general, it's calculated the same way as the EMA except that the multiplier α = 1 / N:



Consider the same example with the same 5 pieces of data. Let's calculate the multiplier:

α = 1 / 5 = 0.2

The SMMA of the first day is taken as the price of that day:

SMMA₁ = 1.3345

SMMA₂ = 1.3345 + 0.2 × (1.3348 - 1.3345) = 1.33456

SMMA₃ = 1.33456 + 0.2 × (1.3350 - 1.33456) = 1.33465

SMMA₄ = 1.33465 + 0.2 × (1.3374 - 1.33465) = 1.3352

SMMA₅ = 1.3352 + 0.2 × (1.3325 - 1.3352) = 1.33466

Although it's different from all of three previous variants of the MA, as you see, it's closer to the result obtained with the EMA calculation.

The nice thing about charting software is that you don't have to learn all these formulas; your charting platform will do your calculations for you. All you have to do is choose the periods you want to calculate the moving averages across and let the software display them for you. Here is a MetaTrader chart of the daily GBP/USD showing all four types of moving averages applied to the close for a period of 14:



Simple Moving Average: Red
Exponential Moving Average: Blue
Weighted Moving Average: Green
Smoothed Moving Average: Orange

As you can see in the chart, exponential and weighted moving averages are faster than simple moving averages, and smoothed moving averages are the slowest of all. The longer the period of any moving average, the greater the lag will be.

What can you do with moving averages? Most people who trade moving averages use them either to provide context for other systems or on their own in crossover systems. Moving averages tend to act as support and resistance levels; a lot of people like to place a slower moving average and a faster moving average on their chart, and then wait for the faster moving average to cross under nr over the slower one. This can indicate an opportunity to sell or buy respectively. But one should also remember that moving average is not some magic trading tool and it will often fail.

If you have any questions or want to share some useful info regarding various types of moving averages, please feel free to reply using the commentary link below.

The Curious Case Of a Weak Japanese Yen.

It has been a few busy weeks for me and I have completely forgotten to update the blog. Today I found some spare time and I thought I would present my thoughts on some Japanese currency pairs. In my trading experience I have noticed that the correlation between EUR/JPY and GBP/JPY is very strong and when either pair presents a situation that is confirmed by the other pair it is wise to listen to the market. I was looking over the chart this weekend and I noticed that the EUR/JPY is forming a divergence setup when viewed on the monthly time frame. If you observe bellow on the chart I have marked a massive triple divergence that is showing on the Relative Strength Index. What is also very interesting to note is that the EUR/JPY has formed a big bullish rejection bar and the low of the bar could not be situated more perfectly. The low of the bar is sitting squarely on a support/resistance price pivot that goes back all the way to 2001. This in my opinion is a momentous occasion. This price pivot has not been visited in ten years and the reaction that is produced on the very first touch tells me that zone will be defended. There is a massive confluence of factors at play on this pair, we have triple divergence formed, a very bullish looking monthly candle and a historic price pivot @ 101.00 that has not been re-visited since 2001. Now the monthly chart are a great indicator of long term bias but it would be splendid if there was something that would give us a better clue on a lower time frame. On the second chart bellow I have marked a very nice "pin" candle that is sitting on a solid support area. The 105.00 pivot was very heavily defended in October and is now being used as support. This pair has started making higher highs already and it looks like for the medium term the bias may have shifted to long.

Having blabbered about the EUR/JPY for so long, let me shift the focus to the GBP/JPY now. If we look at the chart bellow for this pair there is a very similar situation. On the daily chart there are two "pin" candles that have formed, almost the same rejection bars as we see in the EUR/JPY. Also there is added support level @ 123.50 which was used back in August. Both Forex pairs have started making high highs already and there are many supporting factors between both pairs that are showing that at least in the medium term the monster downtrend that has been dominating the Japanese Yen might be at an end!

What Is Confluence in Forex?

In Forex, especially while studying technical analysis, you may hear the term "confluence" used in conjunction with trade setups. What is confluence and why should you care about it as a Forex trader?

Confluence refers to any circumstance where you see multiple trade signals lining up on your charts and telling you to take a trade. Usually these are technical indicators, though sometimes they may be price patterns. It all depends on what you use to plan your trades. A lot of traders fill their charts with dozens of indicators for this reason. They want to find confluence—but oftentimes the result is conflicting signals. This can cause a lapse of confidence and a great deal of confusion. Some traders add more and more signals the less confident they get, and continue to make the problem worse for themselves.

Most Forex traders who succeed do so with a minimal number of indicators on their charts. Two or three is a good number of indicators to aim for. Some traders use just one, and some use none at all—though it’s harder to find a good trade context if you don’t have any at all.

Here is a good example of using confluence to place a great Forex trade. Say you trade using price patterns formed by the candlesticks on your chart, and you see a pattern which signals a "buy" trade. While the price pattern itself might be all you need to be right 80% of the time, perhaps you’ve discovered that confirming the pattern with some confluence can help you to be right 90% of the time. Maybe you’ve tested and discovered that Fibonacci retracement levels can help you find a good context. If your price pattern which signals "buy" lines up with a Fibonacci retracement level which is acting as support, then that is a great example of an "A" trade confirmed by confluence (the price action and the Fibonacci level). Note how this is not a cluttered Forex system. Aside from the Fibonacci levels, there are no indicators drawn on the charts at all. All you’re looking at here are price patterns. You only overlay the indicator when you want to check the context surrounding a price pattern. If you notice that the retracement level matches up with a pivot point you’ve been keeping an eye on, that’s another form of confluence.

This is only one example of using confluence in Forex. There are many different ways to use confluence. Systems are as varied as personalities. Test different combinations of signals to determine the best Forex indicators for you to use. Experiment and see what gives you the best statistical results over a large number of trades using historical data. Maybe you’ll find that using confluence of moving average crossovers combined with Fibonacci levels gives you great results. Maybe you’ll discover that Bollinger bands used in conjunction with support and resistance tests well. One thing which is important to note is that when you experiment with confluence, you need to choose indicators which are independent of each other—not calculated using each other. Otherwise you will stack up time lag, which will decrease accuracy.

Confluence is beneficial because it does more than show you a good setup in isolation—it shows you a good setup in context of the market. This is essential in Forex to avoid fake outs, unexpected reversals and trading against the trend. In a way, most Forex systems are built on the idea of confluence. If you haven’t found a system you like, this is how you can start building one from scratch. A good system will show you what’s going on right now, and how it fits into the bigger picture—and how you can profit from that knowledge.

Avoiding Slippage in Forex

«My Forex broker cheated me. I put in an order at one price and it got filled at another, and now I’m in a losing trade. That’s why I’m losing.»

How often have you heard that story, or been tempted to tell it yourself? One of the many risks of trading Forex is something called slippage. No, it’s not your broker cheating you (well, that’s up for debate, but seriously, don’t make excuses for your lost trades). It’s something you need to be aware of and compensate for during your trades.

What is slippage in Forex? Slippage is when you place an order at a quoted price, and your order gets filled at a different (worse) price than the one you were quoted. Slippage can be minor enough not to impact your trade outcome at all, or it can be major enough to stop you out the moment you’ve entered the trade! You can lose a lot of money through slippage, so it’s something to be wary of and to avoid if at all possible.

Why is there slippage in Forex? Slippage tends to result during times of great volatility, and also in response to fundamental events like reports being filed, etc. Slippage almost always happens when the market opens each weekend on Sunday nights! If you stay in a trade over a weekend, be very wary. Sunday nights are unpredictable—in general this is not a good day to trade.

If you do place a Forex trade which you’re going to hold over the weekend, or set up for a trade on the weekend which might get triggered when the market opens again, compensate for that potential slippage. Place entries a little farther out than you usually would (testing will help you choose a good amount of buffer to leave). You may also want to move your stops out a little farther than usual too if you are already in a trade.

Do some Forex brokers deliberately make money through slippage? Probably, but slippage is a fact of life, even with good Forex brokers. It’s best to learn to deal with it than to complain and blame someone else for your failure. There are bad brokers out there though, so if you’re concerned you might have one, look up their ratings and find out about other traders’ experiences.

On a related note, you can set up most broker platforms to show you the spread. This should help you to understand spread and slippage better and thus make better trading decisions. Spread widens and shrinks in different market conditions—during volatile ones it tends to widen (which is how slippage usually occurs). By setting your charts to show this spread, you’ll be able to visually see the days of the week and the times at which the spreads widen the most. Then you can compensate in the future by following the previous suggestions to avoid slippage in Forex outright or work around it.

Euro To Continue Downtrend?

The daily barrage of news reports and stories about the Euro currency is nauseating to say the least. The mood currently is extremely pessimistic and for good reason. So far every piece of economic news regarding the Euro zone has been disappointing and the charts are accurately reflecting the doom and gloom. Enough with the chit chat, let's get into the important stuff. A few weeks ago I made a post about how the 1.3400 area might provide a road block for any downside movement and it did. Since that last post, price has closed very convincingly bellow the 1.3400 pivot. Over the past week a very important development has taken place on the technical side of things. The iron clad 1.3400 price pivot zone is now being used as resistance. Remember, prior support once broken becomes resistance! You may ask yourselves, how do we know that the 1.3400 will hold? The answer is nobody knows for sure, but the market likes to leave little clues here and there for the observant traders. The Euro left us with a very nice daily rejection candlestick at the close of Friday's trading session. I have marked the very large rejection candle on the chart bellow for easy reference. I am a big believer in these formation because they illustrate when a stop run takes place. For the neophytes here, a stop run is when the market spikes into an important price level and reverses instead of continuing in the initial direction. This is how this rejection dynamic manifests on the chart, and it is very often a precursor to a reversal. The downtrend for the Euro has been a very strong for the last few weeks and as of right now it looks like it may continue. Bearish momentum will be confirmed IF the low of that rejection bar breaks with conviction.

Gold Price To the Moon? Maybe Not!

Over the past couple of weeks I have been reading some popular financial blogs and publications and the common theme and front pages news is the price of gold. You can not find a place online that is not talking about how people are selling their gold dental crowns or selling their children for the privilege of buying some of the precious yellow metal. Everyone and their mother, mother's cousins, mother's brother is buying gold and loading up in preparation for a monetary apocalypse. I have heard so many conflicting opinions from the "Experts" on where the price of gold should be, or where it is going that it will make your head spin. Some financial analysts say $10,000 per ounce, some say $5000 per ounce. As far as I am concerned no one really knows in which direction most of the time the market will move, let alone how far and what exact price the commodity will reach. If you have read anything I have posted on this blog over the past months, you will know that I like to see what the market is telling me on the screen in front of me. In my eyes the charts are the only somewhat reliable indicator of future market bias. In the real world nothing is 100%, but every once in a while if you are observant and patient you might get a clue. If you pull up a daily or weekly chart of gold futures contract or XAU/USD forex pair the uptrend has been steady and the slope of the chart is getting stepper and steeper. Most investors and traders would only see long opportunities and to even suggest a short bias would be considered laughable. I am about to do just that. If you notice on the screenshot bellow, the monthly chart for gold is showing a very large bearish engulfing bar formation.

Since gold started it's stratospheric rise in 2008, there has not been a formation of this magnitude and size. In my experience, before a long term trend is over or a reversal takes place, a parabolic rise in price occurs after which a very sharp downward swing takes place. This is the same dynamic that signaled the crash of the Nasdaq from it's highs at 5000. This very similar price action has played out in gold futures during September and it may be a sign of things to come. I am not stating with a thousand percent certainty that gold is going to collapse, no one knows for sure. However there is an eerie resemblance to what happened right before the Nasdaq bubble popped. If you are a long term investor you should take note of this development, I don't care if you think gold is going to $20,000 per ounce. I would say to wait for a breaking of the low of that bar formation. Always wait for confirmation of directional bias before hopping on the bandwagon. Happy Trading!

SP500 Index To Stage A Turnaround?

Yesterday the S&P500 Index made a very dramatic reversal at the end of the trading session. Today it has formed a very curious setup at precisely that same reversal point. The sellers look exhausted and it seems like a turnaround might be in the cards for the afternoon session. My favorite indicator the Relative Strength is showing bull divergence which is even more evidence for the bullish scenario. If the high of that big bull candle is broken then the bull sentiment will be confirmed.

UPDATE:

The first setup did not materialize any meaningful momentum. However this setup right now has very good potential. If the top of that "pinbar" breaks it's high it will be another bullish bias setup. Triple divergence has formed and this is looking like a very likely scenario that the S&P500 might reverse direction here. If this bad boy breaks to the upside the first resistance area has been marked on the screenshot bellow.

Euro Yen Forex Currency Pair Analysis

It is not exactly news to anyone that is involved in the markets the stratospheric heights to which the Japanese Yen has risen. The trend is absolutely relentless, but in the last week a long overdue retracement appeared and gave the Yen some relief. Today after doing my chart scans I noticed a very cool looking price action on the GBP/JPY and the EUR/JPY forex pairs. Both pairs are very highly correlated and if there is a signal on one pair usually there will be something very similar on the other. Sometimes you can use one as a proxy for the other. I have posted two charts bellow so you can see how evident these correlations are. I am a big believer and fan of rejection bars and today we have some very nice formations. If you notice the four hour charts for both pair are showing very large pin-bars. Not only that, but my favorite RSI divergence is showing very clearly between the swing highs. The GBP/JPY formations is larger and more prominent. A very clear rejection at a very nice price pivot zone. Remember confirmation of bearish momentum is only valid if the low of the candle formation is broken through. Have Fun!

What to Include in a Forex Backtest Spreadsheet

One critical step on your Forex journey is going to be backtesting. Once you find a system or method which you like, you are going to need to run through historical data and see how your method would have performed on real trades over the past few weeks, months or years (depending on the timeframe you’re planning to trade). It is recommended you do at least a couple hundred of backtest trades for any given system to establish a really good idea of how the Forex system will perform in those market conditions. Market conditions do change, so a backtest still doesn’t give you all the information you need, but it can sure give you a good lead in to your demo testing. If you record a lot of important information you can also learn specific things that work and don’t work and how you can refine your system to statistically improve your profits.

On a Forex backtest spreadsheet you will want about six columns. The first will state whether each trade was a buy or a sell. The second column should list the date, and the third column the reason for the trade. The fourth and fifth columns should be the entry and exit prices respectively. The last column will be the sum of pips you gained or lost from each trade. The column where you list the reason you entered the trade can be a good place to take specific notes along with the triggers which caused you to enter. Those notes will come in handy later, so be detailed, especially on trades you lose. Later you can look back and find patterns which will help you to refine and eliminate losses.

Write your Forex trading rules at the top of your spreadsheet. They will help you focus and also remind you of what your rules were on this backtest when you look back on it later. If you make changes as you go to your system, note those changes and the historical dates on which you implemented them.

Some statistics to calculate from your data, which will be useful to you, include net pips from your entire Forex backtest, along with the values of your average win and average loss. You’ll want to tally how many wins and losses you have, and what your win percentage and win to loss ratio is. Remember that the spread will cost you some profit on every trade, and breakeven trades are technically at a very small loss as a result. You can calculate an adjusted net which takes these losses into account. Take note of your biggest losing streak, and how many losses in a row you endured. Also find out your average net winning trades per month, week, day, or whatever is an appropriate unit of time for you to overview your trading. Another good quotient to add up is your net profit divided by your maximum loss. This will tell you how many of your largest losses you could endure before blowing all your profits.

Forex backtesting can be pretty overwhelming at first, but eventually you’ll get used to it and get into a rhythm. And it can be incredibly rewarding—it can make the difference between whether you blow your account in real life or become a profitable trader.

Crude Oil Price To Tumble?

The price of crude oil has been in a sideways movement since early August. Currently crude is trading in the middle of a range and price has come up against a strong barrier. On the posted screenshot bellow, the resistance pivot has been market by an orange box. Two rejection candle bars have closed and are signaling a possible move south into the lower part of the trading range. If the low of the second pin-bar is violated we may see bearish momentum materialize. Overall on the daily and weekly charts oil is stuck in a sideways chop, however the last few trading days the intermediate trend is down. So this situation can be considered a pullback to resistance withing the short term downtrend. I am sure everyone knows the tired old cliché "the trend is your friend"! Enjoy!

Relief Rally for the Euro Currency?

The Eur/Usd currency pair has been under significant downward pressure for the last few trading days. Today was the first sign of the bulls coming into the market and taking over the reigns. I usually check the daily closes at 5 pm EST to see if I can spot any unopened presents the forex markets may have left for me. Today I got a nice surprise. A few days ago I mentioned in one of my posts [Euro Big Support] that the 1.3400 zone is a very significant pivot and that it may be smart to wait for bullish price action before joining the frenzy. Today on the daily chart a very nice long rejection bar has formed. The tail is very nice and long which to me says a lot of short covering was taking place and a lot of stops were hit. You can see the 1.3400 was rejected with force and the market closes above the open. This is a very bullish sign and we also have bullish divergence that has formed from the 12th of September low to today's low. Lets do a quick recap. We have a huge support from the 1.3400 price level, we have a very significant rejection bar and we have Relative Strength showing seller weakness. I would say we have a good solid case for a possible reversal. Before you get all giddy with excitement, remember that bullish momentum is confirmed IF and only IF that long doji bar breaks its top by a few pips. Enjoy!

Dow Jones Index Pull Back?

If the top of that rejection candle breaks its high we can see a nice retracement on the Dow. The Index has fallen straight down for two days without a single sizable pullback anywhere in sight. I just caught this setup by glancing at the one hour charts and it looked very appealing. The rejection bar is situated right on the yesterday's low and it looks a lot like stop hunt to me. We also have RSI DIV between the two swings indicating a lack of seller participation. We are also currently sitting on the low that was formed during the early August panic selling crash. The Dow Jones Index is still in a range bound market. Since we are at the bottom of the range it may be wise to fade the support for now until we get a clear break in either direction.

Gold Price at Major Support!

At the close of today's trading session I did my usual routine checks of the major market instruments and this Gold chart made me smile just a little bit. Gold has been in a very clear sideways range since about August. Today price reaches a very significant support zone at $1720. On the chart bellow, I have marked two instances during the month of August where price respected the $1720 area very clearly. So we have a nice location, but not much else. Yes we have a rejection bar with a tail on it, but for my personal taste it leaves much to be desired. I would like to see much larger rejection bar, something that signifies a "stop hunt" and a show of force by the bulls. Today we saw a very muted response to that major support. I would sit on the sideline for now and wait for a much more convincing scenario. I think the $1700 level will be a major battle zone level and a much better area to look for a continuation of the long term trend.

If that 4-hour bar breaks to the upside the first target will be $1765. I have marked it on the chart as the first minor resistance. So keep your eyes open for the next few days, we are at a cross road for the yellow metal. Let the games begin!

Euro Drops to Massive Support Zone

As I am writing this blog post the Euro is sitting on a very key pivot price area. As I have outlined in the market screen shot bellow, the 1.3400 has proven to be a very contested zone. In December of 2010 and through to February of 2011 the 1.34 price area was used a both support and resistance several times. The Euro finally managed to wiggle its way out of that area with a lot of effort. Today for the first time since mid February we are testing the 1.34 and if history is any indicator we might see this zone produce a much needed support for the Euro currency. It is wise to wait for the close of today's trading session before making an educated guess as to what may be in store for this currency pair. Me personally, I am waiting for a rejection bar to form to confirm any buying interest or taking any positions in the market. Remember, patience is a virtue and is rewarded very well in this business. Enjoy!

Tripple Low with Positive Divergence on the S&P Index.

If the top of that bullish engulfing candle breaks we may be in for a possible retracement to the upside. Right now the S&P is sitting at a very nice support zone that held last week on September 12 very nicely. The location of this reversal price action pattern is absolutely perfect. Bullish momentum will be confirmed IF ad only IF the top of that bullish bar breaks to the upside. You all know I absolutely love to see double and triple divergence and this is a great example.

Tips for Trading Forex at Night

For a lot of us (especially in the US), the best times to trade Forex fall at the worst times of day—either during work hours or while we’re asleep at night. Fortunately for those who trade the dailies in the US, the start of the new candle tends to happen in the afternoon, but that often means that trades will span overnight on this and other timeframes. What do you do if your trading schedule is this inconvenient? Suggestions online usually range from “quit your job” to “move to Europe.” This is hardly feasible for most of us. Most of us are going to be faced with examining an option which is more viable but still challenging: trading Forex at night.

For many people, trading overnight is just a given since position traders who trade longer term charts like weeklies are going to be in trades for many days on end. These timeframes move slowly though and are easier to keep an eye on during the daytime than other trades on faster timeframes. What if you trade the dailies or hourly charts? You could be stuck making critical trading decisions in the dead of night.

Unfortunately many FX traders arrive at the solution, “I’ll just not sleep.” This is the road to disaster though. You cannot function without sleep. You need sleep to be healthy and also to keep your mind sharp and fresh. Trading on a sleep deficit is like trading inebriated. It’s just a really bad idea; it’ll destroy your health and your finances. So you have to sleep. How do you balance sleep with currency trading at night?

The trick is to set up alerts in such a manner that you can maximize your rest, minimize the complexity of your decision-making process, and maximize your returns. You want to only have your alerts wake you up at critical junctures, and you want those junctures to be clear cut. Making difficult, complex decisions in the dead of night will rob you of sleep and also harm your judgment, resulting in losses. The alerts should wake you up in order to make simple, straightforward decisions.

One technique you can use to trade during the night is to set alerts at pivot zones. Different techniques will be appropriate for different Forex systems, but if for example you exit trades partially based on support and resistance, then you will want to identify important pivot areas and set alerts in those areas. Choose a sound to signal when a trade is moving toward profit and another sound to signal when it is moving away. That way if you hear the “good” sound in your sleep you can roll over and go back to sleep (or get up and trail your stop). If you hear the “bad” sound you can get up and choose whether to exit. By letting the sound itself give you information, you can optimize your sleep. Also make sure to have the alert beep at you more than once so you don’t miss it in your sleep the first time.

Trading the foreign exchange market at night is one of the most challenging real life integrations you can do, but with some tweaking you should be able to make it work for you. You don’t have to move to another country or quit your job to trade during the day if you can learn how to trade at night and get adequate sleep!

Australian Dollar Bullish Case!

A few days ago I posted a forex video overview of several currencies and the AUD/USD forex pair was one of them. At the time of that video on the daily AUD/USD candle chart we had 2 reversal bars with long tails. Today we have another very interesting bar formation that has just closed. If you note on the chart bellow we have a bullish pin bar that has a very strong positive close. There is a nice tail on the bar indicating a very strong rejection of the monster 1.0200 price pivot zone. If you also take note the Relative Strength Index has posted a very nice positive divergence. If you have ready my blog for any length of time you know I love to see divergence formations because they are an indication of possible trend reversals. Bullish momentum will be confirmed IF we get a break of the high of that reversal rejection candle. Having said all that, there are many supporting factors for a bullish scenario for the Aussie currency. We have a very strong support, nice bar and a very clear RSI signal that a reversal may be imminent. Enjoy!

Momentum change for the S&P Index?

I just caught this situation on the 1 hour charts. Nice divergence formation and a very large bearish engulfing bar signaling a possible break downwards. If that bar breaks its lows it will confirm a shift from bullish to bearish momentum.

Bellow I have included a zoomed out chart to point out a key price area. I have marked a prize pivot in orange color. That zone has been visited for the first time since the end of August. The location of the bar is very good and has a solid backing from that resistance pivot. So here we have area, we have a nice bar formation and divergence indicating a weakening of the bull momentum. Let see if the downward momentum materializes.

Forex Video Analysis on Euro, Aud and Nzd.

On September 11th I uploaded a video review on the Euro. At the time we were down about 500 pips for the prior week and the currency pair barely had any pull backs. I mentioned that is is common to have a descent sized retracement back to prior support/resistance price area after such a sharp drop. Today the Euro has bulled back and is currently trading at 1.3873 as I am wring this blog post. The 1.3800 zone was my first obstacle to any retracement, but that has broken and the next major pivot is the 1.3900 to 1.4000 area.

The New Zealand Dollar is in a very curious area and has tried to break down 4 time with no success. If you note on the chart bellow, today a very large rejection candle has formed with a nice tail. At this point it looks like that bears are loosing control and a reversal may be in the cards for tomorrow or Monday.

The last time the Australian currency visited the 1.02000 price pivot there were big fireworks. That price zone has proven iron clad many times and until it breaks it is advisable to fade it. In the past two days the Aussie has tried to head for the 1.02000 area and has been rejected quite strongly. A nice rejection candle has formed today and tomorrow if we see a break of the high of that bar the bull may materialize.

If you would like to view a more in depth analysis with extensive commentary you may download my video analysis:

DETAILED VIDEO OVERVIEW: Forex-Overview-September-15th

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I use Filesonic as my file host. If you do not have a premium account you can download for FREE using the slower download button.

Crude Oil back to old resistance!

The crude oil market has been in a sideways range for the past few days. Crude oil is back to a very solid resistance price zone. I spotted a nice situation developing. I marked on the chart bellow a nice rejection candle. It has a nice tail on it and there is divergence developed between the two highs. As we all know divergence is a sign of weakness so it may be a good idea to look for counter move on crude. Short momentum will be confirmed only if the low of that bar breaks. Like I always say, wait for the break of the bar for any directional bias confirmation. Happy Trading!

Short S&P Trade Possibility.

I just noticed this interesting trade opportunity on the S&P index. Price made its way back up to yesterdays high and formed a nice double swing high with a very nice divergence. The chart I posted is a 30 minute time frame and the last bar that closed had a very nice long tail on it. Sellers took over in a very aggressive manner and now it will be interesting to watch if we make it to the first major support zone. The location of the setup is very promising. Let see how she goes. Enjoy!

Stock Market about to tank?

I was watching the close of the market today and a very interesting situation presented itself. Two days ago I pointed out that the S&P was near the low of the range and that we might rally into Tuesday and Wednesday [Monday Analysis]. Well we did get the upside action and now the market is sitting on a price pivot level as I have indicated on the chart bellow. At the close of today's trading session a very nice two swing with divergence appeared. A huge pin bar formed on the last hour of trading which to me says that everyone was dumping into the close and stops got taken out in droves. This sets the stage for possible downside action into the overnight session or probably into tomorrow. So with that said it will be interesting to monitor the markets after hours to see if we go south. I have Also illustrated on the second chart the first minor and major obstacles to any downside movements. What also struck me as quite interesting was the volume participation. The turn over of contracts in the last hour of trading before the close spiked by almost ten fold from the average during the day. This also tells me there may be major repositioning for tomorrow's trading session. Enjoy!!

New Zealand Dollar about to jump?

The daily candle chart for the New Zealand Dollar is showing a very nice rejection formation. Two lows have formed at a very significant price reaction zone. The 0.8200 round number had been proven to be a very contested price area one 3 occasion during the past few months. A large pin bar candle formation has appeared which is telling me the 0.8200 zone haS been rejected and we may be changing direction in the next few days. As I always say only look for bullish momentum to build if the high of that bar is broken by a 3-5 pips. A nice bullish divergence is showing between both swings which is always a good thing when looking for price reversal. Happy Trading!!

Daily S&P Futures Index Overview

The S&P Index is currently stuck in a channel since the beginning of August. There have been several attempts to break out but so far the channel has held up quite well.
Yesterday at the closing of the trading day an interesting candle bar formation has appeared right at the bottom end of the channel. A bullish doji bar with a nice tail is indicative of buyers taking control of the market. The location of the bar formation is very nicely sitting at the bottom of the the current trading range giving us a very clear long bias for Tuesday September 13th. Before getting all excited and giddy it is a wise decision to wait for a break of the top of the bar before the bull momentum is finally confirmed. I decided to mark the minor and major resistance zones in red boxes so they are clearly visible. Enjoy!!

Trading in Real Life: Why You Need to Demo Test

Have you backtested a fantastic system over hundreds or even thousands of trades, and achieved a high win percentage and otherwise excellent statistics? If so, you may be tempted to go live. Some traders struggle to bring themselves to actually take their Forex systems live, but for others it is impatience and not trepidation which is the enemy. If you are thinking of taking this great system which you’ve backtested live without demo testing, think again. Backtesting and trading in real life are completely different, and you may have quite a bit of work ahead of you to achieve the same kind of results in real time as you did backtesting.

The first thing a lot of us discover while demo testing is that we completely forgot that in real life we do stuff like work, eat, and sleep. Something which worked fine in backtesting may be impossible to fit into our real life schedules, or take some very serious workarounds. You may need to learn to trade using a cell phone if you are at work during trading hours for example. Or what if your Forex trades tend to fall in the dead of night? You’ll need to trade in your sleep, and that means setting a lot of price alerts. Those alerts will have to wake you up at useful times though, and even figuring that out can be like designing an entirely new system. The wrong system of alerts can cause you to lose the same trades you’d have won while demo testing!

Another difference you’ll discover quickly is the role which time plays in your trading psychology. When you move the Forex charts forward a candle at a time and make trading decisions in a few seconds or minutes while backtesting, you don’t have a lot of time to second guess yourself. The same trades though, spread out over a time period of hours, days, or even weeks, can cause a lot of traders to experience a wide range of conflicting emotions. Many times we ask ourselves “What decision would I have made backtesting?” only to discover that we don’t know anymore! It takes a lot of practice to find out how timing is impacting your trading. You may find you need to trade on a different timeframe, or just get a grip on your emotions.

While all this may again sound simple in theory, most traders discover Forex demo testing presents a lot of unexpected situations which need resolution before they can go live. We highly recommend that you demo test until you are profitable for at least 2-4 consecutive months before you go live with your system. There is no reason for you to lose a dime in this business unnecessarily since you can demo test for as long as it takes for you to master your trading, completely free! Your drawdown live should reflect your backtesting figures, but it won’t unless you invest some time and effort demo testing and finding out how to integrate trading into your real life first.

USD/CAD Bearish Scenario?

The Canadian Dollar has formed a very interesting chart pattern today. On the daily chart a bearish pin bar formation has formed. This bar signifies a stop run and a possible reversal may develop tonight or tomorrow during the European or US session. Look for a break of the low of the bar @ 0.9900 for a confirmation of short momentum to develop. The formation also has bearish divergence developed which indicates lack of buyers at the current price levels. This chart pattern has formed at a very significant round number 1.0000 which is a very very significant price level in terms of prior support and resistance. As you can see on the chart That price level has been used more then five times as a support and resistance during the year. Enjoy!

AUD/USD Bullish Setup?

Today at the close of the US trading session I scanned over the charts of all the forex pairs to see if there was any interesting developments and I came across this setup on the Australian Dollar. On the one hour chart there is a beautiful two low with divergence setup. If you notice on the chart bellow there is a monster one hour bullish engulfing candle that engulfs the previous three candles by a wide margin. This is an indication of big buying pressure. There is very clean divergence showing between both swing. We also have a round number 1.3000 acting as support. The 1.3000 area has acted as support and resistance on several occasions in the past and is a very proven level.

1 Hour Chart:

4 Hour Chart:

Good Forex Trades Need Great Context

On your path to becoming a profitable trader, you will test many different methods for entering and exiting trades. At some point you may find a method which works pretty well for you and which you feel comfortable using. You may take a lot of great trades using this method, only to find that one day your method just stops working. What happened? Did your system break? Will you have to start all over?

Sometimes the answer to questions like this is simpler than you might expect. A lot of traders pay attention to entry triggers like moving average crossovers, price action patterns, and other indicators lining up on their charts, but don’t pay as much attention to what the market is doing on a given day. The market does slowly transform, and like any other living system it will evolve with time. Some things about Forex will never likely change, but others are sure to do so. The “mood” of the market can change considerably as the years go by, and a system which worked great in one context may fail in another—or simply need an adjustment to keep working.

If you are in a situation like this and your system has abruptly “failed,” you may want to ask yourself if this is what has happened to you. Has the economic climate changed substantially since you were last profitable? If so, then perhaps the context around your trades has stopped being quite as optimal as it once was. You may have been placing trades in an excellent context before without even knowing it or attempting it by complete coincidence. And now that the context isn’t as great, your trades aren’t working out.

Here are some questions to consider. Ask yourself, “Am I trading against the trend?” This can often work against you. “Am I trading in a choppy market?” Choppiness kills a lot of traders. If there are a lot of fake outs, sometimes you need to take a break and wait for the market to even out a bit before you come back in. “But I’ll have to wait forever,” you might say. If this is the case, then look at more currency pairs. If you only trade a couple of pairs, and great setups are coming half as often in the current market climate, then think about looking at twice as many pairs each day. This phase of the market, like all others, will pass. It doesn’t mean your system is broken, it just means that right now it’s a little harder to make it work than usual. All traders face this sometimes. Once in a while you may indeed find you need to go back to the drawing board, but more often than not it’s a waste of time to start all over. If what you have makes sense and it works often enough, than you probably should just adapt to the market conditions and stick with what you’ve got.

Develop a technique to find the best setups in the best locations. Great Forex traders point out that finding excellent setups is like using a rifle, not a shotgun. They’re right—good trades don’t take good setups, they take great setups.