RichardCox

Using the 61.8% Fib Retracement For new traders, the Fibonacci Retracement is one of the most exotic-sounding terms in technical analysis. In some cases, traders might be intimidated because of this and altogether avoid using the associated strategies. Fortunately, trading with Fibonacci tools is not nearly as complicated as it might sound and once you have some practice with the method, excellent trading opportunities can be quickly identified. The ideas behind how Fibonacci measurements are calculated is based on a sequence of numbers identified by a thirteenth century mathematician, but the applications in modern markets are very real and trading methods using these tools are some of the most popular and highly effective currently used. The main idea behind the strategy is that when major trends are in place, corrections in the opposing direction are inevitable as prices revert to the mean. Since these corrections will actually “correct” the previous price move and reinforce the trend, new positions can be taken on the pullback (in uptrends) or in small rallies (in downtrends). Traders looking for entry points in these corrections typically have a difficult time determining when exactly to go long or short. Fibonacci retracements are extremely helpful in this respect, as the trading zones for new long and short positions are highly exact and measured without much difficulty. Measuring Retracement Levels All of the major trading stations will support the use of Fibonacci retracements as one of its drawing tools for your charts. All that is left to the trader is to identify an important impulsive move from which to base your measurement. This is probably the most difficult part of the strategy, and does take some degree of practice before you will start to get good at identifying these price regions. Of course, it must be remembered that there is no “perfect” answer for which price zone should be used. This margin of error is what makes this step difficult to master. In the first charted example, we can see what a Bull Impulse Move looks like on a real time chart. As you can see, there is very little in the way of downside correction until the area that is marked Corrective Bear Retracement, which is when markets are reverting back to the mean (the longer term average). In the second charted example, the opposite scenario unfolds. Here, we have a Bear Impulse Move that does little to rally until we see the area marked Corrective Bull Retracement, which is where the market is looking to make its needed correction. The most important areas to note in both cases will be the highs and the lows, as this is what will be used to measure the Fibonacci levels. In a Bull Impulse Move, we start plotting the Fibonacci retracement using the lows. In a Bear Impulse move, we start measuring with the Fibonacci retracement tool using the highs. Then, we simply plot the other end of the Impulse Move and our trading stations will plot our Fib zones automatically (usually giving us levels for the 38.2%, 50%, and 61.8% retracements). Plotting Entries Once these initial steps are carried out, we can start to look for price activity that approaches the 61.8% Fib retracement level, which is the most commonly watched price zone in Fibonacci strategies. To be sure, any Fib level can be used as an argument for establishing a position. But here we will be focusing on the 61.8% retracement zone, as this tends to offer some of the highest probability trading scenarios. This is largely because price activity that reaches these areas (essentially giving back more than half of the previous Impulse Move) can be viewed as “bargain prices” within the larger, already established trend. In the third charted example, we can see prices in a clear trending move to the upside. Once this series of higher highs and higher lows has exhausted itself (by posting a lower low), traders should be on the lookout for price action that approaches the 61.8% of the previous bull move. The third charted example shows this in action, and trade entries could be taken ahead of the green arrow, as this retracement level can be expected to contain prices, offer a discount price on the previous uptrend, and offer a signal prices are about to extend higher. In the fourth charted example, the opposite occurs with prices caught in an Impulsive Bear Move. Once prices start posting higher lows, we know that the move has reached its exhaustion point and we can draw our Fib measurements. Once prices approach the green arrow (marking the 61.8% Fib retracement), short positions can be taken as it is unlikely prices will rally much further. In this case, traders are able to get back into the dominant downtrend, but at a higher price when compared to those using breakout strategies. Stop Losses and Ideal Structures In both of these cases, stop losses could be placed just outside of the 61.8% retracement level. The reasoning here is that any violation of the 61.8% zone will invalidate the area as support or resistance that is suitable for trades, and will actually suggest that a full retracement (a 100% retracement) is in store for that currency pair. It would not make sense to hold onto the position until all of that move has been recovered, so it makes sense to cut losses early if the 61.8% zone is later invalidated. When prices approach the 61.8%, an ideal structure would be one where the level acted as strong support (for uptrends) or resistance (for downtrends). One indication that this is happening occurs when pin-bars form on the approach of the 61.8%. A pin-bar is a candlestick pattern with a long lower wick (for uptrends) or a long upper wick (for downtrends). When this candlestick formation occurs into the 61.8% zone, it is an indication that markets are forcefully pushing prices away from the retracement zone. These types of patterns help validate these retracement levels, and create a higher probability trading scenario when positions are taken. Plotting Profit Targets For profit targets, a lot depends on whether you are a conservative or aggressive trader. Conservative traders will likely want to book profits on positions once the high or low of the previous Impulse Move has been tested. So, for example, if we are dealing with an uptrend and we went long at the 61.8% Fib support level, it would be a wise idea to take profits as prices reach the price high that defined the original measurements. For more aggressive traders, it would make sense to either book partial profits in this region or at least move stop losses to break-even in order to avoid turning a winning trade into a loser. Another less common but equally efficient approach is to use the 61.8% Fib retracement in the other direction -- for placing profit targets to exit your trade. This might seem counter-intuitive but once we understand how Fib retracements operate, the utility starts to become more clear. Since important Fib levels are expected to contain price activity, it would make sense to take profits on contrarian positions once the market has corrected with a 61.8% retracement. So, for example if we are in an uptrend and prices start posting lower lows (a signal the uptrend has ended), we might decide to enter into short positions. Profit targets for that short position can be defined by the 61.8% Fib retracement of the original move, as this would be an area of expected support. Conclusion: Use the 61.8% Fib Retracement to Capitalize on Previous Trends at Better Prices The 61.8% Fib retracement is a valuable tool that allows traders to quickly identify a trend, and then to establish price areas where it makes sense to establish new positions in the direction of that trend. This strategy is preferable to breakout methods because it allows us to buy lower and sell higher on a comparative basis. These strategies can be adjusted to match your trading style (conservative or aggressive), and take relatively little practice to actively master.

A system that does all the thinking and all the predictions? Easier said than done, don't you think? If something like this was actually possible, wouldn't everyone have a successful trading account?

Why is this posted in this section?

Higher trading volumes always suggest more valid technical patterns because a larger section of the market is present when the patterns occur.

Handle, very good eye. Technically you are correct, but it is very close and I was using that graphic more as an example of what a failure looks like rather than a textbook engulfing pattern. I

3 Signs a Trading Range is Ready to Break Range trading is one of the easiest and most effective technical analysis strategies, given the ease with which sideways ranges can be identified. Another advantage with this approach is the fact that stop loss levels and profit targets are not difficult to place. We simply buy when prices fall toward support (with stop losses just below the range support), and take profits once prices rise back toward range resistance. For short positions, we sell at the upper end range resistance (with stop losses just above that resistance), and take profits once prices fall back toward support. Trading ranges are a fairly common feature of market activity, so it does not take much time to find new trading opportunities. But the biggest risk for these types of trades can be seen when those ranges break, as this will cause your stop loss to be hit. So, it is important to find ways to identify these potential risks as a means for protecting your positions. Here, we will look at three tell-tale signs that a trading range is ready to break and start trending in a new direction. An added benefit of these events can be seen when new trending (breakout) positions are established in their early phases. But even if breakout strategies are not your cup of tea, these signals can still prove highly valuable when you are exposed to positions that benefit from sideways movements. Changing Price Conditions One of the only certainties in the market is that prices cannot continue on one direction forever. Change is a helpful and essential aspect of the market environment, but when we are caught off-guard, losses start to accumulate. There are many ways to spot trend breakouts (a changing range bound environment), and it is important to act on these signals once they develop. This is true not only for those looking to establish new positions in the upcoming trend, but for those in positions that are based on the range scenario that is about to be invalidated. To achieve this, we must note some of the common price traits that are seen when prices are ready to explode into a new bull or bear trend. An understanding of these traits will allow you to get in “on the ground floor” of the next trending move, or at least to avoid range trades that have a better chance of being stopped for a loss. In this article, we will look at three of these traits. To be sure, more than three exist but once these market events are seen they can prove highly effective in signaling significant market changes. Common Breakout Precursors Chart scenarios suggesting prices are trading water should be viewed with skepticism if any or all of the following elements are true: ● Prices are consolidating sideways after a significant trending move has occurred ● Sentiment readings become highly unbalanced and oppose the previous trend ● Oscillator readings are consolidating Consolidating Prices After Impulsive Activity When we use the word consolidation, we essentially mean that prices are trading in constricting ranges. Use of the Average True Range (ATR) indicator is one way of seeing this, and if we see declines in the reading we would see an indication of increased consolidation. Chart patterns offer other ways of seeing this activity. For example, in the first charted illustration we can see a symmetrical triangle (a common consolidation pattern), with prices trading in smaller and smaller ranges. But since this activity cannot continue forever, upside breaks out of these triangles should be thought of as a “buy” signal, while a downside break would indicate that sell positions should be taken. Of course, consolidation patterns do not need to be symmetrical, and other examples include wedges and coil patterns that are marked by higher lows and lower highs. For these patterns, the most interesting area is the apex, as the smaller spaces make it much more likely that prices will break outside the pattern, and send the next trending signal. When prices constrict into consolidation patterns, buy orders can be placed above the structure and sell orders can be placed below. This is done in anticipation of the explosive move that is likely to follow. These patterns can lead to even more extreme moves when they follow a big trending move, creating a “Flag” structure. In these cases, a single entry order can be placed in the direction of the previous trend. Sentiment Indicators Reach Extremes An alternative approach can be used when we look at sentiment indicators, which show the type (buy or sell) and number of open positions in your chosen currency pair. One of the most commonly used readings is the Commitments of Traders (COT) report, which is released every Friday. Essentially, this tells us where the majority of traders have based their positions. So, for example if we see most of the market positioned long in a bullish environment, there is real danger that uptrend will reverse because there is nobody left to buy the asset. An event like this can lead to stalling, where ranges form and prices constrict. Once the majority loses hope and starts to close positions, major reversals can follow, breaking prices out of the previous range. For these reasons, it is important to have an idea of where market sentiment rests before establishing new positions. The best opportunities are usually seen when more than two-thirds of the market is positioned on one side, as this creates strong potential for sharp reversals. Consolidating Oscillator Readings Oscillators can be useful in spotting potential breakouts as well. Tools such as the MACD, which lets us see instances where price and momentum are in agreement or diverging. But what many traders miss is that the indicator readings themselves can show consolidation scenarios, which can signal major breakouts are coming down the pipe. Similar moves can be seen when price and momentum show divergences, as there is little reason to believe that the moves currently seen can sustain themselves. Here, we will look at Oscillator consolidation, which bears resemblance with price consolidation. In the next charted example, we can see that movement in the MACD is constricting near the zero line, indicating a period of indecision and tighter trading ranges. In this example, we can see a symmetrical triangle as formed as movement in the MACD constricts, but price patterns could also be seen as wedges or rectangular trading ranges as well. Price breaks above the symmetrical just as the MACD reading starts to move into positive territory, and this would be our initial signal that a major bullish trend is beginning. So, in a case like this, we would not want to look to simply buy at support and sell at resistance because there are simply too many signals that a big trending move will be seen. In this example, signals are sent from both the MACD and the price itself, so if we were also to see an unbalanced sentiment reading (in this case, a majority of traders positioned short), all three elements would be in place and high probability long positions should be initiated. Conclusion: Avoid Range Trading When Evidence of a Breakout is Apparent These three market elements give traders important clues with respect to the types of trading strategies that should be implemented. When there is mounting evidence which suggests that constricting price activity is coming to an end, traders can expect big breakouts. This means that range trading strategies should be avoided in favor of breakout orders positioned above or below the consolidation pattern.

What will you do if you aren't able to meet this goal?

Honestly, I wouldn't recommend starting off with a dollar figure in mind (like $1,000 a week). I would base things more on your account size and then just risk the standard 2-3% when you see a good trading possibility.

Honestly, I wouldn't recommend starting off with a dollar figure in mind (like $1,000 a week). I would base things more on your account size and then just risk the standard 2-3% when you see a good trading possibility.

Engulfing Patterns: Visual Signals to Buy Low, Sell High Any trader that is interested in “buying low, and selling high” will need strategies to help identify when major price moves (either bullish or bearish) are establishing themselves in the early stages. Of course, all traders should be looking for areas to buy low, sell high -- and one of the easiest ways of successfully entering into trending positions is through the use of “engulfing patterns.” These candlestick patterns can be seen as major trends have reached an exhaustion point, as prices enter into oversold/overbought territory in preparation of a major trending turnaround. These turning points mark the “high” and “low” points in the all-important trading maxim, and for these reasons, engulfing patterns should be utilized as part of regular trading routines. Defining the Engulfing Pattern Specific definitions for engulfing patterns can, to some extent, vary from trader to trader. But the essence of these patterns requires a significant difference in the size and direction of consecutive candlestick periods. In a bullish engulfing pattern, a small negative candlestick will be followed by a much larger positive candlestick, which can be said to eclipse (or “engulf”) the previously bearish price activity. In the first charted example, the prior (negative) candle is shown in in black, next to a much larger positive white candle. In an ideal case, the shadows (or “candle wicks”) will be relatively small as this indicates a stronger close and better bullish momentum. In either case, the candle body of the large candle must completely cover (and extend past) what is seen in the previous bear candle. In a bearish engulfing pattern, a small positive candlestick will be followed by a much larger negative candlestick, and will engulf the previously bullish price activity. In the second charted example, the prior (positive) candle is shown in in white, next to a much larger negative black candle. Stronger momentum is seen when the candle wick in the later candles are short, as this implies a weaker close and less evidence the market is ready to push prices higher. As with the bullish pattern, the candle body of the larger candle must completely cover (and extend past) what is seen in the previous bull candle. Pattern Variations The above definitions of the pattern outline the basics of the engulfing structure. Where traders start to differ will be in the length of the candles themselves. For example, one trader might require the reversal candle to be twice the size (or even larger) when compared to the trend-ending candle that preceeds it. Other traders might look for the reversal candle to be simply larger than the trend-ending candle. The method you choose when spotting these reversals will have some key differences for the trades you eventually place. For example, it is much more rare to see extreme reversals, signified by engulfing candles that are 3 or 4 times the size (or larger) when compared to the trend-ending candle. Because of this, you will receive fewer trading signals. It will also be more difficult to get in near the lows (for long positions) or near the highs (for short positions), and this does take away some of your ability to “buy low, and sell high.” At the same time, however, the signals that you do receive will indicate much stronger momentum is in place, and these are the situations that will create the best follow-through for your positions. This essentially means you will have a better win-to-loss ratio, as well. Alternatively, traders can opt for smaller-sized engulfing patterns as the basis for long and short decisions. This type of approach is better for more active, higher frequency traders that are able to monitor their stations with better regularity -- as this approach will result in a larger number of total signals sent. The main advantage of this approach is that you will be able to buy-in closer to the lows, and sell closer to the highs. But at the same time, you will need to keep your stops tighter, as the quality of these signals will be lower (along with your win-to-loss ratio). In both of these approaches, there are advantages and disadvantages, so the path you choose will depend on your normal trading behaviors, and your overall risk tolerance. Continuations Once an engulfing pattern is recognized, the central expectation is that prices will continue in the direction of the engulfing candle. Because of this, it becomes clear very quickly if the pattern is failing, or was never really valid in the first place. With this in mind, we must start with a definition of a proper continuation, as this will allow us to see whether or not we should stick with the trade that was generated by the original pattern. For long positions, the bullish engulfing pattern should be followed by three bull candles, all with higher lows and higher closes. For short positions, the bearish engulfing pattern should be followed by three bear candles, all with lower highs and lower closes. Of course, this definition can be tweaked as more conservative traders might want to see a larger succession of candles that post in agreement with the direction indicated by the original engulfing pattern. But in the third charted example we will use this “rule of three” to show examples of failed engulfing patterns. In the third charted example, we can see an example of a bullish engulfing candle that fails to result in a reversal uptrend. The initial bull candle is not followed by three positive candles, but instead shows an immediate bear candle. This should be viewed as an immediate signal that the original pattern will fail, and this in fact does happen as a downtrend later emerges. To avoid losses, traders could have closed the position as soon as the next candle closing did not agree with the original signal. In the fourth charted example, we see a similar situation for bearish engulfing patterns. Here, we see only one following candle in agreement with the original signal, and this is then followed by a series of higher lows that invalidates the original signal. This should have been a clear sign for those in bear positions to close those trades. Conclusion: For Reversal Traders, Engulfing Patterns Can Send the Earliest Signals Bullish and Bearish engulfing patterns should be viewed as an easy tool to use when looking to buy low, and sell high in reversal trades. These patterns are easy to visualize and can be tailored to meet your individual trading style in active positions. Depending on your tolerance for risk, and your overall balance as a conservative or aggressive trader, there are strategies that can be implemented in order to meet those needs. Stop losses can either be manual (as positions are closed after patterns fail) or above/below the high/low of the candle that immediately precedes the engulfing pattern. The logic here would be seen in the fact that any moves above or below these prior areas would signal momentum is not reversing and invalidate the idea behind the original trade. Engulfing patterns are relative easy to not only grasp but to actively manage once positions are opened, and these signals are often one of the first signs that one trend has completed and another is beginning.

It looks like you are starting with the right mindset. Remember, there is nothing wrong with starting with very small trade sizes at first.

Technical analysis traders looking to develop and solidify their knowledge of charting techniques should consider the Chartered Market Technician (CMT) certification. Studying the body of knowledge required to achieve the certification will not only help you to improve your trading skills but will also show potential employers that your knowledge is comprehensive, formally approved by a reputable organization, and ready for active markets. Here, we will look at some of the key elements of the certification process, including an overview of the body of knowledge you will need in order to pass the initial levels of the exam. CMT Certification Defined The CMT exam is regulated by the Market Technicians Association (MTA), and is designed to test knowledge of technical analysis terms, strategy, and analytical skills. Additional elements of the exams include tests of the code of ethics, but the majority of the information centers on theory and history, pattern and trend analysis, trade selection, and technical indicators. The overall exam is broken down into three parts, each with differing levels of advanced knowledge and strategy application. Each portion of the exam will also grant a different level title characterization once completed: ● CMT Level 1: Focus is placed on term definitions, and the test aims to certify basic, entry-level competence of commonly used chartist terminology. According to MTA’s website, The CMT Level 1 candidate must demonstrate “a working knowledge of the basic tools of the technical analyst.” The MTA’s recommended reading list for Level 1 qualification can be found here. ● CMT Level 2: Focus is placed on advanced definition and strategy application. The CMT Level 2 examination requires candidates to display a larger depth of analysis and chartist competency. CMT Level 2 candidates are required to show proficiency in applying more advanced analytical techniques, and “is responsible for the theory and application of those concepts and techniques.” The MTA’s recommended reading list for Level 2 qualification can be found here. ● CMT Level 3: Focuses on the integration of techniques and theories learned in the previous sections. The Level 3 Candidate is tested on the “development of logical and consistent research opinions, portfolio strategies and trading decisions” using a series of charted examples and technical data. The CMT 3 candidate is also required to successfully complete the ethics portion of this exam. The MTA’s recommended reading list for Level 3 qualification can be found here. Exam Preparation and Time to Completion The CMT program is designed for self-study, and the MTA gives candidates a comprehensive reading list and a variety of study aids (flash cards, sample exams, webinars, etc) to accomplish this. One of the unique features of the CMT exam is its emphasis on classic literature in the chartist field and its relationship for more modern techniques. Nearly all aspects of technical analysis are addressed: Identification and measuring chart patterns, indicators and oscillators, Gann angles, Elliott wave theory, and candlestick strategies make of a majority of the topics required. Since the certification is split up into three parts, the first two sections are given in multiple choice format while the final section is a much more intensive 4-hour exam in essay form. Each section is offered twice a year, which makes the minimum time to completion 18 months. Most successful candidates take about three years to finish all the required work. The MTA recommends 150 hours of preparation for each segment, but many candidates eventually find more time is needed. Section Descriptions The CMT Level I costs $500 in fees: $250 for the comprehensive program fee (which gives candidates five years to finish all exam components), and $250 for the first test section itself. The level 1 portion consists of 120 multiple choice questions, and must be completed in two hours. The CMT Level 2 exam has 150 questions, is taken over a 4-hour period and costs $450 (offered twice each year). Candidates that pass the first two sections can qualify for the Series 86 exemption, which gives the Research Analyst designation. Candidates will no longer be required to take the Series 86 test, and this designation is suited for those that need certification in conducting market research. The third part of the exam consists of individual essay questions, worth 240 points in total. These questions are broken down further into sub-questions, but the primary focus is on the ethical application of integrated technical analysis methods. The exam questions require candidates to articulate research opinions, conduct portfolio analysis, demonstrate an understanding of theory, and implement an integrated approach to technical analysis. The test is comprehensive, building on the elements needed for the previous sections, and roughly 75% of test applications successfully complete the third section of the exam. And while ethics topics do not make up a large portion of the test, a score of at least 70% must be achieved in order to receive the certification. The third exam also costs $450 (offered twice a year), and the final CMT certification will be conferred if the candidate has three years of verifiable work experience, joins the MTA, and pays $300 in annual dues to the organization. Skills Developed Over the course of each exam, candidates will develop the skills to understand and implement chartist techniques (both classical and modern), conduct and present market research, make trading recommendations, design portfolios and investment programs (for all markets and asset classes), and improve win/loss percentages in personal trading accounts. So, as we can see, the CMT certification does require more than the ability to read a chart or understand an indicator reading. In addition to being able to identify and interpret signals found on point and figure charts, line charts, and candlestick charts, CMT candidates will be required to understand the relationship between price levels and price patterns, spot trends and know what those trends imply, and have an understanding of how to determine whether momentum moves are likely to continue or begin to stall. Candidates must not only know how to interpret indicators but to understand the specifics of their calculations and the intended focus of those measurements. Aspects of market behavior that are often missed by technical analysts -- such as put/call ratios, implied volatility, inferential statistics (T-tests, correlation analysis, regression analysis) -- are covered as well. The importance of volume, inter-market analysis, breadth and sentiment gauges make up some of the other areas that are often ignored by most chartist traders. But topics like these will need to be understood in order to successfully complete the CMT programs. Conclusion: CMT Certification Helps to Hone Skills and Creates an Attractive Resume Component for Employers CMT certification can help traders understand aspects of technical analysis that are often missed by less advanced traders. Once certification is completed, many CMTs are able to land positions are large financial institutions, create unique approaches to trading, or even invent chart indicators of their own. The certification programs offered by the MTA allow traders to improve trading success rates and become active members of an advanced trading community. Achieving the certification is a time-consuming and difficult process, but the rewards are great and many new opportunities are opened for those willing to put in the effort. Today, the MTA has nearly 5,000 members in over 85 countries, so there are essentially no limitations in who is able to achieve this heralded financial designation.

Of course, it is important and valuable to start with demo trading. But I am not sure why you think that managing trades, emotions or truly knowing how we respond to changing markets when live positions are on the line would be the same thing?

One of the first pieces of advice that is given to new traders is that it always makes the most sense to start trading with a demo account. While this approach has some clear advantages and allows you to become familiar with your trading station, general position strategy, and the forex market itself -- there are some drawbacks as well. So, it makes sense to have an idea of where potential pitfalls lie because, at some stage, all traders will have to make the leap from virtual trading to the real thing. Here we will touch briefly on the benefits that are offered by virtual accounts and then compare those to some of the weaknesses and deficiencies that are created by these types of trades. It is important to understand the differences here, as this is the only way to insure that you are truly ready to start actively trading with real money. Benefits of Demo Trading Any trader that does not begin trading using a demo platform can (and probably will) suffer sizable losses in a short period of time. Forex markets have the tendency to see extreme changes in volatility during certain parts of the week (for example, when a critical piece of economic data is released), and for those opening leveraged trades, these moves can prove disastrous when they work out unfavorably. Demo trading allows us to get a better sense of the ebb and flow of market behavior and to position accordingly. Also, for those with automated Expert Advisor (EA) strategies, demo trading will allow you to test your strategy using real market conditions, in order to determine its efficacy. Next, trading with a demo account will allow you to familiarize yourself with all aspects of your platform without risking material mistakes. With all of the software platforms available now, it is important that traders understand how exactly to go long or short on a pair, how to set stop losses and profit targets, how to attach indicators to your chart, and how to manage your open positions. Clicking the wrong button can cost real money without this knowledge, so it is important to have a firm understanding of your platform before going live. Last, demo trading can allow you to monitor the effects of leveraged positioning. Trading accounts can see massive fluctuations in balance when leverage is used, and practicing with certain leverage ratios can help you protect your account down the road. Some brokers allow leverage of up to 500:1, so a trader that wants to take advantage of these offers should try a few trades with these excessive leverage levels with a practice account so they can see how quickly these position sizes can influence your account balance. Limitations of Demo Trading So while demo trading is highly valuable, there are many examples of individuals that hold onto their demo accounts longer than they should. And while the drawbacks here might not be readily apparent, they most certainly do exist. First, with demo trading it is impossible to develop a sense of the emotional reactions (fear vs. greed) that will be encountered when live positions are open and active. In order to be a successful trader, you will need to manage these emotions and make decisions in an objective and logical manner. In trading, fear is healthy because it means you are aware of what is at stake. Managing that fear in constructive ways is the real task, and it is impossible to learn to do this when demo trading. Demo trading gives the illusion that your positions will have no real monetary consequences, and this can create problems once you make the transition to a live account. Next is that demo trading can create unrealistic expectations. It is easy to become over-confident when demo trading because it is much easier to simply wait for your positions to turn positive before closing them out. This is not something that can be done when trading live because your account size is finite (as opposed to the infinite account size you have when trading with virtual money). When using real money, there may come a time when unrealized losses are accumulating too quickly and your positions will need to be closed, either manually by you -- or through a margin call. Because of this, it can appear as though trading is much easier than it actually is, if all we have is experience with demo accounts. Last, it is impossible to know how committed we truly are to a trading strategy if real money is not being put at risk. It can be easy to make the decision to open or close a position when demo trading, but this is not always the case for live accounts. If you are able to pull the trigger on a trade, it is a good indication that you have real confidence in the ability of your trading system to generate consistent profits. Once a position is open, many decisions will need to be made. Where will you place your stop loss and profit target? Will you move your stop loss if the trade moves in your favor? When will you move that stop loss and by how much? If the trade works against you, will you add to the position? Are there any circumstances where you will close out the trade, even if the stop loss or profit target has not been hit? These are all questions you will need to be able to answer in order to trade with real money. And you will need to know how you will truly react once these situations present themselves. Unfortunately, demo trading will only give you a diluted sense of how you will really act in live environments. The only way to get a true idea of your likely strategy and behaviors will be to start getting active with a live account. Conclusion: Demo Trading is Useful, But Gives Only a Limited Picture of Live Environments Make no mistake, it is absolutely essential for new traders to get early practice with demo accounts. This should also be viewed as a requirement for those transitioning to trading software or a new brokerage company. Backtesting results for those using EA will also need to run these tests using a virtual account. But once these preliminary lessons are learned, it is time to move on, or you run the risk of developing trading habits that are not useful. Moving into live trading will allow you to improve your trading discipline and cultivate behaviors that will lead to consistent profitability over time. Risk management skills become honed much more quickly when traders have a real stake in their positions, and this is something that cannot be truly achieved using a demo account. So, while virtual positions do have tremendous value, it is important to note the differences between these two environments, so that avoidable mistakes are not made down the line.

When forex traders are getting started in learning about technical analysis techniques, one of the first terms that we come across is the “breakout,” which is a pattern formation that lets traders know that significant momentum is present in the market. True breakouts indicate major turning points in market sentiment, as highly significant and closely watched support and resistance levels are overcome and invalidated. In most cases, these important levels of supply and demand (support and resistance) hold, and help to guide price activity. So when these levels break, it implies market dynamics are changing and that prices are ready to travel forecfully in the direction of the break. No Guarantees in Trading In some cases, however, these breakouts are “false,” or not truly indicative of changes in the market. False breakouts can happen for a variety of reasons: Erratic order flows can cause choppy trading conditions, there are not enough traders on the side of the break to carry prices further, or we simply have the wrong levels of support or resistance that are truly present in the market. When these false breaks occur, markets are left in a very precarious position, and many traders that bought or sold into the direction of the break are forced to exit their positions. This, of course, sends prices even more forcefully in the direction opposite the break, and leads to increased volatility in the currency pair you are watching. When breakouts are successful, it is because there are usually large amounts of stop losses placed just above and below critical levels of support and resistance. So, when these levels are broken, the orders are tripped and this adds to the momentum seen in prices. But it should always be remembered that there are no guarantees in trading. If traders knew that a large number of stops are at a certain price levels, all we would need to do is place our orders in those areas and ride the wave to constant profits. This, of course, is unrealistic, and for these reasons, breakout trading could not possibly work 100% of the time. Here, we will look at how to play the situations that do not work out as the market had originally planned, the false break. Examples of Breakouts and False Breakouts To understand how we visualize false breaks, we must first understand how to visualize true breakouts, where violations of critical support or resistance levels leads to increased momentum and extended follow-through. The first charted example shows the structure of a bullish breakout, where support and resistance levels are clearly defined (multiple touches), before prices finally make a clear break to the topside. The second charted example shows a live chart in the other direction (a bearish break). An important element to note is that once prices make the bullish break, they fall back to the original resistance level, which now becomes support (and prices extend higher). For the bearish break, prices rise to test previous support (now acting as resistance) before making a significant drop. Consider the bullish example. What would happen if this level did not act as support? This would mean that a false break is in the works, and traders that bought into the upside break of resistance would now be caught long at expensive prices levels (making their positions vulnerable to substantial losses if tight stop losses are not used). In the third charted example, we can see an early false breakout. So let’s next look at the elements of a false breakout, so that trading opportunities can be identified when they arise. ● Price breakout occurs ● Insufficient momentum causes prices to move back through the prior support/resistance level ● Short-term breakout traders are stopped out, and prices reverse violently (such as in the proverbial “short squeeze”) ● Reversal slows once stop losses are covered Reacting to Failed Breakouts Once a failed breakout is identified, you will find yourself in one of two positions: You either traded in the direction of the break and you are looking for a place to exit the trade, or you have no exposure to the asset and you are looking for an opportunity to enter. Traders already in a position will likely need to exit quickly, as reversal volatility can quickly lead to big losses. This is why tight stop losses are essential when breakout trades are opened. Breakout trading becomes complicated, however, when slippage is involved and this is a clear possibility given that these market scenarios are accompanied by extreme increases in volatility. So, how can we structure trades based on false breakouts? The charted example of a failed break comes after an upside breakout. Once prices fall back through the previous resistance level, we have our signal that the bullish breakout was false, and that the bias is now to the downside. Based on this, short positions can be initiated. The main benefit of these types of trades is that we know we are getting in at the best possible price for bearish trades (the upper end of the range, after all upside momentum has failed). For these reasons, trading failed price breaks enables traders to get into positions at the best possible price levels (expensive valuations for short positions, cheap valuations for long positions). This benefit comes in direct contrast to trading valid breakouts, which require traders to enter into long positions at elevated valuations (after resistance has already broken), and to enter into short positions at very cheap valuations (after support levels have already broken). Structuring Trades Let’s assume that we are going to enter a trade based on the failed bullish breakout in the charted example. The short trade entry can be initiated as prices move back through the previous resistance line (as momentum is now in the bearish direction). Stop losses should be placed above the previous spike high. The reasoning here is that any price activity above the breakout high will suggest that an uptrend is in the early stages (with a series of higher highs visible). So, if prices were to overcome the spike high, the original breakout would be a true one and not a false one. Since breakout events typically happen in range trading scenarios, it would make sense to place your profit target inside of the support level of that range. More important, however, is to be aggressive with your stop loss movement. Since volatility is heightened in both breakout and false breakout environments, it is important to reduce risk whenever the option is available. Specifically, this means moving your stop losses to break-even (and even taking partial profits) as soon as your trade is in the black. Once false breakouts are identified and trades are placed, momentum should be on your side and you should see unrealized profits relatively quickly. If this does not occur, it is often a good idea to simply close the position and look for opportunities elsewhere. Being aggressive with your stop losses and profit targets will help you to avoid the volatility risk that is often associated with these types of trading strategies. Conclusion: False Breakout Offer Excellent Price Entry Levels It is true that false breakout scenarios usually involve increased volatility and very erratic price activity. These situations are best managed by short-term traders that are able to closely monitor positions once opened. If this is not your approach, it is unwise to trade these failed patterns. But, at the same time, significant advantages can be found. Specifically, failed breaks allow you to capitalize on the stop loss momentum that is generated by stopped breakout positions. In addition to this, failed breaks enable traders to get in to positions at the absolute best levels, with short entries opened near resistance levels and long entries opened near support.

Looking at the name itself, it is clear that ‘Black Box’ trading systems have something of a negative connotation. Generally speaking, this negative reputation is promoted either by those that have never used these tools, or those that have lost money using them (and there are many). This also is because there is some level of superiority often expressed by those who feel that their market analysis is theirs alone, and that any gains made (even when using an accepted chartist approach) are the direct result of their own ‘financial genius.’ But, is this an entirely fair assessment? Are there huge differences between ‘Black Boxes’ and many forms of technical analysis that are actively accepted by most of the trading community? Is the average chartist using overbought/oversold indicators really all that different from those that employ trading strategies that are purely automated (completed with entries, exits, profit targets and stop losses)? When we start to ask these questions, it is not as easy to view ‘Black Box’ trading in the same negative light. So, while automated trading systems are by no means a ‘holy grail,’ the fact is that technical analysis is technical analysis, no matter what the source. The actual involvement of the trader is simply a matter of degree. ‘Black Box’ Trading Defined Black Box trading is referred to by multiple names. Common phrases include algorithmic trading, system trading, automated trading, or EA trading (using Expert Advisors). It has become clear that this method of trading has risen by leaps and bounds during the last decade, as applicable technology becomes cheaper, faster and more accessible. Not surprisingly, this appeals to the part of the human condition that seeks reward without the requisite effort that is needed to analyze the market on our own. In years past, these tools were available only to the market’s largest players. But the game has changed, and most active traders have some version of these tools ready on their trading stations at all times. So, what are the benefits and drawbacks of these “gooses that lay golden eggs,” and what does this mean for the market trading community as a whole? Advantages in Trade Automation The initial advantage of trade automation is that there is no need to actively monitor your trading station. This effectively takes all of the “work” out of your regular trading scheduled and gives you time to go about your daily life. This also means that you are prepared to receive signals 24 hours a day, as long as markets are open. Last, automated trading systems have backtesting results that are not present with day-to-day approaches that are based on human impulse and intuition. Data limitations tend to produce trading performances that are less successful. Finding An Automated System There are a few ways traders can find and select a Black Box trading system. The easiest way is to simply use a strategy that was developed by another trader. An example can be found at Best Forex Robot (not an endorsement, just an example). Generally, these sites will have performance statistics, such as maximum drawdown, gains (across different time frames), number of winning trades versus losing trades, average gain/loss per trade, etc. Whether or not these statistics are accurate is another story, and this is why it is important to at least test these applications with a demo account before real funds are used. Nobody will ever publish negative results. So, if you ever plan to go down this route, make sure you have an understanding of the methodology being implemented (moving average breaks, momentum, range trading, etc) and do not just buy something with a catchy name. Another option is a social trading community, which have grown vastly in popularity over the last few years. These communities use EAs to allow traders to “mirror” the positions taken by more experienced counterparts. One example can be seen at the MQL5 community, which uses MetaTrader 5 apps and has performance results from a large number of active traders. This approach is similar to using an EA Robot, but has the added advantage of being run by live humans, so it is much easier to ask questions from the traders you follow. It is also possible to become an expert yourself if you have a successful approach that other traders can follow. Last, and most complicated, is the action of devising an automated system of your own. This can be done either through modifying an existing system by changing its parameters. An example could be changing a system that buys upward breaks of a 55-period moving average to a system that buys breaks of a 21-period moving average. In an example like this, your modified system would likely generate more trading signals over shorter periods of time. So, something like this would be less preferable for traders favoring “buy and hold” approaches. This method is best for those with some programming ability and a clear idea of the trading style you want to implement. One example of a site that allows you to customize an EA can be found at FX CodeBase. The site also allows for backtesting and optimization techniques, which we have discussed in a previous article here on TradersLaboratory. The most advanced approach is to build your own strategy “from scratch.” This requires some skill with programming -- but, more importantly, a clear idea of how you want your automated strategy to operate. But if you have been trading using a system that has clear parameters for trade entries, exits, profit targets and stop losses, this might be the best option. Not only are you most familiar with a strategy like this (and you know it meets your needs) but it will allow you to operate around the clock (as long as your trading station is active). Even for traders with no programming skills (just a clear idea of your system parameters), there are developer services that will create your EA for you and make it compatible for your trading station. This, of course, costs more but gives you the added security of having a software app that is stable and reliable. In any case, what is most important is your system itself. Are you a long-term or short-term trader? What is your tolerance for risk? Do you want to base your positions on trend or swing strategies? All of these questions must be answered in order for you to devise your own automated system. If there are more specifics involved in your system, there will be a smaller number of trading signals sent (although those will have higher probabilities for success). Conclusion: Automated Trading Systems Are Not As Uncommon As They Might Seem For those looking to implement an automated, there are many different options that should be considered. Whether you simply want to buy an EA Robot, join a Social Trading Community, Modify an Existing EA, or build one of your own, it is important to start with backtesting and demo trading because this application will eventually be running on its own without you there to monitor it. It is also important to make sure that your system meets your general trading needs. Luckily, there is an immense variety of options available, and finding a strategy that meets your requirements will not be overly difficult for those willing to research a few different sources.

Good point, but this data is often indicative of what is happening in the broader market as well.

Yes, thank you. The third chart is EUR/JPY, not EUR/USD.

One common mistake that is made by most technical analysis traders is to completely disregard all fundamental aspects of the assets being traded. This is clear in the regular assumption that chartists do not even need to know the identity of the asset before placing a position. The rationale behind this is that all of the necessary information is contained in the price action itself. But if we are truly trying to gain an edge on the market, it is important to have at least some fundamental information about the assets being traded. At the most basic levels, forex markets require the ability to pair strong currencies with weak ones. This allows the trader to capture the biggest possible moves at any given time. Another mistake that is commonly made my technicians is to focus on one or two pairs, and then to look for new opportunities in those markets exclusively. For example, traders might believe that technical patterns tend to work best in the EUR/USD, or GBP/JPY, and then regularly monitor those patterns in isolation. This approach does carry with it the added advantage of being most familiar with the historical price data present in those assets, and with the general behaviors (such as high volatility, or a tendency to trend) that are expressed by those assets. But it also means that there might be better opportunities in other pairs that will be missed, and, on the whole, it will be very difficult to pair the strongest currencies with the weakest currencies. Relative Values It is true that in any market, we are always exchanging the value of one asset for another. If you buy a stock, there is an implicit suggestion that the trader believes the value of that stock will rise, more than the value of the original currency. But these relationships are more apparent in forex than in any other place, as it is much easier to structure both sides of the buy/sell relationship. If we are long in the AUD/USD, we are buying the Aussie and selling the U.S. Dollar. It is implied that we expect the relative value of the Aussie to overtake that of the U.S. Dollar. While this information is obvious to some traders, it should be understood that there are many active participants in the market that fail to appreciate these relationships. In order to get the most “bang for our buck” in any position, we need to identify which currencies are on the verge of extreme moves. The first question any trader should ask is: Which currency is most overvalued, and which is the most under-valued? Once we have an idea of this, we buy the asset that is excessively cheap, and sell the currency that is overly expensive. One way of doing this is to look at the trending behavior. Currencies that are marked by long-term downtrends can be paired with those that are caught in a long-term uptrend. When using indicator readings, oversold currencies can be bought with overbought currencies. The main point to remember here is that forex trading is a constant “tug of war” battle, and the way of making the most money in any one trade is to identify points of extreme weakness in one area, and strength in another. Identifying Strength and Weakness In the charted example, we look at the three majors: EUR, JPY, and USD. For the sake of argument, let’s assume that these are the only three currencies that exist. Which is the strongest? Which is the weakest? Which trade makes the most sense? The third question here, of course, is the most subjective and will depend on your general strategy approach. For example, a trend following trader would have a very different answer when compared to a contrarian, or swing trader. The first two questions, however, are much less subjective and can be answered relatively easily. In the USD/JPY chart, we can see a clear rally on the charts. Many technical will stop right here and say the identity of the assets is meaningless. But knowing that we are looking at the USD/JPY carries with it some clear advantages -- especially when we compare these moves to our other two charts. A rallying USD/JPY denotes a strong Dollar and a weak Yen. The second chart shows sharp declines in the EUR/USD (again, a strong USD, and a weakening EUR). The third chart shows a modest rally in the EUR/JPY. All of these charts are taken on the same time frame (hourly perspective). In order of relative strength, this tells us that, in the current environment, the US Dollar is the strongest currency, followed by the Euro, while the Yen is the weakest. This is because the Yen is falling against all counterparts, which the US Dollar is rising against all counterparts. The Euro splits its relative strength and weakness down the middle. The Basket Approach In some cases, it will be easier to identify one side of this equation (a currency ready to make a big move either upwards or downwards). It might be easy to determine which currency is strongest, but not which is weakest (or vice versa). In these cases, it might make sense to split your positions. In these cases, traders might want to take a more diversified approach, and play a few different currencies for (or against) the currency that is showing the clearest tendencies (either toward strength or weakness. When this is done, however, it is important to scale down leverage levels, as multiple positions for or against a currency will equally magnify the potential for losses. Sentiment Indicators Another approach is to watch sentiment indicators, such as the Commitment of Traders (COT) report, which shows the number of open positions in a given currency. In addition to this, many forex brokers will offer similar data, showing the number of bullish or bearish traders active in the market. These numbers are often given as a percentage, so a 50/50 reading would suggest the number of buyers and sellers in the currency are equal. When sentiment becomes extreme (i.e. above 80% or 20%) for a certain currency, trends are likely to reverse. This is because there is a small number of available buyers or sellers left in the market, and little reason to suggest that the current trend can find new reasons to continue. All too often traders make the mistake of catching onto a trend as it is reaching its mature levels. A famous example of this can be seen in the tech stock bubble of the late 1990s, where many inexperienced traders bought-in at the highs, thinking there would be no end to the bull rally. In cases like these, it is important to see how the majority of the market is positioned, as this will give you a good indication of whether or not the market needs to correct itself. Conclusion: Identifying the Weakest and Strongest Currencies Makes the Most Profitable Trades It can be easy for technical traders to view certain markets in isolation, and miss opportunities that can be found when relative comparisons are made. The surest way to make the most profitable trades is to pair the weakest assets with the strongest, as your gains will always depend on the relative valuation of the assets you buy and those you sell. Here, we have strategies for making these determinations, and this information should always be considered (even by the most “purist” of chart technicians).

Forex trading with price patterns is perhaps more prevalent than what is seen in the trading of other financial asset classes (such as stocks or commodities). This is often explained by the fact that the fundamental picture for a currency (i.e. the economy of an entire country) is much more difficult to assess than the similar elements in an individual stock. Because of this, price patterns in the forex markets tend to have more force and accuracy because there is a larger percentage of the trading community that are aware of these patterns as they arise. Pattern Parameters From a trader’s perspective, price patterns are particularly useful because of the way these patterns define clear levels for position entries and exits. It is also relatively easy to see instances when the price pattern itself is valid or invalidated. One problem, however, is that these patterns are subjective. Some traders make the mistake of using pattern recognition software, and then use those signals as if they are accurate in all cases. The issue here is that input parameters for these patterns must be set in advance and are only as accurate as the human input that defined those parameters. So, while it must be understood that any price pattern is a subjective construct, it is important to know how to set trades based on these formations so that you are well-prepared even in cases where those formations prove to be invalid. The main idea here is to take these formations from a risk-based perspective, as this area (failed structures) is one that is most often neglected. This is also the area that creates the largest number of destructive events in personal trading accounts. So, in order to build trading confidence, you will need to know the price elements that formed your trade in the first place. Then, you will need to work from your own version of those paramaters. Price Targets and Invalidation Points When dealing with patterns, price targets and invalidation points are some of the first parameters that must be set. Channel formations give relatively clear-cut levels here, as prices are expected to remain contained within the uptrend and downtrend lines that make up support and resistance. In the first charted example, we have a downtrend channel, which is often used to initiate short positions. Short trade entries are taken as prices reach the top of the pattern, while profit exits can be taken as prices approach the channel bottom. Stop losses can be places above prior resistance levels (as any activity above these areas would end the series of lower highs). Alternatively, the position can be exited if prices break above the downtrend line, as this invalidates the pattern. Using Patterns to Mark Dynamic Support and Resistance Perhaps the biggest advantage of price patterns is how they can make it easy to spot support and resistance levels. Since these are areas in which buyers and sellers start to emerge, these levels are highly valuable in determining trade entries. Further more, if these levels are invalidated, price momentum will often accelerate, as the market is now forced to re-position itself for the shifting paradigm. Pattern examples here include triangles, flags, rectangles and pennants. Once these patterns are recognized, you will be able to use the defined parameters in the pattern to not only determine your directional bias (for long or short positions) but your exit and entry points as well. As with all price patterns, the most critical event that can be seen when basing trades here is to spot instances where those patterns have become invalidated. In the second charted example, we have a descending triangle, which reveals a bearish bias on the pair. Any trader that takes a position based on the assumption that the series of lower highs will generate new lows is forced to bail-out once the resistance line is broken and the overall pattern is invalidated. In cases like this, the broken resistance line should have lit warning flares, prompting the trader to close any bearish positions. This is true for a few different reasons. As we can see in the example, prices rally and this could have created substantial losses for any trader in a bearish position. Of course, we have no way of knowing for sure that prices will rally this strongly. But once the resistance line is broken, it is clear that the paradigm has shifted and that the market will start viewing the currency pair’s momentum in a different way. At the same time, our original reason for entering the trade has been removed. Because of this, there is essentially no reason to remain invested to the downside, and the position should not remain open. Recognizing Price Patterns So while it is true that price patterns are highly subjective, over time it does become easier to recognize these formations quickly and efficiently. These structures give traders a sense of where the market is headed, even in cases where there is no clear trend or momentum direction in your chosen currency pair. But at the same time, you will need to determine the levels at which the structure (and your original analysis) is starting to break down, making positions vulnerable to excessive losses if kept open. Even for successful trades, it is important to look at the parameters you have set for the pattern, as this will give you an indication for when a trending move is in its mature stages and unlikely to continue. There is almost nothing worse than seeing a successful trade turn into a loss, so failing to react once your pattern parameters have been tested is a largely unnecessary mistake. Risk-to-Reward Ratios The final element to consider when establishing a price pattern position is the risk-to-reward ratio that is seen. Of course, it makes no sense to put $10 at risk when there is only the possibility of making $5 if the trade proves profitable. This is a recipe for failure for any long-term approach. Common advice is to risk only $1 in downside for every potential $3 in upside. Any price patterns identified should be used not only to determine entry points and direction, but profit and loss ratios as well. Let’s look again at the original downtrend channel example. Here, we have a downside bias, based on a series of lower highs. The width of the channel is about 210 pips, which means this is the targeted profit. This also means stop losses should be no more than 70 from the entry. This works well in terms of the charted example, because if prices were to travel 70 pips in the positive direction after the trade is triggered, the channel would no longer be valid and there would be no reason to hold onto the trade. In other cases, these risk to reward levels do not match up. In these cases, the trade idea should be forfeited and we should look for better opportunities elsewhere. Conclusion: Invalidated Patterns Remove Rationale Behind Positions From these examples, we can see that price patterns are great tools for arriving at a position bias in cases where there is not even a clear trend in place. But once these patterns are invalidated, the trader must reassess the market’s activity and consider positions in another area of the market. Two traders looking at the same chart might see entirely different formations, and place trades that while well thought-out might be in complete disagreement. But at the same time, it is important to hold true to your original analysis and reconsider your position once an invalidated pattern suggests that your initial ideas are unlikely to play-out.

ok igor, thanks for making a post.

When learning technical analysis, breakout strategies are one of the first topics encountered. This is primarily because breakout price events signal major changes, or continuations, in trend. Either way, breakouts show traders that the market is making a decisive move and even in cases where the direction of the price break fails to match your general strategy, it is important to take note of these events when they happen. One of the main benefits of breakout trading is that the strategies are easy to identify and implement. So, while you will surely encounter traders that think breakout strategies are flawed, it is still important to understand how these patterns form as this is one of the best indicators of market sentiment at any given moment. Definition of a Breakout Price breakouts occur when changing market conditions lead to violations of significant support or resistance levels. Traders that spot these breaks in their early stages are in a position to alter their trading plans and take advantage of the impulse moves that are likely to follow. In the first charted example, we can see that prices are caught in a consolidative range that tests key resistance levels on multiple occasions and fail each time. Once the underlying bias in the markets shifts, this resistance level is overtaken. Range traders are stopped out of their short positions, and since stopped short positions become long positions, this helps to propel prices into a rally. One of the benefits of breakout trading is that it is relatively easy to spot the important levels and then place buy orders (above resistance) or sell orders (below support). Breakout trading does not require us to constantly monitor positions, so this type of strategy works well for traders with limited time schedules. The gains that are posted in breakout trades usually come as the result of an increase in volatility, as it starts to become clear to the rest of the market that decisive moves are being made. Because of these increases in volatility, breakouts are often the point at which new trends begin. Choosing High-Potential Breakouts When breakout trades are manged properly (adjusting stop losses for increased volatility), limited downside risk can be encountered. But breakouts can be found in all market environments, so it is important to look for tendencies that are typically accompanied by significant follow-through. In addition to simple levels of support and resistance, traders will often look for price patterns that support further gains. Examples here can include structures like triangles, channel breaks, or head and shoulders patterns. In addition to this, it is important to see periods of constriction (low price volatility), as these cases can only last for finite periods and generally suggest that markets are waiting for the next driving factor (such as an interest rate decision or economic data release), which will the propel prices through support or resistance and create a new trend. As volatility contracts, it becomes more and more likely that the following price moves will be forceful. Of course, all time frames can be used and breakouts can be applied to a wide variety of additional strategies (such as swing trading or trend following). Support and resistance levels will be considerd as more valid, the more they are tested. So for example, triple top resistance levels will generally lead to bigger moves than double top resistance levels (once broken). The second charted example shows a bearish breakout trade after multiple tests of support. In addition to this, time frames make a difference as well. For example, a support level that has held prices for one month will be considered more important than a support level that has held prices for one day. So, when a more “important” price level is broken, more follow-through (and greater potential for breakout gains) can be expected. Trade Entries Once a breakout is identified, the first step in the process is to decide on a trade entry level. This is another benefit of breakout strategies, as there is relatively little guesswork involved when compared to other strategies. The main points to consider can be seen in the fact that you want to enter into a position as close to the support/resistance break as possible (ensuring you don’t miss a big part of the move). But at the same time, you want to protect yourself against false breaks, which are seen when a significant level breaks only to reverse later with no real follow-through. This is the major risk in breakout trades. To protect against these risks, there are two approaches that can be used. First, traders can set their trade entries at least 5-10 pips above resistance (for long trades) or below support (for support trades). This will help to ensure that the level you are watching has actually broken (and is not just a price reaction to choppy markets). Another option is to wait for price to close above/below your level on the time frame you are using. So, for a bullish example using an hourly chart, you will want to see prices close the first hourly bar (after the resistance break) with prices holding above your resistance level. Trade Exits When looking to define your exit point, a few separate factors should be considered. Primarily, this means you will need a plan to exit for a profit and when to exit as a loss. From a profit perspective, it is important to look at past price ranges, in order to get a sense of how far prices are likely to travel once a breakout is seen. So, if you are trading low volatility currency pairs, this will require much more conservative price targets. In the second charted example, the price range that precedes the breakout is about 450 points, so something in this neighborhood could also work as a price target. In addition to this, traders can look for chart events (candlestick formations, price patterns, trendline breaks, etc.) that are seen in opposition to the direction of the position as an argument to close the position at a profit. Other strategies can implement tools such as Pivot Points or the Average True Range (ATR) as a means for finding areas where prices might reverse. From the protection perspective (stop loss exits), you will mostly be looking for indications that the breakout trade has failed. Once a breakout has occurred previous resistance should start to act as support, while broken support levels should start to act as resistance. If this is not the case, there is a good argument to close the trade. This essentially means stop losses can be placed just below the breakout point. For traders will a higher risk tolerance, stops can be placed below the previous swing lows (for long positions) or above the previous swing highs (for short positions). This idea here is that any violations of these previous highs/lows would create a scenario where prices would not have the ability to create a trend in your chosen direction (as this would require a series of higher highs or lower lows). Conclusion: Base Breakout Trades on Clearly Defined Support and Resistance Levels The most critical aspect of any breakout strategy can be seen in its earliest phases: Identifying clearly defined support and resistance levels. Levels that have been tested multiple times (such as triple tops/bottoms) tend to have a better outcome once positions are set. Trade entries set above/below these support and resistance zones will become profitable only when there is sufficient follow-through and increased volatility in your chosen direction. Losses occur when “false breaks are seen, so traders will need to monitor these events more closely once positions are established.

Trading in the financial markets offers some of the greatest risks and rewards imaginable, and it is for this reason that many traders become quickly ruled by emotion. Emotional reactions, however, can be thought of as the anti-thesis of rational thinking and this can make it extremely difficult to make the best decision at any given moment. Here, we will look at some ways of structuring both your trades and your trading mindset so that emotions can become less of a controlling factor in your daily routines. Problems Created by Emotional Reactions Of course, as human beings, there is no way for us to completely remove the factor of emotional response from the trading equation but there are ways of limiting the destructive effects that can be seen when non-logical reactions become apparent. Added knowledge is a vital component, as understanding the ways indicators or other charting tools actually measure price activity can bring an added sense of mental comfort as technical analysis trades unfold. But this knowledge will have its limitations as well, as there will be cases where flawless technical analysis can still lead to failing trades. This can be a difficult thing to accept, and in many cases emotions here can lead traders to stay in a position too long (and encounter unnecessary losses) in the belief that position “must” turn positive later given the strength of the underlying analysis. This is a key example of a situation where emotions can have very harmful effects - even when solid technical analysis methods are implemented. For these reasons, emotions cannot go unchecked. Ignoring Risk to Reward Ratios Any time we summarily dismiss proper risk to reward approaches, we are basically asking for the market losses. Advanced traders with successful methodologies know how to avoid these obstacles and limit the downside problems that are created when emotional reactions become apparent. In today’s markets, technical analysis entry opportunities are nearly infinite. Broad market choices can be found and traded on any time frame (using any method of analysis). Ultimately, however, success in trades comes down to rising and falling prices and we need to know when to accept losses in order to avoid getting caught short in a bull market, or long in a bear market. When trading, we first need to have a methodical plan that identifies entry opportunities, uses proper position sizing, and obeys risk to reward parameters with a mechanical efficiency. Trading with a sense of certainty is often just a mask for the greed and fear impulses, so we always need to be willing to close positions at a loss and accept flaws in the initial technical analysis used to enter the trade. This is the only way to avoid holding onto losing positions longer than they should be kept open (and deleting a trading account unnecessarily). Managing Emotion: 4 Tips First, it is important to remember that there is no such thing as “certainty” in the markets. Any trader that discusses a “foolproof” method or an “assurance” that prices will rise or fall is simply not telling the truth. The market can (and will) do anything it wants, no matter how solid or thought-out your trading plan. So, while this might seem discouraging on the face of it, the fact is that this idea can be extremely freeing once it is understood that trading losses are not necessarily coming as a result of a flawed strategy. This idea also goes far when traders are forced to manage emotions during a losing trade - because there will already be some acceptance of the fact that any given position could turn in the wrong direction. This also helps you to focus on the price action itself, and not the idea that you made a mistake in your analysis. Second, you must always use appropriate trading lot sizes. It should stand to reason that a forex trader with a $500 account should not be using the same trading sizes as a trader with a $5 million trading account. But if you look at the behaviors commonly exhibited by both new and experienced traders, this really is not the case. Conservative traders will generally avoid risking any more than 2-3% of a trading account at any one time. But it should be remembered that this is inclusive of all open positions. Traders with a higher risk tolerance might increase this number to 5%, but anything above that is really nothing more than trading suicide. In terms of managing emotions, this is important because it will limit the thing that creates destructive emotion in the first place: unmanageable losses. In fact, smaller trade sizes can actually help you to be more objective about what is happening in the market because you are much less focused on Dollars and Cents, and much more focus on what is happening in terms of price activity in the markets. Also, from a profit perspective, winning trades are less likely to be closed early as you are not so eager to close positions as soon as they become gains. This is highly valuable when traders are looking to ride out a trend until it reaches its true end point. Third, always consider “scaling into” a position. This essentially means you should avoid placing your full trading size all at once. Instead, you can break your trade size into thirds (or halves, quarters, etc) and add to your position if prices work against you. This strategy plays into the first rule (no certainty in the markets) and will give you an opportunity to improve on your average entry if prices do actually move in the wrong direction. This is great for protecting against stressful situations, as it means you do not need to enter into your trades with 100% precision, and gives you a buffer against adverse market moves. Fourth, it is important to spend more time focusing on exit strategies, rather than entries. While it is, of course, very important to get a good entry price on your positions, it is ultimately your trading exit that will determine your level of profit or loss. This can also give you a mental view of the market that is healthier and more cohesive. There is a wide variety of ways to exit a positio (for example, a candlestick formation or an overbought/oversold inidicator reading). But the main thing to remember is that traders focusing solely on their position entries will be ill-equipped for adverse moves. This leads to emotional reactions that are not well thought out, and the potential to hold onto losses until they become unmanageable. Conclusion When all is said and done, the trader that is able to limit the negative effects of emotions will beat the trader that can’t in almost every instance. These four tips can help traders to manage the damaging outcome emotional responses can create. While these negative effects cannot be removed completely, it has to be remembered that there are strategies for maintaining your composure and focusing primarily on the price activity seen in the markets. The reality is that traders are rarely (if ever) able to main long and successful trading careers without practicing these methods. Conservative approaches must be applied even in the most volatile situations, and, in order to do this, traders need to have a firm hold on their emotional reactions. Without this, it is nearly impossible to make an accurate assessment of the market and generate consistently profitable trades.

I tried to read this post but you lost me with the third sentence of broken english.

The placement of stop losses is arguably the most critical component of any trading strategy, as this is the only direct way of protecting your account balance from major shifts in market volatility. Many new traders make the mistake of focusing only on profits, but many experienced traders will actually contend that the reverse is true. Either way, the only way to build on your trading account is to shield your trades as much as possible, and using protective stop losses is the best way of doing this. Major difficulties can be encountered, however, when traders determine where exactly those stop losses should be placed. If stops are placed to far away, excessive losses could be encountered (and, by extension, removing some of the benefits associated with using stop losses in the first place). Conversely, if stops are placed too close, a disproportionate number of trades will be closed at a loss. This can be especially disheartening when prices later reverse and create a scenario where your trades would have been profitable in your stop loss placement had been better positioned. Finding a Broad Approach For all of these reasons, stop loss placement is a delicate practice. To further complicate things, there is a large variety of very different ways to determine where trades should be closed in order to prevent further losses (your stop loss level). Stop losses can be either defined or methodical, but it is not necessary to use a single method for all market situations. The most successful traders are the ones that are able to assess the broader environment and adapt their trading plans accordingly. The first element to consider is your initial position size. Many traders will scale into positions (rather than placing their entire trade amount at one level). Then, if prices work against you, it is possible to add to the trade size and improve on the average price paid for the trade. In these cases, stop losses will generally be farther out than if traders place the entire position size at once because the trader is already operating on the assumption prices might continue to move in an adverse direction. Furthermore, short-term traders are usually better off exiting trades on impulsive moves, whereas long-term traders tend to look for signs that the underlying trend has reached completion. Most strategies recommend that traders never risk more than 5% of their account size at any one time, while others with a more conservative approach will take this number down to 2-3%. Here, we will look at some of the methods that can be used to set stop loss levels and protect your trading accounts in the process. Hard Stops Traders determine places for stop (defining an exit point) before any trades are actually place. This is helpful because it allows you to determine your parameters before you are emotionally invested (and potentially irrational) if prices start to work against you. The most basic approach to placing stops is the “Hard Stop,” for which the trader set an exact price level, and then exit the trade is markets reach that region. The main idea here is that your trading strategy suggests there is little reason to believe prices will rise (for short trades) or fall (for long trades) to this area before your profit target is reached. Then, if it does turn out that prices hit the stop loss, either a major change is present in the market or your initial analysis was simply wrong. In both cases, it will be wise to close your trade at a loss and look for new opportunities. There are many ways to determine how to place a Hard Stop. One method is to use the Average True Range (ATR), which calculates the average of past highs and lows to determine a projected range for your chosen time period. Assets with high volatility have a wider ATR, while assets with low volatility will have a smaller ATR. Since it is unlikely prices will travel outside this projected range, stop losses can be placed above the projected high (in short positions) or below the projected low (in long positions). Trailing Stops A more active approach is to use trailing stops. Here, traders will move the stop loss higher (for long positions) when prices move in a favorable direction. In short positions, stops would be moved lower once the trade turns profitable. For this reason, Trailing Stops are also called profit stops but this approach requires continuous monitoring of your position. This approach can be conducted manually or automatically. Most trading stations will allow traders to automatically trail the stops. So, for example, if we start with a stop loss that is 50 points away from the price, we can set a 25 point stop loss interval, which will move the stop loss higher every time the market moves 25 points in our favor. (Chart Example 1) Manual stops require more analysis but can be better tailored to specific market conditions. In the first charted example, assume we take a long entry in the at the black line, with a stop loss below the most recent support (the first red line). As prices move higher, we continually move the stop loss higher (each successive red line). Prices reach a top, reverse and hit the profit stop slightly below. In this example, the trader would need to actively monitor price activity and move the stop loss higher as the trade works into profitability. Parabolic SAR A variation on the trailing stop can be found with the Parabolic SAR approach. This indicator works well when prices move quickly in the direction of your trade, and will quickly spot out a trade when prices reverse. On the negative side, since the Parabolic SAR reacts so quickly to price trend changes, there will be many instances where you are stopped out of a postion before the full trend has run its course. The second charted example shows how a trader could exit a position using the Parabolic SAR tool. (Chart Example 2) In the example short trade, the Parabolic SAR is above prices, indicating a bearish bias for the trade. Once this scenario changes, it is time to exit the position as market conditions are reversing. Donchian Channels Other methods to set stop loss levels can be seen with Donchian Channels and Pivot Points. Donchian Channels will give traders a price action envelope that can be used to determine bullish or bearish bias in a currency. The next charted example shows traders in long positions can set stop losses using this tool. Essentially, upward breaks of the upper band signal a bullish bias, while downside breaks of the lower channel signal a bearish bias. In this example, the long trade is initiated when prices break the upper band, stops will then be placed below the lower band. (Chart Example 3) Conclusion The placing of stop losses is critical for traders looking to maintain positions until trends have run their course, while at the same time protecting a trading account against adverse market volatility. There are many different ways traders can set their stop loss levels but it must be remembered that no trade should be executed without an exit point in mind. The wide variety of stop loss approaches might seem daunting, as it makes it difficult which method to use regularly. But this should, in fact, be viewed as a positive, as it means there are many different methods that can be used for different types of trading environments.