Chart of the Day - Page 3

Thomas Long · #31 (**permalink**) 08-04-2008, 07:22 PM

Written by Thomas Long, FX Power Course Instructor

Our goal of developing a consistent, disciplined approach to trading has brought us up to point #4 in our list of actions that should be taken on every trade.

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

Last week we determined that our risk on the trade was 58 pips, so we know where we intend to get out if the market moves against us. But what if the market moves into profitable area? How many pips should we be looking for in a profitable trade? While most new traders work on finding that “perfect entry”, which is an elusive goal, the exit strategy is what can determine the profitable traders from the rest. Too many times we hear about new traders who have a profitable trade on their hands, get out as soon as the market moves a few pips against them. They are worried that the winner will turn into a loser, so they take profits early in the trade. You can’t lose ringing the cash register is an old line that you will read or hear if you spend any time trading. But the answer is yes, you can lose by taking profits early. If you are disciplined in your approach to the point where you can win half of your trades, you obviously have to win more when you are right than you lose when you are wrong to be consistently profitable. This is where the trading part comes into play. Professional trend traders are experts at “working a trade” in order to get as much out of the move as possible. After all, they are trading with the trend and they never know when the move will be the big move that could make their year. These traders typically only trade with a stop order in the market to protect from big losses but they will also move that stop as the trade becomes profitable to protect gains. As the move continues, they continue to move their stop with the market, hopefully just out of range in order to stay in for the long run. But this is difficult to teach to new traders, so we have another recommendation. We want to use a 1:2 risk:reward ratio on all of our trades. That means that we look for two pips in profit for every pip we are willing to risk on the trade. Since we are risking 58 pips on our trade, we should look for 116 pips in profit. When we enter into the trade, we can also set our protective stop and limit order to take profits. That way we also do not have to watch the screen all day and all night. However, sometimes we found that a trade could run all the way up to within a few pips of profit and then moved all the way back down to stop us out at a loss. Not a good situation. So to keep this from happening, we use the trailing stop feature on the FX Trading Station. So our trade includes an entry, an initial protective stop level which gives us a risk of 58 pips, a target to take profit at 116 pips and our trailing stop. We recommend using the same trailing stop value as your stop. So if we are risking 58 pips on the trade, we should use a trailing stop of 58 pips. This way if the market moves halfway to our target, our stop is moved up to break even. This way we can theoretically only profit 116 pips on the trade or break even. Not a bad position to be in and an excellent money management strategy for new traders to use on their trades.

Thomas Long · #32 (**permalink**) 08-11-2008, 10:19 PM

Written by Thomas Long, FX Power Course Instructor

The current daily chart of the EUR/USD shows a good example of a trading range breakout. This pair had been trading within a range of just above the 1.60 level on the highs to just below the 1.53 level on the lows. Last week’s breakout down through support was quickly followed by more selling as sell stop orders, usually placed just below support, are hit resulting in more selling pressure. Most trend traders would consider this strong move an indication that the trend of the EUR/USD is now down. This means that the preferred play is now to sell rallies up to resistance. Since old support is known to become new resistance, a move up here could have a difficult time moving up through the 1.5300 on the first try. If that were to happen this week, trend traders would consider that a selling opportunity and look for a sign of changing momentum from the upside to the downside to time their entry. This is where the use of technical indicators can be of great help and a look at some of the previous lessons will show some examples.

DailyFX Power Trading Course · #33 (**permalink**) 08-26-2008, 04:51 AM

Here at the DailyFX Education Department we offer our students the opportunity to master technical analysis through three levels study (FX Power Course, Trading the Majors, Day Trading Course). On this thread we will be posting a chart and highlighting the possible trading opportunities that we see. If you have questions about the charts or the analysis feel free to ask. We are here to help!

DailyFX Power Trading Course Instructors

Thomas Long
Matthew Russell
Richard Krivo
Gregory McLeod
Sean Hyman

Watch this video to learn more about FXCM's 3-Step Education Program.

Thomas Long · #34 (**permalink**) 08-26-2008, 07:57 PM

A look at the daily chart of the NZD/USD shows a strong downtrend, so we want to move down to the 4-hour chart to identify selling opportunities. A use of the RSI shows a couple of times when the RSI moved below from above 70. This is a sell signal when using this indicator and one can see how well the signals were timed. The key here is that we are only trading in the direction of the trend on the daily chart. The analysts at DailyFX are also seeing weakness in the New Zealand Dollar.

Thomas Long · #35 (**permalink**) 08-27-2008, 04:53 PM

If you take a look at yesterday's (August 26) thread, Trend of the Day, you will see that Gregory McLeod identified the USD/JPY as being in an uptrend. This means we should look for buying opportunities on this pair. A look at the 4-hour chart shows how using a trendline can identify a buy. The first two points are used to identify the trendline while the third test is the buy entry. Most traders who use this approach will just buy the test and place their protective stop below the trendline. But the key is to make sure that the daily trend is up as trading with the trend increases our chance of success. We can also see at this link that some of the DailyFX analysts still think that this pair has room to run on the upside.

Thomas Long · #36 (**permalink**) 08-28-2008, 10:44 PM

With the daily trend of the AUD/USD being down, we want to move down to the 4-hour chart to find a selling opportunity. We can see here that the AUD/USD has rallied and now we can see where the MACD is about to crossover the MACD signal line. This would signal an entry for those who use this technical indicator. You would then place your protective stop above the high of this recent rally.

Thomas Long · #37 (**permalink**) 09-02-2008, 07:56 PM

When comparing the trends of the various pairs, it helps to look for the weakest and the stongest currency pair and use that analysis when looking for a trade. Currently, there seem to be two currencies that are especially weak...the AUD and the GBP. Here is a 4-hour chart of the GBP/USD and we should be looking at any rally up to resistance to place a sell. This trend is down and assuming that it remains weak after any rally is what we are looking for in this situation. The use of technical indicators can be of great help here as they show changing momentum, which is about all we need for an entry.

Thomas Long · #38 (**permalink**) 09-03-2008, 10:38 PM

Yesterday we looked at the GBP/USD as one of the weakest pairs, but with the USD/JPY moving off the recent highs, the GBP/JPY is also a good candidate. With the daily trend as being down on the daily chart, we should look to sell rallies up to resistance on this pair also. With the Friday morning release of the US Dept of Labor's Nonfarm Payrolls due out at 830AM Eastern, we might see some moves USD and JPY weakness as traders take profits before then. This might set up another series of trading opportunities Friday afternoon or early next week.

Thomas Long · #39 (**permalink**) 09-04-2008, 09:31 PM

Here is an hourly chart of the USD Index. It represents the value of the US Dollar compared to a basket of currencies rather than just the one other you see in the currency pairs we trade here at FXCM. It is designed to give a better view of the US Dollar. We can see that the market pulled back yesterday, most likely profit taking before the Friday morning 830AM Eastern release of the Nonfarm Payrolls. You can find more about that release here,
but this morning's strength shows that the USD may be stronger than suspected. If the Nonfarm Payroll is stronger than expected, seeing a strong rally in the USD is possible. If the number is weak, the sell off might not be as strong as it would normally be. We never know for sure, but having a bias can mean being able to react quicker to market dynamics.

Thomas Long · #40 (**permalink**) 09-10-2008, 07:55 PM

In the DailyFX Power Course, we recommend starting with the daily chart to identify the direction of the trend and then to move down to the 4-hour chart to find our entry and exit in that same direction. Sometimes, you may not be able to find a setup on the 4-hour charts, so you can move further down to the hourly chart. Your win percentage may be lower than trades on the 4-hour chart, but you will find more opportunities. Here is an example of using trendlines to find your sell entry as the market moved up to test resistance as the daily trend is down. This is a classic selling opportunity and is what we should look for as traders.

Thomas Long · #41 (**permalink**) 09-12-2008, 07:06 PM

The stronger USD has meant that the EUR/USD is showing a strong downtrend on the daily chart. This means that we should be looking to sell a rally up to resistance on the 4-hour chart. Here we have the beginnings of a rally as the market has bounced up off of the lows. On the chart below I have plotted a MACD to show when the momentum changes from moving up to moving down. Traders who use this indicator would most likely sell on the crossover of the MACD and place their protective stop above the high. This type of trading activity is not unusual for a Friday after a strong move on the week. The buying is probably dominated by those traders who have been short all week, having sold at the beginning of the week and are now buying back to take profits. We can't be sure of whether this will last all day Friday or if it is about over. But by using the MACD or another indicator to show a possible reversal, we increase our chance of success on the trade.

Thomas Long · #42 (**permalink**) 09-16-2008, 04:24 PM

With the current uncertainty surrounding the US financial markets, the bullish sentiment on the USD seems to be on hold. The advantage of trading the FX markets is that this doesn't have to mean staying out of the markets as there are many trading opportunities in the pairs that do not include the USD. These pairs are referred to as crosses or exotics and the EUR/CAD is currently rallying up to resistance while the pair is in a downtrend. The trendline shows the potential resistance and aggressive traders would be selling up there and placing their stop above that trendline. More conservative traders would wait for confirmation by using a technical indicator to signal the entry. On the 4-hour chart below I have plotted a MACD (Moving Average Convergence/Divergence). The signal to enter into the sell is after the MACD line (green line) crosses below the MACD Signal line (black line). The MACD Signal line is a 9-period moving average of the MACD line as it designed to signal a sell after the sellers have come back into the market. The choice as to when to enter is a matter of personal preference depending on your approach to trading. The key is to stay within your comfort zone as that provides the confidence necessary to take the setups as they happen.

Thomas Long · #43 (**permalink**) 09-22-2008, 06:27 PM

Continued uncertainty about the strength of the USD leads us to once again look at the exotic pairs to find a potential trading opportunity. These are the currency pairs that do not include the USD which limits the influence of the current financial market volatility on this pair. The AUD/CAD is still showing a downtrend on the daily chart which means that we should be looking at selling opportunities only on the intraday chart. Here we see the 4-hour chart showing a move up against the trend, so we look for a sign that sellers are coming back into the market before entering into our trade. The signal to enter into the sell is after the MACD line (green line) crosses below the MACD Signal line (black line). We could then place our stop above the recent high which gives us our risk on the trade. We should then look for at least two pips in potential profit for every pip we are willing to lose for our 1:2 risk:reward ratio.

Thomas Long · #44 (**permalink**) 09-23-2008, 05:59 PM

US Stock Market strength has resulted in the markets perhaps starting to show USD and JPY strength that was leading the FX market before the US intervened in the financial markets. I would still prefer to stand aside as far as trading the USD, but the NZD/JPY is setting up nicely for a resumption of the downward trend that is seen on the daily chart. The MACD has already crossed over on the 4-hour chart, which for some traders was the signal to sell. Protective stops should be placed above the recent high and traders should look to take profits that are twice that risk for a 1:2 risk:reward ratio.

Thomas Long · #45 (**permalink**) 09-24-2008, 09:33 PM

In our continued attempt to trade pairs that do not include the USD, we see that the AUD/JPY is trading similar to the NZD/JPY which we discussed yesterday. This pair is also showing a downtrend on the daily chart, so we should be looking for selling opportunities on the intraday charts. The 4-hour chart shows a rally up to resistance and then a reversal back to the downside. The MACD has already crossed over which for some traders is the signal to sell. These pairs still continue to be in a holding pattern, so keeping your risk small by not opening multiple trades at once is the play. Traders who do sell the crossover, would most likely place their protective stop above the recent high and look for twice that risk in profit potential for a 1:2 risk:reward ratio.

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