Price Action with Dynamic Support and Resistance - Part2

This article is a continuation from the original Price Action with Dynamic Support and Resistance. I have decided not to place to much emphasis on the explanation but mention key points why we use it.

• Markets often respect dynamic support and resistance on all time frame periods
• Price action signals often occur at these levels
• Trade lager time frames such as Daily and 4H as smaller time frames can be more volatile 
• The more price touches the EMA lines the more the market starts to respect the trend
• Help us identify trends and the market bias
• Once we have identified the trend we can also take the slope into consideration
• I don't just trade the cross of the EMA, the reason being I could of entered a trade before the cross occurred with a counter trend price action signal. At a later the stage the EMA's may cross only to validate my entry.

Counter Trade Example

•  The safest way to enter is to wait for the EMA's to cross and once a clear trend is starting to form I could then enter a trade based on a valid price action signal in the direction of the trend. If the market makes an aggressive move either up or down wait for a pull back and if a price action signal appears then enter the trade. Example below doesn't have a valid price action signal this was to demonstrate the best level to enter at, however we could find a valid price action signal at the same level in the smaller time frames such as 4H and 1H.

Pull Back Entry Example / Diverging Trend lines

•  EMA should be used in conjunction with other analysis tools such as price action signals and horizontal support and resistance.
• When the EMA's lines cross and in a obvious direction  we can assume that this is the new short term trend being formed.
• Lets assume the EMA's crossed and new trend has been established and sometime in the future we see price break above the EMA's lines, but the EMA's have not crossed back in that direction we can assume that the trend is still in place and that price will eventually continue in the direction of the current trend.
• Once a trend has been set the EMA will start to diverge the further apart they move the stringer the trend. See image above for diverging trend lines.

Price Action with Dynamic Support and Resistance

In my previous article Trading Key Levels with Price Action, the main topic discussed was using a price action signal off these key event areas to enter the market. These key event areas are also know as support and resistance levels and are marked by horizontal lines drawn across bar highs and bar lows or near the same level. The other category is the dynamic or moving support and resistance levels which are marked by moving averages.

There are several different types of moving averages (MAs) in use by Forex traders. In fact, moving averages are the most common technical indicator across all financial markets, including the Forex .They are called "moving" because each new chart period is included in the calculation, while the oldest period is discarded. This has the effect of the average moving along as time passes and the chart develops. The indicator I use mostly is the EMA. The main reason that early chartists developed the exponential moving average was that they felt the SMA was too reliant on old data, and too slow to react to recent price action, so they devised a way to give the most weight to the most recent price action, and to let the weight taper off as you move back through time on the chart. I'm sure you asking what values should I use? It all depends how you analyzing price and over what  period. Most traders use 50, 100, 200 which allows them to see what the average price did the last 50, 100 and 200 days.

Now I'm sure you questioning the fact that I'm advocating that I trade purely price action without indicators so why am I discussing this? I use EMA for two things for trend analysis and  to identify dynamic support and resistance levels. It's pretty simple when the 2 lines example 50 and 100 EMA cross higher then we have a bullish trend in place, if they cross lower then the opposite applies. Please keep in mind that EMA only works for a trending market but when markets are range bound we need to rely on the static support and resistance levels. Trading with the trend you will want to trade away from the EMA or if you get a very obvious counter trend signal you will then trade toward the EMA.

 From the chart below we can deduce that price has bounced off EMA many times in the course of this recent uptrend. This demonstrates how valuable these levels are in showing us the dynamic or moving support and resistance levels.

Now if we take both static and dynamic support and resistance levels as discussed above and in conjunction with a price action signal this usually gives me a high probability setup that I can take advantage of. 

Hope this article can contribute toward your success in trading

Happy pipping!!

Winning Methods of the Market Wizard

I'm aware that it's been a while since I've updated my blog but during my holidays I came across a video which enlightened me about trading and would like to share this with you.

 Jack D. Schwager is the CEO of Wizard Trading, a commodity trading advisory firm that has been managing client funds since 1990. He is the author of The Complete Guide to the Futures Markets, Market Wizards,
The New Market Wizards, Fundamental Analysis, and Technical Analysis.

Jack Schwager explains the traits and behavior patterns that super traders have in common -- and tells you how you can develop those same winning characteristics. He explains the there is no right way or wrong trading
as a technical trader or through pure  fundamentals. Some of the key topics discussed is patients and that money management is not enough to be successful trader because all successful traders need a method or an edge such as price action. This is a video that you'll find as entertaining as it is informative.


Click here to see video

Market Psychology - Mind over Market

In a previous article I discussed trading psychology at very basic level, but the more I trade and study about the markets it seems that this is one of the corner stones to be a successful trader. I came across these videos where Mark Douglas discuss a few things which put trading in a different light. Its obvious when we trade we all have an edge or a collective pattern that allows us to trade without fear and uncertainty. If you are wondering what an edge is, its a higher probability of a decision taken actually happening over the other but within a series of trades. 

Mark Douglas also describes that trading is not about being right or wrong but we should rather learn to think in probabilities. Therefore when I see my signal or edge I should think that the odds are in my favour and that the market will buy or sell at my entry point. So what happens when I see my edge and it fails? All it means is that other traders didn't come into the market, because they didn't have the same conviction in what I was seeing therefore it failed. If a trade fails even though my edge is present and I've had success in using this edge in the past doesn't mean it will have the same outcome again.

No point in judging if the trade will work or not but rather place as  many probabilities on my end as possible for success. Remember its all probabilities so if you have the correct money management and trading plan in place you should trade your edge without hesitation

Mark Douglas -  Mind over Market - Part1

Mark Douglas -  Mind over Market - Part2

Mark Douglas -  Mind over Market - Part3

Mark Douglas -  Mind over Market - Part4

Mark Douglas -  Mind over Market - Part5

Forex Trading Strategy with Price Action Basics

Now that I have a trading plan as well as some form of money management in place, I will need a trading strategy. Accessing http://www.forextrainingworldwide.com/ website I found a number of successful strategies and they are simple and easy to execute and seem to be profitable if I stick to the rules of that strategy. I will be focusing on the Price Action strategy and in this article I will be discussing price action basics and not setups as such, that will follow in up and coming articles.

Why trade with price action? Looking at all the strategies available the common denominator within all of them was that every chart had price action. What is price action? The best way to describe it's the “footprint” of money. Financial markets are where money is exchanged between market participants, and this exchange of money leaves a trail, this trail is a market’s price movement or price action and it can be observed on a price chart. The price action strategy can be traded in any financial market and on any time frame. Trading any financial market means that I can trade commodities (gold, silver, oil), Index's (SP500, UK100, etc) including Forex. The time frame I will mostly be trading in is the D1 and H4 which suites my currently life style. As I discussed in my previously article  Forex Trading Plan, Forex Training Worldwide mentions the following "DO NOT CHANGE YOUR LIFE FOR TRADING. We can help you change trading to suit your life."

Human beings ultimately behind the price movement of the Forex market and it seems that human emotions are relatively predictable especially when it gets to the matters of money their actions in the market often result in price action formations that repeats itself periodically. So by learning how to read these price action charts correctly it will allow me to use my strategy successfully due to the way the market thinks. A simple way of explaining this is by combining price action setups with core support and resistance levels and dynamic support and resistance levels. Core support and resistance is where I can see that the market reached either a peak or bottom at some point in time this does not mean that price can not break out even higher or lower, but if I can see that in the past when price reached that level and it bounced down or up from that key level of support and resistance then the probability the market may follow  this pattern once again giving me the best chance of getting into a profitable trade.

 One of the main things that stand out with the price action strategy is that I have a clean canvas with no noise. What do I mean by this? Normally the videos or tutorials I have see in the past all display charts with dozens of colours  and lines these are known as indicators. I am not speaking against indicators as such but nothing can beat price that should be our strongest indicator. As a trader I should be able to look at any chart and decide where and how price will move in any any financial market. It seems once again I need to keep all aspects of trading simple and not over complicate which may interfere with my decision making, please note that there are many ways to create a confluence and indicators are one of those tools. 

I will keep you updated with future trade setups and see if they are profitable or not

LET THE JOURNEY BEGIN!!

Forex Trading Plan

I learned that a Forex trading plan is one of the most important pieces of the puzzle of becoming a consistently profitable Forex trader. Let's admit it like it or not we've all been brought up in a society that has some sort of boundaries or rules which in turn brings order and structure and a trading plan is just this. Having a written out pre-defined trading plan means I'm making an effort to hold myself accountable to something, this is necessary because there is no one to be accountable to as a trader.

It seems that my emotions can run wild especially when I start calling the trades correctly and over-confidence starts to kick in. One of the best ways to not let emotions influence my trading activities is to have a defined trading plan that describes in concrete terms what I will do in any given market scenario. Many traders do not attempt to have a trading plan because they aren’t really sure where to begin but in http://www.forextrainingworldwide.com/ website you will be able to download a trading plan template with a set number of questions and it's also designed in such a way allowing  you to add things to as you go along. 

I'm going to mention some of the key elements a trading plan should include

• Have a financial goal, after all that is why you are learning to trade.
•  It's important for me to keep a balance in my life, therefore I will have to decide in which time frame will suite me best. Forex Training Worldwide mentions the following "DO NOT CHANGE YOUR LIFE FOR TRADING. We can help you change trading to suit your life." This is very reassuring due to the fact I work nights and find myself asleep during the UK and US trading  timezones, but they have assisted me in finding a strategy that suites my requirements and lifestyle.
• I have to define my entry strategy, in other words create a mini check list which will identify that trade as grade 1,2 or 3
• Determining the risk to reward scenario on any potential trade setup
• Adjust my position size on the trade to meet my necessary stop-loss distance, NEVER adjust my stop-loss to meet a desired position size, this = GREED.
• Exit strategy  BEFORE entering the trade will this be a fixed profit target or will the trade be managed with a fluid stop loss.

There is no concrete way to make a good trading plan but at least my mentor has supplied me with a good template which sets me on the right path and in time eventually I will add my own ideas or concepts. One of the key thing to remember is that the whole point of a trading plan is to keep me accountable and to keep me on track of objective thinking and this is really the only effective way to consciously make an effort at eliminating emotional trading mistakes.

Lets see if I can practice what I've learned.

Forex Money Management

What does a stop loss, limit, profit target, spread, margin, have in common? They are all related to money management, these are systems which are put in place to make sure I make money and try not give it back to the market. The course material goes into detail explaining the above terms in how and when to use them.

The main function of money management is to help  me manage my emotions. It seems that I need to take a logical approach in my decision making knowing that every trade setup taken there is a calculated risk. By doing that I have now taken an unknown variable and replaced it with some certainty, which can help me remove the emotional side to trading. The course states that many begging traders are largely unaware of some or most of the basic concepts of effective Forex money management, and this is a major reason why so many traders fail to make money over the long-term in the markets. 

How much should I risk on a trade?

The question should be how much money do I have as disposable income that I can realistically afford to lose? This approach does seem to be subjective, but through the course they have supplied me with a few tools to help me gauge how large or small my position size should be, and it also helps me calculate how much money I potentially could loose. I also learned that I should never risk any money in the markets that is not truly disposable, doing this will start me on an “even” emotional playing field, because I will have no emotional attachment to my trading money.

Risk Reward

It seems that proper implementation of risk reward is how professional traders make money, but many traders take the wrong approach to risk reward by worrying first about the potential reward and last about the potential risk. I need to first calculate the risk involved in any potential trade setup AFTER I've determine the most logical place to put my stop loss. Once I've done this, I then can determine what the potential reward is.e.g. If I risked £100 on a trade, I ideally want to aim for a reward of at least £200 or more; the R:R would be 1:2. The idea is that if I can make at least 2 times my risk on all my winning trades, I will, over a series of trades, offset my losers to the point of turning a decent profit.

Position sizing

Position sizing allows me to risk the same amount of money no matter what trading strategy I trade or how large or small my stop loss distance is. Having a wider stop loss on a trade doesn't mean I'm risking more money or that by having a smaller stop loss on a trade I'm risking less money, therefore I can adjust my position size up or down to meet the necessary stop loss distance. Once again logical place to start is with my stop loss on a trade setup, after I've figuring out where to place my stop loss, I THEN calculate the number of lots I can trade to maintain my pre-determined risk amount. Thankfully once again Forex Training Worldwide has supplied me with tools to easily work this out.

If I don't logically manage my risk on every single trade it will be impossible for me to manage my emotions. The better I manage my risk and money in the Forex markets with a trading strategy, the easier it becomes to manage my emotions, if I know exactly how much I can lose, and exactly how much I can make on every single time I enter a trade I'm unlikely to become emotional.

Keep you posted Happy pipping!!