2Bull Forex Blog

The Forex market can lure the novice Forex trader into trading scenarios that appear very attractive at first glance but turn very quickly into a losing trade.

Many a Forex trader will relate to this experience:

* Price has been in a consolidation channel for one or two hours.
* You place an entry order to get taken in at the top or bottom of the channel.
* Within a few minutes your trade is in and within a few minutes more you are looking at a loss of -10 pips, then -15 pips, and then your stop gets taken out.
* Price hardly moved for hours but as soon as you got into a trade you were taken out within minutes for a loss leaving you bewildered and muttering, “What happened?”

In the early stages of gaining trading experience, it is good for the novice Forex trader to go by a checklist every time before entering a trade until certain habits become ingrained.

Just having a procedure in place that has to be executed before pulling the trigger on a trade can prevent the Forex trader from quickly entering a trade just because there are some sudden movements on the screen and the trader is worried about missing an opportunity.

Yes, disciplining oneself to take time and go through a checklist first may mean missing some good opportunities occasionally. On the other hand, it will prevent having losing trades frequently.

For a very cautious approach to trading the newer Forex trader can use this Failsafe Checklist to determine whether the potential trade setup is likely to be high probability or low probability.

FailSafe Checklist

Avoid Going Long If:

* There is negative divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
* MACD on the 4 hour or 1 hour chart is pointing down.
* Price is well above the Central Pivot Point for the day in a Sell Area.
* Price is below the 200 EMA (Exponential Moving Average) on the 4 hour and 1 hour chart but above the 200 EMA on the 15 minute chart. (With this setup on the 3 times frames price is bucking the overall trend and can turn against you at any time.)
* Price is above a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
* Your stop is not below multiple layers of support such as a significant previous high or low, pivot point, or Fibonacci level.

Avoid Going Short If:

* There is positive divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
* MACD on the 4 hour or 1 hour chart is pointing up.
* Price is well below the Central Pivot Point for the day in a Buy Area.
* Price is above the 200 EMA on the 4 hour and 1 hour chart but below the 200 EMA on the 15 minute chart.
* Price is below a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
* Your stop is not above multiple layers of resistance such as a significant previous high or low, pivot point, or Fibonacci level.

The Most Important Lesson Of All

Implementing this Failsafe Checklist strategy may reduce the number of trades the Forex trader participates in. However, here an important lesson is learned - patience! Waiting for a high probability setup can make many demands on a Forex trader’s mental resources and emotional strength.

This is probably the most important lesson the new Forex trader will have to learn. Using a Failsafe Checklist like the one above can make the Forex trader slow down, engage in thorough analysis using the technical indicators available, and really start to make progress as a trader.

Why not print off the Failsafe Checklist and keep it beside the computer for consultation before pulling the trigger on any trade?

Currency day trading is 90% mental! I had heard this from many professional traders but when you start as a novice in the Forex world you can fail to realize the significance of that statement.

Of course, it is necessary to develop analysis skills using a variety of technical indicators. Risk management and understanding of the market is also crucial if anyone is to succeed at currency day trading.

But the greatest challenge of all is developing mental discipline and emotional control. After many months of practicing in a demo account and testing the water cautiously with a few hundred dollars in a mini account, I studied my main trading faults and documented them.

Here are my 5 biggest mistakes. Perhaps you can learn from them too!

1. ANXIETY & DESPERATION - LEARN TO RELAX!

Feeling a compulsion to trade - its poison!

If good opportunities were missed the day before, or if one or two days have been quiet with no trades, then you need to carefully monitor your emotional and mental state.

If feelings of desperation begin to rise take a step back and enforce strict mental discipline - keep to your strategy, only look for safe trades, wait for the right setup!

2. IMPATIENCE - LEARN TO WAIT!

How many times do we enter trades prematurely? Wait until the setup really sets up!

Don’t be afraid of losing an initial big run because:

* Its not worth the risk

* There will always be another opportunity

* Catch the next retrace when it is much safer

3. LOSING CONCENTRATION AFTER A LOSS - KEEP FOCUSED

There is a danger after a losing trade to either:

* Shut the mind down so you become closed to further opportunities that day

* Act in desperation by impetuously entering an ill-thought out trade soon after to try and regain losses

After a losing trade muster up all your mental resources and detach yourself from it. Imagine standing on a chair and shouting at the top of your voice: “NEXT!”

4. THE MENTAL RUT - BE READY TO SWITCH DIRECTION

If price goes opposite to what your initial analysis told you, look at charts with new eyes following the direction of price.

It can help to maximize a chart on your screen and look at it from across the other side of the room. Get your mind out of the one direction rut and look at the chart afresh looking for new opportunities in the new direction.

5. FAILING TO TAKE REASONABLE PROFITS

How many times I have been looking at a profit of 20 to 25 pips on the screen only to see it evaporate before my eyes because I was hoping for a big move and decided to hold on.

Currency day trading by nature revolves around smaller price movements. Often price will get to 20 or 25 pips and then retrace. It may then resume its direction or it may not.

I have learned it is important to take the first profit early, and then let an additional lot or position(s) run to a more ambitious profit target. At the same time as taking out the first early profit, the stop is moved to protect the remaining positions.

I used to put myself through much mental anguish from failing to take a 20 or 25 pip profit. Price would come back to perhaps 5 or 3 or 2 pips and now your emotions come rushing in regretting you didn’t take the profit that was offered to you and hoping against hope price will return and even go on further for the big one!

Save yourself a lot of mental exhaustion by taking a reasonable profit early after examining the charts to see where the first major level of support or resistance is likely to be.

Identify And Act

I have heard it said many times that currency day trading is more an art than a science. Each individual interprets the charts according to their own perception. There are no rigid, hard and fast rules. Having said that, a solid currency day trading strategy is necessary obviously.

However, it must be backed up by strict mental discipline and control over emotions. See if you identify with any of my 5 biggest mistakes listed above and take the appropriate action!

To learn the ways in which traders can determine areas where many barriers are can make a trader a good profit. Many kinds of cost barriers are in the FX market. It is ordinary for currency pairs to change direction at these barriers. When traders learn the ways they can put them together, traders may create a system of trading with higher probabilities of success. A few barriers contain resistances levels, support levels, Fibonacci levels and psychological barriers. Barriers on trend lines and at pivot points can also enhance our observation. Now we will examine the various kinds of barriers that are common in the Forex market.

Support and Resistance Levels

Support and resistance levels are huge turning points that the market has consistently respected in the past. When the market respects them more, then they become stronger Support is identified as the turning point where the buyers put themselves at the top which made the currency pair go up. Resistance is any level where the market finished rising and turned down. Support and resistance levels on larger time charts are considered more significant than those on smaller time charts.

Psychological Barriers

Psychological barriers are identified as huge numbers. Any numeral ending in 50 or 00 is a significant barrier. Any number ending with 000 is more significant. You will be in wonder at how much a currency pair exhausts itself and turns within a few pips of a psychological barrier.

Fibonacci Levels

Fibonacci lines are frequently used to determine if a point has the potential to reverse. Begin with your larger time charts and make Fibonacci lines on major moves. Drill down and mark all smaller moves. See where the Fibonacci lines, psychological barriers and support and resistance lines match.

Trend Lines

Make trend lines to put a mark on all major moves and then work your way down to smaller trends. If you ever run into trend lines that go in the same direction, mark them. To do this, put lines along the lowest points of an upward trend and along the tops of a downward trend.

Pivot Points

Most charting packages have either a calculator or a tool that plots your points where it can pivot. These are areas where the currency pair is likely to turn. Most tools and calculators offer several numbers both below and above the current levels of the currencies you are following.

Drawing lines to mark the various barriers that we always encounter in the foreign currency market can aid us in identifying where a pair is likely to turn. Take note of those levels where multiple barriers correspond. This increases the chance of having success while trading. If you have many barriers that connect at a certain point, then it is very significant

To find out more information about these barriers and their application on your charts, check out our other articles and resources.

The Fibonacci number series is ubiquitous. It is everywhere, whether one is aware or not.

Not only was it prevalently found in older cultures (Greek, Egyptian, and Hebrew), in elements of life (DNA molecule and the human body), and even in recent studies of the entire universe, Fibonacci numerical relationships play a very significant yet subtle
role in market action and hence, trading.

Even more, Fibonacci Forex trading has actually become the platform of a majority of Forex trading systems and is used by numerous professional Forex brokers all
over the world.

Yet, it may well be asked why a relatively simple series of numbers would play such a strong role in the Forex market with traders quite often separated by culture and great distances.

The difficulty in perceiving the possibility of this at least in part comes from a human tendency to believe itself to be independent and somewhat separated from nature.

Certainly, when we are injured, sick, or close to death, the influence of nature in our lives is quite obvious.

However, under ‘normal conditions”, our intelligence gives us a sense of being “above” the control of nature, especially in a collective sense and blinds us to elements of the truth.

The truth under discussion is that changes in market prices largely reflect human opinions,expectations, and valuations.

A series of studies, published in the 1980s by mathematical psychologist Vladimir Lefebvre, demonstrated that humans exhibit positive and negative evaluations of the opinions they hold with 61.8% positive and 38.2% negative.

If you recall, these two numbers (61.8%/ 0.618 and 38.2%/0.382) are important Fibonacci ratios. This as well as other related studies suggest that Fibonacci numbers are intrinsically rooted in a trader’s psychology.

Furthermore, other research has shown that markets are perfectly patterned, explaining that human traders, being part of nature, create geometric like relationships in their behaviors, even if they are not aware of it.

Therefore, the real truth here is that Fibonacci ratios affect all traders, whether they consciously apply the numbers or not in their trading !

This has a very important implication for the Forex Trader !!!

Since these ratios as well as other Fibonacci numerical relationships appear frequently enough in the timing of highs and lows and price resistance points, adding Fibonacci evaluations to technical analysis of the markets may help identify key turning points, and significantly improve trading results.

Forex traders can greatly benefit from such mathematical proportions due to the fact that the currency price fluctuations observed in Forex charts, where prices are visibly changing in an oscillatory pattern, are known to follow Fibonacci ratios very closely as indicators of resistance and support levels.

Additionally, it is important to understand that Fibonacci analysis is a LEADING indicator. This means that such analysis will provide a direction where the market will advance to, not where it has gone to date, as most other indicators yield. This can be a very real advantage.

What does this means in practical terms ? How does a trader actually apply Fibonacci Forex trading in whatever plan he uses?

As can be seen on a typical Forex chart, the currency prices are constantly changing, following an oscillatory pattern with peaks and valleys. The limit of the peak is called resistance while the valley is known as support.

In order to find, say, the 0.328 ratio level in an example, the size of the drop (or rise) is measured over the time of interest. That value is then multiplied by 0.328 and then added to the total drop (or subtracted from the total rise). This defines the anticipated retracement level and provides good numerical probability of where the market will retrace to and find new support or resistance.

Once this level has been determined, the strategy can be planned which theoretically will allow a trader to yield a high probability profit.

Successful application of Fibonacci analysis has the potential to allow traders to earn an excellent income. Two very well known traders who effectively used Fibonacci especially in the Stock Market are W. D. Gann and R. N. Elliott.

Gann made his fortune using methods which he developed for trading instruments based on relationships between price movement and his work was heavily influenced by applying Fibonacci in his analysis.

Elliot developed the so called Elliot Wave Theory where all major market moves are defined by a five-wave series, adding to the potential to identify the turns. The Classic Elliot Wave series consists of an initial wave up, a second wave down (typically retracing 61.8 % of the initial move up), then the third wave (the largest) up again, another retracement, and finally the fifth wave,which completes the cycle.

It is very likely for a new Forex trader to become initially overwhelmed by this kind of numerical applications in their market analysis. Such traders if truly interested in applying Fibonacci numbers in their trading plan, should be encouraged to learn the basics well first and practice as much as needed before actually risking any of their capital.

Since this discussion has hopefully demonstrated the importance (and strong influence) of Fibonacci ratios on the Forex market, it seems quite logical than to achieve the ultimate success as a trader, it is essential to understand and effectively apply Fibonacci Forex trading in the trader’s plan.

To totally ignore Fibonacci analysis in trading the Forex market would be like walking into traffic blindfolded.

The cars may not be seen, but they could kill nonetheless.

Whenever there is an opportunity to make large amounts of money, there will be people who are eager to jump right in and start making money. And where there are people who are eager to get rich quick with a minimum of effort on their part, there are fraudsters waiting to take their money. Experienced traders are wise enough to avoid the frauds - it’s the new traders who are most vulnerable to the forex scams that are slipping into the currency exchange market.

The U.S. CFTC (Commodity Futures Trading Commission), which regulates futures and commodities trading, warns new investors to be wary of frauds and scams that promise huge profits from your investments, in and out of the Forex market. The CFTC has issued several Consumer Fraud Alerts in connection with foreign currency trading. They offer the following tips to help you avoid being scammed.

Be skeptical of high-profit-low-risk come-ons.

“I made $1900 in one minute!” touts one sidebar ad for a Forex trading company. Ads that promise high returns on small investments with little or no risk to you are tempting bait. The fact is that while there are certainly big profits to be made in forex, there are correspondingly large losses. And most novice traders drop out of active trading by the end of their first year because they can’t afford the risk.

Be suspicious. Period.

Before you part with a penny, thoroughly check out the company or trader you’re planning to do business with. Check the CFTC’s consumer fraud alert page. Check to see if the company is registered with the CFTC, or is a member of the National Futures Association. Check to see if there’s any disciplinary action against the firm or company. Get even more basic. Get a valid address and telephone number, and verify that it belongs to the company. Check to be sure the person you’re dealing with actually works for the company. Especially if you’re doing business on the Internet, it’s very easy for a scammer to fake credentials.

Be wary of sending money over the Internet.

The Internet has made it incredibly easy for scammers to operate. It only costs $6.95 a month to have a professional looking web site hosted - that’s pennies a day to reach millions of potential marks. Before you part with credit card numbers, bank account transfer permissions or wire transfers, be sure to check out the company with all the authorities listed above.

Beware high pressure sales tactics.

Legitimate dealers don’t need to contact you with unsolicited email, or pressure you into doing business with them. If someone is pushing you to invest right now, tonight, this moment, it should set off huge warning signals in your head. A real dealer is more concerned with keeping you as a customer for the long haul. He’ll be patient while you check out his credentials and reputation. A phony dealer can’t afford that luxury - he needs to get you on the hook right now, or risk losing his score.

Be cautious of companies that tell you they’ll trade for you on the ‘interbank’ market.

The interbank market is a term for a loose network of currency traders that include banks, financial institutions and large corporations. Fraudulent currency trading firms often tell customers that they’ll trade for them on the interbank market where the prices are better. It should be a warning signal to you to stay away.

While technically not ’scams’, you should also be wary of paying good money for training courses that promise you systems that are ‘guaranteed’ to earn you high profits. If the course advertises that their system will earn you huge profits with minimal risk, or guarantee you 40% return on your money in six weeks, take the promises with a huge grain of salt. Experienced traders understand that the forex market is a time market - while it’s possible to make large amounts of money in short-term trades, finding those profitable trades is a matter of being in the right place at the right time… which means putting in the time and the effort to be there.

They also understand that they’ll lose more often than they win - the trick is to keep your losses short and your profits long. Any company that guarantees that you’ll make a profit on all or most of your profits is coloring their advertising. Stick with trusted companies whose credentials you can verify and whose background you can check.