2Bull Forex Blog

In developing a personal Forex trading style it is likely a trader will experiment with numerous technical indicators over time but eventually end up with just a handful of favorites which are used on a daily basis.

The use of trendlines is taught in just about every training course out there and popular opinion seems to suggest they should take a reasonably prominent place in any successful Forex trading style.

This article begs to differ. Yes, trendlines can be useful but in my opinion they are superseded by horizontal lines.

What is the difference?

Trendlines are simply lines drawn across the lows of bars or candles in an uptrend, or lines drawn across the highs of bars or candles in a downtrend.

One Forex trading style may use the Tom DeMark method of drawing trendlines which gets very specific by joining the most recent low with the previous lower low (looking left on the chart) and then extending the line forward (looking right on the chart) for an uptrend.

For a downtrend join the most recent high with the previous higher high (looking left on the chart) and then extending the line forward (looking right on the chart). These trendlines then give indications of a breakout once they are broken.

Horizontal lines are simply lines drawn across highs and lows on a chart marking support and resistance.

Why are horizontal lines superior?

The ideal Forex trading style is simple and easy to use and it helps if the charts we are studying are clear and reasonably uncluttered.

Drawing numerous trendlines can obscure what is really happening with price action. True, some traders just draw trendlines across main highs and lows and ignore the mini swings. Nevertheless, trendlines have to be constantly re-drawn and updated as price action continues.

On the other hand, just putting in a horizontal line on key levels of support and resistance is simple and easy to see. They have great significance on the higher time frames, especially the 4 hour or the daily charts.

Of particular value is marking the previous day’s high and low and watching price action around those levels. It is possible to catch 10 to 20 pips often as price tests the previous day’s high or low and pulls back. Of course, the probability of a successful trade becomes higher if the previous day’s high or low also coincides with other factors such as a Fibonacci level or pivot point.

Why are horizontal lines probably more significant than trendlines?

When developing your Forex trading style it is very important to look beyond candles. Trading is much more than that. The successful trader understands what is going on behind the scenes. Candles and price action is simply an outward manifestation of what is happening across the desks of thousands of traders across the globe who deal with billions of dollars worth of flows and orders.

A previous high or low in price action, especially on the higher time frame, means that the bulls or the bears won the battle in that trading session. If a number of traders committed a large amount of equity to a currency at a certain price, then obviously that price point is going to be fiercely defended in the future by those traders.

So horizontal lines drawn across levels of support and resistance mark very real points at which we can expect a reaction from price.

Trendlines on the other hand tend to be more speculative in my opinion. Watch price reaction at horizontal lines of support and resistance as opposed to trendlines and you will notice that price respects key levels of support and resistance more often than trendline levels.

Should trendlines be included in your Forex trading style?

That is an individual matter. They can certainly be helpful in offering confirmation of a trade after taking into consideration other factors. But to trade on trendlines alone can be very risky. On the other hand, it is possible to trade almost entirely on what support and resistance tell you at certain times when key levels are being tested.

Generally though, a successful Forex trading style will combine a number of factors. My favorites in order of importance are:

1. Support & Resistance levels on the higher time frames
2. Fibonacci retracement and extension levels
3. Pivot points
4. Candle patterns
5. 200 EMA (Exponential Moving Average)

If you are in the process of developing your own Forex trading style you may arrive at a different priority list. Why not experiment with horizontal support and resistance lines and trendlines and decide for yourself which gives the most reliable indication of price movement?

Thanks to technological advancements like computers and the internet, we can easily manage many of our everyday tasks right from the comfort of our homes. We can do most of our shopping online and manage our banking transactions. We can even manage our social and business lives online, so it is no wonder that online stock trading is gaining such popularity.

Managing your investments and buying and selling stocks via the internet is fast and convenient. With a little background information and minimal equipment, investors of every level can enjoy the ease of trading online. Before you get started, you need a reliable computer with adequate memory and a sufficient processor speed, as well as a dependable internet connection.

A high speed internet connection from a reputable company will give you the most flexibility in your online transactions. You should also consider a back-up connection if you plan to be a serious online investor. A second internet connection, even if it is a dial-up connection, can prevent down time or missed deals if your primary connection happens to fail. A dedicated phone line is recommended if you will depend on a dial-up connection for your online stock trading.

Once you have a comfortable office area with a reliable computer that is connected to the internet, you will need to establish a relationship with a broker. There are a number of stock brokerage firms that offer a variety of products and trading packages online. Look around and compare various brokers and the deals they offer before making a decision. It is important for your broker to offer consistent details and knowledgeable advice, but you also want a trustworthy broker that is always available to offer support when you need it. Choose a reputable broker that will still be around five years from now and offers low commission fees, as well as a good value.

The next step in successful online stock trading is becoming familiar with the stock charts. Knowing how to read these informational charts will keep you up to date on the most recent stock trends and help you understand the best times to buy and sell. There are a number of websites available that will help you learn how to read stock charts.

Once you get started buying and selling, there are a few important tips to remember. First, don’t always believe the advice you hear from the many stock trading gurus promoting themselves online. While the advice may be sound advice and could be beneficial, these people are relaying their information to so many different people that it is most likely out of date by the time it will reach you.

As you make your stock buying decisions, remember that a falling stock is not always the best investment. A stock that is dropping in price is not guaranteed to rise again, so you are not promised a profit. A stock that is on the rise, however, will deliver a profit of some size so these are the best stocks to purchase.

Each time you make the decision to purchase a new stock, set a selling price immediately. It is a bad idea to trade stocks without setting your limits and it is important to remember that the amount of money you make trading online is determined by when you sell, not when you buy.

Enclosed you will find 2 simple tips that will help you increase your profitability dramatically and they can be incorporated in any forex trading strategy. These tips are not commonly accepted by most traders but as 90% of traders lose, we wont let that worry us!

Let’s look at these two simple tips and why they increase your profits.

1. Don’t Diversify

If you don’t risk much you won’t make much and that’s a fact.

If you have a small trading account all diversification does is dilute your profit potential. If you trade a small account don’t spread your resources to thinly – when you see a trade go for it and hit it with as much cash as you can afford.

You hear a lot of forex guru’s saying you should risk 2% per trade well, if you have a $10,000 account that’s $200.00! If you risk a small amount, you will end up getting stopped out to soon and never catch a major move or profit.

Risk 10 – 20% and be very selective with your trades. Patience is the key, only trade the really high return low risk trades.

Forex trading is all about taking calculated risks at the Right time – if you don’t like taking a risk find another profession.

2. Hold Your Stop Back

This leads on from the above point.

You already know that you have to risk meaningful amounts to make a lot and it’s a fact that most traders try so hard to avoid risk they actually create it.

They wont risk much as we discussed in point 1 and the most common group who do this are day traders, their stops are so close they are almost guaranteed to be stopped out.

The other critical error traders make is they move stops too quickly to lock in profits, as the market moves up.

The Result?

They are simply clipped out by normal volatility and bank a small profit.

Of course, the trade then continues the way they thought and piles up thousands or ten of thousands in profit and their not in!

Get used to holding your stop back, so that you are not clipped out by random volatile reactions.

This takes courage and conviction and most traders can’t do it. Sure they want big gains, but they simply can’t hold a big profit, as they get to excited or worried it will get away, so they bank early.

Hold the longer term trends and hold your stops back and work with a profit target to liquidate.

Don’t Be Scared Of Risk

If you are, stay away from forex trading.

The fact is that most traders are terrified of risk, that’s why they only risk small amounts and can’t hold a profit. There risk control is so conservative, that they give themselves no chance of making meaningful gains and their risk control simply ensures they lose.

If you buy a currency trading system from a vendor, chances are it won’t make money in line with its track record. Furthermore, if you test your own in most cases it won’t produce the same in real time trading.

Why? The answer lies in curve fitting - if you don’t know what curve fitting is, read this article and it could save you a lot of money.

What is curve fitting?

Curve fitting is when the system rules are bent (curve fitted) to the data, to make it produce a profit. This is very similar to shooting blindly at a barn door with a shotgun and then drawing a bulls-eye around everyone afterwards!

Curve fitting and buying a system

Most of the currency trading systems sold by vendors have great track records in back testing and in most instances never produce the gains in real time.

A hypothetical track record is exactly that:

It’s designed knowing the closing forex prices and of course it’s easy to make a profit when you know the closing price in advance.

Many vendors simply make sure the trading system makes money so they can sell it.

They know it wont work in real time, but that doesn’t matter, their after system sales.

A clue to curve fitted system is:

1. Black box – Where the logic and rules are not revealed.
2. Optimization – This is where the data has to be bent. Clues to an optimized curve fitted system are - unique rules or parameters, for different market conditions or currencies.

The Gamblers Illusion

Of course, on a few years currency trading history there is an apparent order, but just like the roulette gambler who sees number sequences repeating themselves, they will never exactly repeat in the same order again.

Bending the rules and curve fitting to make a currency trading system more profitable is a futile exercise.

If a system is robust and based upon sound logic, it should contain only a few rules and parameters and they should be applied to all currencies and all market conditions.

Of course, not all vendors selling currency trading systems deliberately curve fit, like individual traders back testing their system they do it without understanding exactly what they are doing.

Many individual traders I have seen, back test their systems and make money, but they want to improve profitability, so they simply bend the system to fit the data with lots of parameters and indicators.

When they trade it real time they lose.

They would have been better off with their simpler non curve fitted system!

No snap shot of trading history will produce the same patterns again – it’s an illusion as we have just seen.

When back testing or looking at a system just keep the following points in mind:

1. It should be based around trading the odds.
2. It should be simple with only a few rules or parameters.
3. It should trade all currencies the same way.
4. It should trade all market conditions the same way.
5. If a track record has an absence of draw down chances are its curve fitted, so if a hypothetical track record looks to good it probably is.

Don’t fall into the trap of curve fitting!

Curve fitting is done by the majority of trading systems sold and most traders when constructing their own fall victim to it.

Curve fitting deliberate or not, is the major reason hypothetical track records that appear to give fantastic growth rates in hindsight fail miserably in real time trading.