2Bull Forex Blog

When you look back at a forex chart forex trends that last for weeks or months are easy to see but there much harder to hold in real time trading. There are huge profits to be made if you can milk the longer term trends but you must be aware of two main problems you will encounter.

Volatility within the Main Trend

When your are forex trend following you get constant pullbacks in price and you have to decide whether they are a trend change or a pullback and this is not so easy when money is on the line.

The dilemma you face is:
Where should you put your stop so that you can stay with the trend but get at least a good chunk of profit should the trend turn.

For this you should have an understanding of standard deviation of price – if you don’t know what it is – make it an essential part of your forex education.

Our view is to use trend line support and moving averages pullbacks to the 18 – 25 day moving average are normal and pullbacks to the 40 day moving average indicate a trend that might turn.

Once the trend is in motion, use the 40 day and trend line support as your stop.

Of course when the trend turns you give back a bit of profit but that’s ok – if you caught 50% of every major trend, you would be very rich.

Don’t ever try and predict when a trend might end or impose your view on the market let the market action tell you when you are wrong.

You Have to Accept Short Term Dips to Make Long Term Gains!

Many traders get excited when they get a profit and the bigger it becomes, the more excited they get – Every dip in open equity causes them emotional turmoil and they simply want to get the profit in the bank, before it gets away.

They end up snatching their profit and banking a marginal one – what happens next?

The trend continues and makes $5 10 or 15,000 and their not in yet, that’s where they thought the price was going anyway!

They just didn’t have the discipline to stay with them.

The fact is you must be disciplined and be prepared to take open equity dips – sometimes of thousands at a time, once a big trend is in motion.

This requires confidence and discipline in your forex trading strategy, an understanding of volatility and a mindset to put up with it, to seek a longer term gain.

Take a look at a forex charts and you won’t just see trends at present that yield a few hundred pips in motion, you will see ones that could give you thousands or tens of thousands and you can get these trends with the right attitude.

If you have the discipline and the mindset to succeed you can make a lot of money from long term trends – you don’t have to be perfect and you and you don’t have to be clever, just have the patience to stay with the trend, until the chart tells you that your wrong.

Here we will look at the best forex trading indicator for swing trading this is for trading into overbought / oversold areas within the major trend. Here we will look at how to do this, with the stochastic indicator and show you a simple powerful method for big profits.

Swing trading is easy to do, logical and easy to understand and can be very effective. The stochastic indicator combined with valid support and resistance gives you a robust simple strategy you can learn quickly than can be highly effective in making big forex profits so here it is.

An Introduction

George Lane developed the stochastic indicator which was based on the premise that in an up-trend, prices tend to close near their highs and of course in a down-trend the reverse occurs, prices tend to close near their lows.

This simple logic is the basis of the stochastic indicator but despite its simplicity it’s a powerful tool.

The stochastic should our view be used in association with areas of support and resistance and be used to enter positions when price momentum wanes in an uptrend below resistance and strengthens in a down trend above resistance.

The Mathematics

If you are technically minded, the stochastic calculation is outlined below. If you are not don’t worry, as most major chart services plot the stochastic and you can simply see the set ups visually – here it is:

The stochastic is plotted as two lines %K, a fast line and %D, a slow line.

The %K line is more sensitive than %D

The %D line is a moving average of %K.

The %D line then triggers the trading signals.

The lines are plotted on a scale of 1 to 100.

“Trigger” lines can be drawn on stochastic charts at the 80% (overbought) and 20% (oversold) levels. A signal is then generated when the stochastic lines cross.

The Stochastic can help you enter trading signals in a number of ways and here we have outlined the 3 major ways you can use it in a swing trading strategy.

As an Overbought Oversold

When the 20% and 80% trigger lines are crossed look to do the following in terms of initiating your trading signal. Take a long position and buy when the stochastic moves below 20% and then rises above this level. On the other hand take a short position and sell, when the stochastic rises above 80% and then comes back below this level.

Stochastic Crossovers Against the Trend

This is a highly reliable signal

You can buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

The most reliable or high odds crossovers occur when the %K line intersects after the peak of the %D line.

Stochastic Divergences

Divergences between the stochastic and the underlying price trend warn that a potential price change is on the way and are a great leading indicator for your trading signals.

For example, if prices are making a series of new highs and trending upwards and the stochastic moves lower or crosses to the downside then price momentum and velocity is weakening and the reverse occurs of course in a bear market.

Why It Works

The reason it works and we consider it the best forex technical indicator for swing trading is based upon human psychology.

A long term price trend does not just go in a straight line – there are peaks and troughs along the way. Forex traders will push prices to far too quickly and prices then return back to fair value. It is these moves within long term trends, that swing traders want to catch – so by combining the stochastic with simple support and resistance is very effective.

If you are new to forex trading then swing trading with the stochastic gives you a simple method which works and the stochastic is the best forex technical indicator to use and while there are others, using the stochastic wisely, with support and resistance lines, can make big consistent profits.

Forex trading can be fun and lucrative, but if not done properly, it can also take more time than you have to manage it. In order to have your Forex trades managed the way you want them to be, you can set up Forex orders. These orders will request that your broker buy, sell or close out your position at specific times, deemed by you.

The three most common types of Forex orders are limit orders, market orders and stoploss orders.

A limit order is an order you place to buy or sell at a certain price. For example, let’s say you buy Pounds Sterling and sell US dollars thusly by issuing the following market order: GBP/USD = 1.9710/1.9715. You can then set up a limit order to sell Pounds Sterling when the Forex quote has increased by 50 pips, such as with the following: GBP/USD = 1.9760/1.9765. If you wish, you can also utilize a time frame for your limit order. For example, you can request to close the trade at the end of the trading day, whether or not the price has gone up by 50 pips. An alternative to this is that you can request that the trade would continue until the price has either increased by 50 pips or you cancel the trade altogether.

A market order happens when you sell or buy currencies at the current market price. This is what usually happens when you open an order.

The stoploss order is an order whereby you order your trade closed if the market should move against you. For example, if you buy Pounds Sterling when the quote is: GBP/USD = 1.9710/1.9715, you could order a stoploss to close the trade if the quote goes below GBP/USD = 1.9690/1.9695. This would mean that you would only lose 20 pips plus the bid/ask spread.

Other types of orders include:

Good till Canceled, or GTC: This keeps your trade open until you order the trade closed, by issuing a market order.

Good for Day, or GFD: This order closes your position at the end of the trading day, which is 5 p.m. Eastern standard time.

Order Cancels Other: This type of order is a mixture of two stoploss or limit orders. As an example, you could set up an OCO to sell your holding of Pounds Sterling when your Forex quote is at GBP/USD = 1.9760/1.9765, or you could close your position if your Forex quote goes below GBP/USD = 1.9690/1.9695.

Usually, GCC and GFD orders are used in conjunction with limit orders.

If you are new at Forex trading, it’s perhaps best to start with the first three order types mentioned. In other words, stoploss, markets and limit orders are the basics you should start with. It’s most important that you familiarize yourself with a stoploss order before you start trading in earnest. Most Forex trading sites will let you familiarize yourself with their procedures by doing mock trades until you are completely familiar with them. This is imperative that you do this and familiarize yourself with a stoploss order in particular before you begin to trade with real money. Otherwise, if the trade moves against you, you could lose all the money within your account.

In the vast majority of circumstances, a reputable broker will not let you keep trading if your account drops below zero. Even so, this may not protect you in volatile markets where currency values can change very quickly. Therefore, there’s a slight chance that you could lose more than just your equity in your account. However, this is only likely if you trade with margins that are less than 1% or if you have too much leverage, which means that you don’t have adequate unused margin in your account.