2Bull Forex Blog

This post is all about the basics of forex charts and using technical analysis to win. It’s the simplest most time efficient way to achieve currency trading success and anyone can do it with the right forex education…

Forex charts allow you to see all the inputs that go to make up the price and while you get people who say you cant trade without taking into account the fundamentals, that to a degree is true - but forex technical analysis does take the fundamentals into account and the following equation will make this clearer:

Fundamentals (supply and demand) + Investor View Of = Price

The fundamentals are not important by themselves - it’s how all the traders view them that makes the price. We all have the same facts to look at but we all draw different conclusions from what we see and this vast mass of opinion makes the market price.

Technical analysis simply assumes that all fundamentals will quickly show up in price action and it also does something more - it tells you how the investors perceive them.

Markets move on investor sentiment and that’s why studying charts is so effective.

Human nature is constant and this is reflected in the charts.

The same formations reflect human psychology, again and again and if you can spot these high odds formations or patterns, you can execute you’re trading signals, with the odds on your side and enjoy currency trading success.

A big myth about forex charting is you need to predict what happens next.

You don’t.

If you do you are simply hoping or guessing and that won’t get you far in life, let alone forex trading. You should simply trade the truth, as you see it, on the chart and by doing so, you will have the odds on your side.

When trading with charts you only need a simple system, as it’s proven that simple systems work best, as they are more robust in the face of brutal ever changing market conditions.

You also need to trade valid data.

This is data where you can get the odds on your side and this means no day trading and no forex scalping!

The data is not reliable and prices can and do go anywhere in a day. In the longer term you can measure investor sentiment but not in the short term.

If you have a simple trading system, trade the reality of price and show discipline you can win.

Forex charts allow you to step back from the crowd and see value and sentiment, right there on the chart which you can trade for profit.

Charting is an art not a science but if you practice your art, you will soon have a powerful way of trading which will allow you to seek big forex profits in just 30 minutes a day.

If you want to win at forex trading then using forex charts and technical analysis is a great way to do it. Forex charting is easy, time efficient and works yet; traders still make basic errors that cause them to lose.

Let’s look at the errors made and why you need to avoid them.

1. Forex Charts Predict

A common mistake, traders think they need to predict to win - but of course this is simply hoping or guessing and is destined to see you lose.

If you use charts the correct way, you trade on the reality of price change and trade it, you don’t predict.

There is a big industry in forex trading that says prices move to a scientific theory and you know what will happen next - but of course if prices did move to science, we would all know the price in advance and there would be no market.

Don’t believe any of the prediction nonsense - trade the reality of price change i.e if a price comes to support, don’t predict support will hold, wait for it to move the other way and trade the fact it has held.

Another great way to trade is to trade now breakouts to new highs or lows - it’s a proven fact that most big moves start from these breaks, so make breakouts part of your forex trading strategy.

2. The More Inputs the Better

5 or 6 indicators must be better than 1 or 2 - totally wrong!

The more inputs the more chances are the system will break.

Simple forex trading systems work best and always have.

All you need is support and resistance and a few indicators and your all set.

3. Using Invalid Data

You need to use technical analysis on valid data, where you can get the odds in your favour.

Do not try and use forex day trading or scalping systems the data is to short to be traded. All volatility is random and you can’t use it, so don’t - Either forex swing trade or trend follow.

4. Using Indicators in the Wrong Way

Many traders do this.

They use lagging indicators such as moving averages to enter price, or Bollinger bands are stops. This is not what they were intended to do!

Use an indicator for what it was intended and understand its limitations.

5. Curve Fitting

To succeed with forex charts we have said you need to keep your system simple and if you do, you will avoid another common mistake curve fitting.

Today with powerful software packages, it’s tempting to back test and bend the rules to fit the data to make a profit - this is also known as curve fitting.

If you do this, the system will collapse in real time trading, as no two segments of data repeat themselves in the same way again.

To avoid curve fitting - keep it simple and make sure the rules you use to execute your trading signal are the same for all currencies and all market conditions.

A Simple Route to Profits

Forex charting is essentially simple - You need to use support and resistance and a few confirming indicators and to trade the reality of price change either, with breakouts or shifts in price momentum near support and resistance tests.

If you do the above, you can build your own forex trading system in about a week and you could soon be making profits, big ones, in less than 30 minutes a day.

Bollinger bands for forex trading are a great tool. Why? Because they help you deal with a major problem all traders face - dealing with volatility. Knowing how to execute trading signals taking into account high and low volatility is the reason Bollinger Bands are such a great indicator for forex traders.

Introduction

John Bollinger developed the bands and they carry his name and are featured on all standard charting packages. They simply give an indication of volatility and standard deviation of price from the mean and there very easy to use.

What They Show You

They are defined as volatility bands which are shown either side of a simple moving average. You have a trading envelope - with a middle average price and 2 x bands (expanding or contracting all the time) either side that gives you a snapshot of the volatility present in the currency.

How to Use Bollinger Bands

In any market, the value of a currency traded tends to rise slowly over the longer term in line with a long term average.

Of course the price ebbs and flows in the short term, as traders drive prices to far up or down, when greed and fear are to the fore and prices become overbought or oversold.

These short term price spikes characterized by high volatility don’t last long and prices will normally return to the longer term moving average.

The standard deviation of the outer bands (how far they are from the average mean) shows how far prices have moved from the long term moving average or fair value.

Bollinger bands simply tell you how volatile the market is at a glance as you can see how far the outer bands are from the average.

There are various ways a forex trader can use Bollinger Bands.

1. Trading Greed and Fearкомпютри

When the bands are a long way from the mean average price you can use Bollinger bands to exit the market and lock in profits. In certain scenarios they can be used to enter contrary positions to the existing trend - either looking for a swing trade opportunity or new trend

2. Enter Trends in Motion

A strong trend when in motion will tend to have dips back to the mid band and these can be used to enter new positions in line with trend line support and resistance. Look how in any strongly trending currency the mid band provides a low risk buying opportunity.

3. As a Warning

When prices are trading in tight range and volatility is low you can be on the look out for a price breakout. In currencies low volatility tends to be followed by higher volatility and this can be a warning of a new trend.

Therefore a change from low to higher volatility, gives advance warning that this volatility will create a new trend.

Using Them Correctly

Bollinger bands should not be used on there own or to enter trading signals or for market timing - they are used to give you an idea of volatility and indicate value.

Bollinger bands work best when combined with good old fashioned trend lines, with momentum indicators used to confirm the trading signal.

If you want to win at forex trading and make consistent long term profits, you need to deal with volatility and Bollinger Bands can help you do just that by indicating overbought, oversold levels and areas of value.

Make Bollinger Bands an essential part of your forex education and learn how to use them correctly with momentum oscillators and trend lines and they can lead you to greater profits. Simply, a great tool all forex traders should have in their armory.

I use the stochastic all the time and think there is no better indicator for timing your trading signals - its simply the ultimate momentum indicator and every forex trader should use it - lets look at this fantastic indicator in greater depth….

The stochastic indicator is:

A momentum indicator which warns of strength or weakness in advance, making it leading indicator to confirm trading signals in conjunction with support and resistance.

The Technical Bit

The stochastic is plotted as two lines %K and %D.

The %K line is the more sensitive line

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

The plotting of the stochastic is a bit similar to a moving average. Substitute the %K for the fast moving average and %D for the slower average.

The lines are plotted 1 - 100.

Here are 3 ways you can use the stochastic indicator to great affect, with crossovers from over bought - oversold being my personal favorite.

1. As a Overbought / Oversold Indicator

A common use of the stochastic is to use it as an overbought / oversold indicator. When stochastic moves below the 20% and above 80% trigger lines are crossed the Buy when the stochastic goes below 20% and then rises above that level and sell when the stochastic rises above 80% and then goes below.

2. Trading Crossovers

the crossover is my favorite way of using the stochastic from over bought above 80% or oversold below 20% Many traders simply buy when the %K line rises above the %D line and then sell when the %K line falls below the %D line.

This can work but you tend to get a lot of whips in price. I personally prefer to do crossovers from very overbought and oversold levels. In currencies you often get above 90 and below 10 and a recent currency signal I had was from 96!

When these levels are reached and you have cross the upside from oversold or down turn from overbought are great signals.

I know traders who simply use support and resistance and crossovers from extremes and make a lot of money with the stochastic and support and resistance lines.

Sure it’s simple but it’s very effective now the final use.

3. Trading Stochastic Divergences

Divergences between the stochastic and price can be used as a leading indicator for executing trading signals.

For example, if prices are making new lows and the stochastic moves higher or crosses to the upside you have a warning that prices may re bound as price move up. The opposite is of course true in a bear market.

Of course no indicator works all the time by itself - but in terms of a momentum and timing indicator for your trades, it’s a fantastic indicator if used correctly.

As stated my preference is not just to use crossovers but crossovers from price chart extremes and this with trend lines and a little practice works.

I also like to use filters in line with the stochastic and use the Relative Strength Index (RSI) and Average Directional Movement (ADX). There great as momentum indicators and work well with the stochastic. Get the book they come from - New Concepts in Technical Trading - By Wells Wilder it’s a great book and outlines them in more detail.

I have used the stochastic for 25 years and use it for swing trading and trend following and never execute a trade without checking it.

It’s a very visual indicator and you can learn to use it in 30 minutes. If you don’t know or use the stochastic, its time to make it part of your essential forex education.

Forex charts and technical analysis can make you money - its simple to learn time efficient and can deliver huge profits. Here we are going to look at a simple way to incorporate forex charts in your trading system and win big.

First things First

Forget the myths and there numerous ones but here 2 of the worst:

- You predict forex prices
- Forex markets move to a scientific theory

There related to each other of course so lets be clear:

Prediction is another word for hoping or guessing and that wont get you far in life and certainly not forex trading - you need to simply trade the reality of price change and that’s it. Human nature is constant - but were not logical beings and we don’t conform to scientific theories. There are many people who will tell you there is a scientific theory of market movement but if there were, we would all know the price in advance and there would be no market!

A Game of Odds

When you trade forex you are involved in a game of odds not certainties. Sure you are going to lose some trades but like the good poker player if you trade the odds you can win big.

The theory of market movement

Is very simple, here it is:

All fundamentals + Human perception of them = Price

All you do when using forex technical analysis and charts is to assume that all fundamentals will show up instantly in price action, so you are taking into account the supply and demand situation. Forex charts though give you a huge advantage:

They show you how humans view price and it is humans who decide the price of anything. You can then follow your charts and look out for high odds repetitive chart patterns to trade for profit.

You can do this in many ways but let’s make an important point - your forex trading system needs to be simple!

Simple systems work best and always have. Clutter your analysis with to many indicators or make it to complex and it will have too many elements to break.

When trying to make profits with forex charts this is all you need:

- An understanding of support and resistance
- A few indicators to indicate if a level will hold or break which are momentum based

You can put together a forex trading strategy based upon the above in less than a week and we will discuss these strategies in greater depth, in part 2 of this article theory.

Here we have given you a basic understanding of what to expect from your forex charting and how to get the basics sorted.

In the next posts, we will look at building your own trading system based upon forex charting. We are going to look at putting together a system which will take you less than a week to master, 30 minutes a day to execute and could make a lot of money.