2Bull Forex Blog

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.

When you analyze Forex, you want to try and predict which way the market is going to move. If your predictions are right, you’ll profit, but if you aren’t right, you’ll lose your money. You can do a Forex analysis in two ways. One is technical analysis and the other is fundamental analysis.

Technical analysis means that you examine currency prices over a period of time so that you can try and tell what trends and patterns there are. As an example, let’s say that the value of one currency has been steadily growing over several weeks. It’s likely that this trend is going to continue into the future at least for the short term. When you are doing technical analysis, identifying a trend is the most important aspect of this. If you can correctly identify a trend and then trade so that you dovetail with that trend, your trades are likely to be profitable. In addition, the earlier you identify a trend, the more likely you are to have profitable trades.

Fundamental analysis means that you take into account the economic social and political forces influencing the value of a particular currency within a given country. If the country’s economy is strong, and if the country has a stable government, the country’s currency is likely to be valuable and will likely rise against the currencies out countries whose economies are weaker.

Currently, as of early 2008, Zimbabwe is a country with a very weak economy. This is largely due to a very unstable and corrupt government. Currently, farmland is being stolen and currency reserves plundered by Zimbabwe’s corrupt government officials. Inaddition, Zimbabwe’s inflation is now over 1000%. This means that the currency loses more than 90% of its value every year. At present, Zimbabwe’s currency is literally worth less than the paper it is printed on.

Even in countries that have stable and healthy economies, however, a particular reserve bank’s actions (such as the Bank of England in the UK or the Federal Reserve in the US) can influence a country’s currency value.

For best results, you need to use both technical analysis and fundamental analysis when you trade in Forex.

As an example, let’s say the chart the value of the UK pound (GBP) against the US dollar during October through November 2007, and you just use technical analysis. You would have noticed that for several consecutive days, Pounds Sterling was going up against the US dollar buy a round 100 pigs every day. On November 8, 2007, you see that the Forex quote is GBP/USD = 2.1104/2.1109. Your instincts tell you that by the end of the trading day, this should have gone up to about: GBP/USD = 2.1204/2.1209. You decide to buy one standard lot at a rate of 1 GBP = 2.1109 USD, = 47373 GBP. As before, you expect the GBP to go up by 100 pips; this will mean that you can sell your 47373 GBP for 2.1204 USD each, which gives you $100,450, or a $450 profit for the days trade.

However, when you check the day’s trading a few hours later, you see that it has moved against you, so that the Forex quote is now 2.0906/2.0911. You decide to get out so that you can cut your losses; you sell your 47373 GBP for 2.0906 USD each = $99,294. Now, instead of making $450, you have lost $706. What has happened here? On the first Thursday of every month, the Bank of England sets the UK base interest rate.

So, on Thursday, November 8, 2007, the Bank of England was to increase the UK base interest rate. This meant that UK inflation rates were lower so that the value of Pounds Sterling went up.

However, what the Bank of England did instead was to leave the UK interest rate on hold. This caused the GBP to fall in value instead of rising as expected.

Many traders don’t understand how and why forex technical analysis works and base there trading systems on wrong assumptions and lose. Here we will show the advantages of forex charts and how you can make big profits from them.

1. The Equation for Market Movement

The equation is simple

Market Fundamentals + Human perception of = Price.

Its humans that decide the price of anything and that includes currency prices.

As human nature is constant this is reflected in chart patterns which repeat and repeat again. The fundamental news is not important by itself, its how it is perceived that determines the course of events.

Forex technical analysis simply assumes all the fundamentals will quickly show up in price action and more importantly, the forex charts will tell you how all the traders have perceived them.

You are viewing the truth on a forex chart no guessing or predicting is needed, you are seeing the reality of the market price.

2. Forex Trend Following

Forex prices move in trends up or down and as the currency markets reflect the health of the economy they represent, these trends can last for weeks, months or even years.

A forex chartist doesn’t care how or why prices are moving, they simply want to lock into these trends and make money from them.

3. A Game of Odds Not Certainties

Many people think prices move to some mysterious scientific theory - but they don’t and there is no way of predicting where prices will go. If of course there were a scientific theory of forex market movement, we would all know the price in advance and there would be no market!

When you trade forex you are simply trading the odds - but don’t let that put you off, you can make a lot of money. You’re like a good poker player who passes hands by, folds losing ones and hits the big paying high odds hands.

Your trade is your hand and you should be patient, to wait for the right opportunities and not be afraid to fold or pass a trade by, until you get the right opportunity.

4. Best Time Frames

The best time frames are the big trends which last for weeks and months and the overbought / oversold areas within the trend which, last for few days to a week.

Never day trade! This is huge mistake made by many traders. All short term volatility is random and you will never win so don’t try it.

You can however swing trade or long term trend follow, it’s a matter of choice which method you choose - both work.

5. Choosing Your Indicators

Start by using support and resistance lines and learn a breakout methodology, its timeless and it works and is covered in our other articles. Then, just add a few indicators to help you confirm your trades and your all set.

Forex technical analysis can make you a lot of money if used correctly and this means

- Acting on the reality of price change not predicting
- Using simple robust rule based system
- Being patent and only trading high odds trades
- Controlling losses with rigid money management.

When using forex technical analysis, you have a time efficient way to seek huge profits from the markets and if you can get yourself a simple rule based system which trades the reality of price change and locks into and holds trends, you can make outstanding gains.

Fundamentals move currency prices and this is obvious but if you try and trade the news you will lose it is incredibly difficult to trade news stories and win - but if you know how to use fundamental analysis in your trading correctly, you can make huge profits.

Let’s start with a simple equation for market movement

Forex supply and demand fundamentals + Investor perception = price

Millions of trades see the facts but they all draw their own conclusions from what they see.

Humans are not logical, they are motivated by the emotions of greed and fear and guessing the impact of the fundamentals is the hard bit.

Consider this rather startling fact:

In the last 100 years the amount of winners in forex trading remains the same about 5% and 95% lose.

This is despite the fact that we have seen huge advances in forecasting, computers are more advanced today than the one that landed man on the moon and we can get the news instantly at the click of a mouse.

It hasn’t helped why?

The answer is simple humans determine the price of what something should be. While prices tend to move in line with the long term fundamentals prices spike away from fair value as greed and fear take hold and volatility takes prices in the opposite direction of the fundamentals a lot of the time.

It’s a fact that markets collapse when the fundamentals are most bullish and rally when they are most bearish - this is human psychology at work.

You can still use them to back up your analysis of the long term trends - but you should really use forex charts to look for price spikes away from fair value.

These are easy to see on a chart and then you can time your entry with your trading signal to take advantage of the spike.

It’s a fact that throughout history, that strong price spikes are temporary and eventually prices fall back to fair value - ALL you need to do is spot them.

News can also be used to spot contrary trades - if bullish news fails to push a market higher and bearish news fails to push it lower, this is warning you of a price change.

Today, trying to guess the impact of each individual news story is impossible, as the news is discounted instantly and you have no chance of winning.

Forex charts take care of this for you.

All forex technical analysis does is assume that all the fundamentals that are known show up instantly in price action. The technician is only interested in letting the chart tell him where prices are going next, not the reason and the bonus is - the chart shows human psychology to.

If you want to use the news then go ahead - but always use charts to time your entry and look for news stories that don’t have the affect most traders thought they would to generate contrary trading signals.

There’s an old saying:

“If you can hold your head when everyone else is losing theirs you probably haven’t heard the news”

In forex trading you have but you are looking at the news in a different way to the majority and know how to use it to make forex profits.