Short-term traders often focus on large elements of the pattern cycle and miss important signals buried within intraday price movement. This relativity error forces them to wait on the sidelines until these major swing points are reached and participants from broader time frames enter the game. Rather than wait, traders can locate good setups by reading reversal and breakout patterns within very short periods of cyclical market movement.

Chart analysis works best when several time frames are combined to identify important swing points and breakouts. But once the short-term trader identifies the broad framework of support and resistance, profits come from predicting how the next few minutes or hours of market action will play out.

Let's trade through a small pattern cycle following a powerful Intuit (INTU) rally.

As INTU slowly pulled out of a 9-month base in mid-October, few realized it was headed into a quick price triple. Typically, short-term traders become aware of dynamic rallies very late in their development. The majority then engages in momentum strategies to chase the big move. But risk is very high at this stage of the broader pattern cycle. As stocks go parabolic, traders get caught in sharp downdrafts that empty pockets as quickly as they are filled.


Smart technicians use major reversals, such as the one INTU printed at 60, to signal the start of predictable swing trading conditions. The downswing generates fear and provides a perfect environment for well-defined pattern and support-resistance formation. But don't rush into poorly defined entries. Be patient and wait for the right opportunities to develop.

While good short sales print on the downdraft, we'll concentrate on going long with the uptrend. A large crowd always misses the boat on strong rallies and sees any pullback as a good entry. Our first job will be to wait until a bottom pattern prints and then join them. This can occur in a few minutes but routinely takes several days to form on a typical 15-min or 60-min chart.

We are fortunate with INTU. The appearance of a symmetrical triangle quickly defines a possible bottom and clear breakout point. Note how our bottom support line actually violates the 11/30 low. The markets rarely offer perfection on very short-term patterns. Traders must be skilled enough to draw useful trendlines based on limited and conflicting information. If we have done our drawing well, the gap on the morning of the 2nd will be immediately recognized as a breakout from that triangle and completion of the bottom reversal pattern.


The market does not give away its gifts easily. Traders that buy the INTU morning gap face considerable whipsaw action until the lunch hour. Note the common 3rd bar reversal just 10 minutes after the market opens. This sets the stage for traders to apply a simple 1st hour range breakout strategy and look for an entry just above the reversal high.

The pattern also offers swing traders safe entry on both the first test of the morning gap and the double bottom test later that morning. However those that enter at bottom support then risk considerable profit if they choose to hold to new highs. Exit this classic swing trade just before the top of the first hour range and consider the setup for a new breakout trade on its own merits.


The safest breakout entry takes place just minutes before the move above the morning highs. But how will the trader know to buy? A well-trained eye recognizes the small cup action of the tall bar just prior to the breakout. The morning pattern gives up its secret here, leaving the smart trader with 2-3 minutes to enter quietly at the bid through a favorite ECN. Also note the small ascending triangle just above the breakout point. New breakouts typically pause for 4-6 bars before momentum shoots out in a tall candlestick.

The next morning opens with a powerful opportunity for traders. It takes very strong demand to break the rising trendline of a price channel. For this reason, channel breaks often produce very tall price bars immediately following the initial signal. Note how much of the break takes place in the first 30 minutes of trading. This offers a very small window for the trader to get on board safely.


INTU pattern cycles shift back and forth through charts of different time frames. If you get lazy and only focus your attention on a single segment, your level II screen may flash a breakout but you won't understand the source or reason. Without the right information, odds increase that you'll jump in at the wrong time and buy a top or sell a bottom.

Good traders know when to stand aside. As INTU approaches 60, long side trades become very risky. But after the strong momentum of the opening move, shouldn't we expect another long thrust after a short pullback? At this point, our strategy relies on the broader pattern cycle to provide our guidance. Looking back, we realize that price has returned to the beginning of the original reversal and stands right at a potential double top. Smart traders never buy into a double top.


But we should not sell short at this level either since the uptrend remains well intact. Our best tactic is to pause and let the market tell us what will happen next. Through the balance of the session, INTU sketches a narrow consolidation flag. Here at the end of the week, the broad 60-min chart resembles a classic cup and handle pattern.

Should we now buy or sell? Let's wait for Monday and see what the market tells us to do.

Having trouble with those irritating morning gaps? You're not alone. Many of us spend hours working on new setups, only to watch them go up in smoke overnight. But there's no need to throw out all of your hard work just yet. You can do a quick analysis, adjust your trading strategy and get into a good position well after the crowd pulls the trigger on a gap play.

Many traders still place market orders before the open and walk away. Unfortunately, this is a sucker move that yields the worst fills imaginable. Take a few extra minutes to plan your gap entry, and you'll get much better prices. No, this isn't a daytrading column, although it will benefit anyone who plays in the intraday markets. It's for swing traders trying to fine-tune their entries and get positioned where they can take home the most money. Here are some strategies you can use.


Stand aside at the open, and use the third-bar swing to find the best gap entry. This is a dependable reversal or expansion move on the five-minute chart, occurring 11 or 12 minutes into the new trading day. This phenomenon is a relic of the old 15-minute quote delay. In past years, painting the tape before retail investors could access stock prices ensured a few extra pennies for market insiders. Because retailers were the last "paper" in the door, natural forces would then take over and trigger reversals or breakouts. Although real-time market access has grown substantially, this third-bar swing still shows its face on many days.


Let the stock draw the first three five-minute bars, and then use the high and low of this "three-bar range" as support and resistance levels. A buy signal issues when price exceeds the high of the three-bar range after an up gap. A sell signal issues when price exceeds the low of the three-bar range after a down gap. It's a simple technique that works like a charm in many cases. If you use this technique, though, a few caveats are in order to avoid whipsaws and other market traps. The most common is a first swing that lasts longer than three bars. If an obvious range builds in four, five or even six bars, use those to define your support and resistance levels. Also consider the higher noise level in five-minute charts. A breakout that extends only a tick or two can be easily reversed and trap you in a sudden loss. So let others take the bait at these levels, while you find pullbacks and narrow range bars for trade execution.


Gap location is more important than the gap itself. Does the opening bar push price into longer-term support or resistance? A strong up gap may force a stock through several resistance levels and plant it firmly on top of new support. Or it can push it straight into an impenetrable barrier, from which the path of least resistance is straight down.


Three-bar range support and resistance often need to complete a testing pattern before they will yield to higher or lower prices. This comes in the form of a small cup and handle, or an inverse cup-and-handle pattern. Simply stated, price reverses the first time it tries to exceed an old high or low, but succeeds on the subsequent try.

Price gaps generate other action levels as well. The most obvious is the support line in an up gap (or resistance line in a down gap). We'll call these "reverse break" lines. Violation of the reverse break can trigger price acceleration toward the gap fill line. These market mechanics make perfect sense: everyone who entered a position in the direction of the gap is losing money once price moves past the reverse break line.


The gap fill line marks support in an up gap and resistance in a down gap. In other words, the odds favor a reversal when price reaches it. Paradoxically, this is a terrible place for swing traders to enter new positions. The reverse break line will resist price from re-entering the three-bar range. In fact, price bouncing like a pinball from the fill line to the reverse break line and back to the fill line sets off a powerful trading signal in the opposite direction. It predicts the demise of the gap and a significant reversal.

The flip side of this reversal is a failure of a failure signal. In other words, price overcomes resistance at the reverse break line and retests the high of an up gap (or low of a down gap). The ability of price to retest these levels issues a strong signal to take positions in the direction of the gap.

Managing high volatility levels is a major challenge in this crazy summer market. Waves of intraday whipsaws have been the norm, ripping through logical stop losses and destroying perfectly good trading patterns. So what can traders do to survive this maelstrom, other than shutting down their screens and heading out for the beach?

First, we should talk about what not to do in this wicked environment. The greatest danger these days comes when executing the same-old-strategies that worked so well during the quieter periods of the last two years. No, it isn't business as usual, and many of the classic techniques taught in Trading 101 will trigger major losses.

So, whatever else you do, stop fighting the tape. How can you tell if you're headed down this path? Typically, your daily P&L will turn red early in the session and do a slow bleed into the close. This is the classic profile of a trader that's in conflict with the market, especially when it happens two or three times per week.

Look at your results in March and August 2007, as well as January and March 2008. If you're incurring the same type of performance errors in this market, you haven't learned your lessons and are in considerable danger. Readers repeating these mistakes should stop trading immediately and take time off to get their strategies readjusted.

Yes, this is a tough period for the financial markets. But you don't need to undermine your profitability just because it feels like the world is coming apart at the seams. So, to get back on track, here are 10 more things you can do to turn around your summer trading performance.

1. Lower Share Size: Smaller positions can move through greater daily ranges and not shake you out. They dampen volatility levels and let large-scale support and resistance levels work as intended with your trading strategies.

2. Limit Total Positions: Find just one or two promising opportunities in a session and work those trades to their final outcomes. Take off the rest of the day when they close out, rather than flipping the freed-up funds into new positions.

3. Learn To Daytrade: Shorten your time frame and play the quick bursts of buying and selling pressure during the intraday markets. Just make sure to get out as soon as momentum starts to turn and move on to the next opportunity.

4. Use Weekly Charts: Lengthen your holding period and trade off major levels delineated on the weekly patterns. This means staying out of the market for days at a time and waiting for prices to hit long-term buying or selling signals. Ironically, this strategy requires even more discipline than daytrading.


5. Become a One-Stock Specialist: Playing a single big mover, like Apple (AAPL) or Celgene (CELG), let you internalize price levels and know them by heart. The process frees your mind and reduces your vulnerability to negative news flow.

6. Find Unaffected Sectors: Not all stocks move in lockstep with the major indices. Take the time to find maverick issues that go their own way, even when massive program selling hits the tape. Right now, biotech stocks are filling this bill.

7. Forget Momentum: Chasing momentum is the single worst strategy in this market because sellers are hitting every buying spike, while short-sellers are getting squeezed after every plunge. A much better approach is to buy the dips and sell the rips.

8. Trade ETFs: Seek out exchange-traded funds that don't track the daily convulsions of the financial crisis.

9. Play The Indices: Sharp swings in the index futures and related ETFs trigger program-driven arbitrage through thousands of stocks. It's often safer to trade the indices directly because the patterns show early warning signals for breakouts, breakdowns and reversals.

10. Avoid The Midday: The most annoying price action these days pops up between 11 a.m. and 2 p.m. EDT. This is the period when computers and hedge funds attack price pivots, trying to break highs and lows to fish out the stops. So get your work done in the first hour and don't come back until everyone has eaten their sandwiches.

The only thing predictable about currencies these days is that they will remain unpredictable. Forgive me for speaking in cliches, but when you consider that the last twelve months have seen both record rises and record falls, I think a cliche might be justified in this case. We’ve seen the Dollar soar, only to collapse again. On the other side, we’ve seen the bottom fall out from emerging market currencies, before rising 20-30% in a matter of weeks.

Volatility levels have certainly declined (see Chart below) from the record highs of October 2008, when Lehman Brothers collapsed. At the same time, the oft-cited VIX index remains well above its average over the last decade. This suggests that while investors may have been lulled into a relative sense of security, serious doubts remain.


If the current rally is to be seen as “legitimate,” then perhaps the worst of the 2008-2009 recession is truly behind us, and the global financial system has been given a reprieve from a meltdown. The concern going forward then will naturally shift past the steps that governments and Central Banks are taking to fight the crisis, towards the long-term economic impact of those measures.

Jim Rogers, a famous and perennially outspoken investor, is now sounding alarm bells over the possibility of “meltdown” in currency markets, due to inflation and currency debasement that he views as an inherent byproduct of quantitative easing and deficit spending.

Most of the attention is being focused on the US, whose stimulus and monetary programs are probably larger than all other economies in the world, combined. Offers one analyst, “We keep very low U.S. Dollar exposures because we think a further devaluation of the greenback is imminent, and we see a structural weakness for at least a number of years.” Meanwhile, there is speculation that the US could soon receive a ratings downgrade, following a similar threat by S&P directed towards Britain. But this remains highly unlikely.

The problem that Rogers (and all other investors who are worried about currency debasement) faces is how to construct a viable strategy to protect yourself and/or exploit such an outcome. Rogers himself has admitted, “At the moment I have virtually no hedges…I’m trying to figure out what to do there.” The difficulty can be found in the inherent nature of currencies, whose values are derived relative to other currencies. While you can short the entire stock market or the entire bond market (via market indexes), you can’t short all currencies simultaneously- at least not yet.

Instead, you can pick one currency or a basket of currencies, that you believed is best protected from currency collapse and buy it against threatened currencies. But how do you deal with an environment when all currencies appears equally questionable- when all governments all loosening monetary policy and risking inflation? Really, the only answer is to invest in commodities that you think represent good stores of value, such as oil or gold, or the currencies that benefit when prices of such commodities are high. Naturally, the relationship between commodities and currencies is not cut-and-dried, and if the currency system were indeed beset by meltdown, it’s not clear to me that commodities would hold their value.

On June 1, the Forex Blog reported that Brazil is considering a forex tax on capital inflows as a way of discourage the inflow of speculative capital that is causing the Real to appreciate. It turns out that Brazil is not alone; England and France, among others, are also mulling taxes on forex transactions. Their goal is not necessarily to discourage capital inflows, but rather to raise money to fund projects that would otherwise not be viable under current budgetary conditions. The UK “levy would raise $30bn-$50bn a year - enough to double spending on health in low-income countries.” The French plan, meanwhile, would “involve taking 0.005% of the proceeds of currency transactions, perhaps on a voluntary basis, to benefit global aid projects.”

While Brazil and England/France appear to be pursuing different ends, together their plans capture the idea behind the “Tobin Tax.” Originally proposed by Nobel Laureate James Tobin after President Nixon declared the end of the gold standard, the tax would be levied on all forex transactions with the proceeds deposited in forex stability funds. One of the most popular versions would only impose the tax during periods of volatility (i.e. speculation) so as not to punish those exchanging currency for “mundane” reasons.

Tobin Tax on Forex Trading

While still a fringe idea, the tax initially gained momentum following the 1997 Southeast Asian economic crisis, and has found new followers in the wake of the ongoing credit crisis. Consider the unprecedented volatility in currency markets of late, manifested in wild daily fluctuations.

2009 Forex Volatility

Even the US Dollar, the world’s reserve currency, has been on a veritable roller coaster of late, rising and falling by 10% in a matter of months. Prior to the rise of forex speculation (already a $1 Quadrillion/year market!), it was rare for a currency to move that much in a year. Given that such speculation probably accounts for 90% of daily turnover, it seems obvious as to who is causing this volatility.

USDX Dollar Index

Don’t get me wrong; there’s a role for speculation in the forex markets, just like there’s a role for speculation in all securities markets. When markets function efficiently and players act rationally, currences should and will reflect economic fundamentals and act to minimize global imbalances. Due to the rise of the carry trade and the herd mentality, however, the oppose often obtains in practice. This can cause currency runs and or artificially inflated currencies that compel Central Banks to act counter to the way they otherwise would (i.e. by raising interest rates rapidly to deter capital flight, crimping economic growth.)

A Tobin tax would work both to minimize speculation in the short-term (by taxing trades) and promote stability in the long-term (by providing Central Banks with funds that they can use to fight speculative “attacks.” Besides, given that forex traders already enjoy favorable tax treatment - i.e. taxed below the short-term speculative rate - it wouldn’t be the end of forex trading as we know it.

In my experience, currency markets (and most other securities) markets tend to be governed by trends. There are short-term trends, long-term trends, and medium-term trends. Granted, this is an oversimplification, but generally speaking, if you were to chart a given currency pair, you could characterize its fluctuations in accordance with this paradigm.

Short-term trends are typically the focus of technical analysts, who ignore the broader forces affecting a given currency pair and instead try to discern slight trading patterns. Long-term trends, on the other hand, are the purview of economists, and reflect interest rate and growth differentials. Medium-term trends, meanwhile, unfold over a period of months (sometimes shorter, sometimes longer) and require a combination of technical and fundamental analysis to discern and trade successfully. With this post, I want to focus on the current medium-term trend, which is that of declining risk aversion.

I would not use the expression “old” news to describe the stock market (and accompanying) rallies that have taken hold broadly since the beginning of March, since it’s still be unfolding. Given that hindsight is 20/20, it now appears that the (perceived) stabilization of the US financial sector provided the impetus for the rally. In the weeks that followed, investors pulled an about-face and piled back into risky sectors and trades. The US stock market rapidly reversed course and is now trading around the level following the Lehman Brothers collapse last October.

The rally in March marked the end of one medium-term trend and the beginning of a diametrically opposed, but conceptually similar medium term-trend. Sorry to make it sound complicated, since it’s actually quite simple; in an overnight switch, investors went from being bearish and risk-averse to bullish and risk-seeking. These mindsets (and the switch between) is also reflected in currency markets. You can see from the chart below how the Australian Dollar, British Pound, and Down Jones Industrial Average have tracked each other closely over the last year, and moved in lockstep since March 3.


I suppose you could say that the correlation between US stocks and currencies represents one continuous long-term trend, and based on this chart, you would be making an accurate assessment. However, it’s equally important to unveil the underlying mindset that is driving both stocks and currencies, and is causing them to move in tandem. This is a nuanced distinction, and an important one to understand. There is a difference between a change in sentiment that causes investors to simultaneously pour money into risky investments (stocks and currencies, etc.) and a change in sentiment that causes a stock market rally and consequently, a currency rally. In the first scenario, both currency traders and stock market investors are in tacit agreement over risk-seeking, while in the second scenario, currency traders are uncertain, and hence taking their cues from the stock market.

Part of what makes a good currency trader is discerning which of these scenarios accurately describes the current reality in forex markets, so that a viable forecast and trading strategy can be implemented. Scenario 1 suggests that if the stock market rally falters, risky currencies will also decline. Scenario 2, meanwhile, suggests that currency traders would maintain their positions even in the event of stock weakness, which would cause the correlation between forex and the S&P to break down.

Pretty much every brochure advertising forex trading highlights the fact there is no such a thing as a bear market in forex. Stocks, bonds, and commodities can all lose value simultaneously (as happened when Lehman Brothers declared bankruptcy in October 2008) but it’s impossible for all currencies to decline simultaneously. A bear market in the Euro might be offset by a bull market in the Dollar; or Swiss Franc; or Brazilian Real. Regardless, you don’t have to search far to find currencies that are outperforming, whereas a stock picker would certainly have his work cut out for him during an economic recession.

I remind you of this cliche because in the current market environment, it has apparently taken on new significance. Anecdotal reports of investors frustrated with stocks, or having been burned by China, or disappointed by the collapse in oil, are flocking to forex by the thousands. Angry about suspended trading rules on stock markets? This could never happen in forex (at least not under current rules), since currencies are traded on multiple exchanges linked through a decentralized system.

Here are the stats: at, “New accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008….By the end of 2006 [the last year apparently for which this type of data is available], average daily trade volume reached over $60 billion, a 500 percent increase from 2001…Trading volume generated by ‘retail aggregators’ — electronic trading platforms that cater to individual retail traders — rose almost 43 percent from 2007 to 2008.” This dwarfs both overall growth in forex, as well as retail growth in the bread-and-butter securities markets.

One trend worth drawing attention to is that new investors are focusing on the most popular currency pairs. [See Chart below, courtesy of Wikipedia]. It has been proposed that this is because of widening spreads (i.e. more PIPs) on less liquid pairs, but it is just as likely being caused by investors applying the stock market logic of “buy what you know” to forex. It is understandable that those new to the game would want to get their feet wet by dabbling in the Euro/Dollar/Yen, rather than diving right in to niche currencies such as the Mexican Peso or even Korean Won, whose movements are both more volatile and more difficult for the average trader to understand.

most traded currencies

As always, all investors are advised to be on the lookout for scams. In the last few months, it seems hundreds of low-profile forex ponzi schemes have been discovered, which means there are doubtless hundreds of more still flying below the radar of the authorities.

Back testing a Forex Trading System

One you have identified one or more potential systems that you are interested in using, or even if you are you are working on developing a trading system on your own, it is critical that you take the time and effort necessary to perform thorough backtesting.

Backtesting is the act of verifying that the system actually performs as expected under diverse market conditions so you can be confident that it will not let you down when you need it the most. If you fail to backtest a trading system you will not have the confidence to do what the system is telling you to do when your instinct is telling you to do something else instead.

Backtesting a trading system involves actually executing that system against historical market data and analysing the trades you would have made according to your system̢۪s strategies.

Backtesting in this manner not only uncovers any hidden flaws in the system, but it also gives you the ability to hone the system̢۪s performance until it is the best that it can be.

Not only is it important that you never skip the system backtesting process, it is also important that you spend all of the time necessary to do the job right. This can be time-consuming depending upon the complexity of the trading system you are thinking about using and the amount of historical data you will be analysing.

However, no matter how thorough, complete and accurate your backtesting strategy is, you should never forget the #1 rule of trading:

“Past performance does not guarantee future results!”

Here are some of the vital statistics that play a part when backtesting your FX trading system:

  • Net Profit/Loss for the defined testing period
  • Historical data date range
  • Universe Currencies included in the dataset
  • Volatility
  • Average gains and losses as a percentage of total trades
  • Amount of capital exposed to risk
  • Win vs. Loss Ratios
  • Annualized returns
  • Risk-adjusted return

In forex, undisciplined, hit-or-miss and seat-of-your-pants trading will only get you so far. Eventually the law of averages takes over and you start finding yourself upside down too many times. What you need is a trading system. The difference between winning and losing traders is that winners have a tested system that defines entry and exit points, and how much to risk on each trade.

Forex Currency Trading Strategy

You can either buy a trading system from one of the “experts”, or you can develop one that exactly matches your needs, budget and trading personality.

While the term “trading system” can sound technical, it’s really no more than a formalized set of rules that dictate when you will buy and when you will sell.

If you buy a trading system then you are also buying into the author’s ideas of what buy and sell signals look like. If you develop your own then you make the rules.

A trading system’s objective is to keep your trades in the money as much as possible and to help limit your losses. It’s designed to remove fear, greed and pride from the trading equation. If you decide to develop your own system, be sure that it addresses these points:

1. The Foreign Currency Trading System must define and supports realistic trading goals

If you set your daily income levels too high then you will force yourself to take more risks to achieve them. Low goals are relatively easy to reach. Raise them as your skills and bankroll grows.

In addition, a trading system should be able to work with your available capital. It is not much use having a system that has heavy drawdowns, requiring a $100,000 account if your account is $10,000.

2. The Forex Trading system must define the rules for entering and exiting a trade

What does a “buy signal” and “sell signal” look like to you? It could be something as simple as “buy when the target currency’s exchange rate is above the moving average and sell when it falls below”. These signals need to be clear and unambiguous.

3. The FX Strategy define the rules for limiting your risk and exposure

Remember that the concept of stop loss is different in the Forex market because of the principles of leverage. If you take a position at 100:1 then it makes very little sense to place a stop loss at 2% of your entry point. On the other hand, you don’t want to walk the FX tightwire without a safety net. What will yours be?

4. It must limit the number of open trades allowed

Too many open trades are not only hard to track, but they put too much of your money at risk. Ensure that your system does not place trades in correlated markets without you understanding the risk involved.

5. It must reflect your trading methodology or personality

Using a system that conflicts with your trading personality will mean that you will be uncertain about some of the signals, and lack confidence in the system. In addition, the trading style may not fit your risk tolerance. This is why it is generally best to develop your own system rather than purchase one from someone else – a system you develop will reflect your own view of the markets and appetite for risk.

6. The fx trading strategy must have a positive expectancy

Expectancy is the average amount you expect to make for every trade placed, winning or losing. A system that wins 80% of the time but loses 10 times as much for a losing trade as it wins will eventually wipe out your trading account. You should never trade a system with negative expectancy. It is important to backtest your system before committing money to trading with it.

Think of trading like a casino. The casino may lose individual bets, but in the long term it always wins. Why? It has a house advantage. This means that it has a positive expectancy. The casino doesn’t gamble, that is for the gamblers. On average, it gains for every bet placed. That is what pays for the grand buildings. You need to build in a positive expectancy if you want to win.

7. The online forex trading system must perform well in both backtesting and in real time testing

Backtesting is the process of checking your system against historical data. You should use at least 1,000 periods of data to ensure that you are not “curve fitting” your system. This is when the trader optimises the system to a particular time period so that it performs well during that time period. Inevitably this curve fitting results in a model that does not trade well in real life. Using a lot of data for testing eliminates the tendency to over optimise your system.

In addition, you should test your system in real time. Most brokers offer trial accounts where you can place trades without risking your real money. You can see how the system performs in the real market, rather than just against historical data, and iron out any problems that come up. A Good forex trading system will do well both historical and in the future.

8. Don’t be afraid to use the work of others

Even if you are developing your own trading system, there’s no law saying you can’t borrow heavily from other systems that you like. You’re not trying to reinvent the wheel, you’re just looking for a safe and profitable set of trading rules that can make you more money than you lose.

Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.

Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.

Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:

Trade with money you can afford to lose:

Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.

Identify the state of the market:

What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.

Determine what time frame you're trading on:

Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.

Time your trade:

You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.

If in doubt, stay out:

If you're unsure about a trade and find you're hesitating, stay on the sidelines.

Trade logical transaction sizes:

Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.

Gauge market sentiment:

Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.

Market expectation:

Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.

Use what other traders use:

In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.


appears when price is going upward or downward over a specific time period. In an upward trend, each price hike reaches a higher level than the previous hike and each price decline halts at a higher level than the previous decline. Upward trend is also known as uptrend.

Here is an example of trending price movement :

Forex Trading Tutorial and Guide - Trend Lines & Channels - Uptrend

In an downward trend, each price decline drops to a lower level than the previous decline and each price hike halts at a lower level than the previous hike. Downward trend is also known as downtrend.

Forex Trading Tutorial and Guide - Trend Lines & Channels - Downtrend

Sideway (Range Bound Market) happens when price hikes halt at the same level than the previous hikes, and when price declines halt at the same level than the previous declines.

Forex Trading Tutorial and Guide - Trend Lines & Channels - Sideway

Trend Lines
Trendline is a bounding line connecting two or more consecutive bottoms (illustrates a bullish power) or a bounding line connecting two or more consecutive tops (illustrates a bearish power). A trendline can be drawn along the tops of a downtrend, or along the bottoms of an uptrend.

Forex Trading Tutorial and Guide - Trend Lines & Channels - Bullish Trendline

Forex Trading Tutorial and Guide - Trend Lines & Channels - Bearish Trendline

Factors Affecting Trend Lines Strength
  1. Timeframe's Length of the trendline
    The Longer the timeframe, the more valid the trend line. A monthly timeframe trendline is more valid than a week timeframe.
  2. Trendline's Length
    The Longer the trendline, the more valid the trend line. A longer trendline shows a major pattern over a longer period. And is likely more important than a shorter trend line.
  3. Trendline's Number of Hits
    The more frequent price hit a trend line, the more valid the trend line. A trend line which is hit 3 times by the price signals a more valid than a trend line which only receives 2 hits.
  4. The Angle of a Trend Line
    The steeper the trend line, the faster the action of a group of traders. A trend line that has a 60 degrees angle shows a faster action of a group of traders than a 45 degrees trendline.
  5. Number of Trading Volume relative to direction of price movement
    The larger trading volume which is moving in the same direction of a trend line, the more valid the trendline . If price is moving in the direction of a trend line with a greater volume, it confirms the trend. If price is pulling back to a trend line with smaller volume, it also confirms the trend.
Channel Trendlines
Price Channel is made up by two parallel trend lines. One trend line is connecting tops of price hikes while the other is connecting the bottoms of price declines. The wider the channel the stronger the trend.

Forex Trading Tutorial and Guide - Trend Lines & Channels - Trendline Channel

Looking for a reputable broker

  • Ability to trade effectively depends heavily on consistency in the spreads and ample liquidity
  • Anyone can establish a position quite easily.
  • The Ability to close out a position at a fair market price is more important than anything else

Live to trade another day

  • Always apply prudent money management skills
  • Avoid using excessive leverage that puts your investment capital at risk.. Refer to the leverage articles that i will be posting soon.
  • And very importantly Always trade with a stop!

Don’t trade emotionally like an emotional fool, Just stick to your plan and maintain discipline

  • Establish a trading plan or strategy before initiating a trade
  • Set reasonable risk/reward parameters
  • Don’t override your stops for emotional reasons
  • Don’t react to price action – means don’t buy just because it looks cheap or sell because it looks too high, Have reliable evidence to back up your trade

Don’t punt

  • Don't punt( Punting is trading for trading sake without a view)

Don’t leave stops at obvious levels such as “big figures” (e.g. eur/usd 1.20, usd/jpy 110)

  • i.e. JUBBS stops = stops at obvious levels and thus are more likely triggered

Don’t add to a losing position in unless it is part of a strategy to scale into a position

  • In other words, don’t double up in the hope of recouping losses unless it is part of a broader trading strategy

Trading with and against the trend

  • When trading with a trend, consider the use of trailing stops.
  • When trading against the trend, be disciplined taking profits and don’t hold out for the last pip

Treat trading as a continuum

  • Don’t base success on one trade
  • Avoid emotional highs or lows on individual trades
  • Consistency should be an objective

Forex trading is multi-currency

  • Watch crosses as they are key influences on spot trading
  • Crosses are one currency vs. another, such as eur/jpy (euro vs. jpy) or eur/gbp (eur vs. gbp)
  • Crosses can be used as clues for direction for spot currencies even if you are not trading them

Be cognizant of what news is coming out each day so you don’t get blindsided

  • Be cognizant of what news is coming out each day so you don’t get blindsided
  • Beware of trading just ahead of an economic number and be wary of volatility following key releases

Beware of illiquid markets

  • Beware of illiquid markets
  • Adjust strategies during holiday or pre-holiday periods to take into account thin liquidity
  • Beware of central bank intervention in illiquid markets

The facts and figures that will be denoted in this article relate to the foreign exchange market. Much of the information is drawn from the findngs of the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2007 and released on September 25, 2007. 54 central banks and monetary authorities took part in this survey, collecting information from approximately 1280 market participants.

Summary of this survey by BIS:"The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71% at current exchange rates and 65% at constant exchange rates. Against the background of low levels of financial market volatility and risk aversion, market participants point to a significant expansion in the activity of investor groups including hedge funds, which was partly facilitated by substantial growth in the use of prime brokerage, and retail investors. A marked increase in the levels of technical trading – most notably algorithmic trading – is also likely to have boosted turnover in the spot market." - BIS


  • Decentralized , over-the-counter market, also known as the 'interbank' market
  • Main participants: Central Banks, commercial and investment banks, hedge funds, corporations and private speculators
  • The free-floating currency system began in the early 1970's and was ratified in 1978
  • Online trading trend started in the mid to late 1990's

Source: BIS Triennial Survey 2007

Trading Hours

  • 24 hours market . Note: not 24/7 though
  • Sunday 5pm EST through Friday 4pm EST.
  • Trading starts in New Zealand, followed by Australia, Asia, the Middle East, Europe, and America


  • Largest financial market in the world
  • $3.5 trillion average daily turnover, equivalent to:
    • More than 10 times the average daily turnover of global equity markets1
    • More than 35 times the average daily turnover of the NYSE2
    • Nearly $500 a day for every man, woman, and child on earth3
    • An annual turnover more than 10 times world GDP4

  • The spot market accounts for just under one-third of daily turnover

1. About $281 billion - World Federation of Exchanges aggregate 2006
2. About $86 billion - World Federation of Exchanges 2006
3. Based on world population of 6.6 billion - US Census Bureau
4. About $48 trillion - World Bank 2006.

Source: BIS Triennial Survey 2007

Major Markets

  • The United States & the United Kingdom markets account for just over 50% of turnover
  • Major markets: London, New York, Tokyo
  • Trading activity is the heaviest when major markets overlap5
  • Nearly two-thirds of NY activity occurs in the wee morning hours while European markets are open6

5. The Foreign Exchange Market in the United States - NY Federal Reserve
6. The Foreign Exchange Market in the United States - NY Federal Reserve

Average Daily Turnover by Geographic Location

Source: BIS Triennial Survey 2007

Technical Analysis

Commonly used technical indicators:

  • Moving averages
  • RSI
  • Fibonacci retracements
  • Stochastics
  • MACD
  • Momentum
  • Bollinger bands
  • Pivot point
  • Elliott Wave


  • The US dollar is involved in an overwhelming 80% of all foreign exchange transactions that take place daily , equivalent to over US$2.7 trillion per each single day.

Currency Codes

  • USD = US Dollar
  • EUR = Euro
  • JPY = Japanese Yen
  • GBP = British Pound
  • CHF = Swiss Franc
  • CAD = Canadian Dollar
  • AUD = Australian Dollar
  • NZD = New Zealand Dollar

Average Daily Turnover by Currency

N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

Source: BIS Triennial Survey 2007

Currency Pairs

  • Dollar bloc: USD/CAD, AUD/USD, NZD/USD
  • Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair

Source: BIS Triennial Survey 2007

When the trade goes well, then you feel fine. When the trade goes wrong, it could be like a nightmare. Entire do in the weeks and lost in minutes. These examples are repeated each time as soon as a new generation of traders come to market. Obviously, for the trader if he wants to succeed, it is better to examine this experience and not repeat others' mistakes. This can be achieved by asking the right questions and finding the correct answers by rational observation and logical conclusions.

This article will be reviewed by one question: "What makes a successful trader ?"

Further suggested eleven observations and conclusions made by the author and used them in his own trade. Maybe these ideas will be useful to you.

Observation 1
The largest number of playback Traders are short-and intra-day trading. This is not so much connected with the interim period, but the fact that many of them lack the proper training and well-thought-out trade. Trading during the severe market movements, they are most vulnerable to the "market noise" and also have higher overall costs when trading (spread, communication, etc.) They also often lack the capital. Successful traders are often traded medium-and long-term positions. Often they also have higher initial capital.

Trading on the medium-and long-term positions, in terms of statistics, a greater chance of success. The same can be said about the level of initial capital. The higher initial assets, the greater the chance of survival.

Playback traders often use complex systems and methodologies or rely entirely on the recommendations of analysts. Successful traders often use very simple methods. Invariably they use, or a modified version of an existing technology, or its own methodology.

This seems at odds with the mistaken belief that the harder the better. This is not the case. Logically, it would be possible to argue that the simplified market-based approaches tend to be more practical and less prone to false interpretation. Frankly, even the term "simple" or "complex" have no meaning. What really matters is what makes money and what does not. You can also conclude that to be a successful trader it is important to most of the analysis to make their own.

Observation 3
Playback traders often rely heavily on the automatically-calculated systems and indicators. They do not spend time on the study of mathematical algorithms, and these instruments are not considered distinct from the more popular interpretations. Successful traders are often exploited by computers because of their speed of processing large amounts of data. However, they are also studying the mathematical formulas used indicators and spend the time to understand the market mechanism to the "last boltika.

If you want to be successful in anything, you must have a good understanding of the instruments used.

Playback traders spend a lot of time, predicting where the market will be tomorrow. Successful traders spend most of their time thinking about how other traders will react to what the market is now, and in accordance with this plan his strategy.

The success of trade is likely to depend on the trader's ability to predict what the reaction will cause the market at any event and the availability of well-thought-out plan of action when such reactions. It may be that the successful trader is easier than to be a successful analyst, as analysts have to actually predict the final outcome. If you ask a successful trader, which, in his view, the market will be tomorrow, the most likely answer is a simple clasp shoulders and a comment that he would follow the market wherever it goes.

Playback traders focus on winning transactions and the high percentage of the winnings. Successful traders focus on Losing transactions, stable income and good about the risk and income.

The observation implies that much more important to focus on the full risk to the total profit, and not "gain" or "loss". A successful trader is focused on the potential income against potential losses, and have little to worry about the emotional satisfaction associated with the order to be "right" or "wrong."

Playback traders are often unable to recognize and manage their emotions at the time of trade. Successful traders are aware of their emotions and then researched the market. If the market has not changed, the emotions are ignored. If the market has changed - the emotions appropriate and they are a trade.

If a trader enters or leaves the transaction, simply based on emotions, then his market approach is not practical and not rational. Strangely enough, the damage can be caused if a trader has completely ignored their emotions. In extreme cases it can cause physical illness due to psychological stress. In addition, valuable subconscious skills trade, which has a trader, but who have no conscious awareness, may be lost. Better to recognize emotions and to analyze the emerging market in these moments once again, to see whether it is the conclusion, based on where you strike a bargain. The proof of this equity withdrawal may be the fact that even a very systematic traders are the time when they conclude a successful transaction without any apparent reason. Usually, this is referred to as "luck" or "being in the zone."

Playback a lot of traders are worried about that to be right. They love the adrenaline and endorfin that can trade. They should be in touch with the market almost twenty-four hours a day. Successful traders recognize emotions, but do not allow them to become manager of a factor in the trading process. They may not look all day at the monitor. For them, trade - this is business. They are not worried about that to be right. They focus on what makes money and what does not. They get pleasure from finding the best chances to trade. If no such chances, they do not play.

It is important to be in harmony with the market, but also important to have a life outside of commerce, not to go the limit and did not suffer psychological and physical overload. Successful traders are actively traded, so as not to lose their shape, but also understand that this is business, not mania.

Playback trader in the event of a failed trade goes and buys a new book or system, and then again from scratch. Successful traders on failure, find out what happened, and then adapt its current methodology to reflect this. They do not jump easily to the new system or technique, but do so only when it becomes clear that the old approach is no longer valid. In fact, the best traders often use methodologies that are organically linked to the main structure of the market and therefore will always be part of the market in which they sell. Thus, the possibility that the market will change its shape to such an extent that the technique will be useless, is very unlikely.

The most successful traders have a methodology or system that they are consistently used. Often, it is tied to one or two techniques and market approaches that have proven effective in the past. Even a bad plan, which is used consistently, will be better than jumping from system to system. This observation implies that there must be established stylistic foundations of market-based approach before you begin a consistent profit.

Playback traders look to newly "guru" and try to imitate their technique. Successful traders look for new methods, which appear on the market, but remain at his or her opinion, if some of this equipment can not be effectively applied in their current market approach.

Once again I draw your attention that the individual trader and his comfort level and knowledge of its system is more important than the latest news or opinion "market gurus".

Playback traders often do not take into account all factors, which are included in the full process of trade and influence the results. Successful traders understand that winning in the marketplace is the final financial result. More money must come, than to go and everything that affects it, it should be taken into account. Thus the successful trader is also closely related to opportunities to reduce their costs, as well as opportunities to improve its trading system.

Anything that affects the overall financial results of trade, should be carefully monitored for efficiency.

Playback traders often refer to themselves too seriously, and rarely find a place for humor in that relates to trade. Successful traders are very funny and funny people. They get pleasure from trade and the first ready to laugh or tell a funny story. They relate to trade seriously, but they are always ready to laugh at themselves.

No wonder that one of the first test when considering the patient's mental health is to determine whether it is with a sense of humor to their misery. The more serious tone of the patient, the more likely it is that the problems began.

And successful traders think and play trading game. However, successful traders do not see the game as entertainment but as a vocation which they practice with intensity and dedication, comparable with the zeal of professional athletes. As a sports metaphor seems relevant, summarize in this note.

As for sporting events, affecting the outcome of factors, both internal and external. We are dealing with the market and directly with each other. And like the arms trade can be for the benefit and harm. Each transaction must be undertaken with professional care and planning.

If we compare trade with firing a handgun, it is important to hit the goal, but it is equally important to make sure the gun is not directed at you, when you press the trigger. Minor differences in how we aims at the market, can have a surprising impact on the final result. In one case, the exact spot shooting, in another - Russian roulette.

based on

Morning gaps drive traders crazy, because they hurl positions and assumptions into unknown territory. These shocking events also force an immediate re-evaluation of the charting landscape to deal with the altered reward-risk equation. But the extra work pays off, because the gaps may predict big changes in subsequent price action.

Gaps reveal shifts in crowd sentiment through single price bars. They can print anywhere within a pattern or trend, but they tend to occur in several common scenarios. Each type of gap generates unique characteristics related to persistence, response during retracements and impact on price movement.

Gaps cut through all time frames and trends, but they represent different phenomena in each one. For example, a breakout move in one time frame may print an exhaustion event in another.

A gap's importance is directly related to its location, range and volume. For this reason, a high-volume gap late in a trend often signals the end of the move.


A gap can print in the direction of the major trend, or against it. When it moves against current momentum, it triggers the only chart phenomenon that can signal trend change without a topping or bottoming pattern. A narrow-range or wide-range bar can stand at the end of the gap event. Long bars predict reliable follow-through in the direction of the gap. Short bars suggest sideways action, or a pullback into the violated space.

Take the time to distinguish between gaps in the direction of the trend and those moving against it. Countertrend gaps represent important shock events when they occur near big highs or lows. For example, a price break in the wrong direction after a strong rally can produce considerable fear and lead to much lower prices.

Gaps through major support and resistance levels signal breakouts and breakdowns. Emotions can build so strongly at these levels that the gap exceeds common sense and sets off a violent reversal. Strong greed or fear can trigger multiple gaps as a growing trend builds momentum. Gaps that print within sideways patterns show less persistence and can fill with little warning or volume.

Gap creation aligns with Elliott Wave Theory. The breakaway gap corresponds with the breakout that occurs during the dynamic first-wave impulse. Runaway emotions trigger the continuation gap at the center of the third-wave rally or selloff. The trend sequence ends with the fifth-wave exhaustion gap.


The continuation gap should mark the halfway point of a trend. Traders familiar with waves can use this projection to target potential reversal levels. Visualize the gap as soon as possible after the fourth wave begins. Then draw an extension from the edge of the first wave into the continuation gap. Then double that distance and wait for price to push into the target level. Enter a position in the opposite direction when price moves out of a reversal pattern in a smaller time dimension.

High-percentage gaps can exhaust further movement in that direction for an extended period of time. The reason is simple: The big move forces all uncommitted players off the sidelines, while winners take profits and losers take losses. This provokes an overextended condition that forces a reversal back toward the prior bar.

Opening gaps fascinate traders but require solid execution skills. Cash seeks opportunity at the start of the day while insiders paint the tape to encourage execution. This encourages a supply-demand imbalance, with ill-advised orders well above or below the market, depending on the gap direction. The resulting friction can set the stage for a reversal just minutes into the new session.

No easy formula shows traders how far a gap can travel and still remain healthy. But we need to apply common sense when observing premarket action above or below the last closing price. The most important question for traders to consider: Does the news and market environment justify the price you're seeing?


The level of crowd participation limits or fuels the strength and durability of the gap event. Certain gaps verify only when strong volume accompanies them. For example, a breakaway gap without heavy volume suggests it will eventually yield to a failed breakout.

The relationship between gaps and the crowd relies on complex interactions. For example, a high-volume gap may end movement in that direction because it uses up the last available supply for that trend. But another gap with less volume leaves just enough on the table to ensure sustained movement in that direction.

Old traders' wisdom tells us that gaps get filled. This classic expression does a good job describing the mechanics of retracement found in most trends. However, some gaps never fill. This suggests using common sense with these specialized patterns. Learn the unique characteristics of each gap type and then apply the strategy that aligns best with its behavior.

Custom Search