Friday, March 9, 2012

My Golden Trading Rules

This is my strategy for success as a professional trader. As a professional there is nothing more important than acting like a professional. Here are my rules:

goal #1not to break trading plan under any circumstance. This is the golden rule of trading.
goal #2learn to deal with losses that happen do to the law of averages. In other-words you can't win every trade.
goal #3exercise extreme discipline.
goal #4exercise extreme patience.
goal #5participation! participate in the market either by real trading or demo. This yields experience.
goal #6lock in profit, repeat formula, increase trade size as account gets larger.
goal #7reward myself for doing my job

Under no circumstance should a trader break the trading plan. If you as a trader can't master the trading plan; the other rules become useless. If the trading plan doesn't work it means that the trading plan needs work and there's no reason to have any other rules. For that reason "trading plan" is goal number #1.

When goal 1 is achieved the other goals became easier.

There are going to be times when no matter what---losses will occur.

Goal 2 is a reflection of goal 1 - stick to your plan as long as it works on average but accept the losses when it doesn't. There's no trading plan that will work 100% of the time so those are the times to stick to the trading plan which includes stop losses and learn to deal with the law of averages or market randomness if you will. Sometimes it's just wise to stay out of the market which leads to another rule of patience.

Since there is no holly grail you have to accept losses! or even random gains but when they occur take the stop loss or the target point without question.

Also losses are like failures; Anyone who has ever tried to achieve something learns that failing is part of learning, as long as you learn from the failure and the failures are not too great. So learn to minimize a failure and learn why it did not work; essentially stop losses minimize failures.

Goal 3 is a reflection of 1 and 2. You must do what is required without question. If you write out a plan but don't stick to it, there's no point in having a plan. The main reason traders fail is because they don't have discipline required to look for good setups and get caught up in their emotions after placing bad trades.

Another way to put it is stick to your plan while being in control of your emotions at all times - that is discipline in trading. The law of averages might beat you here and there but if the plan is good enough it will equal out to profitability in the long run.

There are times when discipline is not enough so:
goal 4 is like goal 3 but you have to just wait it out sometimes. Discipline works when there are opportunities so a more refined quality is patience . In other-words wait until the opportunities are there such as when the indicators line up and avoid what I call "big emotion days" when there are major financial or political decisions being made that can cause major unpredictable volatility. With all that said don't confuse patience  with going to the beach and wasting time when you should be participating and keeping skills sharp. **Patience in trading is the discipline not to pull the trigger and wait for a better opportunity; you still watch the market and take notes.

Goal 5 Participate! The only way to gain experience is to participate. This does not mean to overtrade! Overtrading is avoided with patience but that doesn't mean to soak up rays on the beach when there's work to be done. A dull knife won't cut a path to success! While exercising patience  waiting for a trade - participate in sharpening up trading skills by reading, practicing in demo, ect..

Professional sports players spend most of their time practicing for competition. This shouldn't be an exception for any other profession that has a lot of competition. Trading is more competitive mentally than professional sports. Movie Quote "Nothing can prepare you for the unbridled carnage you are about to witness" Dan Aykroyd in Trading Places. That quote couldn't be more accurate. He goes on to say the Super Bowl and other sports finals are nothing in comparison. Everyday of trading is harder mentally than a Superbowl.

Goal 6 If the chips are falling into place and when all those things come together through exhaustive work and with proven success through repetition of the formula it is time to expand and increase the size of trades if there's leverage/capital to do so. **Don't increase lots if trading account is under-capitalized; this is surely a recipe for bankruptcy / blown account.

Goal 7 If you make it this far! Enjoy the profits! Take time off and enjoy relaxing vacations at the beach! Hey why have goals without rewards? I didn't say don't have fun - just don't do it when there's money to be made. Another golden rule is work before play.

Everyone thinks trading is easy - believe me if it were everyone would quit their job and become traders. When it comes to money people will lie, cheat, steal, and act poorly. Don't believe me - put $1000 bucks on the table with a group of people and ask them what they would do for it? On a second thought maybe don't - they might end up killing each other.

Trading requires one not to get emotional and follow mathematical rules without question. Even those don't always work but it's a learning process.

You may have even made money easy in the past but to hold on to a fortune requires that you follow rules if you are to trade with real money. For most of us, we have to follow many rules to work our way up into profitability.

Violating trading rules can lead to bad habits that could also lead to serious financial losses. In fact breaking rules of the trade is why many people don't succeed as traders. Personally, I've often looked back after a big loss to see I've broke a trading rule or a combination of them (eg violating trading plan, stop loss, patience, discipline).

Conversely, my profitable trades are usually when I followed the rules but there's always going to be losses do to the law of averages.

Rules must be followed to a T to take the emotion out of trading. It's the emotion that causes failure.

These rules sound easy on the surface but in live trading these rules are like life and death.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Thursday, March 1, 2012

MACD calculation

MACD (Moving Average Convergence Divergence) Calculation

MACD Line: (12-day EMA - 26-day EMA)

Signal Line: 9-day EMA of MACD Line
MACD Histogram: MACD Line - Signal Line

The MACD Line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line and identify turns. The MACD Histogram represents the difference between MACD and its 9-day EMA, the Signal line. The histogram is positive when the MACD Line is above its Signal line and negative when the MACD Line is below its Signal line.

The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style.

Where to get MACD for metarader
Macd is a free tool in Metatrader and is found through the navigator in indicators. Simple drag and drop on the chart.

Historically, the MACD was invented by Gerald Appel in the 1970s. Later, Thomas Aspray added a histogram to the MACD in 1986, as a means to anticipate MACD crossovers, an indicator of important moves in the underlying security.

Today, MACD is a common indicator in Metatrader and other trading platforms. MACD is often the basis of other advanced indicators and trading systems.

Indicator Components

The graph above shows a stock with a MACD indicator underneath it. The indicator shows a blue line, a red line, and a histogram or bar chart which calculates the difference between the two lines. Values are calculated from the price of the stock in the main part of the graph.

The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD (faster, slower, signal) or in this case, MACD(12,26,9).

Standard Interpretation
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different lengths, the MACD line gauges changes in the trend of a stock. By then comparing differences in the change of that line to an average, an analyst can identify subtle shifts in the strength and direction of a stock's trend.

Traders recognize three meaningful signals generated by the MACD indicator.

**the MACD line crosses the signal line
**the MACD line crosses zero
**there is a divergence between the MACD line and the price of the stock or between the histogram and the price of the stock

Graphically this corresponds to:
the blue line crossing the red line
the blue line crossing the x-axis (the straight black line in the middle of the indicator)
higher highs (lower lows) on the price graph but not on the blue line, or higher highs (lower lows) on the price graph but not on the bar graph

Signal–line crossover
Signal–line crossovers are the primary cues provided by the MACD. The standard interpretation is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line.

The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover.

The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them.

The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.

While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing.

Zero crossover
A crossing of the MACD line through zero happens when there is no difference between the fast and slow EMAs. A move from positive to negative is bearish and from negative to positive, bullish. Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover.

The third cue, divergence, refers to a discrepancy between the MACD line and the graph of the stock price. Positive divergence between the MACD and price arises when price hits a new low, but the MACD doesn't. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is when the stock price hits a new high but the MACD does not. This is interpreted as bearish, suggesting that recent price increases will not continue.

Divergence may also occur between the stock price and the histogram. If new high price levels are not confirmed by new high histogram levels, it is considered bearish; alternatively, if new low price levels are not confirmed by new low histogram levels, it is considered bullish.

Longer and sharper divergences—distinct peaks or troughs—are regarded as more significant than small, shallow patterns.

The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend. Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).

False signals
Like any indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there was no bullish crossover, yet the stock accelerated suddenly upwards.

A filter can be applied to the signal line crossovers to ensure that they will hold. An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces the probability of false signals but increases the frequency of missed profit.

Analysts use a variety of approaches to filter out false signals and confirm true ones.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Saturday, February 18, 2012

Forex Basics - Forex Trading Basics Part 2 Forex Trading For Absolute Newbie

FOREX Basics Part II
click here for part I

---FOREX Transactions---

There are 2 basic transactions in FOREX: BUY or SELL. Unlike selling something you already own a Sell means to go SHORT the currency expecting it to fall. A Buy means to LONG the currency expecting the price to fall. You simply close a position to exit it weather it's a buy or sell.

As previously stated in Part 1, one standard lot in FOREX is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit.

So in essence when the trader buy a standard lot is controlling 100,000 units of the base currency.

---What are pips?---

Profit and loss is reflected in Pips in currency trading. A pip is the smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.

1 pip of a standard lot of EUR/USD represents approximately $10 USD. 1 pip of a mini lot represents approximately $1 USD. 1 pip in a micro represents approximately $0.10 (although this can vary depending on the actually size of the micro lot).

So if a trader places a long trade of the EUR/USD and the current price is 1.0700 and the price goes to 1.0815 what is the profit? The profit is ruffly $1150.00 (per standard lot), $115 (per mini lot), or $15 (per micro lot). Of course this is minus the spread.

---What is the spread?---

The spread is the premium the broker gets for the transaction and the difference between the sell quote and the buy quote. Usually for the EUR/USD the going rate is 3 pips or $30 USD per standard lot, $3 per mini lot but it depends on the broker and the currency pair.

More exotic pairs require a higher premium for various reasons such as liquidity and how fast the price moves. So basically your in the hole as a trader from the second you place your trade and don't forget market slippage.

---What is Slippage?---

The difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades. So just because you click buy or sell it does not mean that your order will get filled at exactly that price.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Forex Basics - Forex Trading Basics Part 1 What is forex?

Part 1 - What is forex?
To describe Forex we must have at least a basic understanding of other markets.
Everyone in the world knows what trading stocks is but not everyone knows what trading forex is. Everyone knows that when you buy a stock you are buying a share of a corporation. Some even know what buying an option is.

Options Contracts - Similarities to Forex
An option represents the right to buy(long contract called a call) or sell(short contract called a put) a certain amount of shares of the traded instrument in question. In essence these are future contracts with expiration dates as to what the future price is speculated to be. Unlike actual commodity futures, options contracts do not require physical delivery of any goods.

Since no actual goods are exchanged options contracts are strictly speculative contracts. However an options trader can earn a huge reward if the trader gets the market right. With great reward often comes risk so if the futures trader gets it wrong it results in massive financial loss.

In an options trade a single options contract controls a much larger size of the asset in question (eg stock or commodity). For example 1 stock option controls 100 shares of the underlying asset. The cost of the options contract is called the premium based on what the going rate for that option is. The option will also have a strike price which is based on the actual price of the stock.

Origin of Futures
Aristotle described the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application". Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or poor and because the olive press owners were willing to hedge against the possibility of a poor yield. When the harvest time came, and many presses were wanted concurrently and suddenly, he let them out at any rate he pleased, and made a large quantity of money.

The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai who—being paid in rice, and after a series of bad harvests—needed a stable conversion to coin.

The Chicago Board of Trade (CBOT) listed the first ever standardized 'exchange traded' forward contracts in 1864, which were called futures contracts. This contract was based on grain trading and started a trend that saw contracts created on a number of different commodities as well as a number of futures exchanges set up in countries around the world. By 1875 cotton futures were being traded in Mumbai in India and within a few years this had expanded to futures on edible oilseeds complex, raw jute and jute goods and bullion.

Forex trading is much like the highly speculative futures markets. The major difference is it involves currencies and it is what the exchange rate is based on. A currency can be traded like a future in which case it would be a single currency as in the USD (US dollar) or the EUR (EURO).

But usually they are trading in pairs which represent the exchange rate between the 2 countries. A pair looks like this AUD/USD (this is the Australian US Dollar Pair. I can trade FOREX without a broker. I can simply buy Australian dollars and hold on to them for a certain length of time and then turn them in at a bank that allows the exchange of foreign money. There is no mystery to FOREX - it is just an exchange rate based on various valuations of a currency that are mostly based on the current economic conditions of the perspective country and future expectations.

1 standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. The exception is the contracts don't expire unless the trade is closed. In that aspect (although the risk is still high) it is safer than an options contract that loses value based on time.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Saturday, February 4, 2012

The Death Cross: What is it and how to use it!

At first glance this sounds like a very complicated trading idea but actually it is not. However it can be a powerful signal if used properly.

The Death Cross is when a short term moving average breaks below a long term moving average. Example 15ema crosses below a 50ema on a 1hr chart.

Conversly the Golden Cross is when a short term average breaks above a long term moving average. Example 15ema crosses above a 50ema on a 1hr chart.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Tuesday, January 31, 2012

The Art of War (Trading)

The legend of Sun Tzu and a walk down Traders Lane
The legendary Sun Tzu wrote The Art of War more than 2500 years ago - in many ways it actually applies to trading:

---Sun Tzu War Quotes As Applied to Trading---
All warfare (--trading--) is based on deception.
According as circumstances (--market conditions--) are favorable,one should modify one's plans (--trading strategy--).
He will win who knows when to fight (--place a trade--) and when not to fight (--place a trade--).

If you know the enemy (--market--) and know yourself,you need not fear the result of 100 battles (--100 trades--). If you know yourself but not the enemy (--market--),for every victory (--target price--) gained you will also suffer a defeat.
If you know neither the enemy nor yourself,you will succumb in every battle (--trade--)

The consummate leader (--trader--) strictly adheres to method and discipline,thus it is in his power to control success (--financial gain--).

In respect of military method (--one's trading method--), we have, firstly, Measurement; secondly, Estimation of quantity; thirdly, Calculation; fourthly, Balancing of chances; fifthly, Victory!!

Ponder and deliberate before you make a move (--a trade decision--).

Do not linger in dangerously isolated positions.

Who Was Sun Tzu?
Sun Tzu (Sūn Wǔ)) was a legendary ancient Chinese military general, strategist, and philosopher.

More Sun Tzu quotes/excerpts without the trading translations but translations from ancient Japanese literature (not necessarily exactly as written or in the same order).:

The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected. The art of war, then, is governed by five constant factors, to be taken into account in one's deliberations, when seeking to determine the conditions obtaining in the field. These are: (1) The Moral Law; (2) Heaven; (3) Earth; (4) The Commander; (5) Method and discipline.

All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.

Hold out baits to entice the enemy. Feign disorder, and crush him. If he is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant.

If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected. These military devices, leading to victory, must not be divulged beforehand.

When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be damped. If you lay siege to a town, you will exhaust your strength.

There is no instance of a country having benefited from prolonged warfare.

Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.

The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.

Understand that the other people you are trading with are not really your friends. They may joke with you in chat rooms or forums and you may even share advice however they actually are your direct competition - unless they are your actual trading partner using the same money to trade. Many times in these forums you are talking to a representative of a large hedgefund that wants you to lose and lose badly (unless you actually know them in real life). Believe me I've been walked on many times by people I thought were my "friends". When it comes to money you will find your true friends are few.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
Please rate, recommend, and comment below:

Sunday, January 22, 2012

FOREX Metatrader Brokers MT4-MT5

Link List: xx = very bad reviews, A - Top Rated, Mix = Mixed Rating, N/A = not enough info - mt4 download demo mt5 download demo
Alpari UK mt4 & mt5 -- reviews Mix
Alpari Russian -- reviews A
Broco Trader mt4 & mt5 -- reviews xx
Ava FX -- reviews xx
GCI Financial -- reviews xx
Admiral Markets -- reviews N/A
ActivTrades -- reviews Mix
Dukascopy -- reviews Mix
AM Financials -- reviews N/A
MB Trading -- reviews Mix
FastBrokers -- reviews A
Compass FX -- reviews A
GFT -- reviews Mix
FiboGroup -- reviews Mix
GainScope -- reviews A
Oanda -- reviews Mix

(for the small fish) List of Metatrader brokers with Micro Account (minimum lot size 0.01):

Name ~ minimum starting ~ P=Paypal ~ M=Moneybookers

1lotstp $100 M
1pipfix $100
4XDG $50 P
AAAFx $300 M
AccentForex $10 M
ACFX $50 M
ACM Gold $250 P reviews
ActivTrades €250
Admiral Markets $1 M
AFX Capital $200
Alpari UK $200
Alpari US $1 P
Arab Financial Brokers (K.S.C.C) $50 M
AstaForex $1 M
AVS Carter $500
Axiory $500
Broco $25
Bulbrokers $50
CMS Forex $500
Deltastock $100
DF Markets $1
EES FX $500 0.01
EFX - England Foreign Exchange $500
eToro $50 M
EuroBroker $10 P
FalcoFX $100
FastBrokers $500 P
FBS $5 M
Finexo $100
FinOdds $25 M
Forex Club $200
Forex Control $500 M $500
Forex4you $1
ForexCent $1
Forex FS $500
ForexYard $100
ForexWebTrader $25 M
FX|Clearing $1 P M
FX Choice $10 M
FX Financial Group $300
FX Solutions $250 P reviews
FXcast $10 M
FXCM Micro $50
FXD24 - FX direct S.A. $10
FXDD $250 P
FXDealer $250 P
FXM Financial Group $100 P M
FXOpen $1
FXOptimax $10 M
FXPrice $250 P
FXSalt $250 M
Gallant Capital Markets (GCMFX) $100 M
Go Markets $1 M
Grand Capital $1
Hirose Financial UK $20
HotForex $5 M
IamFX $100 M
IBFX - Interbank FX $1
IFC Markets $1
InovaTrade $500 P
InstaForex $1 M
Intel FX $10 M
InvestTechFX $100 M
IronFX $500 M
LiteForex $10
Loyal Forex $50
Lucror FX $500 M
Marketiva $1 $100
Masterforex $1
MB Trading $400
NordFX $5 M
One Financial Markets $250
Pacific Financial Derivatives (PFD) $200 M
PaxForex $5 P
Pepperstone $200 M
PFG FX - Pro Finance Group $10
PipFixed $100 P reviews N/A
Proedge FX $250 P reviews N/A
Profiforex $1 M
RBS - Royal Bank of Scotland £1
Real Trade Group $20
RoboForex $10 M
SmartTradeFX $100
Solidity Brokers $100 M
Sunbird $100 M
Synergy FX $500 M
ThinkForex $500 M
Trader's Way $1 M
TradersChoiceFX $250 P
Tradeview Forex $100 M
Trading Point $5 M
UpFX $250 Paypal
UPME Group $1 M
UWC - United World Capital $5 M
Vantage FX $500 M
Vantage FX UK £350 M
Windsor Brokers $100
WSBrokers $10 M
XForex $100
XoomForex $100 M
YouTradeFX $100

Mt5 Broker List:
Admiral Markets
Alpari UK
Alpari US
FIBO Group
GO Markets
Grand Capital
IC Markets

NordFX Live
N2 Capital Markets
Tradeview Forex
UWC - United World Capital
Vantage FX
Windsor Brokers

*As you can see there are alot of FOREX brokers. Chose a broker that is well capitalized, has a good reputation, is available by phone and able to answer questions, and lastly verify they are currently regulated. If they are well capitalized they will usually brag about that in their about company page. Don't just go by look or features - those are 2ndary options when trading real money.

Difference between account types in pips:
Standard Account $10 a pip for EUR/USD *lot size = 1 lot
Mini Account $1 a pip for EUR/USD *lot size = .1 lots
Micro Account $.1 a pip for EUR/USD *lot size = .01 lots (some brokers even lower)

rate below:

Tuesday, January 17, 2012

Trading Topic: Placing Orders In Metatrader

This article covers how to set a stop loss in metatrader, how to set a target price, how to set buy limit, and how to set a sell limit.

This is an often overlooked topic. The brokers are quick to sign you up to trade FOREX but they often won't teach you how to correctly place an automated order. It's easy to click buy or sell from the trading terminal but what if you want to place a stop loss or target price that triggers at a specific price? It sounds simple at first glance but choosing the wrong order type can yield undesirable results.

You wouldn't want to make any type of mistake with real money involved so learn the difference between order types.

Orders that occur at a different price are called Pending Orders.

Types of Pending Orders:
Buy Limit - A buy limit is placed at a price that is lower than the current price. If that price is met an order will be sent at the market price.
Sell Limit - A sell limit is placed at a price that is higher than the current price. If that price is met an order will be sent at the market price.
Buy Stop - Buy Stops are used by momentum traders above the current price.
Sell Stop - Sell Stops are used by momentum traders below the current price.
Stop Loss - A stop loss is a price that is so many pips in the opposite direction of your trade if your trade fails to meet it's objective. Stop losses are meant to protect equity / further destruction of trading account. Traders that don't use them often blow up their accounts especially if their account is small.
Take Profit - A take profit is a price that is so many pips in the direction of your trade if the trade is successful.
Trailing Stop - A trailing stop price is adjusted as the price fluctuates to capture maximum profit if the trader gets in a good trend. Not useful in a range.

Example of trade in Metatrader (practice in demo):
1. Right click on chart and select "Trading" and "New Order".
2. Under "Type" the first choice is "Instant Execution". We want to change that
to "Pending Order".
3. Now Pending Order Will be under Type at the top and just below it will be a Pending Order section. There will also be a "Type" here with choices of Buy Limit, Sell Limit, Sell Stop, and Buy Stop.
4. Select a Buy limit below the current price by about 20 pips and select a Sell Limit of about 20 pips from current price by changing the "at price". The "at price" will have up and down arrows so for buy click 20 times down and 20 times up for sell. You will then see horizontal levels across the chart for each pending order you made once you click ok. There will be a ticket number to the left of the horizontal level and the type of order. eg some number like #3252646 sell limit. #434266 buy limit.
5. When the price goes to the sell limit or buy limit price a real order will be filled. While it says buy limit or sell limit it is still pending and no actual trade has been made. If the trade hasn't been triggered you can go into terminal (View/Terminal or Ctrl+t) select Trade in the terminal to make changes to the order. Right click on the trade and select "Modify or Delete Order" You change the price the same way you set it with the up down arrows where price is. To delete the order select "Delete". Practice deleting and changing orders a few times - in live markets this might save you some money if you had made a mistake and have to act fast before the trade is triggered.
6. Once the target prices of the pending orders have been filled "sell limit" horizontal line will change to "sell" and "buy limit" will change to "buy" meaning these orders are open.

That's basically it for buy and sell limits. Now what if you want to close those orders?

You can always manually right click on the order and choose close order. Or:

Exercise: Make pending orders for a stop loss and target price as 20 pips profit or loss:
1. right click order and select "Modify or Delete Order" again. The only choice will be to "Modify Order".

2. Select "Copy as" to change both Stop Loss and Take Profit and adjust the price accordingly (20pips difference) then click modify. If done properly red lines will show up on the chart for you stop loss and target. *Both these prices must differ by a specific amount from the current price - on my broker is 5 pips.

Correct Way To Properly Draw Fibonacci Retracements

This is almost never explained precisely or correctly so I will provide a precise howto that illustrates which end goes at the top and bottom of an uptrend and downtrend so that you draw the fib retracement in the right direction (not backwords) for meaningful technical analysis.

How to draw Fibonacci Levels in Metatrader:
(This is in Metatrader (mt4) but most other terminals are practically the same)
This part is as simple as pedaling a bike but don't worry it gets more complicated.

I personally use metatrader to do this so that will be our model. The tool should be part of the "line studies" toolbar in mt4 - if not you have to add it by clicking customize and insert. With your line studies toolbar is enabled, click on Fibonacci Retracement, and simply place it to the chart you are using. You may have to also double click it to stretch it.

The big idea is to find a big movement to measure which can be subjective to the traders eye but in general you want a pretty good chunk of data (a trend) that actually measures the correct starting point of the trend in question (the top of a downtrend or the bottom of an uptrend is the starting point). The end point might still be forming so that is the hard part. You basically use swing points (high to low or low to high) of the movement to draw your extensions.

If you are measuring a downtrend the top (swing high) will be the 100% and the bottom (swing low) will be 0%. If you are measuring a uptrend the bottom (swing low) is the 100% and the top (swing high) is 0%. In otherwords you are always chasing 0% in the direction of the trend and 100% is the starting point.

Finding a top or bottom
It takes participation to find a good retracement and this is subjective to every technician but I'll tell you my own method. You have to continually redraw the extension - because as mentioned you never know exactly where the top or bottom will actually occur unless you are a high profile fortune teller that sees in the future and thus wouldn't need technical analysis at all. So with that said - keep drawing extensions until there's a reaction to a retracement to the 1st Fibonacci level 23.6% and then interpret the pattern at that point with other confirmations (eg is volume picking up? ect).

Interpretation (add more detail)
The key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. These lines
are simply ratios between two extreme points of a high and a low. The 50% level actually does not have anything to do with Fibonacci, but traders use this level because of the tendency of reversals after retracing half of the previous move. The 50% was added by Dow Theory's. Basically the ratios act as either support or resistance levels.

The 61.8% is considered the golden ratio but my advice is to simply use all levels as support and resistance points to confirm with other indicators such as volume.

Example: If there is strong move but the move starts to loose it's steam. Lets say it's a downtrend and the sellers reduce their position so you draw a fibo extension from the swing high (100%) to the swing low (0%). There is a pullback to approximately the 38.2% and the sell off continues there with selling volume coming into play. What that means is the majority of sellers may have reduced their position by about 38% - the amount of the correction. Or perhaps it retraces to the 50% area and the sell off continues there because the sellers perhaps reduced half of their position (the amount of the bounce you see) and then new sellers came back in at the proximity of the "retracement level" if the trend is strong. If it breaks the 50% perhaps the sellers are not only reducing their position but the pattern may be reversing since resistance is not working.

Retracements are really not meant to be stand alone. They work well with other strategies combined (also called confluence see my article in blog archive). Many sophisticated traders will often combine Elliot Wave Theory, volume analysis, or other strategies with Fibo Retracements. It's just a way of finding weakness in a trading pattern of confirming it's strength instead of a stand alone magic trick. In live trading you need to confirm with other trading tricks especially when you have real money on the table.

In Action:

In an Uptrend:

Here a Fibonacci Retracement manually drawn between a low and a high in a short-term uptrend on a hourly chart for a currency pair. Price falls through the 23.6% and firms up at roughly the 38.2% providing a re-entry point for a long. Notice the candle pattern stays bearish here into the 38.2% - that is ideal. Then candles clearly firm up at the 38.2% which acts as strong support. The implication is that the trend will continue and perhaps set a new high.

Another clear example of a bounce that occurs at ruffly the 38.2% which acts as support because it's an uptrend. There is also some confluence with the 50ema which is considered a key moving average.

Did you notice something? Compare it to the example above. It is the same instrument at a different date. The previous bounce at 38.2% made a new high so this is actually a new fib retracement but it's still in an uptrend and the 38.2% once again turned out to be the buying point.

In fact if you zoom in on each example the only difference is the first Fibonacci retracement is drawn from January 13th 2012 to January 17th 2012 and the 2nd example is drawn from January 24th 2012 to January 26th 2012. That is the power of both a strong uptrend and Fibonacci. Does it work? What's it look like?

In a Downtrend:

Here a fib retracement is drawn from swing high to swing low because it's measuring a downtrend. The bounce occurs at ruffly the 38.2% and the 50ema. Again the fib levels are merely support and resistance points. In the case of a downtrend the 38.2% is resistance.

What can Fibonacci Retracements work on?
Everything that has price data: Bonds, Stocks (Google, Apple, IBM, Dow Jones Index), Currency Pairs/FOREX (aud/usd, gpy/jpy, usd/jpy, usd/chf), Options, Commodities(gold, silver, copper, wheat, sugar, coffee, crude oil), ect.

The history of Fibonacci dates back to when Leonardo Fibonacci (12th Century Italian Mathematician) was studying the construction of the pyramids and wrote about what he learned in a book called Liber Abaci (Book of Abacus or Book of Calculation).

The number pattern seemed to be found everywhere - even in nature.

Liber Abaci proposed and solved a problem involving the growth of a population of rabbits based on idealized assumptions. The solution, generation by generation, was a sequence of numbers later known as Fibonacci numbers. The number sequence was known to Indian mathematicians as early as the 6th century, but it was Fibonacci's Liber Abaci that introduced it to the West.

In the Fibonacci sequence of numbers, each number is the sum of the previous two numbers, starting with 0 and 1. This sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 ..

The higher up in the sequence, the closer two consecutive "Fibonacci numbers" of the sequence divided by each other will approach the golden ratio (approximately 1 : 1.618 or 0.618 : 1).

When used in technical analysis, the golden ratio is typically translated into three percentages: 38.2%, 50% and 61.8%. However, more multiples can be used when needed, such as 23.6%, 161.8%, 423% and so on.

The primary methods for applying the Fibonacci sequence to finance:
retracements / extensions
time zones

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

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Monday, January 16, 2012

Candlesticks Overview and The Doji Pattern

The Doji is a good candlestick pattern for a beginner to recognize because it's very easy to spot so it will be emphasized it in this article.

Candlesticks were originally used by Japanese rice traders to do early technical analysis in the 1600's and was implemented by Charles Dow in the 1900's in the US. Steve Nison later made candlestick trading more popular in the US from his book "Japanese Candlestick Charting Techniques" published in 1991. Nison also translated early Japanese works.

Although candlesticks were first used in the 1600's they were not fully utilized until Munehisa Homna a prominent rice trader implemented them in the 1700's. With his research he developed a philosophy called "The Sakata Rules" which became the framework for Japanese investment. His research took into account historic price moves and weather conditions. Surprisingly, Japanese Candlestick analysis was never a hidden or secretive trading system.

In 1755, Munehisa Homna wrote "The fountain of Gold - The Three Monkey Record of Money", the first book on market psychology. He notes the psychological aspect of the market is critical to trading success. He is rumored to be the most successful market trader in history, generating over $100bn in profits at today's prices, some years earning over $10bn a year. He literally cornered the rice market and was made a financial adviser to the government. To some he is despised (many successful rice traders were) but to some (including myself) he is a Japanese hero of the time.

Homma named various patterns; Long days, Short days, White Marubozu , Black Marubozu, Spinning tops, Stars, Rain drops, Dark Cloud Cover, Evening Star, Doji's, Three Black Crows, Dragonfly Doji, Hanging Man and others.

The key to candlesticks was price action rather than news events that were unreliable than the actual mathematical representation of supply and demand or market emotion that could depicted in the form of a candlestick.

There are various patterns watched by candlestick traders that reflected emotion, supply and demand, or simply put points where the market may reverse do to previous interpretations. A Doji is one such pattern - it represents a decision point (some say a meeting of the minds) because the open and close are very close together (nearly equal).

To properly identify the Doji you must know what the candlestick parts mean. The first key part of a candlestick is the body. The body is the point between the open and close which makes up the width of the candle. I use a dark color (red or brown) to represent bear candlesticks and a bright color (lime or light blue) to represent bull candlesticks. A stick is bearish when the closing price is less than the opening price and bullish when the closing price is greater than the opening price.

The other key part of the candlestick is it's wick (also called shadows - a more confusing term) which is a very important piece of data but not as important as the open and close. The wick represents the high and low prices. Wicks represent where price action goes independent from the open and close so they don't have a body but reflect price extremes.

Don't get too complicated with candlestick parts - they are meant to be easy to read - interpreting patterns however is another subject entirely. The key pieces of a candle are: 1. The Body 2. The Upper Wick 3. The Lower Wick 4. The Opening Price 5. The Closing Price. How those various parts interact together make up what type of candlestick has formed - the wise rice traders watched these pieces of data like hawks. Also what the previous sticks have done and the following candlesticks after a pattern has formed are the key to learning and using the patterns. The previous candlesticks help identify patterns while the following (not yet formed) are used for confirmation of a pattern.

*Sometimes candles have no upper or lower wicks or no body (for example: when opening price equals closing price.

Doji Tutorial, Identification, Analysis

Above are variations of valid Doji's. Both variations represent a meeting of the minds - decision points (also called a tug-of-war between the buyers and sellers where the result is a standoff).

Bullish or Bearish action is based on preceding price action and future confirmation.
Therefore the previous trend is one of the keys to spotting a valid Doji Pattern. A Doji in a range is not as enticing as one that appears in a ascending or descending set of candles.

People get very technical in the identification of Doji Patterns but in general you are looking for a meeting of the minds (where open and close is nearly equal) after a preceding uptrend or downtrend. Preferable there's at least 5-10 bars in an uptrend or downtrend when the Doji occurs and not within a range.

(click to enlarge)

To me the above pattern is a valid Doji Pattern with all the essentials: 1. A prior trend 2. A long (of the previous direction) candle prior to the actual Doji. 3. A Meeting Of The Minds or Tug-of-war that ends in a standoff. 4. Confirmation / breakout of the Doji Pattern.

In my opinion you couldn't ask for more from the above pattern. The reward was also very impressive. It occurred in a daily timeframe so the profit was very generous.
Some might say that pattern was actually a spinning top (but the upper wick is not tall enough if you want to get technical - there are some grey areas to identification). I classify it as a Doji because I see a meeting of the minds and that's what were looking for - indecision after a prior trend.

Also the above pattern can be confused with a Hanging Man or Hammer but no look closely the lower wick is not long enough for either patterns to be valid.

A rarer variation is the Dragon Fly and Gravestone Doji. These patterns are times of high emotion and sometimes mark massive tops or bottoms.

Another variation is the Long Legged Doji.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

Why I blog

My blog and some BS about me
Actually since the inception of this blog I've never really introduced it properly in so far as describing exactly what this blog is or my motives. This is a forex trading blogspot obviously and it's primary emphasis/motive has always been to keep my nose in trading when I'm not in a trade. It is nothing more than my own personal blog and trading experiences. My trading diary if you will.

Initially I started the blog just to keep track of market movements. As I gained more knowledge of trading I began developing products which I decided to sell through my blog - which was actually not a plan of mine and I don't really make much doing it. The blog is just to keep myself actively involved in the business. Weather I sell a product or not makes no difference to me but I have made a few pennies selling products which I do not deny.

My primary emphasis however is to make money trading. The blog is simply my experiences, to make myself more knowledgeable, and meet other traders to share a common interest. Another motive is to keep myself from over-trading and kill time between those empty moments of just staring at a chart when nothings happening - but you just never know so I like to stay by the computer, watch the charts, and blog.

If I can make a marketable trading product that is a bonus and makes me a more competent trader (a professional) with a greater edge because I can put forth something "in the trade" that is worth something other than just making a fast buck with my skills in the game (which is also great! I'm just saying, you know I can have a name for myself because someone might say down the line I helped them which is something to feel good about). It's just another way of seeing it in that aspect that my imprint will go down in history if I end up helping other traders and prove that there is enough money to be made in trading that we don't have to fight over it - we don't have to be enemies just because we're trying to get a piece of the same pie. The way I see it is if I get to into one of those big penthouse condos overlooking the beech I don't want to be the only one there.

Every now and then I like to put up some great charts and show off my charting skills as well. In fact if there was no money in trading I like the mathematical aspect of charting so much that I would do nothing but post chart patterns all day and explain the theories as a hobby. I would be like one of those weird little kids you sometimes hear about that have a butterfly collection to find them sickly fascinating. In other words I'm someone that can find something that most people would find utterly boring and turn it into an interesting science. So if you think I'm just some greedy financial person I would gladly study things (most others wouldn't) just for the betterment and greater good of society. That is if society didn't revolve around money but unfortunately it does.

I'm never one to be shy about talking about the markets, charts, making money, or forex. I don't really like to talk about individual companies though - that is just too yuppie for me. I could care less about big names like Exxon Mobile, Goldman Sachs, or Google. My quest is a scientific one that revolves around the inner aspects that are mathematically based.

Forums were a learning experience but not for me
Ironically (and what actually brought me here) I'm actually well known in some trading forums which I don't frequent as often anymore but will drop in from time to time just to see how many originals are still around. I left because I got sick of the arguments (although I'm actually well respected by most), newbies that think they know everything - are very annoying to say the least, and the rampant unprofessionalism of many of the posters that is often a constant theme (with the exception of few select posters that are consistent and serious).

So I decided although everyday is a new learning experience to me that I would much rather write in my quite blog without the abstractions of meaningless jabber mixed with a few sporadic but worthy post that you have to fish for in those large forums that are open to the public. When I have something to say people will find me if they are interested in the same topics rather than those crowded forums that are often filled with trolls that make post after post just to hear themselves talk - honestly I think half of them were market makers because they often try to run you off if you talk too much sense.

Blogging for me is a more focused and a thought out form of logging my trading experiences without all the attitudes online.

Outside of blogging...
I like to read books on trading. One of my favorite books in trading is Remnants of a Stock Market Operator. I think it's because it was one of the 1st books I read from cover to cover in trading. I got addicted to that book - I mean addicted. I was in St. Augustine, FL reading that book over and over by the beach while taking a little vacation.

I actually had a beautiful girlfriend there and I didn't even want to see her I would rather read that new trading book about one of the orginal heavy hitters in thrading. I got it at the local Barnes & Noble (I think I read it a few times there too over some cappuccinos) and headed over to the beach. You know I read that book through several times in a day. I would get up again and go to the beach and read it a few times more - so much so I thought I was the great trader Jesse Lauriston Livermore. I think I must of read it from cover to cover 10 times in a 3 day period.

I used to carry books around with me about trading to bars, the beach, on walks, the hot tub, you name it lol - where ever I would go I would have at least 1 book about trading. I would meet some pretty interesting people that way and they would want to discuss trading with me - it wasn't a great way to pick up girls though but it was my passion. Some would ask totally lame questions but every now and then I would meet some very interesting and knowledgeable people that could hold a descent conversation about trading or the financial world.

With my extensive knowledge I called a massive bottom in gold back then and predicted the big recession when the market was at a peak. People looked at me like I was nuts when I said there would be a big market crash and possibly a recession or the fact that gold would go much higher than $600 (at the time was in the $500's). At the time I predicted it people were raking in the cash in real estate - I warned people who ended up losing big but no one would listen and now they won't even talk to me because I warned them and unfortunately for them I was right. It's too bad they didn't listen to me because although I seemed crazy then I was offering them very rational sane advice but they didn't want to listen.

So anyway that is the story of my life and why I blog. My blogging style has changed considerably since I first started blogging. I'm more into trading topics rather than market events.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

Sunday, January 15, 2012

Advanced Trading Topic: Confluence

-Confluence in Trading-
Real World Definition: 1. A coming or flowing together, meeting, or gathering at one point. 2. In geography, a confluence is the meeting of two or more bodies of water.

Synonyms: convergence, conjunction, convergency, meeting
Antonyms: divergence

When 2 streams come together and flow together there can be a spectacular current that is dependent on the force of the 2 streams. In nature the flow of water is a very powerful force - much like a strong trend in trading.

In Trading, my definition of confluence is when 2+ forces intersect and more accurately the implementation of multiple trading strategies into one. When there are more forces intersecting there is more confluence. When several forces intersect at once we more astute traders will say there is a great deal of confluence. One might say well that's just a fancy word for "confirmation" - not exactly but there are similarities. I see confluence as something that occurs more naturally than when a trader is looking for some type of confirmation of a signal in their linear trading system.

It takes greater knowledge to spot confluence than a simple confirmation - the greater degree of understanding in technical analysis and trading the greater mastery you will have of conflowing factors that work together like a strong rushing river or mark the end of a drying stream.

Confluence may also be thought of as events - as in the confluence of events. These events make up a theme.

examples of confluence in trading:
example 1 (case: reversal - bear signal) price hits a major resistance in HR4 time-frame. Soon after in the hourly tf MACD negative divergence occurs. You also see at the M15 tf that stochastic is overbought.
*All the indicators do not have to have the same signal for every time-frame.

example 2 (case: reentry or confirm short) after a strong sell off you measure from your swing high to swing low and find that price action retraces to an area of supply
that intersects with a 50% Fibonacci level. In this case the strategy is to hold a short longer (if already short) or to look for a short at the 50% fib extension retrace. *Or perhaps your not in a trade but were considering a long and you see price approaching the 50% fib at an area of supply - you might want to steer clear of that long.

example 3 (case: continuation) An Elliot C wave forms at a 38.2 retracement fibo level ie b to c for the fib extension. After the 38.2 price action of the trading instrument in question breaks through the swing point with heavy volume indicating a stronger move should follow. An aggressive trader in this scenario might place a trade at the 38.2% fib with a stop loss at the 50% fib. If the swing point (at the Elliott b wave) breaks with heavy volume it is just an indication to perhaps hold trade for more profit or trade that break. (warning aggressive strategies can produce high losses - always adhere to a stop loss in any scenario). A "conservative" trader would wait for the break of the b wave + confirmation of heavy volume in this scenario and put stop loss and the 38.2%. *note that 61.8% retracements are warning signs of a potential trend changes.

Confluence is the increase of probabilities. It's like adding more straws to the camels back and eventually the camels back will surely break - this is the case of a trend reversal.

In a continuation it is like the construction of a house - where you see the contractor putting in the foundation, then the frame, and ultimately the roof.

It becomes evident at some point that the final stages will proceed or the beginning stages will fail. You wouldn't want to place a trade against the trend when the "frame" of the pattern goes up unless there's really bad news like the builder didn't pay his bills and the project was canceled or held off do to funding - this is the equivalent of a big news event that can reverse or stall a pattern.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer

Monday, January 9, 2012

Forex Trading Strategies

Every newbie trader in the world wants to put down their first trade and win the lottery. They are told how easy it is to trade FOREX and that they can be the next over-night millionaire. It could happen but without a complex strategy and the leverage to put the money down it probably won't. Some literally believe they will whip out a few thousand dollars and in a few days they will be wealthy playboys/girls.

9 trading tips!
Criteria for a good trading strategy when charting with Metatrader:
1. As a bare minimum a trader must have rules for entry and exit - possibly re-entry points (add or subtract from a position if your a multi-lot trader). Additionally these
rules can contain what-if scenarios that I call plan B's if the trade doesn't
work as expected but to keep it less complicated you can just firmly stick to stop losses and target points. I neglected to say that part of your exit is either a target price or a stop loss.
I often take a break after a stop loss
to avoid making the same mistake twice.

2. Use at least 1 indicator that provides a strong signal that predicts a reversal point. One of the most important part of a good strategy is the initial signal.

3. The signal indicator should then be confirmed by a confirmation indicator. I actually have a stand alone indicator that I use but I set levels to provide strong signals for it. In other words it doesn't need a confirmation if used properly but most indicators need further confirmation - it's great to have a sharp signal but a sharp signal can be nothing without a confirmation. It goes back to the old carpentry rule - measure twice and cut once.

4. The strategy is not so complex that the chart is filled with clusters of indicators. As a rule of thumb I only will have 3 windowed indicators and 3 on-chart indicators for a total of 6 indicators. I also try to not use indicators that do the same thing or nearly the same thing. I then set up my trading rules for each of the indicators. If I can't think of a rule for a particular indicator I then weigh it's specific use and will likely get rid of it if I can't define a trading rule for it. *I can sometimes break the rule of 6 total indicators if they are luxury indicators that make the chart look better such as pretty candles or enlarged price - in which case they are indicators that don't help to make decisions.

5. Your trading strategy should be tweaked for the particular time-frame(s) you trade such as scalping, daytrading, swing, or long term. For instance: A long term strategy will not have the same stop loss/target price as a scalping strategy - if so something is not right because a 10 pip stop-loss might work for a scalp but must be much deeper for a long term. Finely tweak the trading strategy to a time-frame and don't try to negotiate. If you have a 100 pip stop loss and are taking 10 pip gains something isn't working right.

6. Practice in the strategy tester (Ctrl+R in your trading terminal) and then when you got the strategy down use a demo account with practice money before going live. Almost all Metatrader Brokers have demo accounts (I haven't seen one that hasn't). Take advantage of the demo feature before losing real money.

7. This seems simple but if the trading strategy is not working change it until it does or find a completely different one all together.

8. Master technical analysis. Trading without concrete understanding of the technicals is not very wise. I always notice the easy patterns such as Head & Shoulders - anyone who hasn't isn't taking trading seriously.

9. Not following any one of these tips can be a serious mistake and lead to a short trading career. These rules apply to trading stocks, currency pairs, futures, or options. So follow these tips with concrete discipline and put yourself a step ahead of most of the competition who won't.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer