Forex Charting Tutorials

Double top formations on a bearish trending pair are very low risk to good reward positions. Conversely, double bottom formations on an uptrending pair have a similar risk to reward. Remember that breakouts retrace and retest constantly on all time frames. So if a big move was missed the first time, Smart Money plays the retest of that previous swing high reversal, or swing low reversal (depending on the trend of the pair). Smart money will place a limit order at this strategic location, with a stop loss reasonably set on the other side of that swing reversal level, and will target support/resistance, quickly taking partial profits at relatively safe profit-taking levels, and letting the remaining trade run its course naturally while playing with HOUSE MONEY.

The above chart is an excellent example of a double top formation taken from the hourly chart for usd/jpy.

Short term traders must be quick to adapt to a changing momentum in wildly swinging markets, such as we have seen lately. As long as this market condition continues, be prepared to take PARTIAL PROFITS quickly, short cover your positions when called for, again taking only PARTIAL PROFITS and letting the positions expire using trailing, positive (or break even) stop losses, with HOUSE MONEY. At times you may have both long and short positions active on the same pair at the same time.

The USD/JPY has fallen precipitously from the June 2007 swing high of 124.12, to the recent low from October 2008, at 90.89, as seen on the following monthly chart.

 The pair is in a long term downtrend. We place positions at logical reversal levels on any corrections/retracements (up) to catch a resumption of the downtrend. in other words, we trade against any move up as long as we are fairly certain of a resumption down occurring. We are protected by our strategic  entry level, combined with a reasonable, affordable stop loss, if the market reverses trend on us.

Trends change, so study to show yourself worthy. Build wealth slowly and steadily, be logical, and protect your account from unnecessary drawdowns. Analyze your losers. We all have them. We sort through an array of small tester positions on multiple pairs, elimating those that are unprofitable and building a base of those that are income producers, preferably daily interest income producing, along with a considerable pip gain using HOUSE MONEY, after we took out partial profits and set a break-even stop loss, and trailed that stop to secure some bit of profit. Then you use the profits taken and establish another tester position, knowing that the original cost of the remaining open position has been covered. We now have a free position earning us a no-risk income, no matter what happens. On some pairs we may pay some swap, but that is the cost of doing business.

The 4 hour chart and the hourly chart are used to maximize entry and exit levels. You look for candlestick formations, pivot support, sma’s, and fibs to locate where the buying interest resides, and where the selling pressure resides. Long wicks on candles show strong resistance or strong support, depending on the bias of the price momentum.

Using this “Cruise Control” strategy, we are free to enjoy the good life, and not be obligated to sit in front of the pc for hours, while neglecting our family, and our honey-do list. Or our fishing time. Yeah…. WE ARE PROTECTED, BECAUSE WE MADE LOGICAL CHOICES AND EXPLOITED WHAT THE CHARTS TOLD US THEY WANTED TO DO. The array of small tester limit orders will activate independently, opening and sometimes closing all on their own, with a properly prepared order, resulting in an acceptable loss, or a very profitable gain. It functions as an automated E.A. or robot program would function. It requires minimal maintainence: a few hours a week for those of you who are required to work a real job at this point in time, as are most newbies when they begin to take an interest in Forex trading.

Search your charts on all currency pairs to find this set up. Place your orders with stop losses and take profit targets in place. Set it and forget it… Live Life to the fullest.

On the hourly chart above we see exactly where the price reversed trend on the 15:00 GMT hour candlestick of November 6, 2008. That short term resumption of the downtrend lasted until it formed a new reversal candlestick pattern on November 7th on the  01:00 GMT hour candle. For around 24 hours, that position gathered almost 200 pips, where it retraced up again and retested that high on the 19:00 GMT candle of the same day. Our strategy calls for a limit order sitting at the retest area waiting for a bounce on that second attempt. The entry is placed around the high of that previous swing candle at 98.67. That level has been tested and bounced there, triggering our limit sell order. 1st downside target was the open of the previous hourly candle at 98.04, where partial profits were taken and a trailing stop loss was in place, which also got hit, closing the trade in profit.

EASY MONEY…

The daily chart for eur/usd shows strong selling pressure sitting around the 61 fib area, and the green 22 sma area (previous swing low). Price sneaked back into the 5 sma channel.

Downside target is the yellow 5 sma close, or the white 5 sma low. Upside target would be the 50 fib and the brown 55 sma.

The weekly moms are quite bearish. all 4 moms are pointing down in agreement. The current candle is quite bearish. Until risk aversion returns, she will trade sideways in consolidation, or reverse the trend to bearish.

Look for the range that has been established, denoting the buying interest areas and the selling pressure areas. It could take a while to play out. Patience and discipline are needed to trade this scenario.

Strategy: Range Trade Technique until breakout occurs.

The monthly chart for eur/usd shows a rejection of the corrective wave 4 down around the blue 50% fib, at the 1.3884 area. The 1 candle momentum indicator showed us this retrace was coming long before it happened. You can see from from our previous articles on eur/usd, that we have been warning about the upcoming consolidation/retrace, and we closed our USD positions across the board, booking some very nice profits.

We have studied price action in relation to many different indicators, such as the MACD, RSI, CCI, ATP, ADX, etc. We have found them all to be lagging indicators. The Momentum indicator used at different values has given us a leading indicator that is predictive rather than reactive. We do not trade indicators, however, but rather candlestick formations, price action, and support/resistance.

New Forex traders need to learn to read and interpret what the charts are telling them. Learning to recognize reversal candlestick formations, and knowing where previous swing highs or swing lows are located, will greatly enhance your odds of being on the correct side of most price movements. Studying the longer time frames will remove the noise and the choppy price action. Monitor the direction and slope of the Momentum indicators at the candles’ open/close of each time frame you choose to study on any currency pair.

Gabriel asked:
Hi again,
Still studying the momentums and am wondering how you put the mom’s together below. Could you please direct me to a download site for MT4. Greatly appreciate your work here.
Happy trading my friend.

Answer:

My broker uses the MT4 platform. It has a navigator icon which contains a list of indicators and custom indicators. I use the default momentum indicator from the custom indicator list on this navigator.

I drag and drop it into my chart, which opens a separate indicator window for the mom. I dont want 4 separate mom windows, which would take up too much space. So i drag and drop a 2nd mom into the window of the 1st mom. Then i change the value to 10 and change the color, so i can easily distinguish between the 2.

I drag a new mom into the main chart to open a second mom window, then change the colors and the values to 1 and 5.

Our goal is to teach long term, low risk Forex investing, as opposed to short term trading at high risk.

It is possible to have a daily income from strong positions set at strategic locations with little or no risk of loss.

Just imagine having a dozen positions, all with a positive stop loss on long term trending pairs. With patience, discipline, and good money management, this can be accomplished over time.

If anyone needs a chart interpretation for any particular currency pair, just drop me a line here at the blog comments, or the blog email.

My strategy will work for any type of trading that uses a chart. Send us your chart and we will tell you what we see.

GBP/JPY weekly chart is showing solid resistance. We are holding our long positions but covering with a short position to capture the move down. We will look to add another long position when we see a rejection of the move down, as long as 209 holds.

Long term forex investing is boring and safe. By placing limit orders at strong support/resistance with a reasonable stop loss on the opposite side, in a pair that pays a positive swap, and is in a long term trend, you get a daily income from the swap, over a long period of time.

Buy it as cheap as you can. Sell it as high as you can. Get a good solid price to hold for the long term, and set your stop loss to break even when the position moves into profit. Use small lot sizes and add to them.

Trail your stop loss with the trend to maximize and protect your profit.

Over time, with patience, discipline, and safe money management, you will have many small positions in profit and paying daily interest, with NO risk of loss.

Set it and forget it. Cover it when necessary.

If you look at the monthly chart for the yen carry pairs, you can see nearly 3 months of bullish candles forming. Risk aversion, which caused a massive unwinding of the Yen carry trade, seems to be contained for the time being, at least for now. As of the time of this article, we have seen a short term bottom in the yen carry trade pairs.

Here is the montly chart for gbp/jpy.

 Here the monthly chart for aud/jpy.

Here is the nzd/usd monthly chart. We see 2 months of bullishness, followed by the current montly candle showing weaker growth. Stand aside on this pair, as the trend is not as clear. the price has retraced to the 5 sma, but shows a previous breach.

 Here is the monthly chart usd/jpy.

Here is the eur/jpy looking to retest the all time high in the pair.

We will continue to monitor this yen carry trade situation. Risk aversion market sentiment would cancel this view.

Until risk aversion returns, the strategy is to buy dips in these pairs, after you see a rejection of any downward retracement. This strategy will pay a nice daily swap (interest income) over time, as long as the the pairs are maintaining the overall upward trend.

Place buy orders at areas of support with a reasonable stop loss placed on the opposite side of that support. Move stop loss to break even when the position moves into profit, and collect the daily interest with no risk of loss. Trail the stop loss up to protect profits as the market price movement allows.

There seems to be a correlation developing between the chinese and other asian equities and the yen carry trade. Notice how the yen carry pairs, are advancing as the hang seng and shanghai markets tumble. Also notice how the long term gbp/usd and eur/usd experienced profit taking and some closing of positions. It is my guess that the profits from these usd carry trades were used to cover losses in the asian equities.

Ovaforty

To be continued….

The object of this article is how to set up a chart for the “Holy Grail” system of forex investing.

Here is a naked monthly chart set up for eur/usd.

From this chart, we can see a multi-year uptrend, but not much else.

Let’s add some tools to help us better interpret what we are seeing, and to allow us to predict where the market may move in the future. By studying the price action of any given forex currency pair, especially on the longer time frames, we can see where the market has been, where the market is now, and where it may be headed to in the future. We look for repeatable patterns, that significantly enhance the odds of success, and reduce risk of loss.

Moving averages are an invaluable tool in pattern recognition. The chart we are using is the metatrader4 platform. The navigator icon contains a drop down list of indicators and custom indicators. Using the custom indicator list, drag and drop Moving Averages to the main chart. That will produce a dialog window for the moving average. On the “Inputs” tab, type in the number 22 under the value. leave the other numbers at the default “0″ on the inputs. Click on the “Colors” tab next. Hold your cursor on the default color of the dialog window and double click it. From the drop down color palette, choose lime (green). Under width, double click the default and choose 2 from the drop down list. This will make the lime colored 22 sma bold. Click on the OK and you have your first moving average.

Now follow the same procedure and install the brown 55, aqua 100, lawn green 250, red 200, pink 300, and purple 400 moving averages. Making them bold will help them to stand out in a congested chart.

Here is the weekly chart showing the larger moving averages sitting well below the price action.

Next, from the navigator custom indicators list, drag and the zigzag indicator into your main chart. This will give us a rough estimate of Elliot wave formation without having to understand more than the very basics of that complicated theory.

Again, from the custom indicators, drag and drop the momentum indicator into your main chart. This will open a dialog window, and we use the default settings. This will give you the 14 candle mom. Change the color to orange, and add the level 100, also making it orange.

This time drag and drop a new mom into the 14 candle mom window, changing the value to 10, adding the level 100 and making its color orange red.

Next drag and drop another new mom into the main chart, changing the value to 5, adding the level 100, and making this color yellow.

Finally, drag a new mom into the 5 candle window, changing the value to 1, adding the level 100, and making it a dodger blue color.

Add the 5 sma channel by dragging the moving average from the indicator list to the main chart, and set the value to 5 simple close (yellow). Drag another ma and change the value to 5 simple open (orange-red), then add the 5 simple low and the 5 simple high, making them both white.

Using the fibonacci retracement icon draw a fib from the low of 1.1640 to the high of 1.6018. add fibo extensions of 123.6%, 1382%, and 161%. Also -123.6%, -138.2%, and -161.8% to the levels tab on your fibo dialog window.

Your chart is now set up. Save as a template and name it. You can then open any currency pair and instantly have the exact same set up, except for the fibo’s.