Technical Analysis For Beginners Part 5: How To Trade The Hidden Divergence in Forex

The divergence that forms in the forex market is one of the set ups that many traders look for from time to time. The same with the head and shoulder pattern, it doesn’t show up all the time but when it does, it gives traders a big upper hand over the market.

Divergence is a situation in the market where in the price chart shows a certain direction of the price but the technical indicator such as the Relative Strength Index or RSI shows the opposite direction.

Technical indicators are supposed to mimic the movement of price but in the case of a hidden divergence it shows a different outcome. Seeing this in the chart will make you think that there is something fishy about the market. This abnormality translates to forex trading as a reversal of the current price movement.

To make this all clear and less confusing, I will show you some examples of hidden divergence in the forex market that are hard to see if you don’t know where to look. Divergence in the market occurs on any time frame but in the examples I will be using the 4 hour time frame.

Also, the technical indicator that I will be using is the RSI with its default settings.

There are two types of divergence in the forex market; the bullish divergence and the bearish divergence

1. Traders call it bullish divergence when the price action is bearish or down trending but the technical indicator which is the RSI is showing a bullish move or a consolidating move defying the real movement of price which is supposed to be a bearish move.
    
2. Traders call it bearish divergence when the price action is bullish or up trending but the RSI is showing a bearish move or a consolidating move defying the real movement of price which is supposed to be a bullish move.

Bearish divergence example in the EURUSD forex pair in the 4 hour time frame

Click the image to zoom in..

Observe that the price is basically showing a sideways direction with a somewhat bullish bias as it created a higher high indicated with the number 2.

But look at the RSI indicator below.

What have you noticed? 

The RSI indicator was showing a different data, it is clearly showing us a down 

trending graph as indicated with the red arrow going down.

This is how a bearish divergence looks like! Two graphs ( price graph and RSI graph ) showing different facts that are supposed to be the same.

The question now is this..

How to trade this divergence forex set up?

We could confirm that this is a divergence when both graph showing contradicting movements.

All we have to do after that is to wait for a candle stick set up for an entry. We need to wait for a candle stick set up so that we can plan our entry and stop loss point.

Seeing that bearish pin bar formed as indicated with number 3, we can now put on our entry point and stop loss.

Our entry point would be right after the pin bar formed or perhaps you could wait for a little bit of pullback.

Our stop loss placement would then be above that bearish pin bar.

Our logical placement of the profit target would be right at the previous resistance as shown with the black horizontal line.

The final set up of the trade would look like this

Click the image to zoom in

I don’t know if there are forex divergence scanner out there but what happened with the market after just shows us how powerful and profitable bearish divergence set up could be if traded correctly. In this particular trade it could have been an easy 1:4 risk to reward ratio winning trade.

 Bullish divergence example in the EURGBP forex pair in the 4 hour time frame

 In this pair we could see that the price chart is showing us a down trending price. But when we look at the RSI graph below it, we could clearly see that the graph is showing an uptrend movement as indicated with an upward pointing arrow.

Click the image to zoom in

With these we could confirm that this forex pair at this particular time is bullish divergence.

Since this is confirmed already, we can now use our divergence forex system strategy set up.

We wait for a candle stick formation that signals a start of a bullish move.

Observe that a bullish pinbar formed followed by a bullish engulfing candle as indicated with the magenta rectangle.

Our entry point would then be right after that bullish engulfing candle and we put our stop loss below the pin bar.

The logical placement of the profit target would be below the resistance as indicated with the horizontal black line.

The final forex divergence trade set up would look like this

Click the image to zoom in

This trade here could easily give us a 1:4 risk to reward ratio.

Forex divergence trade set up combined with a reliable candle stick formation will not only  give us a great edge in the market but also big profits.

Patiently scan your chart for these kinds of patterns and you will be rewarded.

The big question is that are you willing to wait for this kind of patterns to occur in the market?

See you in the last and final part of this article series!

Technical Analysis For Beginners Part 4: Trading The Ever Famous Head and Shoulder Pattern

Price action formations in the FOREX market seems very random to starting traders. I remember when I first look at a chart 2 years ago I could not mentally form any formation at all.

All seems to be just random ups and downs of the flow of the market. Never did I realize that the ebb and flow of the market is all driven by people’s psychology.

Later on as I put more time in studying and observing how the market moves, I came to conclude that there are certain patterns formed repeatedly.

In this part 4 of these article series, I want to talk about the ever famous head and shoulder pattern formations.

It’s undeniable that there are many patterns out there but this pattern formation is the most or if not one of the most pattern formation traders looked for in the market.

Why do traders look for this head and shoulder patterns?

• First of all it’s easy to recognize because of its obvious formation.
• Second reason is that this set up has a huge probability of forming which means it has high win rate.
• The final reason is that depending on how the pattern forms it usually gives good risk to reward ratio.

Take a look at our example below.

Click the image to zoom in

This head and shoulder pattern formed in the EURNZD 4 hour time frame. 

As you can see, this pattern formation is quite obvious. Derived from its name itself it is composed of two shoulders and one head..

Click the image to zoom in

On trading this kind of pattern, its is best traded right at the formation of the right shoulder. As you can see in the example above. There is a bearish pin bar set up formed in the right shoulder. 

Entry point would be right after this pin bar formed. 

The stop loss should be placed above the pin bar.

The most logical place for the profit target would be the bottom of the left shoulder which is a known support indicated with a red horizontal line.

This trade set up using the head and shoulder pattern alone could have generated a good 1:6 risk to reward ratio.

The inverted head and shoulder pattern

The inverted head and shoulder pattern is pretty much the same with the usual head and shoulder pattern. It just that this formed in reversed form but mind you  the concept is still the same.

Click the image to zoom in

This inverted head and shoulder pattern was formed in the NZDUSD pair 4 hour time frame.

In the eyes of those novice traders this might look hard to recognize as a pattern. But the more you put time on studying charts there will come a time when you will be able to recognize this patterns almost instantly.

Since this is an inverted one we should be looking for a set up here to go long. In my own style of trading, the set up would go like this.

Click the image to zoom in

As I have talk about in my previous article about Japanese candle stick formation where the topic is about engulfing candles and its psychology. This bullish engulfing candle here could be our signal that the price would be bullish and will form the inverted pattern.

Our entry would be right after the bullish engulfing candle formation.

Our stop loss must be placed below the candle that had been engulfed.

Our profit target again should be based on the pattern itself. In this inverted one it should be placed at the top of the leg of the left shoulder which is a known resistance indicated with a green horizontal line.

In this particular trade set up, we could have had easily generated a 1:4 risk to reward ratio winning trade.

In summary of this article.

Head and shoulder pattern is literary composed of a HEAD and a SHOULDER which makes it easy to recognize.

If its a usual head and shoulder pattern, look to trade short right at the formation of the RIGHT SHOULDER.

If its an inverted head and shoulder pattern look to trade long at the RIGHT SHOULDER. 

A pin bar or an engulfing candle formation at the right shoulder usually is the signal for an entry.

Stop loss should be placed above or below the set up candle.

And lastly, the best placement of the profit target is in the parallel side of the leg of the left shoulder.

See you in part 5!

Technical Analysis for Beginners Part 3: Psychology Behind Japanese Candle Stick Formations

I can’t remember fully the story about the origin of Japanese candle sticks, can’t even remember if I read it from a book or from a blog of some famous trader. But the summary of the story goes like this.

 There’s this Japanese guy who become so good at trading commodities because he records the highest point, the lowest point, opening and closing price of the commodities that he is trading.  Later on he learned that he could make a drawing out of it which is now the candle stick. He’s so good with trading because he understood the psychology of the market by the use of the candle stick formations.

 In this part 3 of technical analysis for beginners our aim is to know how to read the candle stick formations. We will be using the DAILY TIME FRAME in our examples because I believe that the daily candles are more accurate in portraying the psychology of traders.

 

 Let’s begin with the parts of the Japanese candle sticks

A candle is composed of a body that’s for sure and sometimes with an upper tail and/or lower tail.

1.     The upper tail indicates the highest value the price went in that particular day.
2.     The lower tail indicates the lowest value the price went in that particular day.
3.     The open is the opening price of the day and
4.     The close is the closing price of the day.   

See the image below for reference.

Credits to Wikipedia for this image

It’s parts are pretty basic and self-explanatory that’s why we move on and see some examples of its formations and understand the message that it brings.

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 Click the image to zoom in


That candle enclosed with green rectangle is our first candle to be explained.  To tell you the truth I don’t know what this candle specifically called but the important things is knowing the meaning behind it.


Noticed that the lower tail of the candle is longer than the body itself. This candle brings the message that the price has a big probability of going up which it did. Having this long tail simply shows that there are more buyers in the market.

 Click the image to zoom in

The candle above enclosed with rectangle has the same meaning with the first candle that I have explained. It’s just that this candle signifies that the price would probably go down.

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 Now let’s talk about pin bars. 

This candle stick pattern is actually just similar to that of the first two candles that I’ve shown but has a much smaller body.

There are so many traders out there who complicate their lives and made some other names for it like, hammer, shooting star, sword and etc. To avoid confusion of names if a candle looks like this as shown below let’s call it a pin bar.

Click the image to zoom in

This two candles enclosed in a rectangle is called a pin bar. Its body is relatively small and its tail is very long.  Long tail formed because price initially moved in that direction but was rejected. If we see a long tailed pin bar like this then that only indicates that there's a big chance that the price would go up.

Another example below.

Click the image to zoom in

 As you can see, its very clear what these bearish pin bar's message is. It shows that in that particular days the sellers dominated the market and created a strong sell down.

This candle stick formation will serve as a catalyst for price direction in short term or long term.



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Doji, the candle in the middle

Click the image to zoom in

Basically the doji candle is a plus sign. It has an equilibrium formation of buyers and sellers. If this candle stick form, it usually means that the current trend is ending and a new trend is approaching.

Doji is a trend reversal candle.

Its that time in the market when the dominating movement of the market just halted and exhausted.

As you can see in the example above, it just shows that the trend had just arrived at its peak and instantly reversed.

Click the image to zoom in

Another example above of a Doji candle formation which acted as a catalyst for price reversal.

We are done with the single candle formations, now lets go to the combination of these candles and lets try to understand its psychology behind.

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Inside Bar Japanese Candle Stick Formations

Click the image to zoom in

The above image is an example of what an inside bar candle looks like.

An inside bar is basically a candle which is formed inside the previous candle. Inside bar formations indicates indecisiveness also in the market.

The big candle is what they called the mother candle and the small one is its child.

Something to note here. In the above image you can only see 1 child/inside candle but there are times that inside bar candles can be as much as 3 candles. The more the candle inside, the more the strong the momentum when its price broke the mother candle.

How do we trade the inside bar set up?

Trading the inside bar candle is quite tricky.

Usually traders trade this set up when the prices broke out the mother candle but sometimes this is where the fake movement happens.

As you can see in the image above a bearish pin bar was formed. Intraday, the price broke to the upside and looks bullish, many traders thought it was going up but it was a trap. Eventually the price came back inside the mother candle and formed this bearish pin bar set up.

To me this is the best time to trade inside bar candles. The market made a false move and after that it shows its real intention. Lets take a look at another example below.

Click the image to zoom in

Noticed here that there are 2 child candles inside the mother candle formed before the appearance of the false breakout. This to me indicates a strong momentum to whichever side it decides to go.

The false breakout formed and buyers saw this set up and made the price very bullish.

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If we have inside bars we also have outside bars which is commonly called ENGULFING CANDLES.

Engulfing Japanese Candle Stick Formations

 

Click the image to zoom in

Engulfing candles are candles who engulfs/eat the previous day candle. This indicates rejection of price and when you combine these two candles it will somewhat form into a pin bar.

I find engulfing candles a very good set up in taking trades because it shows clearly the sudden shift of momentum between buyers and sellers.

How do we use the engulfing candles as a set up for a trade?

The best time to trade engulfing candles is when it formed at least twice in a known support or resistance area. Just like what happened in the image above. The bearish engulfing candles formed right at a resistance twice. After the formation of the second bearish engulfing candle, the price just burst to the downside.

The above chart of AUDCHF forex pair shows 2 engulfing candles. Lets try to see where should we entered the trade and its risk to reward ratio.

Click the image to zoom in

We could have entered right away a short trade after the second engulfing candle formed. The stop loss placement should be above it with a 3 to 5 pips allowance for the spread.

Looking at the price action we can automatically conclude where our profit target should be located. It should be in the previous support of 0.74180 as indicated with the horizontal blue line.

What happened after we took our entry? The market just did its thing and moved towards the direction of our profit target. After 8 days of waiting our profit target was finally triggered and bagged 1:4 risk to reward ratio.

Understanding Japanese candle stick formation is really essential in creating a trading strategy. In my own opinion the more you combine this candle stick formation with each other the higher the chance of it going your desired direction.

Take time in studying charts and you will see this set ups forming over and over again. The part 4 of this article series will be about head and shoulder pattern. Stay tuned..

Ciao and till next time again!

Technical Analysis for Beginners Part 2: Knowing Support and Resistance

Recognizing the support and resistance in the currency market is one of the most important knowledge that every beginner traders must hold.  In fact it is very hard to make a trading strategy without basing it on a support and resistance.

 Let us define what is support and resistance.

• Support – Is an area that acts as a base of the price movement. We can think of it as a floor that when hit by price they push the prices up.
• Resistance – is an area that resists prices when touched. We can think of it as the ceiling of a house.

Note that when we plot support and resistance we can only make sure of its validity when it is tested at least 3 times.

Support and resistance in the market is an area or zone in which the price bounces off from time to time. 

It usually forms in two ways, one is in a horizontal formation and other is in a trend formation.

What is the difference between the two?

Horizontal support and resistance forms in horizontal sideways motion. It looked like a consolidating market as what we have discussed in the part one of this article series.

Click the image to zoom in

As we can see in the image above, we can say that it’s a valid horizontal support and resistance when the price line is tested at least 3 times.

Take note here that once a support or resistance is broken, it will act the opposite way. Like for example in the pair above. The support line was broken and price closed below it. What happened when the price tried to go up? The broken support now acted as a resistance and now starts rejecting price from going up as indicated in a yellow arrow the candle formed a bearish pin bar.

A trending support and resistance very similarly looks like a either a down trending or up trending market it just that it bounces in the same line of support and resistance when we plotted it.

Click on the image to zoom in

As we can see in the image above, the support and resistance formed in an up rending fashion. Again we can be sure about its validity when its lines are tested at least thrice.

Another thing to notice here also is that when the price broke the support line and closed below it, that support will now eventually act as a resistance as indicated in a yellow arrow a bearish pin bar was formed. Same will happen also if the resistance is broken and the price closed above it, it will then act as a support.

How to use support and resistance as a set up for an entry point?

Many strategies could be generated by using the support and resistance. The most common strategy that I know would be is taking an entry at the retest once the support or the resistance is broken. The set up would look like the one that I’ve labeled on a yellow arrow. A pin bar or an engulfing candle formed in the retest is good enough confirmation for an entry.

Dynamic support and resistance using a moving average

We can also use a moving average as a dynamic support and resistance. I believe that moving averages are the most used indicators in trading. Because not only will it give you a dynamic support and resistance but also it will assist you in identifying the current trend. Just like in our example below.

 

Click on the image to zoom in

Sometimes I incorporate in my trading strategy the use of moving averages 100 (red) and 50 (green). You may have noticed here that price also respects moving averages. Price tends to bounce when touched by the moving averages.

When price is below the moving averages it will act as resistance to it as labeled with the red arrows. At the same time acts as support when price is above it as labeled in green arrows.

Successful price action trader is good at plotting support and resistance. It may seem hard for a novice trader to see these patterns in the start but with constant market exposure and practice all becomes a piece of cake.

Take a look at your chart and try to see if you can identify and plot any of this support and resistance.

In my next article which is the part 3 of this series, I will talk about the basic Japanese candle stick formation and the psychology behind its formations.

“Tell me and I forget. Teach me and I remember. Involve me and I learn.” – Benjamin Franklin

Until next time, see you in part 3!

Technical Analysis for Beginners Part 1: Identifying the Market’s Movement/Trend

This month of January 2019 so far is really a quiet market for me. My set ups are not showing up in the chart. Because of this, boredom strikes and I don’t like it. I want to be productive as always that’s why I am motivated to impart to you readers my knowledge and understanding about forex trading.

I have decided to write about technical analysis since I based my trading set ups using price action. I believe what I’m about to write is a good foundation to all the starting traders so pay attention and take notes if you want.

This is the first part of the 6 article series about technical analysis that I will be writing dedicated to all the newbie traders out there.

This article is all about how to identify the 3 movements/trends of the market and I will give also some examples on how to trade them. 

Namely:

1. the uptrend, 
2. downtrend and 
3. the consolidation.

Let us begin by answering the question why we need to identify the current trend or movement of the market?

We need to identify it so that we can have an idea of what kind of trade set up we are going to look for in the market.

Like for example, the current trend is uptrend. Should you be looking to go short/sell or should be looking to go long/buy? Of course you’re going to look for set up to buy. Knowing that it’s an uptrend it would be stupid to go short when everyone is buying.

“The trend is your friend so go with the trend”

As you go along with your trading you will be hearing that phrase all the time.

An uptrend or a downtrend is like an unstoppable moving train that losses its brake system and is very hard to stop. It has a snowball effect to it and just gets bigger and bigger until such time that it will finally hit a solid wall and halt its momentum.

This halting period is what we call the CONSOLIDATION. It is the time when the market is exhausted and prepares again for its next move. The market in this state is undecided and needs a significant catalyst before it starts to move again.

How do we identify the market trend and use it on our favor?

In my case since I am trading the 4 hour time frame. I always look at the daily time frame in identifying the current trend of the forex pair that I am eyeing to trade on.

By looking at the daily time frame I can have a bigger picture of what’s really happening in the market. It gives me a bird’s eye view to which direction the market will try to go to.

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Let’s take a look at  how an uptrend market looked like.

 

Click the image to zoom in

An uptrend market looks like this as viewed in the daily time frame of the USDCAD forex pair. We would know that it’s a valid uptrend when its shows a series of HIGHER HIGHS (HH) and HIGHER LOWS (HL) as indicated in the image above.

What’s the reason behind an uptrend and how can we ride the trend?

In this pair it is very clear that the USD is strengthening across the board while the CAD is weakening. In my own opinion uptrends happens because the economy of a country is improving and investors are coming in to buy their currency relative to its paired currency.

To those of you who don't know, we can actually ride the trend by waiting at the pullback point of the market.

 Where can we find a set up for the pull back and join the trend?

If we look at the 4 hour time frame we can see the pullback of the market and we can actually make a valid entry and join the uptrend by using my PRICE ACTION STRATEGY as seen in the image below.

Click the image to zoom in

This is how it looks like in the 4 hour time frame chart when we zoom in from the daily chart. This is where we can see clearly the pull back. 

As you can see here there are 3 engulfing candles formed in this support area that I put on a horizontal red line. This candle stick formations here is my go signal to execute a trade.  This is the beauty of my price action strategy in the 4 hour time frame it shows very clearly that the market bias is going up. 

To those who didn't know whats my trading set up is CLICK HERE.

The best time to enter this trade would be after the formation of the 3rd bullish engulfing candle.

So what do you think happened after that entry? Lets take a look at it below.

Click the image to zoom in

Wow! Can you see how powerful my price action strategy is? Anyway lets not talk about it here. We are here to talk about the market's trends and movement.

So far we have identified what an uptrend market looks like through the series of higher highs and higher lows. 

We have also identified how to look for an entry to join the uptrend movement by using the 4 hour time frame pull backs.

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Lets move on and see now how a downtrend market looks like 

This is how a down trending market looks like. It is basically the exact opposite of an uptrending market.

Looking at this AUDCAD forex pair in the daily time frame, we could clearly say that its a downtrend because of its LOWER HIGHS (LH) and LOWER LOWS (LL) formations.

Finding a trade to join the downward trend is just the same with how I explained in the uptrend. 

That steps would still be going to the 4 hour time frame and look for the set up there.

When you see a trend like this, be sure that you are only looking for a selling set up to make your winning probability more higher.

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Last but not the least, a consolidating market

Click the image to zoom in

A consolidating market looks exactly like this.

 In this example we will be using the EURGBP forex pair  as viewed in the daily time frame. 

We can say that the market is consolidating when price movement can be enclosed inside a rectangle or a square depends on the structure of the price. Or we can also say that the price just keeps on moving in a horizontal way as seen in the above image. 

Unlike the downtrend and uptrend it does not create any higher highs and lower lows. The market just seems to be in equilibrium.

What does it indicates when prices are just moving in this sinusoidal way?

 Well in my own opinion, this just means that the market is indecisive at the moment. But you need to watch out for this because usually when the price broke from its consolidation it will continue moving towards the direction it broke out as I will show you later on.

So how do I trade or plan my trade in a consolidating market?

 

I don't want to complicate my life. So the way I trade this kind of market is still the same with how I traded the uptrend and downtrend.

Let's take a look at this image

Click the image to zoom in

This how the EURGBP consolidating market looks like when zoomed in the 4 hour time frame.

We need to look for a strong and solid set up here so that we can join in and trade the consolidation.

As you noticed, we have here a strong signal that the price would go down as highlighted and numbered by 1, 2 and 3. A combination of an engulfing candle and a pin bar candle was formed.

Lets assume that we have entered a short trade after the bearish pin bar formation which is labeled 3.

Now see what happened to the market after we executed a bearish trade.

 

 Click the image to zoom in

Woaahh! 

The market just crashed after that bearish pin bar and bearish engulfing candle combination formed.

Noticed also that the second bearish candle after our entry closed below the consolidation. The one that I encircled. Which to me suggests that the consolidation is over and the market would then be going down and that's what exactly happened!

To summarize the three movements of the market

• Uptrend Market - The price movement is going upward. A series of higher highs and higher lows was formed in the market.

• Downtrend Market - The exact opposite of an uptrend. The price movement is going down. A series of lower highs and lower lows was formed in the market.

• Consolidating Market - The price movement of the market is bouncing around a support and resistance ( which I will be writing next ) line almost equally.

This ends the first part of the six article series about the basics of technical analysis especially made for beginners trader. Keep practicing and keep learning until you get it right.

Until next time, bye for now!

Don’t Bother Trading Forex If You Don’t Have A Trading Plan And Not Willing To Think Long Term

Did you know that 90% of traders fail and only 10% are profitable?

If not then you’re in for a treat because I had no idea about this when I started.

I learned it the hard way, took me several accounts before I did my research and stumbled upon this shocking statistics of winners and losers.

Wonder why there’s such a big difference between the winners and the losers?

It’s all because of the wrong expectations of the people about forex trading

They thought it’s easy and doesn’t need a trading plan; they thought it’s a quick rich scheme and would give them fortune in just a short period of time.

The scenarios are always somewhat like this:

Beginner trader sees a random pin bar and traded it. The market immediately take out their tight stop loss. They got angry and emotional, want to take revenge on the market took another trade with double the leverage and still became a losing trade.

Or

Saw a random engulfing candle and took a trade. Luckily won the trade and become over confident. Here comes a pin bar formed, took that set up and opened a trade but now with double the leverage because he came from a winning trade and he is full of confidence that's why. The result a fail set up and a losing trade. Now become emotional and try to find a new set up to get back the losing trade. While being emotionally driven, one cannot think logically and the result would be a wipe out account balance.

Most of the people just simply don’t know what they are doing. They think they know what they are doing but I’m telling you they don’t.

Perhaps they know the basics of price action like the support and resistance; maybe they know how to recognize pin bars and engulfing candles; perhaps they know how to use technical indicators like moving average, RSI, MACD and etc. But still they wonder why they are still not profitable? What’s lacking?

They failed to realize the need to integrate all of the knowledge into a trading plan/strategy for them to have an edge in the market.

The successful 10% are successful because they follow strictly a trading plan and trading strategy which gives them the edge.

Be like them, model them; apply all the things that you have learn so far: basic price action, basic use of technical indicators, fundamental factors, money management, trading psychology and create a trading strategy base on it.

The trading plan and strategy will act as your edge in the market

If the criteria in your trading plan is met that’s the only time you take a trade, if it doesn’t then standby and just do nothing. Eliminate the fear of missing out a day without executing a trade.

Don’t pressure yourself on thinking that you should always have a trade open.

By not doing anything you are actually winning.

Forex trading for me is a game of defense and not offense

Stop wasting your precious energy by trying to join all of the markets movement.

To avoid over trading, one simple solution is to wait for your set up which is based on your trading plan to show up. 

That’s the surest way to beat the market.

Use this proven and tested strategy consistently and the result will be astonishing. You will see that your account balance will gradually increase.

It takes time. Great things take time. You need to be disciplined and stick with your edge at all times. That’s what professionals do. That’s why they are called professionals because they knew it’s the only way to become profitable consistently.

 Once you have your trading plan/strategy another challenge will emerge

Do you have what it takes to strictly follow this trading plan?

There are times that the markets are quiet. No trade set ups formed in a week. Can you handle these times and still stick to your strategy?

There are times that your strategy will have setbacks and you will have consecutive losing trades. Can you handle these setbacks and not resort to finding another strategy?

There are times that you will feel your gains are quite too small which will make you think of doubling your leverage. Will you be able to maintain your money management plan?

Forex trading is not a quick rich scheme. It takes time to become profitable.

Successful traders are turtle traders. They have a steady but surely approach in the market.

We should model their mentality; We should learn how they see the big picture by taking it slow and steady.

To give you an idea, here’s how most of the professionals think when they say long term.

Let us say that they have a 10k USD capital. What they do is they create a trading plan/strategy which aims for a certain amount of percentage gain each year. And by sticking to this plan they can predict how much they could possibly earn in a decade.

Let us assume that they have created a trading strategy that will give them 50% gain of the capital in a year which means roughly gives 4% to 5% returns every month. This is how it goes to them.

• 1st year = 15,000 USD
• 2nd year = 22,500 USD
• 3rd year = 33,750 USD
• 4th year = 50,625 USD
• 5th year = 75,937 USD
• 6th year = 113,906 USD
• 7th year = 170,859 USD
• 8th year = 256,289 USD
• 9th year = 384,433 USD
• 10th year = 576,650 USD

Almost 600k USD in 10 years with only 10k USD starting capital. That’s how it works to them. By following strictly a trading strategy and thinking long term one can become profitable.

We are only assuming here that we have a 10k capital with a 50% gain every year. 

What if you have a 50k capital how much could you possibly earn?

That’s why I could say that trading is a game of the wealthy to make them more wealthy. Your capital matters if you want to make big gains. 

The amount of success we are going to make is directly proportional to the amount of risk we are going to take. Be realistic on your expectations if you have a small capital.

But anyway the point here is that we should all be thinking like the professionals.

And acknowledge that majority did not succeed because they fail to recognize these two important aspects in trading which is creating a trading plan/strategy and thinking long term.

The big question now is do you have a trading plan/strategy for your long term goals?

 If not then just forget about trading because you will just loss money if you will force yourself into it. 

See you till next time my friends!

The Only Japanese Candle Stick Formations That I Watch Out For In the Market

I know you will agree with me when I say that we are living in the age of information or should I say the Internet Era. Where information is very accessible anywhere you go with just a click of a button.

In this age whatever we want to learn we can learn; but because there’s so much information out there, so much option to choose from we tend to hop from one subject to another without even learning thoroughly yet the first subject that we have chosen. What I wanted to imply here is that we become jacks of all trades and we all know this comes with this figure of speech.

“Jack of all trades, master of none.”

I want to talk about this and apply it to forex trading and mainly focus on the candle stick formations.

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So why do we need to master and focus on certain Japanese candle stick formations?

The answer to that is because candle stick formations serves as an indicator of the psychology of all the participating traders. It’s our clue of whether the BULLS or the BEARS won at that particular time frame.

Perhaps all of the traders, including me will only decide to take on a trade when a certain formation of candle stick patterns formed. This is called the trade set up candle or for me candles, which I will be sharing later on.  I hope you will put this in your mind, to trade only when your trade set up candle/s formed and don’t trade when it doesn’t. One big benefit you can get from following this is that you will somewhat avoid over trading which is one of the biggest mistake a beginner forex trader would do.

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  What are my trade set up candles and the logic behind it?

This candle set ups that I'm gonna show you is the skeletal system of my forex trading strategy. Without this specific formation no trades will happen for me. I wait and wait and wait patiently until this formation shows up. I’m like a soldier with two guns here, I have a machine gun and a sniper rifle but I choose to use the sniper rifle and target those big bosses which equals to the big moves in the market. I hope you get my point here. So here we go!

Fist trade set up candles: Formation of at least two engulfing candles

To those who don't know yet, lets define first what is an engulfing candle.

An engulfing candle is a candle that ENGULFS or EATS wholly the body of its preceding candle. I want this to be very clear because a lot of people get confused with this formation, an engulfing candle is the candle that engulfs the body of its "PRECEDING CANDLE" as you will see in the image below.

I’m in an aggressive mood here when I say that at least two engulfing candles. Because usually I wait for a third engulfing to form before I hop in. Sometimes only two engulfing candles form but if the structure of the price action is pretty convincing I will sometimes trade that set up.

Just click the image to zoom in...

 As you noticed in this example, EURGBP 4 hour time frame. Ive highlighted 7 engulfing candle formations here which to me signifies that the momentum here is bullish.

Why these? Why I wait for these candle formations to show up? Whats the significance of this?

Click to enlarge the image and you will see that based on this candle stick formations you will understand who dominates the market. Every bullish engulfing candles indicates that the buyers dominated or overpowered the sellers every time the price tries to go down. If these engulfing candles keep on showing up in the chart what does it indicates? What does it resonates? What does it tries to say to you? Its very obvious already, eventually the price would go up!

Another good thing about this kind of set up is that it gives you a lot of time and chances to ride it before it decides to go up. 

In this case I could have had decided to join the trade after the 3rd engulfing occurred. Then a 4th engulfing shows up, another opportunity to those who are late and a 5th shows up another one for the late commers. Mind you this is in the 4 hour time frame. So each candle here is equivalent to 4 hours, if you are just trading part time there's no reason you could not join this trade.

Traders with the same strategy could chose to ride this trade with the pullback which is the 6th and 7th engulfing, for me its still a valid signal or set up.

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Lets take a look at another forex pair as an example.

 

Click the image to zoom in..

This is in the AUDUSD pair. The best time to join this trade would be the formation of either the number 4 or number 5 engulfing candles. 

In this case here, the 4th engulfing candle is a 3 candle combination in which when you add up the last two candles it would end up engulfing the first one. I hope you grasp what I'm trying to say here, its just basic actually.

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Second trade set up candles: Combination of engulfing candles and pin bar

We already defined what is an engulfing candle, now we need to define what is a pin bar candle since we need to understand it for this set up.

A pin bar is a candle which has a short body and long wick or tail. Its very easy to recognize because it looked like a pin.

Pin bar formation means price rejection in the market, sometimes it indicates reversals of momentum. It has the same logic behind engulfing candles it just that pin bars are quiet more obvious to notice, especially the long tailed once.

Lets take this example below:

 

Click the image to zoom in..

This set up formed in the USD/CAD forex pair in the 4 hour time frame. Actually, I was able to bank 1:4 risk to reward ratio with this set up and I made a live recording here in my YouTube Channel. Click here if you want to see the live trade and don't forget to subscribe :)

If the engulfing candle formation is already a powerful set up, how much more when you combined it with the pin bar?

Is it a 100% percent guaranteed that this set up will work? Of course not, but you can have my word that the win rate of this set up is more than 70%.

After the 4th signal formed which is the engulfing candle, I waited for a pull back before I took my entry. As you can see it formed yet again another engulfing candle which is labeled 5, before the price moved bearish and never looked back. This is what I love about having this FOREX STRATEGY IN THE 4 HOUR TIME FRAME, it gives you so much time to see this opportunity for an entry before it manifests.

I'll show you again another example of this candle stick formation set up in the 4 hour time frame.

Click the image to zoom in..

Formed in the USDJPY 4 hour time frame. This time its just 3 signals, but still leads to the same result; price movement reacted to the combination signal and became bearish. Here its all bearish engulfing candles with number 2 being an engulfing at the same time looks like a pin bar because of the rejection tail. There are so many set ups like this in the market and its very easy to recognize also. In this kind of set up I set my risk to reward ratio to 1:3, depends really on the price structure. Safest place for the stop loss would be above the engulfing candles.

That's it! These are the only Japanese candle stick formation that I always looked for in the market. I only trade this kind of set up. If they don't show up then I wait. Out of the 27 forex pairs that I monitor I could say that at least once a week a set up like this comes out.


 In trading the currency market you need to create rules of engagement, and not just blindly taking trades without logic behind. That is the main thought of this article. If you are really serious of becoming a successful forex trader you must learn how to think like the 10% and be disciplined always on taking trades. Be like a sniper and take only trades with high probability of winning.

If you think my set up looks good, looks profitable then feel free to use it :)

If you have some questions in your mind comment below and I will try to answer them ASAP.

See you soon my friends!

"It does not matter how slowly you go as long as you don't stop" - Confucius

Big Mistakes That I've Made in The Beginning Days of Undertaking Foreign Exchange Trading

I’ve made countless mistakes way back in my early days of doing foreign exchange trading. Nobody taught me how to trade currency and I had no clue about any forex trading platform to use. That’s why I did my own research, I watch a lot videos, read a couple of books and blogs about it. After trial and error and all those mistakes that I’ve made I came to realize that experience is the best teacher. I want to share with you some of the lesson I’ve learned in this post. I will try to explain all of the major mistakes that I have encountered when I started my forex trading journey.

Very optimistic to go live trade after seeing positive gains in a demo account with only less than a week of practice.

 This is my first mistake when I started trading. As a beginner, I jumped in directly to trading using real money and guess what happened to my first trade? I won! Not that I knew what risk and reward ratio is but I closed that trade that time with a positive gain. Apparently that’s what they call the BEGINNERS LUCK! After that trade, my luck just seems to run out in every trade I took and my first account is finished in less than a week.

What I’d like to point out here is that I was very excited about forex trading that I could only think of the reward, positive side of it and I was very naïve, blinded to the consequences when I didn’t get it right. The hardest part of it when I think about it now is that I could have avoided those losses if only I am more familiar about the trading platform that I used. Such as the movement of the spread during a news event, during end of day, during weekends, volatility and proper usage of leverage.

My suggestion to all aspiring forex trader would be to get to know first your trading platform. Observe what happens to the market and the spreads during news events, during end of day and end of the week. If only I had put more time trading in my demo account perhaps I would noticed those things and avoided those mistakes. So guys don’t take for granted trading using a demo account. At least try playing with it for a month or two.

I live in Asia, that’s why I traded during the Asian session which should be a big NO NO

What I mean here is taking a trade during a time when the open market is the Asian markets like (Australia), Japan, Singapore and China. Don’t get me wrong here. I know there are a lot of profitable forex traders out here who trades during the Asian session. But in my experience I had a very slim chance of winning during these sessions.

Most of the fake moves in the market usually happen during the Asean market. Like for example, a certain pair went up during the said session but suddenly went down when the Western markets opened. This is what they called the “FAKEY” move of the market. The market fakes the traders, prices seems to go to one direction and suddenly changes to the opposite.

So how do you avoid this? Well just don’t trade during these hours and for me since I traded the 4 hour time frame it’s the best time to plan my set ups and wait for pullbacks to enter trades.

Discovering ForexFactory and trading the news every now and then

I know! I just know that you will eventually discover this website and you will learn that news events will affect the price movement of the forex pairs. You will know that during this scheduled time, especially the RED FLAG NEWS, prices are gonna be wild.

As I was still learning forex as a beginner, this is what I often do. I looked at the scheduled news and put on an order on it by just randomly guessing which way the market goes. I hoped for positive news when I traded long and I hoped for negative news when I go short. What I did here was very stupid; I entered a trade without any reason behind it. And as expected the result will almost always be a disaster! Deposit time again.

So how do we avoid this mistake? If you have open trades prior to the news events is no problem. Just don’t put orders during the scheduled event. Don’t be greedy; eliminate the thinking that you will miss that possible big move which should be a big profit for you. Always think about capital preservation.

 

Not following a standard risk to reward ratio when executing a trade

I never knew that I should plan on the amount that I would bet during those time when I traded the currency pairs. It was only when I started reading and watching youtube videos of successful forex trader that I understood it all. You know you just don’t bet randomly, there are systems to this. Most advice would be to risk only 1 % to 3% of your capital.

Let’s say you have a 100k USD capital. And you had a 1:3 risk to reward ratio strategy. That means you only need to bet 1k-3k USD or 1%-3% USD of your account every trade and expect to win 3%-9% gain if ever you are right. The reason for this is that you can easily calculate your gains and losses in the market. Also, it give you control over the amount of money that you are comfortable losing in each trade without making you stress and emotional.

I believe having a good risk to reward ratio plan is essential for capital preservation. As what I have said before, being on the defensive for capital preservation should always be the priority of a beginner forex trader.

Unclear forex trading strategy which leads to over trading and over leveraging

Beginners in forex trading most of the time have no preplanned trading strategy upon entering the game of currency trading. Perhaps they have the idea of support and resistance, bullish pin bars and bearish pin bars but that knowledge is not enough.

You can’t just jump on a trade every time the price is in a support or a resistance zone. You can’t just take on a trade just because a bullish or a bearish pin bar formed in the 4 hour time frame or any time frame in that manner. Another thing also is the consistency of the amount of risk and reward ratio in every trade should be look upon. Every beginners need to have a well-defined trading system and rules in every trade that they would take. A systematic approach should be involved in it.

Find a trading system that fits your personality and lifestyle. When you are doing it part time perhaps you can try trading the 4 hour chart. If you really don’t have the time to look at the chart every 4 hours then you can trade the daily chart which I think is the best time frame for starters.

Leveraging for me is a very good thing because I started with small amount of capital. But usually this is the main cause why most of the traders burned their capitals to the ground. The emotional and the psychological aspect of trading plays the biggest obstacle that we all need to overcome. One example of this is when I loss a trade and I jumped right back in the market, this time using twice the amount of leverage in the hope that I can earn back my losing trade which eventually resulted to another loss. But this time the loss was huge, twice the amount of the loss that I was trying to recover. Imagine what would you feel after this happened to you. It’s really disappointing but I don’t know why you just can’t stop trading, it’s like you got addicted to the market even though you are losing. This is gonna be another topic about trading psychology which I plan to write soon.

You cannot control the market, you can only control yourself so don’t try taking your revenge in the market after a frustrating loss. Because at this moment you become driven by your emotion so much and cannot think logically anymore.

Fear of missing out the opportunities or what most traders called “FOMO”

The best example I could give to FOMO is when you saw a set up and you say to yourself this is the best set up in the world, It’s the best opportunity I have ever seen, I need to take it. I need to take it! But the price already moved a little bit further from the set up because you just noticed it and yet you still chase the price and took the trade with a very tight stop loss and eventually the price pulled back and stopped you before it burst out going to your desired direction.

Happened to me all the time, which is not good. Later on I came to realize that there is always opportunity in the market and the market is not going anywhere. If I saw a good set up but the price already moved what I do is I wait for pullbacks before I enter or if there’s no pullbacks then I let it be and move on to find another opportunity. There are plenty trade set ups occur in the market every week, there’s no need to chase one single trade.

Jumping from one strategy to another

If you type forex trading strategies in YouTube a lot of videos will pop out. You choose carefully strategy that fits your lifestyle and stick to it. Bear in mind also that all trading strategy has drawdowns so don’t expect to have 100% win rate.

The reason why I made this mistake jumping from one strategy to another strategy is because I felt like the one that I am using is not giving me gains anymore because of my losing streak. I didn’t realize that those are only setbacks and is normal.

To make this clear let’s take this example:

Let’s say you have a strategy that has 70% win rate. So that means in every 100 trade you take you will have a RANDOM DISTRIBUTION of 70 winning trades and 30 losing trades. Since these are RANDOM there is a possibility that you will have a series of winning trades and A SERIES OF LOSSING TRADES AS WELL. That’s why don’t be discourage and think that the strategy that you are using has lost its touch and is not working anymore and I need to look for another strategy that works.

My advice here is to stick to a strategy for at least 3 months. And when this strategy is not giving you gains then that’s the time that you’ll have to find another one.

I want to end this post with an inspiring quote in the hopes that you will not give up no matter what happens. Don’t be afraid to make mistakes because that’s where we grow.

Bye for now and I’ll see you again my friend!

“Every artist was first an amateur” - Ralph Waldo Emerson