Forex Trader Tips

What about Fundamental Analysis?

Most of the time we talk about Technical trading strategies and systems. The On Target Trading System and other trading systems used and taught by myself, Richard Ottley, use technical analysis exclusively in making trading decisions. What about Fundamental Analysis? Does it have the potential of creating consistent profits over time? Fundamental Analysis is the study of the market strengths and weaknesses. Due to the global environment of the Forex, Fundamental Analysis is more focused on news catalysis’s than the strengths and weaknesses of the currencies themselves. If you used fundamental analysis to trade stocks you would spend a great deal of time focused on the make-up of the company, its CEO, earnings per share, and future product line. The same isn’t as true with Forex, you spend more time focused on the changing of interest rates than anything else. It is impossible to teach Fundamental Analysis in a single paragraph, but if you desire to explore further this trading technical my suggestion is to start by taking a look at the current news events of each day and spend some time seeing how the market reacts to the price fluctuations. Be careful as price can move on a dime with one single word change in the news. One of the best free sources on the web is www.forexfactory.com. Even though I don’t trade on fundamental analysis I still from time to time like to see what the other guru’s are talking about. This is a great resource to hear the buzz of the market. Check them out and happy trading.

Making Money with Support and Resistance Levels - Part I

“Look both ways before you cross the street,” is a phrase that we all heard as a child and now is a phrase that I say constantly to my own children. Why do we say this? Because we want our children to look for the potential dangers in front of them as well as those behind them. The same principle can be said with the forex market, but instead of looking for cars we are looking for support and resistance lines. Levels of support and resistance are what gives the markets shape and form. It is what keeps price from just drifting to the ends of the earth. Now to understand why these levels create shape to the markets you need to understand how they came about. We will cover the reasons why in this months tip and we will cover the what’s and how to make money from support and resistance levels in our next months tip.

First, the why. Support and resistance levels are created by at least one of two major things: volume and/or the mental phenomenon. Volume is the major cause of these levels and creates the strongest level of the two. When price is either bought or sold in a high volume amount at a certain price level, that level now becomes either support or resistance (support if price was bought up or resistance if price was sold down). Since a large body of trades entered the market at that price, lets say 1.2345, if price returns to that area, price is usually held by those initial traders through additional position taking. Traders add additional positions to hold the market from going against them. In addition, other traders that missed out on the opportunity to get in from the beginning, now jump in and follow the crowd. Hence, price is maintained beyond the initial entry level. The greater the volume at a given price, the stronger the level will be. Initial volume levels are strong, but they do tend to weaken overtime as traders close out positions for profits. These high volume levels are usually generate through news catalysts and that is why we see a lot of support and resistance lines initiated at 5:30 AM, 8:30 AM, and 9:30 PM EST as these are the times when most major news releases come out worldwide.

            Our other explanation for levels of support and resistance is the mental phenomenon. We are taught from an early age to recognize that the world is made of numbers from price tags to how much we weigh, everything is associated with a number. Just like in sales, where a number ending in .99 makes the product seem less expensive then the even number .00, even though it is only one cent lower, the same goes for the forex. The mental numbers in the forex market are those even-whole numbers like: 10, 50, and 100. Price is going to find some form of support or resistance at these number levels as traders tend to respect price as these numbers are approached. Of course the larger the even number the better (Ex. 1.3000 or 2.0000). Whether there was volume at these levels or not you will find that price tends to hold for a time at these levels.

Making Money with Support and Resistance Levels - Part II

Looking Both Ways Part 2 – Last week we talked about how support and resistance lines are create. Now let’s explore a few ways to make money with these levels.  

The first is Profit Targets. The majority of traders trade on emotion and close their trades when, “They have made enough money.” The problem with most traders is they have never made enough money. Just like Las Vegas, they stay in the game too long and give back all their profits to the house. Using support and resistance lines as levels to take your money off the table is a consistently winning strategy. What I like to do is to look for a close level of support/resistance for my Target 1 and then look at a further away support/resistance for Target 2. Once I hit Target 1, I take half of the lots off the table realizing profits, and then I allow the other half to ride toward Target 2. To conserve capital and eliminate the risk of loss, I will bring my stop loss up to breakeven or even set-up a trailing stop. Remember when you are in Buy trade you are looking for the next level of resistance to place your targets and if you are in a Sell trade then you are looking for the next level of support. 

The second way to make money with these levels is through money management. This actually comprises two aspects: 1) stop loss positioning and 2) Lot Sizing. A smart stop loss is one placed below/above a key level of support/resistance. If you are in a Buy trade, place your stop loss 5 – 10 pips below the next level of support that is below your entry price. If you are in a Sell trade, you are going to place your stop loss 5 – 10 pips above the next resistance line. By doing this, you actually hire other world traders to protect your position. If price approaches your stop, other larger traders will step in to maintain price as explained in our last week’s article. Lot Sizing is another form of management that can be enhanced with these support/resistance levels. It all has to do with risk. If your profit targets compared to your stop loss are not large enough then your risk vs. reward is not exactly in your favor. Instead of trading and missing the trade set-up, minimize your lots to reduce risk. Vice versa, if the risk vs. reward is in your favor or Target 1 sits at a place that has a high probability of being reached, then you can take on more risk and increase your lot sizing and profits.

Make sure that you look both ways before you enter a trade. Look behind you for potential risks that may keep price from going where you think it will go and also look for shelter for a solid stop loss. Look ahead of you to establish profit targets where price will most likely go. Support and Resistance Lines are the railings of the markets. Lean on them, trust them, and use them to better your trading.