One of the heart-fainting aspects about forex trading is the dynamic movement of the prices. On certain crazy occasions, it can swing up 100 pips, going down 50 pips, and then move back upwards another 100 and so on, within minutes to several hours. Sometimes, it even defy technical indicators reading and is especially true if you look at the GBP/JPY and GBP/USD pairs. They seem to be quite hard to predict.When the price starts dancing swiftly, you are likely to jump in a way if you do not plan your trade wisely, you will end up trapped in various losing positions, especially if you are day trading.
We as traders, especially individual traders who are less informed and handicapped in understanding the market in full swing, are normally bombarded with questions like 'how can I know where the price is going?"
The fact is, you will never know, no one ever will but of course you can calculate the probability by applying both technical and fundamental analysis in your trading approach. Remember the key here is PROBABILITY.
Base on my own experience, there is no hard & fast rules. If someone told you he knows something for sure, he is lying. And don't forget that even a balance approach is not a guarantee for you to make profit. But surely you have better chances.
Since technical analysis is a very broad subject that I assumed most of you already knew (or shall be discussed later separately), I will only mention the 4 fundamental aspects that I personally remember (by heart).
1st fundamental key is to keep in mind that the market is always right. Do not argue with them or else prepare for the consequences.
2nd fundamental thing is to understand that these volatilities are always due to ongoing battles between the bulls and the bears ie buyers vs sellers. The buyers are pushing the price up and the sellers are pulling it down. Clearly the majority will win. If the trend is strong in one way (say bullish), or when a breakout occurs, it shows that the market is in consensus on where the price should be heading.
After times when it starts to slow down, stop moving and showing tiredness, it is likely that the bulls (buyers) are running out of steam. This is the time when most short term traders (like me) start to run away by taking their profits and stay out for a while. These shorting activities on profit taking (and shorting scalpers too) are normally traps that new traders need to be aware of. Some might thought that the market is reversing, hence open a short position and later caught when a new batch of buyers come in and start buying the pairs again. Same applies on bearish trends.
The ways to avoid this strap is to:
1. Calculate the daily range movement. Normally if it is still below 100 pips range, the movement will likely to continue. Otherwise when it stops, it could be a reversal and major corrections. Watch out the 4 hours and 1 hour candlestick interval as confirmation.
2. Be particular with the daily pivot, resistance x3 and supports x3. These lines are the easiest way to plan for entries & exits. Hence if the current movement is yet to reach any of these lines, the best is to stay out.
3. Instead of trying to predict reversals (or picking top or bottoms), join the trend with minimum risk at stakes. Use the 5 minute candlestcik to time your entry well. Enter when there is a sign that market is start buying again (for bullish trend).
3rd fundamental is to analyse the daily news, economic calendars, stocks, crude & gold prices as well as sentiment index readings (available at www.fxcm.com/forex-news-software-exchange.jsp). Sounds too much right? It isn't that complicated actually.
In simple words, you need to emphatize the market, feel it, look at the chart and try to understand what the majorities are doing. If you can't do the above, easiest way is to study the daily bias (up or down) and the 4hr candlestick. These 2 alone speaks for the majority.
The 4th fundamental is to look at the 5 majors and see whether the movement is about USD, JPY, CHF, GBP or EUR. Just check the news. Weakness or strength in dollars, swiss franc, sterling, yen or euro has significant difference in terms of movement correlation. So be extra careful not to blindly buy the EUR/USD pair when you see GBP/USD pair price is jumping up.
Hence, back to the topic on predicting price movement, my conclusions are:
1. There is no hard and fast rules in predicting the price movement precisely. Use various fundamental & technical indicators as your best bet. Beware, surprise do happen at times.
2. Trend is your friend, going against is crazy but joining blindly is lazy. Not all friends are
really friends. At times, friends do trap you. So be extra careful. Analyse the RSI and Stochastic for any Overbought or Oversold signs.
3. Watch out the daily pivot, resistance and support as well as the Daily and 4 hours bias (up or down). These are among the easiest indicators on what's next.
4*. Trading is a life lesson. If you are serious about trading, you must learn and take an educated approach. There are no shortcuts in becoming successful in anything.
Finally, I like to use the word "taking advantage" on the market movement for my trades since normally I do not bias to either side. Both ways are profitable as long as I get it right.
p/s: At times, I always smile to myself, feeling greed everytime I exit a trade, taking half of my TP, and later on looking at the price moving to my original TP, and even went another 100 pips above. (talking about buying). Last time when I sticked to my TP, the market reverse and I lost the trade. So, how? ;))
Btw today is another great day. 177 pips from 11 trades. All winning ! Took advantage on the GU and EU movements.
copyright Ó 2009 by shahrul nizam hussin
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