Forex Trading Articles

TRADING TIPS TO HELP YOU BECOME A BETTER TRADER
Part II

Forexmentor Team
© 2007, Currex Investment Services Inc.

Jan 3, 2007

We would like to help you become a better trader by providing you with trading tips that could both save you money in avoidable losses, and potentially lead to more profits.

16. Channel lines have measuring implications. Once a breakout occurs from an existing price channel, price usually travels a distance equal to the width of the channel. Therefore, the trader has to simply measure the width of the channel and then project that amount from the point at which either trendline is broken.

17. The larger the pattern, the greater the potential. When we use the term “larger”, we are referring to the the height and the width of the price pattern. The height measures the volatility of the pattern. The width is the amount of time required to build and complete the pattern. The greater the size of the pattern, that is the wider the price swings within the pattern (the volatility) and the longer it takes to build, the more important the pattern becomes and the greater the potential for the ensuing price move.

18. The breaking of important trendlines. The first sign of an impending trend reversal is often the breaking of an important trendline. Remember however, that the violation of a major trendline does not necessarily signal a trend reversal. The breaking of a major up trendline might signal the beginning of a sideways price pattern, which later would be intedified as either the reversal or consolidation type. Sometimes the breaking of the major trendline coincides with the completion of the price pattern.

19. Long term charts provide important information regarding long-term trends or cycles. The trader can get a correct perspective regarding the real direction of the market in the long run, the strength or direction of the current trend occurring within that trend, or the possibility of a breakout from the long-term trend.

20. Common points of the reversal patterns:
- The first signal of an impending trend reversal is often the breaking of an important trendline.
- The larger the pattern, the greater the subsequent move.
- Topping patterns are usually shorter in duration and more volatile than bottoms.
- Bottoms usually have smaller price ranges and take longer to build.

21. The head-and-shoulders formation is confirmed only when the completion of the three rallies and their reversals is followed by a breach of the neckline. The failure of the price to break through the neckline on closing prices basis puts on hold or negates the validity of the formation.

22. The flag formation is a reliable chart pattern that provides two vital signals: direction and price objective. This formation consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat.

23. When the oscillator reaches an extreme value in either the upper or lower end of the band, this suggest that the current price move have gone too far, too fast and is due for a correction of some type.

24. The oscillator is most useful when its value reaches an extreme reading near the upper or lower end of its boundaries. The market is said to be overbought when it is near the upper extreme and oversold when it is near the lower extreme. This warns that the price trend is overextended and vulnerable.

25. A divergence between the oscillator and the price action when the oscillator is in an extreme position is usually an important warning.

26. RSI is plotted on a vertical scale of 0 to 100. Movements above 70 are considered overbought, while an oversold condition would be a move under 30. Because of shifting that takes place in bull and bear markets, the 80 level usually becomes the overbought level in bull markets and the 20 level the oversold level in bear markets.

27. The first move of RSI into the overbought or oversold region is usually just a warning. The signal to pay close attention to is the second move by the oscillator into the danger zone. If the second move fails to confirm the price move into new highs or new lows, a possible divergence exists. At that point, some defensive action can be taken to protect existing positions. If the oscillator moves in the opposite direction, breaking a previous high or low, then a divergence or failure swing is confirmed.

28. Stochastics simply measures on a percentage basis of 0 to 100, where the closing price is in relation to the total price range for a selected time period. A very high reading (over 80) would put the closing price near the top of the range, while a low reading (under 20) near the bottom of the range.

29 . Support and resistance are the most effective chart tools to use for entry and exit points. For purposes of placing stop loss, support and resistance levels are
most valuable. Support is a price level that a currency pair has trouble breaking through to the downside. You will often hear support referred to as the floor of the currency pair. Resistance is a price level that a currency pair has trouble breaking through to the upside. You will often hear resistance referred to as the ceiling of the currency pair.

30. Support and resistance levels are often self-fulfilling prophecies. The only reason it serves as a support or resistance level is that thousands of investors say it should, and it acts accordingly. If enough investors predict that a certain price level will act as support or resistance, they can fulfill their own prophesy by buying or selling the currency pair when the price reaches the prophesied level.

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