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Thread: Post of the Day

  1. #1
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    Post of the Day

    On this thread you can get a sneak peak into DailyFX's Education Department. Every day we will be sharing an actual post from one of our three courses (FX Power Course, Trading the Majors, Day Trading Course). If you have questions about any of the content presented in this thread feel free to ask. We are here to help!

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  2. #2
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    Setting Limits to Capture Profit

    Subject:

    Setting Limits to Capture Profit

    Student’s question:

    In the first chart Daily for 6 months, I found that it is a downtrend and I drew a down trendline and in the other chart 15 minute I opened a selling position and I put the stop above the resistance line and the limit order around double the stop. Is it good?

    But I found in this case the trend still going down and I felt that if I didn’t get out on this limit, maybe I will get more profit…what is the answer now…get out at the limit or shift it down?

    Power Course Instructor Response:

    You did a good job of determining the trend with the Daily chart and then “fine tuning” your entry based on a smaller time frame chart…good work.

    I would suggest, however, not to use charts smaller than a 1 hour time frame. The data on minute charts will very often be skewed by market noise and can provide misleading information.

    To capture more of a move without sacrificing profit, a trader can do a couple of things. Once the trade reaches your predetermined limit, move the stop down to that level. By doing so you will lock in at least that amount and you are positioned to capture more of the move should it continue. Another similar strategy would be to open multiple lots instead of only one lot. When the trade reaches the limit, close out half of the lots and then move the stop to breakeven (entry price) on the remaining open lots. You will then have assured profit on the first portion of the trade and the worst that can happen on the remaining position is a breakeven. Should the trade continue to move in your favor, the stop can be trailed as the trade progresses.
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    Last edited by Richard Krivo; 08-26-2008 at 01:32 PM.
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  3. #3
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    Trading in the Direction of the Trend

    Subject

    Trading in the Direction of the Trend


    Student's Question

    Does this sound okay?


    Power Course Instructor Response

    You definitely have the right idea here.

    Since the pair is in an uptrend, and the price action is currently at support, a long position could be taken with a stop just below the lower channel line.

    Your thought about waiting until price reaches resistance is sound but that level is about 250 pips away. If a trader chose to enter now, the stop would be very close to the entry level providing a very solid Risk Reward Ratio. If the trade moved in your direction, to the upside, those 250 pips could be captured prior to resistance being reached. If the trade moves against you, with tight stop, sensibly placed, any loss would be quite minimal.
    รูปขนาดเล็ก รูปขนาดเล็ก Post of the Day-post.jpg  

    Last edited by Thomas Long; 08-27-2008 at 02:35 PM.
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  4. #4
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    Placement of Stops

    Subject:

    Placement of Stops


    Student’s Question:

    Here is the chart for the NZD/USD. I would place a stop just above the hammer's high for the day and enter possibly near the low.


    Power Course Instructor’s Response:

    You definitely have the right idea about taking the trade in the direction of the trend on the Daily chart...well done.

    However, since the pair has quite recently traded just above the wick of the candle you suggest, I would recommend placing the stop just above the wick of the candle immediately to the left and marked in red.

    Placing the stop there, while compromising the risk reward ratio of the trade a bit, will increase the probability of a successful trade by placing the stop in an area where price has not ventured since the beginning of June. A stop out can still occur, but it is less likely.
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  5. #5
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    Type of Trading Style

    Subject

    Type of Trading Style


    Student's Question

    I read all the time about "aggressive" in contrast to "conservative" traders. I simply have no idea what I should be! Could you maybe comment on contrasts between these two "types of traders". How should I behave? What brings more profit or what preconditions or situations should I look at to know if I should act agressive or conservative?

    Power Course Instructor's Response

    Much of this will be determined by your own personality and your emotional composition. How do you tend to be right now? Outside of trading, do you tend to take the risky path more often or do you go down the conservative path?

    As you go through this course and as you Demo trade you will gravitate toward a style that suits you. You will find yourself feeling more comfortable, more confident trading one way rather than the other. Also, it is not something that has to be decided at the outset.

    Take a look at the grid that I have posted below...this is one way of breaking out trading styles.

    At the top of the grid you will find the more risky trader while at the bottom you will find the more conservative. Clearly other things have to be considered, but this will give you a start.
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    Last edited by Thomas Long; 09-02-2008 at 09:37 PM.
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  6. #6
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    Drawing Support and Resistance Lines

    Subject

    Drawing Support and Resistance Lines


    Student's Question

    I am not certain about these lines but here goes.


    Power Course Instructor's Response

    Keep in mind that when drawing Support and Resistance lines, the lines can go through wicks but they cannot go through the bodies of the candles themselves.

    When we discuss support and resistance, think of a room with a floor and a ceiling.

    The FLOOR is SUPPORT and the CEILING is RESISTANCE. A large ball bouncing between the FLOOR and the CEILING represents PRICE.

    When PRICE (BALL) hits the FLOOR (SUPPORT) it bounces UP. When PRICE (BALL) hit the CEILING (RESISTANCE) it bounces DOWN.

    When the PRICE (BALL) breaks through the CEILING(RESISTANCE); the old CEILING (RESISTANCE) becomes the new FLOOR.

    See the chart below for clarification.

    The red resistance line is the one we would want to observe as it does not pass through any candle bodies and it has been tested (touched) several times for confirmation.

    On the chart submitted, since the pair is in an uptrend, we would want to buy at support (as you suggested) with a stop just below that level and then close the position profitably once the resistance level is reached.
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  7. #7
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    Divergence

    Subject

    RSI Divergence


    Student's Question

    Is this a proper example of divergence on the eurjpy 4H chart? If yes, would I take from this chart that the downward momentum is weakening, and to just tighten my stops, and not to put any new short trades on at this time? Is this all I would get from the chart, or is my next plan of action to see if I get a candle formation, or trend line break that suggests a buy?


    Power Course Instructor's Reply

    Yes. This would be an example of divergence...price is making a new low while the RSI is not. You are correct in saying this indicates that downward momentum is subsiding. Given this scenario, some traders would tighten their stops, some may elect to close out a portion of their shorts right now and tighten the stops on the remainder while others might cover (close) all of their positions right now.

    To gain more from this chart, personally, I would check out two other charts on this pair: the Daily and the 1 hour. What I am looking for is how is this 4 hour chart playing into the direction on the Daily...or is it? Then, what does the 1 hour look like...is it coming into line with the Daily? Looking at multiple time frames on a pair will provide a more complete view of exactly where the pair is in its overall trading cycle.

    Keep in mind that we want to trade in the direction of the trend on the Daily chart as these will be our highest probability trades.
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  8. #8
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    Time Scale for Support and Resistance Levels

    Student's Question:

    What time scale do you recommend to set up support /resistance for day trading?


    Power Course Instructor's Response:

    In our opinion, whether Day Trading or Position Trading, the best procedure to find a pair to trade (and identify significant levels of Support and Resistance) is to check the Daily chart to locate a strong trend in either direction.

    Sometimes Day Traders will resist checking a Daily chart. We find, however, that no matter what your trading style, being aware of the prevailing trend that is influencing the pair certainly cannot hurt.

    Support and Resistance levels that appear on a Daily chart, for example, will have more significance than those that appear on a minute chart. Also, if you see the same S/R levels that appear on a Daily chart or a 4 hour chart also making an appearance on, say, a 15 minute chart, those levels are to be respected as they are quite strong and will have an influence on how the trade plays out.

    Using Multiple Time Frames to identify the trend, time an entry and identify levels of Support and Resistance is a solid way to analyze a currency pair.
    Enroll in our online DailyFX Course today and get personalized instruction from our team of expert traders 24 hours a day. We have taught over 25,000 students and in our online courses in the past. The new DailyFX Course has nearly 600 minutes of content delivered via video so you can learn at your own pace. Join the instructors in live webinars where they will show you how to use the highlighted tool in current market conditions. Click here to get more information.

  9. #9
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    MACD Exit Strategy

    Student's Question:

    This is an example of trending market. However this is where I would have a problem as to where to take profits, Do I trust MACD or RSI? in this case it seems RSI signal the take profit before MACD when it crossed below overbought line. I like MACD more espically when pairs are trending, What can you suggest in this type of situations?


    Power Course Instructor's Response:

    Nicely done. Waiting for price action to come back to trendline support for a long position is a higher probability way of trading...good work.

    All indicators, by definition, are lagging. They will lag behind price action to a greater or lesser degree. Therefore, the signal to enter or exit a trade will not occur until after the optimum moment has passed. Since you like MACD, many traders using it will use the histogram bars since they move in a more direct relationship with price action. (Note the example on the chart below.)

    Keep in mind, however, that the more quickly an indicator signals an entry or exit, the less the likelihood that the move will be sustained. The longer an indicator takes to signal an entry or exit, the greater the potential that the move will be continued since it is based on a larger number of data points. More speed equals less accuracy...more accuracy equals less speed.
    รูปขนาดเล็ก รูปขนาดเล็ก Post of the Day-usdcad-sept-19.jpg  

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  10. #10
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    Selling on Rallies/Buying on Dips

    Student's Question:

    What exactly is meant by selling rallies with example if possible?
    thank you


    Power Course Instructor's Response:

    In a downtrend, each time the pair retraces or "rallies" (see chart below), that would be another opportunity to sell the pair. As the pair rallies back up a bit, you are able to sell it or short the pair at a higher price thereby increasing your profit potential as the pair continues its downward move.

    In an uptrend, the opposite would be true. The trader would buy on "dips".
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  11. #11
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    Ranging or Trending Markets

    Student's Question:

    If we are looking at the chart, surely it's nothing too difficult to identify whether the market is in range or trending condition since the chart is representing historical prices. But is there anyway to know whether the market is going to be trending or range bound?


    Power Course Instructor's Response:

    Unfortunately we cannot predict what a pair will do before the fact.

    What we do know, in a general sense, is that markets are either trending or ranging. If they are trending, at some point they will begin trading in a range and if they are in a range, at some point they will begin trending. Once we have identified that a pair is trading in a range, we can trade that range...buy at support and sell at resistance. Once the pair breaks out of the range, then we would trade the trend.

    See the chart below for a visual....
    รูป รูป  
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  12. #12
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    Identifying the Trend on the USDJPY Daily Chart

    Student's Question:

    In the following chart what is the current trend: Uptrend, down trend, or fading downtrend?


    Power Course Instructor's Response:


    In looking at the entire chart, the overall trend is virtually flat (See the chart below for a visual.) The red line connects the opening price on the chart (left side) with the closing price on the chart (right side).

    About mid-March, however, the current bullish trend begins to take shape. At this point, we would be looking for buying opportunities should price action continue to move to the upside off of support. If channel line support is broken, a short position could be taken with a stop just above old support which has now become new resistance.

    The above being said, keep in mind that our primary filter in looking for a trade is to identify the currency pair with the strongest trend on the Daily chart. Since the Daily trend on this pair is flat overall, a recommendation would be to look for another pair to trade with a stronger, more dominant trend represented across the chart.
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  13. #13
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    Range Trading and RSI

    Student's Question:

    The areas of support and resistance are near where I entered the trade and put my stop and limit on the expectation that the resistance line in the middle will turn into a support line. I also checked RSI and made sure that it had just come into neutral position after being oversold. Now, it looks more likely that the trade will be losing. What was wrong with the execution?


    Power Course Instructor's Response:


    First of all, congratulations on entering your trade in the direction of the trend on the Daily chart…that is key.

    When a trader is dealing with a range, ideally, you do not want to take trades in the middle of the range...too much potential for price action meandering around and causing stop outs. I see where you were going with the thought that the "mid line" will become support…and it very well could. However, it is best not to base trades on suppositions of that type.

    Take a look at the chart below for a visual on this trade...

    The ideal "buy points" are noted on the chart. Also, using the RSI in a buying scenario, we would want it to be below 30 and then, to confirm our entry, we would want the RSI to be coming up through 30 for maximum momentum in the direction of our trade.
    รูปขนาดเล็ก รูปขนาดเล็ก Post of the Day-chart-09-23-08.jpg  

    Enroll in our online DailyFX Course today and get personalized instruction from our team of expert traders 24 hours a day. We have taught over 25,000 students and in our online courses in the past. The new DailyFX Course has nearly 600 minutes of content delivered via video so you can learn at your own pace. Join the instructors in live webinars where they will show you how to use the highlighted tool in current market conditions. Click here to get more information.

  14. #14
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    Trade Entry Based on a Doji

    Student's Question:


    On the daily chart for NZD/USD, the most recent candlestick is a Doji at the top of a recent uptrend. The top of the Doji's wick is at .69482. I would put the stop at approximately 20 pips below the top of the wick at .69462. I put the sell at approximately the body of the Doji at .68731.

    What is your recommendation for an entry position?

    I put my buy at .64914, above the bottom support line which is .64414.



    Power Course Instructor's Response:


    Since this NZDUSD pair has been in a strong downtrend lately, we would only be looking for opportunities to sell the pair...go short.

    As soon as the doji closes, one could go short with a stop above the wick on the doji...see the chart below. The point at which you indicate that the trade would be exited is valid since the pair has traded down to that level before.

    Keep in mind that the 5th decimal place in this (and other) currency pairs is a fractional pip...it is not taken into account for the calculation of stops and limits. So, if we were to put a stop 20 pips above the wick on the doji, it would be at .6968.
    รูปขนาดเล็ก รูปขนาดเล็ก Post of the Day-chart-9-24-08.jpg  

    Enroll in our online DailyFX Course today and get personalized instruction from our team of expert traders 24 hours a day. We have taught over 25,000 students and in our online courses in the past. The new DailyFX Course has nearly 600 minutes of content delivered via video so you can learn at your own pace. Join the instructors in live webinars where they will show you how to use the highlighted tool in current market conditions. Click here to get more information.

  15. #15
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    Setting Profit Targets

    Student's Question:


    I have placed the order point, with the stop 50 pips above the high of the double top marking, and the limit at double the size of the range (of the two highs and low in between). Is this the best method for taking profit in this situation?



    Power Course Instructor's Response:


    Nicely done...

    This is a good example of using a double top pattern to enter a trade.

    A nice advantage of trading a double top/bottom is that you can be fairly tight with your stop placement...10-15 pips would be fine and that would enhance your risk reward ratio as well.

    Depending on how many lots you might put on this trade, you can have mulitple profit targets...see the chart below for 1st, 2nd and 3rd profit targets. As each level is achieved, a portion of the trade can be closed (locking in profit) and the stops can be trailed as the trade continues to move in your favor.
    รูป รูป  
    Enroll in our online DailyFX Course today and get personalized instruction from our team of expert traders 24 hours a day. We have taught over 25,000 students and in our online courses in the past. The new DailyFX Course has nearly 600 minutes of content delivered via video so you can learn at your own pace. Join the instructors in live webinars where they will show you how to use the highlighted tool in current market conditions. Click here to get more information.

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