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Thread: Chart of the Day

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    Chart of the Day

    Here at the DailyFX Education Department we offer our students the opportunity to master technical analysis through three levels study (FX Power Course, Trading the Majors, Day Trading Course). On this thread we will be posting a chart and highlighting the possible trading opportunities that we see. If you have questions about the charts or the analysis feel free to ask. We are here to help!

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    Last edited by DailyFX Instructors; 08-25-2008 at 11:14 PM.

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    What a Trend Change Looks Like.

    Written by Thomas Long, FX Power Course Instructor

    With expectations of a USD trend change rising as we head into the summer of 2008, it might be a good time to look at what this event looks like on a chart.


    The USD/CAD trend change of 2007 was a classic example of what the daily chart looks like when the market moves from a strong uptrend to a strong downtrend. First of all, we identify an uptrend as a series of higher highs and higher lows. The first part of the chart is a classic uptrend where the highs and lows look like a staircase moving up. With every pullback down to a support level, buyers were getting into long positions (buying) to ride the trend up for as long as possible. In March, we saw the change where the market moved down through the previous low for the first time and started to print lower highs and lower lows, which is a downtrend. But it is the point where the trend changes that causes confusion and this chart shows what that change looks like. When looking for a trade, the first step is to find the strongest uptrends and look for buying opportunities or to find the strongest downtrends and look for selling opportunities. With experience, you will eventually want to take advantage of these trend changes to enter into a trade with the new trend. This is how professional traders are able to get in early on a trend and ride the trend for a long period time of time, moving their protective stop with the market to protect any gains. This is a daily chart, but short-term traders will look for the same activity on hourly chart to take advantage of the shorter-term trends. The key for short-term traders is to trade in the direction of the daily trend to make sure they are trading with the momentum of the market and not against it.
    Last edited by DailyFX Analyst; 05-02-2008 at 05:04 PM.

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    Macro subjective movers vs Micro objective movers

    The forest is likened to the Macro economy and the trees in the forest to the Micro economy. The entire forest will move when Macro subjective statements are made which equate to a Macro objective future occurance. This is what changes the direction of currencies. The Micro movements are mostly objective due to their follow the hurd mentality. Those moves are the individual tree bending in the forest. The qiuck to see Macro direction changes can change positions before the hurd, and thus becomes the first to the water of profit. Those that rely on micro trends may not see the forest for the trees. Step back and you will see the forest.

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    The Relative Strength Index (RSI)

    Written by Thomas Long, FX Power Course Instructor

    The Relative Strength Index or RSI was developed by J. Welles Wilder in 1978. It has since become an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a market's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. A reading of 70 or higher is considered overbought with an increasing chance of a reversal to the downside, while a reading of 30 or below is considered oversold with an increasing chance of a reversal to the upside. But not all of the time and that is what can get new traders into trouble. Like any technical indicator, they are really designed to help you time your entry, but without a clear idea of what a trading opportunity looks like, too often new traders just use the extreme moves by the RSI to above 70 or below 30 to automatically signal their trade. The chart below shows how the moves below 30 resulted in reversals and good buying opportunities. However, there were more moves above 70 which did not offer as many potentially profitable trades even though there were more occurrences. The difference is the direction of the trend. We always teach new traders to first identify the direction of the trend on the daily chart and then to only take trades in that direction. I used this activity of the EUR/USD as an example of a strong uptrend where we should only be looking for buys. In a strong uptrend, the market will move up to overbought and stay there for long periods of time. That is what makes it an uptrend. But in that uptrend, we should look for pullbacks off of the highs down to support as potential buying opportunities. This is where the use of the RSI as it moves to below 30 and then up through 30 helps with our entry. We first need to identify the trend, find the potential trade, and then use the indicator to time our entry. On their own, technical indicators give off far too many false signals, but when used correctly, they can be a valuable addition to any trader’s approach.
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    Last edited by Thomas Long; 06-02-2008 at 01:14 PM.

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    The Moving Average Convergence/Divergence (MACD)

    Written by Thomas Long, FX Power Course Instructor


    Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. It is calculated by plotting the difference between two moving averages and then adding another moving average to the difference. Like most technical indicators, these tools are meant to help us time our entry rather than predict where the market will go. Here is a daily chart of the USD/JPY with an MACD plotted with the common values of 12,26,9. You can see that the crossovers of the MACD line and the MACD Signal Line, which is the moving average of the MACD, offered good entries for selling opportunities. However, the key here and with all technical indicators is that we are only taking the sell signals since the direction of the daily trend is down. So we look to sell rallies up to a resistance level in this downtrend. After that happens, we can see the crossover and the subsequent selling pressure which could have led to winning trades. One of the keys to increasing your chance of success on these setups is to place your protective stop above the high after entry and then to look for twice that risk in profit potential for your 1:2 risk:reward ratio. If you are risking 100 pips, look for at least 200 pips in profit. These setups on the daily chart can be solid about half of the time, so you have to make sure the losing trades do not keep you from being profitable in the long run. Using a 1:2 risk:reward ratio can be the difference.
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    Last edited by Thomas Long; 05-13-2008 at 12:34 PM.

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    Just a small question though a silly one (my other computer has the power course notes on it and it's late) 100 pips is eg 100.100 to 100.200 or 100.000?

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    Quote Originally Posted by Trev1 View Post
    Just a small question though a silly one (my other computer has the power course notes on it and it's late) 100 pips is eg 100.100 to 100.200 or 100.000?
    On the USD/JPY chart above a 100 pip move would from 104.71 down to 103.71. Another example would a move by the EUR/USD from the current price of 1.5490 up to the 1.5590 level.

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    This is great. When is the next trading idea posted?

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    Quote Originally Posted by johnbrown2008 View Post
    This is great. When is the next trading idea posted?
    Thank you...I will post a new lesson every Monday.

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    Some criticism is warranted here. Newbies should understand that the after the fact examples look great, "you could have bought here and you could have sold here". The charts show long term trends underway, but actually, these trends are not known until after the fact, and it makes it appear trading is simple. The traders viewing this thread would be better served by showing real time trade calls and the reasons why this trade is taken. This would show the reality that trading is not easy. How bout' it?

    Good trading to all here.

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    Quote Originally Posted by 4xis2ez View Post
    Some criticism is warranted here. Newbies should understand that the after the fact examples look great, "you could have bought here and you could have sold here". The charts show long term trends underway, but actually, these trends are not known until after the fact, and it makes it appear trading is simple. The traders viewing this thread would be better served by showing real time trade calls and the reasons why this trade is taken. This would show the reality that trading is not easy. How bout' it?

    Good trading to all here.
    It is not my intention here to give out trading recommendations but rather to teach new traders how to identify their own trading opportunities. The downtrend in the USD/JPY has been strong for over a year now, so identifying it and taking advantage of it does not require a crystal ball but rather a trend following approach to the markets. I have given a few examples of what that approach could look like. Trading is supposed to be easy, it is our own emotions and unrealistic expectations that make it more difficult than it has to be.

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    The Trader’s Approach

    Written by Thomas Long, FX Power Course Instructor

    As new traders come into one of our FX Power Courses, one of the big questions we are asked is what to do first when looking for a trade. Typically we see new traders open up a short-term chart like the 5-minute or 15-minute, place as many indicators as possible on that chart and wonder what they should do next. We recommend taking a step back to get a good feel for the mood of the market and then to look for your trade. What we mean by that is to first start with a daily chart with one year of trading to identify the direction of the trend. If the market is trading between two similar price levels, then the market is range bound and we want to buy above support and sell below resistance. If the market is in an uptrend, we want to buy the pullbacks off of the highs down to support. If the market is in a downtrend, we want to sell the rallies up to a resistance level. We would prefer that all new traders use the daily chart to both identify the trend and to find a trading opportunity. However, there are many times when no trades are setting up on the daily chart. So, at that time we recommend moving down to the 4-hour chart to find your trade, but always in the direction of the daily trend. If there are no setups on the 4-hour chart, you can then move down to the hourly chart to find a trade, but still only in the direction of the daily trend. This keeps you on the momentum side of the market and puts you in a position to be in on some of the big moves that the FX markets are known for. Most likely, you will find that the best trades are found on the daily charts and as the time frame shortens, the trades become less reliable. However, you will find many more trading opportunities on the hourly chart than on the daily chart. But if you always trade with the trend on the daily chart, you increase your chance of success and should be able to find plenty of quality setups.
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    Making and Correcting Trading Mistakes.

    Written by Thomas Long, FX Power Course Instructor

    Occasionally (hopefully not more than once) we accidentally find ourselves on the wrong side of a trade. We meant to sell, but instead we bought. After the few seconds of panic, we are left with a decision. What do we do now? Most professionals will tell you that whenever they find themselves in this position, they immediately close the trade and correct their error. Too many times a new trader will convince themselves that the trade may work out anyway if they stay in long enough. However, more often than not the loss just gets bigger and the trader just gets more frustrated. Now you find yourself losing when you should have been winning. If you immediately exit and reenter in the direction you originally meant to, you could quickly absorb that loss and start to profit. Do not hesitate in fixing these types of errors. If it costs you a little money, chalk it up to experience. But don’t let a mistake like this get out of hand or it could cost you a lot of money in losses and missed opportunities.
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    Quote Originally Posted by Thomas Long View Post
    Written by Thomas Long, FX Power Course Instructor

    Occasionally (hopefully not more than once) we accidentally find ourselves on the wrong side of a trade. We meant to sell, but instead we bought. After the few seconds of panic, we are left with a decision. What do we do now? Most professionals will tell you that whenever they find themselves in this position, they immediately close the trade and correct their error. Too many times a new trader will convince themselves that the trade may work out anyway if they stay in long enough. However, more often than not the loss just gets bigger and the trader just gets more frustrated. Now you find yourself losing when you should have been winning. If you immediately exit and reenter in the direction you originally meant to, you could quickly absorb that loss and start to profit. Do not hesitate in fixing these types of errors. If it costs you a little money, chalk it up to experience. But don’t let a mistake like this get out of hand or it could cost you a lot of money in losses and missed opportunities.
    This is a great advice and should apply to all people who are planning to succeed in life, not just trading. Once in a while, there are people who loves a particular currency so much that there's no way that the market could change their minds until they lose all completely. I call them ' losers'. Did you know that you could still make profit although your current position is not favorable? Do just what Thomas Long suggested. Fixing your errors shows signs of success in the future. Don't get fed up with a small change! I cannot change your attitude but I can change your habits of trading.
    Last edited by Suzanne Burdett; 05-30-2008 at 02:16 PM.

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    Chart Patterns and the Trend

    Written by Thomas Long, FX Power Course Instructor

    Those of you who have taken one of our FX Power Courses know that the instructors always recommend trading in the direction of the trend on the daily chart. If the trend is up, then only look for buys and if the trend is down, then only look for sells. This includes those situations where you have identified a trading opportunity using a chart pattern. On the daily chart of the GBP/CHF below, I have identified two Double Tops and a Range Bound situation. Many traders look for these patterns on a chart as solid trading opportunities. They will try to sell Double Tops (and buy Double Bottoms) and wait for a breakout of the range with the intention of entering into a trade in the direction of that breakout. But we still recommend using the direction of the trend as a directional bias on your trades even in these situations. When a market pulls back off of an all-time high and then starts to move back up to new all-time highs, there will be a period of time when the market looks like a potential double top. However, selling all-time highs or buying all-time lows is really not an approach that will lead to consistent profits. We should be looking to buy a market that is at or near all-time highs, not try to predict the end of the trending move. Our preferred play is to sell Double Tops in a downtrend and buy Double Bottoms in an uptrend. On the chart below are two examples of what that looks like. Many traders will sell as the market moves down through the low between the two highs as that serves as some confirmation that it is indeed a Double Top. Selling as the market moves down through that low and placing your protective stop above the Double Top represents a solid trading opportunity. Since we are looking at a market in a downtrend, we can also see how that trend may determine the direction of a break out of a trading range. When a market moves into a range bound situation, many times it is because traders are waiting for a news event before putting on new positions. More often than not, that news event just confirms the direction of the trend and breaks out of the range in that same direction. So markets that are moving down and then move into a range will more often than not, break down through support. Markets that are moving up and then move into a range will more often than not, break out up through resistance. Otherwise, markets have a tendency to break out of a range in the same direction it was trading in before going into the range. “More often than not” does not mean every time, but does offer a professional enough of an edge to use as the basis of a solid approach to trading.
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