Monday, August 31, 2015

Understanding Standard Deviation for Bigger Profits

Understanding Standard Deviation for Bigger Profits
In forex trading the vast majority of novice forex traders don’t understand the concept of standard deviation, but they should – as it is essential Forex education and will lead you to bigger profits. You will gain greater insight into price movements and how to trade these currency trends for profit.
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Let’s look at the concept of standard deviation and how it can help you in your forex trading strategy. Let’s do the technical bit first and how to apply it. Later we will look at how to apply it and it’s advantages.
Defining Standard Deviation
Standard deviation is a statistical term that provides an indication of the volatility of price in any investment and that includes currencies. Don’t worry if you find the next bit confusing - it will become clearer as we get to the end of the article.
Standard deviation measures how widely values (closing prices) are dispersed from the average price. Dispersion is the difference between the actual value (closing price) and the average value (mean closing price). The larger the difference between the closing prices and the average price, the higher the standard deviation will be and therefore the volatility of the market. The closer the closing prices are to the average mean price, the lower the standard deviation and the volatility of the currency is.
Standard deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean. High Standard Deviation values occur when the data item being analyzed is changing dramatically and volatility is high. Conversely, low Standard Deviation values occur when prices are more stable and moving within tight ranges. Major tops and bottoms always feature high volatility as investor emotions are to the fore and greed and fear drive prices.
Using Standard Deviation
Most short term price spikes that move too far from the mean price are unsustainable and prices normally “blow off” at highs or lows and return to the mean average. High standard deviation can be a great way to spot important market highs or lows. You can then use other technical indicators to generate trading signals to enter the forex markets when the risk is lowest and the rewards are highest.
A big rise in volatility away from the mean, i.e. a spike is normally driven by human emotion and the odds of prices returning to the average are high. It’s therefore a great way to generate contrary trades.
It's also great for trend followers. For example, if you have a market that features low volatility and you see an important price break accompanied by a spike in volatility, then chances are the trend will continue. Again you enter the trade with the odds on your side.
Standard deviation can also be used to buy into support (the mean) and can generate profit taking signals and can also help you set stops. If you understand volatility and standard deviation of forex prices, you will be able to trade with higher profit potential and lower risk.
Bollinger Bands
A simple way of looking and taking advantage of standard deviation when trading currencies is to use Bollinger bands. If you incorporate them in your currency trading system you will gain an extra edge in your quest for forex profits. Check out our article on Bollinger bands and how to use them – if you have never used them before, you will be glad you found them.
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Bollinger Bands Can Give You a Huge Trading Edge

Bollinger Bands Can Give You a Huge Trading Edge
One of the critical pieces of forex education for any Forex trader is to understand the concept of standard deviation of price and how to use volatility to their advantage. If you understand the concept you can easily apply it with Bollinger bands which are an essential tool for all forex traders.
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Let’s look at why Bollinger Bands are so useful and profitable, when incorporated in your Forex Strategy. If you don’t know what standard deviation is, simply check our article on the concept – let’s take a look at Bollinger bands.
Bollinger Bands Defined
Bollinger bands are simply volatility bands drawn either side of a moving average. You calculate Bollinger bands using the standard deviation of price over the same period as moving averages the mean price, then the volatility bands are plotted above and below the moving average. Moving averages are used to identify the underlying trend of currencies and Bollinger bands take this one step further by: Combining the moving average of the currency with the volatility of the individual market (or the standard deviation) – this then creates a trading envelope – with a middle mean price (moving average and 2 x bands (expanding or contracting) either side that reflect volatility or standard deviation. As prices move away from the longer-term average, the standard deviation rises - and thus the bands will fluctuate in varying amounts, away from the average.
Why they work
In any market, the value of a currency traded tends to rise slowly over the longer term. Prices can and do spike quickly in the short term, but will normally return to the longer term moving average - which represents fair value. The standard deviation of the outer bands (how far they are from the mean) shows how far prices are from longer-term value. Most price spikes are caused by trader psychology with greed and fear to the fore and this can be graphically seen with Bollinger bands. So how should you use Bollinger bands? There are 3 main ways to use them.
1. Spotting price spikes
When the bands are a long way from the mean you can use Bollinger bands as profit taking signal on existing trades or use them to spot contrary trades.
2. Enter exisiting trends
If you have a good trend in the forex markets then you can use dips to the middle band to buy at fair value.
3. Entering new trends
When prices are trading in tight range and start to breakout with a change in volatility a great new trend could be emerging.
Bollinger bands can certainly give you a new dimension to your forex trading strategy and any currency trading system can benefit from the extra insight that they can give you.
A word of warning
Like all technical indicators you should not use Bollinger bands in isolation to enter trades, however combined with timing indicators such as, the stochastic or RSI, then you have a powerful combination for greater FX profits.
With regard to forex education, knowing what standard deviation is and how to apply the concept through Bollinger Bands, will give you a huge trading edge, so make sure you use them.
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Sunday, August 30, 2015

Advanced Technical Analysis

Advanced Technical Analysis
Technical analysis depends on the use of indicators in finding the optimal points for entry and exit for each trade. A number of advanced technical indicators have been developed over the years that are used by traders to confirm a particular market pattern. Two or more indicators are used in conjunction to confirm whether the markets are trending, ranging etc.
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You should understand how to use these technical indicators to confirm trending or non trending conditions. Each technical indicator plays a unique role in the overall technical analysis process. Time periods and the technical indicators are useful tools for the traders. Spotting interday or intraday turning points caused by large moves, retracements, continuances or reversals is very important for traders and technical indictors are used to identify and confirm these turning points.
Each technical indicator performs differently in both trending and non trending markets. You should understand how each technical indicator shows direction, entry, exit or weaknesses or strength of price action in trending or non trending market conditions. You should memorize these differences to make the best use of these tools in your trading.
Let's discuss some of the important technical indicators -
Directional Movement Indicator (DMI) consists of the Average Directional Index (ADX) and the Directional Index (DI). The Average Directional Index measures the strength of a prevailing trend. It rises when the trend is strong and falls when the prior confirmed trend or direction is weakening. ADX measures the trending quality of the market. It isolates those periods where the market is not trending.
Directional Index (DI) comprises positive DI+ and negative DI-. When DI+ rises above DI-, an upward direction is confirmed. When DI- rises above DI+, a downward direction is confirmed. Both DI+ and DI- show direction. A strong move in the currency markets is confirmed when ADX is rising and both DI+ and DI- are apart.
The Stochastic Indicator is often referred to as the overbought or oversold indicator. The Stochastic Indicator identifies swings, tops and bottoms. It measures the relationship between the closing price of a currency pair and its high or low during a specific number of days or weeks. It does a wonderful job in finding the reversal tendencies in prices. When the price of the currency pair rises, the closing price tends to be closer and closer to the extreme high prices of the currency pair in that time period. Likewise when the prices fall, the closing price tends to fall on average closer and closer to the extreme low prices. The Stochastic Indicator is very popular among the traders. It is considered to be a highly accurate method of picking the tops and bottoms. It is a very useful tool that can used as a timing aid in knowing when to take action in a currency pair, particularly when it is used in conjunction with other technical indicators. This indicator tries to find a correlation between the moving closing price of the currency pair and its reversal tendencies.
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4 Simple Effective Ones For Bigger Profits

4 Simple Effective Ones For Bigger Profits
Here we will look at some of the best Forex Trading indicators and how you can combine them into a simple robust Forex trading strategy for long term gains. No single Forex trading indicator works all the time by itself and the way you combine them is essential. Many traders make the mistake of thinking the more indicators they combine the better - Wrong! If you do this the system has too many elements to break. You only need a few and your Forex trading system will be simple and robust in the face of ever changing prices.
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Let's build our Forex trading system and look at some of the best Forex trading indicators to help you build a trend following Forex trading system.
First Identify the Trend
This is obvious by looking at a bar chart but you also want to use moving averages as well. Simple moving averages are great in terms of smoothing out the fluctuations. Two great periods to use are first, the 40 day MA to identify the long term trend. Secondly, use the 20 day MA to buy and sell back to in a strong trend. You will find this moving average is excellent for getting in on a trend in motion, with optimium risk / reward.
Spotting the Set Ups
We don't have time to cover this in detail here but there are a couple of points that are the key to maximizing profits. Firstly, be patient and only trade high odds set ups and secondly, make sure you trade breaks to new highs and lows. All the big trends start and continue from them so you need to trade them.
Bollinger Bands - Check Volatility and Standard Deviation
Ask most traders what standard deviation of price is and you will probably get a blank look, but an understanding of the standard deviation of price and volatility is something that all forex traders need to know about. If you don't, make it part of your forex education and learn about Bollinger Bands. Bollinger Bands are not used for market timing, but to give you an all around view of volatility and when you understand this concept, Bollinger Bands can help you in 3 ways: They can alert you to potential big moves, help set targets and spot market value and entry levels.
Best Forex Trading Indicators for Confirming
When you spot a potential opportunity, you need to confirm the move and make sure price momentum is going the way you wish to trade. There are plenty of momentum indicators, but for the last 25 years I have found the following two the best. They are easy to learn and apply. Let's take a quick look at them.
The Relative Strength Index (RSI)
A great leading indicator to time your trading signals with. If the RSI supports your view of the market you can use it in strong trends, or when it diverges from the prevailing trend (from overbought or oversold) to enter trades against the prevailing trend.
The Stochastic Indicator
The best Forex trading indicator of all for better market timing and when combined with the RSI you have a dynamite combination. The stochastic is a simple indicator but is the ultimate timing tool for timing trading signals in my view. If you use stochastic crossovers to confirm your move, you will get the odds on your side. It's also very effective for timing contrary positions. A stochastic cross, from overbought or oversold levels, against the trend is a highly effective way of getting in on the big contrary trades.
Simple and Effective
There are other great indicators around such as the ADX indicator, MACD and many others, but as a blend the above 4 indicators with a bar chart are my best forex trading indicators for profit and they have served me well over the last 25 years. The indicators are easy to learn and apply and if blended correctly can add a new dimension to your forex trading strategy.
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Saturday, August 29, 2015

A Combination of Indicators For Bigger Profits

A Combination of Indicators For Bigger Profits
The group of indicators outlined here are the best Forex trading indicators in my view and any trader, novice or pro, should know about them. They are all simple to learn visual indicators which are very effective. No indicator is perfect, but if you learn how to combine the best and practice you can build a robust Forex trading strategy for success. Here are your best Forex trading indicators and how you can use them for bigger Forex profits.
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The Bollinger Band
Developed by John Bollinger, this indicator has the use of showing the volatility of a currency from the norm. You can soon spot overbought and oversold levels as volatility rises and trade into them. The middle band is a simple moving average and you can buy and sell back to it in strongly trending markets as this area indicates value. This simple strategy is one any trader should know. The Bollinger band maybe one of the best Forex trading indicators, but you must confirm moves and for this you need some momentum indicators to time your trading signals. Let's look at some.
Relative Strength Index RSI
Developed by trading legend Wells Wilder, this is a great indicator you can use to gauge the strength of a trend. If the RSI is in favor of the trend you stay with it, when it diverges from the trend, then it's time to either bank profits or enter contrary trades.
Average Directional Movement ADX
Another indicator from Wells Wilder and like the RSI, the ADX attempts to determine if the market is in a trend or not. The ADX line is a great momentum indicator and will help you trade and stay with the strongest trends. It also acts as a great indicator in terms of warning when a strong trend may change. A great profit taking signal is when the ADX rises above 40 and turns. When this happens you can bank profits or look for contrary trades.
The Stochastic
Developed by George Lane, this is probably the best indicator to help you get better market timing and execute trading signals. Stochastic crossovers can confirm any move within a trend and can also be used to take contrary trades. In contrary trades, a stochastic cross with bullish or bearish divergence (from overbought or oversold levels) against the prevailing trend is very effective.
Moving Averages
Price spikes don't last for long and prices will return to a longer term average. In existing trends this tends to be around the 20 day average and in longer term trends, you can trail a stop back behind the 40 day moving average. This is a simple tool and every trader should use them for setting up entry and exit points.
They Work and Will Continue to Work
The above are the only indicators I use and I have been using them for 25 years. They're still as effective today as they ever were. These best Forex trading indicators, if used correctly, can improve profits and decrease risk and that's what all Forex traders need in their trading.
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The Ultimate Forex Trading Momentum Indicator For Bigger Profits

The Ultimate Forex Trading Momentum Indicator For Bigger Profits
I use the stochastic all the time and think there is no better indicator for timing your trading signals. It's simply the ultimate momentum indicator and every forex trader should use it. Let's look at this fantastic indicator in greater depth.
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The stochastic indicator is a momentum indicator which warns of strength or weakness in advance, making it a leading indicator to confirm trading signals in conjunction with support and resistance.
The Technical Bit - The stochastic is plotted as two lines, %K and %D. The %K line is the more sensitive line. The %D line is a moving average of %K. The plotting of the stochastic is a bit similar to a moving average. Substitute the %K for the fast moving average and %D for the slower average. The lines are plotted 1 - 100.
Here are 3 ways you can use the stochastic indicator to great affect, with crossovers from overbought / oversold being my personal favorite.
1. As an Overbought / Oversold Indicator
A common use of the stochastic is to use it as an overbought / oversold indicator. When stochastic moves below the 20% and above 80% trigger lines are crossed. The Buy when the stochastic goes below 20% and then rises above that level and sell when the stochastic rises above 80% and then goes below.
2. Trading Crossovers
The crossover is my favorite way of using the stochastic from overbought above 80% or oversold below 20%. Many traders simply buy when the %K line rises above the %D line and then sell when the %K line falls below the %D line. This can work but you tend to get a lot of whips in price. I personally prefer to do crossovers from very overbought and oversold levels. In currencies you often get above 90 and below 10 and a recent currency signal I had was from 96! When these levels are reached and you have crossed the upside from oversold or downturn from overbought, these are great signals. I know traders who simply use support and resistance and crossovers from extremes and make a lot of money with the stochastic and support and resistance lines. Sure it's simple, but it's very effective.
3. Trading Stochastic Divergences
Divergences between the stochastic and price can be used as a leading indicator for executing trading signals. For example, if prices are making new lows and the stochastic moves higher or crosses to the upside you have a warning that prices may rebound as price moves up. The opposite is of course true in a bear market.
Of course no indicator works all the time by itself, but in terms of a momentum and timing indicator for your trades, it's a fantastic indicator if used correctly. As stated my preference is not just to use crossovers but crossovers from price chart extremes and this, with trend lines and a little practice, works. I also like to use filters in line with the stochastic and use the Relative Strength Index (RSI) and Average Directional Movement (ADX). They're great as momentum indicators and work well with the stochastic. Get the book they come from, New Concepts in Technical Trading by Wells Wilder. it's a great book and outlines them in more detail.
I have used the stochastic for 25 years and use it for swing trading and trend following and never execute a trade without checking it. It's a very visual indicator and you can learn to use it in 30 minutes. If you don't know or use the stochastic, its time to make it part of your essential forex education.
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Thursday, August 27, 2015

How Does the Relative Strength Indicator Function

How Does the Relative Strength Indicator Function
Have you read Welles Wilder's "New Strategies in Technical Trading Systems?" If you haven't, I would advise reading the book today. If you want to trade the RSI, learn about it from the original text and apply the original RSI knowledge to your trading. Don't settle for the endless stream of reviews and technical explanations on the nature of this remarkable volume and don't be satisfied with simply understanding a bit about his technical indicators. No, I think a proper foundation in trading starts at the source, not the endless stream of late comers who have adapted aspects of the book into their trading systems. Now let's get started with the RSI.
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Let me ask you a quick question. What do all of the following have in common?
1. Relative Strength Indicator 
2. Directional Movement Indicator 
3. Average Directional Index 
4. Parabolic Stop and Reverse 
5. Average True Range 
6. Wilder Smoothing Average
They were all in one book! Yep, "New Strategies in Technical Trading Systems" is the source. Of course, today we are going to concentrate on just one of those indicators, the Relative Strength Index, or RSI.
RS = Average of x days' up closes / Average of x days' down closes
The RSI is an indicator that compares recent gains and recent losses to formulate a system for determining overbought and oversold conditions. I can't see it as a stand-alone indicator, as it tends to whipshaw you in and out of the markets, but it is the perfect indicator to use in conjunction with other indicators. I use it as a confirming indicator for my primary indicator.
There are three primary areas to pay attention to when trading the RSI. The overbought area is derived from the data when the indicator hits 70. The oversold indication is derived from data when the indicator hits 30. In his original thesis, both these readings (70, 30) were buy and sell points of the RSI. Since the RSI is used to measure the strength of the underlying security, there is a wealth of information to be gleaned from the RSI. Again, I caution you in trading the RSI as a primary indicator.
Another system uses the RSI in a similar manner, except it focuses on the 50 line in the RSI. Some believe that when the RSI pierces the 50 line going upward a buy signal is generated, and the corollary is true also, when the line is headed downward through the 50 line, a short signal is generated. While I am aware of these two trading methods, it's not what I am looking for in the RSI, though the information is valuable for confirming trade decisions.
No, I want to look at price divergences with the RSI. When the RSI is headed one way and the price action on the chart is headed another I like to take notice, especially if I am currently in a trade. Divergent indicators are the stuff of gold and they are hard to come across, especially in short term trading, but the RSI shines at its assigned task. When price is still headed in an upward direction and the RSI joins that movement direction, I am looking for a point in time when the RSI changes direction and it usually begins to swing before the price movement reflects the deteriorating underlying short term trend. Put in less esoteric terms, if the price is going up and the RSI starts to head down, you better be prepared to take quick action. Convergence and divergence are what makes guys like me, who trade with price action and oscilllators, feel good. Any information that I can glean about what is happening in the market is helpful, especially when you are trying to scan your screen for something that isn't necessarily reflected in the charts.
I feel using the RSI makes me a more nimble, more informed trader. It generally occupies the middle of the indicator row, second from the top. Once I am in a trade I generally keep a close watch on what the RSI is trying to tell me and then plan my strategy accordingly. My recommendation is to give the RSI a try and see if makes sense in your overall trading strategy. Are you paying attention to divergent indicators? You should be.
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Using The ADX Indicator For Bigger Profits

Using The ADX Indicator For Bigger Profits
If you're using charts, then you want to trade the strong trends, and the Average Directional Movement Index Indicator, or ADX, enables you to do this. Wells Wilder developed the ADX, and outlined it in his classic book “New Concepts in Technical Trading Systems”. Let’s look at this essential indicator in more detail - and see how to apply it on your forex charts, to give you greater accuracy when generating your trading signals.
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Determining the Strength of the Trend
The ADX is a momentum indicator, which aims to measure the strength of the trend - and attempts to determine if the market is trending, or is trading sideways.
The Advantages of the ADX
A core belief of technical analysis is that a strong trend in motion is more likely to continue, than reverse. Therefore, you always want to be trading strong trends - as your odds of success are higher. The Average Directional Movement is a good indictor – and you should consider using it as part of your currency trading system.
The Technical Bit
For the boffin’s out there, here’s the technical bit – don’t worry if you don’t understand the calculation, its easy to use when visually plotted. The ADX is based on the comparison of two other directional indicators, both of which were also developed by Wilder, and they are: Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) to produce ADX as shown in the following formula: ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N, Where: N: Refers to the period of calculation. The formula above produces the ADX line, which oscillates between 0 to 100 values. The +DI and -DI are both present and can be seen to make up the indicator.
You don’t need to understand the above calculation to use the indicator – you only need to accept that the indicator works. The indicator is easy to use when it’s visually plotted - and you’ll find it included, with most of the good forex chart services.
How to Trade using the ADX Indicator
The ADX is not a bullish, bearish trading signal generator - and should never be used as such. The ADX indicator simply indicates the strength of the trend - and other indicators should be used to enter, and exit trades. Although the ADX fluctuates from 0 to 100, it rarely moves above 60.
Use the ADX in the following way: 
- Readings above 40 indicate the strength of the trend. 
- Readings below 20 indicate range trading and flat periods of consolidation. 
- You can use the crossing of +DI and -DI to determine the trend direction; when +DI crosses -DI upward, it’s a bullish signal, on the other hand, when +DI crosses -DI downward it’s a bearish signal.
The ADX line is a great momentum indicator and like the RSI (also developed by Wells Wilder), the ADX it will help you trade the strongest trends - and give you advance warning of changes in momentum.
The Bottom Line
If you want currency trading success, you can’t just trade support and resistance levels, and hope they hold or break. You need confirmation of momentum to get the odds on your side - and the ADX indicator will assist you.
Final Words
New Concepts in Technical Trading Systems was published in 1978, and was one of the first trading books I ever bought. Every trader should make this book a part of his or her forex education. If you want to learn forex trading the right way, get the book, and use the ADX indicator to increase your chances of making big FX Profits.
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Wednesday, August 26, 2015

Practical Uses of Technical Analysis for Forex Trading

Practical Uses of Technical Analysis for Forex Trading
When Trading Forex, one of the main cornerstones of your trading system will be a method or technique that helps you select the entry and exit points of all your trades. To achieve this, many newbies resort to listening to hunches or tips from so-called Forex gurus whilst others follow price alerts provided by the financial media or their Forex brokers. However, if you adopt any of these approaches, you could well be making important trading decisions without fully understanding them and enter trades for all the wrong reasons. This often leads to losses and disappointments.
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Many traders overcome this problem by utilizing technical analysis to help them evaluate and predict currency movements. This technique does not attempt to measure the intrinsic value of a currency pair, nor does it require a degree in finance and economics. Instead it uses charts to identify patterns that can suggest future activity.
The main functions of technical analysis are to identify and then exploit non-random price patterns and trends that are continuously being created within the Forex market. This study takes advantage of the fact that Forex moves in trends 30% of the time. There are many methods that are used to perform technical analysis but the primary ones utilize the study of past price and trading actions. The central concept of technical analysis is that price predictions are only extrapolations from historical price patterns.
Technical Analysis provides you with a large number of technical indicators that you can use to detect entry and exit points for your trades including Stochastics, RSI, Bollinger Bands, MACD, Moving averages plus many more. However, most of these technical indicators were designed for markets different in nature from Forex (such as stocks) and as such do not cope very well with Forex market volatility. Consequently, they really need to be updated and modified in order to handle these new conditions better. However, unless you are brilliant mathematically this is not a plausible solution. Instead, you are better advised to create or use a Forex trading strategy, possibly an automated one, that uses your chosen technical iIndicator as its central components.
To improve the detection of entry and exit points, many traders combine fundamental and technical analysis together. Fundamental analysis is the study of political, economy and social influences that can affect the value of a country's currency against those of other nations. If the economy of the country is strong and the country has a stable government, then the value of that country's currency can be expected to rise against the currencies of countries with weaker economies. However, if you intend to use a Forex trading system based on this concept, you will need to constantly stay updated on any global financial or political news. This is definitely not everybody's cup of tea.
Many experienced traders, who have designed and used successful Forex trading systems, have coded them into an automated robot, also called a Forex Expert Advisor. These robots are programmed to alert the user when new entry opportunities arise. They can also be used to trade accounts automatically by performing actions such as sending orders directly to the appropriate broker's server and adjusting stop loss, trailing stops and taking profits.
Expert Advisors (robots) are programmed to eliminate the emotional trading decisions that cripple novice trading accounts by providing users with a very strict Forex trading system. The system prevents them from falling outside pre-programmed parameters, or falling prey to emotions of greed and fear that causes bad decision making. In addition, Forex Expert Advisors are able to evaluate more parameters at the same time than humanly possible. However, you still need to proceed with caution as the seller's claims are quite often widely exaggerated as their systems are unable to cope with the vast variety of trading conditions that Forex can throw at them.
In conclusion, you are advised always to use a well-developed Forex trading plan or an automated system, but it is essential that you examine the performance of the strategy or robot, to see how well it withstands the test of time and market volatility.
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An Introduction to Technical Analysis

An Introduction to Technical Analysis
There are two types of analysis used in Forex trading, fundamental analysis and technical analysis. Fundamental analysis examines current political and economic events in order to predict movements in currencies, while technical analysis uses historical economic data to predict movements in the Forex market.
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There are three underlying assumptions to technical analysis:
1. Movements in price are the result of a combination of all the forces is in the market. While currency prices can be affected by all sorts of things including political events, economic conditions, supply and demand and even the weather, technical analysis is not concerned with the reasons for movements in the market but is solely concerned with the movements themselves.
2. Currency prices follow trends. Over the years a number of market patterns have been recognized and technical analysis assumes that these have predictable consequences.
3. Movements in price follow historical trends. Forex data has been collected from more than 100 years and, over time, a number of patterns have emerged. These patterns are indicative of human psychology and the way in which people react to certain circumstances.
Although most Forex traders will use fundamental analysis to support their trading strategy, they will also rely heavily on technical analysis. The major problem with fundamental analysis is that it requires a detailed knowledge of the political and economic conditions of a large number of countries and for most traders, this is simply impractical. Technical analysis, on the other hand, can be applied across many different markets and currencies at the same time.
If you are new to Forex trading, then you may well find the complexity of technical analysis off-putting and wonder if it is really necessary. As with almost any form of investment, you must have a strategy for trading and that strategy must be based upon a prediction of movements in the market. Technical analysis has shown itself over time to be a sound tool for predicting such movements and is fairly accurate. Nothing of course will provide one hundred percent accuracy and currency prices are affected by a variety of different factors. It is for this reason that, while many traders use technical analysis, they also back up their trading strategy with fundamental analysis.
Every Forex broker will provide access to a range of different tools used for technical analysis and most of these tools, which will have the ability to update in real time, will generally be made available free of charge with some additional professional analytical tools being provided for a fee.
Before you start Forex trading it is a good idea to acquaint yourself with market behavior by following Forex charts for a period of time and by studying the movements and gaining an understanding of trends. Many brokers will provide training accounts just for this purpose, allowing you to trade on paper rather than with real money.
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How to Use Forex Technical Analysis Properly

How to Use Forex Technical Analysis Properly
A general discussion of the limitations of forex technical analysis and how to properly apply this element into your forex trading strategy. Forex technical analysis is solely based on a self-fulfilling prophecy. It works better on higher time frames and there are never any guarantees, which is why it should be used in conjunction with other aspects.
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Forex analysis is used to design forex trading systems and consists basically of two elements: fundamental analysis and technical analysis. Technical analysis encompasses a wide range of techniques used to try and predict the following move of a certain currency pair. Technical analysis includes the use of pivot points, time cycles, trendlines, candlesticks formations, moving averages, typical chart patterns such as double top, head and shoulder, etc.
There are a lot of different aspects to forex technical analysis. It is not my intention to give advice on which technical patterns or indicators are better than others, but more to share with you some of my observations. In addition to this, we will look into testing trading systems based mainly on technical analysis.
First of all, it is important to understand that there is no magic to forex technical analysis, although it is often marketed in such a way. Technical analysis works only because it is similar to that of a self-fulfilling prophecy and ,in my opinion, nothing else. When this is taken into consideration, it only makes sense to use the most known ones and stay away from all the so-called "secrets" or new technical indicators, as an unknown technical indicator simply will not respond well to a self-fulfilling prophecy. A simple way to test the popularity is to do a search on Google for the name and look at the results.
How about fundamental analysis contra technical analysis; are there times when one supersedes the other? Yes, there is. The release of highly important forex fundamental data can be very dramatic events and technical analysis is of very limited use during these times. This is because the statistical techniques that technical analysis depends on are ineffective during the volatile times of the release and for about at least one hour afterwards. However, this all depends on the kind of news and the deviation from the expected number. But it should be kept in mind that these are definitely not good times to try and detect trends or their tops and bottoms. You are well advised to wait for calmer waters when technical analysis can be applied properly. As fundamental data releases can produce spikes of price movements in minutes, this is not the time to try and detect reversals, although some traders try to do just that.
Fundamentally, technical analysis produces more reliable results the longer the time frame used. This is especially true when the trading is following a regular pattern such as during "stable times". However, longer time frames can be more vulnerable to sudden sharp reversals, which is a serious problem. During volatile times, irregular trading patterns, much larger pip movements and spikes reduce the effectiveness of statistical analysis.
The most popular timeframes used by most forex traders are the hourly, four-hourly and the daily charts. Very short time frames below 1 hour do not lend themselves to statistical analysis very well. However, some traders do use them for other types of trading strategies such as scalping which is used by many expert advisors. The general idea behind any scalping method of trading is to reduce risk by getting into a trade and then out of it as quickly as possible. This type of action limits the risk exposure during a trade. This process is then repeated many times, always aiming for a small low risk gain. One of the main ideas of this strategy is to attack the markets during their off hours when they have settled into a tight and more predictable range pattern. The time period selected is between 9.00pm and 1.00am GMT. Typically the following currency pairs are traded: EURGBP, EURCHF, GBPCHF and USDCAD. Europe, UK, Switzerland, USA and Canada do not release any national fundamental data during this time period and thus the forex market can be very quiet with low volatility. However, as the liquidity is lower during these hours, the market is more prone to macroeconomic events, and it is important to keep in mind that large spikes easily can occur in these periods.
In addition to the specific timeframes, it should be noticed that Fridays often tend to respond poorly to any technical analytical approach, as well as fundamental news releases. Although I heard this many times before I actually started trading, I was still in front of my screen on a typical Friday. You can easily get chopped up in this trading period. One of the main reasons for this is probably that large institutions such as banks and hedge funds close their books for the weekend. It can be argued that they might be more prone to psychological aspects in order to reach breakeven or in an attempt to squeeze the last possible profit before the end of the week. Fridays can be a tough challenge. This is often true for Mondays as well, as a new week starts and a direction is to be decided on.
You should begin to understand that using technical analysis as a central part of your trading strategy is not so easy as first thought and prone to difficulties. So how do forex traders attempt to overcome this serious problem? It is important to understand that many technical analytical approaches are rather useless, and especially so if they are applied solely as a trading strategy. You will need to devise a forex strategy that is wrapped around your limitations and facilities and it should entail more than simply basing an entry or exit on technical analytical aspect. You also want to make sure that you don't fill up your screen with too many different indicators.
Although a large number of the technical approaches are nothing but hot air, there are several technical indicators that can be used to help you achieve a better trading foundation, including stochastic, RSI, Bollinger Bands, MACD, moving averages, etc.
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