Forex Tips

Forex Tips – Be Wary of Average Daily Ranges

Posted by Nick 10 Comments

I have been working closely with a small group of newbie traders recently. Working with newbies has forced me to remember a lot of Forex knowledge that I have forgotten. A lot of this knowledge has become instinctive in my trading so I use it without knowing or thinking about it. One of these pieces of knowledge is how vital knowing and being wary of a pairs average daily range (ADR) is.

Why should you worry about a pairs ADR?

Well, when a pair reaches its ADR for the day it tends to slow down, which makes it much harder to trade the pair.

Below are the current 200 day ADR figures for E/U and G/U:

E/U = 128 pips
G/U = 116 pips

Let’s imagine E/U has ranged 148 pips today, which is 20 pips beyond it’s ADR, and I see a good trade set-up on it. If entering the trade set-up will require me to set a target that goes even further beyond the ADR this trade might be a bade move. This is because statistically E/U cannot be expected to range much more than it already has. So if I enter the odds would be stacked against me from the start. You can see an example of this trade below, the green lines show the days range, the blue shows the trade entry, and the red the trade exit. As you can see after the trade entry EUR/USD ranged up 10 more pips before the price stagnated and reversed.

There will certainly be days in which the ADR is greatly surpassed so you shouldn’t immediately dismiss a trade because the pair has reached it’s ADR. However, it should definitely be a factor when considering a trade.

Check out our Forex ADR indicator.

Have any questions? Leave a comment below and I will answer them!

Americas AAA downgrade – Is it Safe to Trade This Week?

Posted by Nick 4 Comments

I was asked today in the Forex forum and if it is safe to trade this week after the news that Americas credit rating was downgraded.

I am sure this is a question many traders are asking today so I thought I would make a quick post to answer it.

Short answer is – Yes it is safe to trade but be wary.
Long answer is – The credit rating downgrade did not come out of the blue. Standards & Poor’s has been warning America the downgrade was coming for a while and in the last few weeks it became inevitable. This means that for the most part the downgrades has already been factored into the currency markets.

I would certainly expect some volatility and unpredictable swings. However, as a Forex trader you should always be prepared for volatility and unpredictable swings.

So my opinion is that you should be wary and vigilant but do not take the week off!

Don’t Put Too Much Faith in Your Method

Posted by Nick 7 Comments

Lately I have been spending a lot of time with new traders. Specifically I have been spending time training traders who:

Fully understand the basics of Forex.
Have a trading plan and a money management plan.
Have a working trading method.
Have nailed down their trading psychology.
Are barely breaking even.

These new traders have all the pieces of the puzzle but are still failing. They most commonly fail because they follow their trading plan too strictly!

What is a trading method?

A trading method is an essential part of your overall trading plan. Ideally, a trading method lays out a set of guidelines and gives you a set of tools you use to:

Analyze the market.
Plan trades.
Enter and exit trades.

Recently, I have been noticing that new traders tend to follow their method too strictly. This is no surprise as most new traders are bombarded with misleading information, by self-proclaimed trading gurus. A very common and very destructive piece of advice given is:

“trust your trading method, if your trading method tells you to go long, go long. If it tells you to go short, go short”

This advice may seem logical, on the surface, but it is in fact extremely counterproductive. If you follow the advice above, you are effectively switching off your brain and blindly following your method. The problem is that in trading it is perfectly sensible and healthy to question your method. With any given trade there are several variables that can affect the likelihood of the trade being profitable. Your method may signal a trade but when it does you should not blindly take it. You should always access current market conditions and see if the trade has a reasonable chance of success.

Your methods job is to suggest possible trades to you. Your job as a trader is to take those suggestions on board and decide if the trade is viable. Your trading method should not decide for you when you should enter a trade. The second you give your method complete control over your decision making process your chances of success dwindle.

What is a Traders Job?

We have already established that the job of a trading method is to suggest trades to a trader. The easiest way to understand a trader’s job is to stop thinking of yourself as a trader and start thinking of yourself as an information gatherer.
Your trading methods purpose is to provide you with information. So for example my trading method consists of three main forms of analysis:

Candle patterns.
Support and resistance lines and areas. (s+r lines)
Trend lines.

I think of each of these forms of analysis as pieces of information. My trading method, which uses those three forms of analysis, is really just a tool I use to gather information. My job as a trader is to interpret the information and assess whether I should enter a trade or not.

If I see an indecision pattern forming on my chart, like the one above, it means my candle patterns are telling me a long reversal is possible. I would then look at the other two forms of analysis I use, s+r lines and trend lines, to see if they support what the candles are telling me.

Looking at the image above there is a major s+r line in the way of my trade (green line), so I may not take the trade. What’s the point of entering a reversal trade if it is likely to be blocked by a major resistance point?

Many new traders stick too closely to their trading method. Instead of gathering and interpreting information they blindly trade the moment their method indicates a possible trade.

What’s The Solution?

Inside every human is a very powerful organ called a brain. The solution is to simply use your brain when you trade. Instead of trading by mindlessly following your trading method start to question what you see. It is human nature to ask questions and you should not suppress it in your trading.

Your trading method should be used as a tool to gather information. The final decision to enter a trade should be made by you, after you assess the information.

Like this post? Then leave a comment below!

Forex – Get Rich Slow

Posted by Nick 16 Comments

Hey guys, I haven’t had much of a chance to update the blog recently. I have been working hard with the Super VIP guys and it has been taking up a lot of my time. Over the last two weeks I started noting down some of the most common questions newbies in the Super VIP group have asked me. These questions are probably familiar to you:

How long do you think it will take to grow my account from $1,000 to $50,000?
How long before I can quit my job?
How long until I can make $20,000?

You probably notice a theme to all these questions:; money. Let’s face it the vast majority of people are attracted to Forex for the money. Forex can make you money. It can make you a lot of money, but it will not happen fast.

Reality Check

I am sure you already know that Forex is not a get rich quick scheme. Many people out there spout that line. However, what many people won’t tell you Forex trading is a career. And as with any career it can take a long time to master Forex. So, if you are considering Forex you need to ask yourself two simple questions:

Do I have the passion needed to take on a new career and become successful?
Do I have the patience needed to get through the bumps in the road to succeed?

If your answer is no to either of these questions perhaps Forex isn’t for you.

Getting Rich Slow

I have been trading for nine years now and I have yet to meet anybody who has gotten rich fast in Forex. I am not saying that it is impossible. What I am saying is that the vast majority of successful traders get rich slowly. Becoming a successful Forex trader breaks down into five steps:

Learning the basics
Planing & Preparing (write a proper trading plan and money management plan)
Developing a trading method
- Testing your trading method
- Tweaking your trading method
Nailing down your trading psychology.
Getting rich!

Most new traders want to jump from step one to step five in the space of a few months. Realistically, you will have to go through each step to succeed and it will take you some time. So I am sorry to be the one to tell you this but Forex is very much a get rich slowly game. Some good news though is that Forex4Noobs provides a free video course that will guide you through step two “Plan & Prepare”. Forex4Noobs also has a fun and interactive forex education section that will help you with step one “learn the basics”.

So Why Bother?

Well the fact is that most people do not get rich quick in any career or business. So giving up on Forex because it will take you time to achieve success is silly. I personally feel that the best thing about Forex is the freedom it provides. Unlike most careers, once you become consistently profitable in Forex you can scale back your chart time.

Over the past two months, I set up a stop watch and timed the total amount of time I spend trading per week. I found that on average I spend six hours per week trading. Compare that against the 8-12 hour work day most people are forced to do these days. Forex is the obvious winner.

Forex certainly does have a lot of benefits and it can turn your life around. However, please do not fall into the trap of thinking that you will be rich within six months.

Grill Me on Reversal Trading

Posted by Nick 6 Comments

Hey Guys,

Have you ever wanted to grill a full time trader on their method? Well, if you join me this Wednesday in the Forex4Noobs chat room you can!

The problem with webinars is I couldn’t possibly answer or cover everything in a single webinar. So, after the hugely popular Forex reversal trading webinar I have been bombarded with questions about reversal trading. Instead of answering each question individually and answering the same questions over and over I will be holding a live Q&A session. A Q&A session allows me to cover anything I missed and it give you the opportunity to better understand my method.

How Will it Work?

Just like a regular webinar you simply join the Forex chat room at the assigned time. Once in the chat room you can grill me live on reversal trading. There will be limited seats available so be early!

What will be the exact time?

The Q&A session will be held on Wednesday the 25th of May at 11pm GMT (6pm US EST).

How will you be notified?

I will be sending out a remainder email 3 hours prior to the webinar.

Forex Trade Check List – Be a Forex Pro

Posted by Nick 13 Comments

Over 80% of my trades are successful.

Last week I was trying to think of articles to write. Then it dawned on me, I win more than 80% of my trades. So I should analyse why I win the majority of my trades and write a series of articles, explaining my secret.

“What is a Trade Check List?” you may be asking. For me, it is a mental list which sets out strict criteria that a potential trade must fit into. If a potential trade does not fit into my criteria I most likely will not enter. However, if the potential trade falls into my entry criteria I will enter.

For me, a Trade Check List is a very effective way of filtering out bad trades. My Trade Check List also helps keep me on track and helps me to stick to my plan. My Trade Check List is part of the reason why I profit on over 80% of the trades it take.
If you’re a newbie you should probably commit your Check List to paper, or at least to a notepad/word document.

Putting Together a Check List
Putting together a Check List requires you to define a good trade set up. So if you trade pivot point break outs a good set up may be a strong trend breaking a pivot point. In my case, I trade mainly reversals so a good set up for me is a strong trend in which indecision forms. In addition, I want to see a transition of power, so if the strong trend is bullish and indecision forms I want to see a transition of power, from the bulls to the bears. On my list this translates to:

Are there strong signs of indecision?
Who currently has control of the market, the bulls or the bears?
Is a transition of power likely and have I selected a suitable entry point?

Those first three questions on my Check List help me filter out weak set-ups, that I should not be taking. They also help me to select the best entry point. The next items on my Check List help me to manage my trade.

Are there any significant areas of support or resistance nearby? (see what happens when I ignore this item on my Check List)
Are any significant news releases due out that could impact this trade? (see this post for an easy way to be prepared for news releases.
What is my stop and target on this trade?
Does the answer to the previous item fall within the parameters of my money management strategy?

Print It Baby!

There must have been a forest in China sacrificed for me to become a professional trader. As a newbie, I could never remember all of the items on my Check List when I was preparing to enter a trade. And even if I did remember all the items, I found it hard to follow them if they weren’t committed to paper in front of me. For this reason, I printed stacks of these Check Lists and kept them on my desk ready for a trade. As soon as I saw a set-up, I would answer the questions on the Check List live and if all the answers were good I would enter.

I actually found one of these old Check Lists on my hard drive yesterday so I thought I would share it. Please print it on recycled paper

Forex Trade Checklist Template

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Be a Forex Pro – Significant Support/Resistance Lines

Posted by Nick 14 Comments

Significant support/resistance lines, do you use them? If you don’t then you’re making a critical mistake!

Recently I have been frequenting the Forex4Noobs chat room and speaking to a lot of newbie traders. One thing I noticed is many new traders are not marking significant support/resistance lines on their charts. Significant support/resistance lines mark out points of extreme support and resistance. Knowing where these points are located is invaluable for:

1. Managing open trades.
2. Knowing when/if to enter a trade.
3. Trading reversals.
4. Knowing when you should stay out of the market.

In the video below I show you how to spot and place support/resistance lines.

Podcast: Play in new window | Download

EDIT: Below is an update to this post.

Update

The video above was shot earlier today just after London session open. In the video the second line I placed on that chart was the 133.30 support/resistance level. If you take a look at a current GBP/JPY chart you will see an extremely long bullish trend stopped in its tracks by that same 133.30 line. This just shows you how important these lines are! You can see an image of this below:

Was This Helpful?

Was this post and video helpful? Please let me know by leaving a comment below. I would really like to know if this helped or if I should expand on it!

Forex Tips – Be Prepared for News Releases

Posted by Nick 7 Comments

Recently I have been noticing a huge influx of newbies entering the market who do not bother checking for news releases. This can be a critical mistake as news releases can turn a good trade bad in seconds.

I realise many of you reading this blog are not absolute newbies so you may already check news releases daily. However, there are a lot of newbies here that do not know how to check news. So this is what I do at the beginning of every week to prepare myself for news releases.

1. Log on to forexfactory.com

First of all I make sure I set the clock to match my local time. This way the report releases match my clock, making them easier to keep track of.

2. Filter out useless data

ForexFactory has a great filter system which allows you to remove data you do not need. I keep USD reports as they have a market wide impact. I then keep any reports for countries related to the pairs I trade. So if I trade EUR/JPY, GBP/JPY and EUR/CHF I will keep all EUR, GBP, JPY and CHF reports. I also filter out low impact reports (yellow).

3. Print it

I print the calendar and keep it beside my keyboard all week.

Hopefully this articel some of the less experienced traders. You should always know whats going on with the market you trade. Only Forex losers enter trades blindly!

3 Techniques for Fighting Forex Fear

Posted by Nick 31 Comments

You spot a great GBP/USD trade set up. You check ForexFactory to see if any news is due out. You confirm your analysis and remind yourself of your money management rules. Finally, you go back to your platform and take a short.

You are targeting 40 pips and almost immediately your trade goes into profit.

+5 pips…… You feel that little tingle of excitement you get when you’re in a winning trade.
+10 Pips…… That excitement grows.
+20 Pips…… “I’m half way there” you say to yourself. You can feel the blood coursing through your veins.
+ 30 Pips…… “Yeah only 10 pips to go” you’re really happy now, this trade is almost over.
- 15 Pips…… “What? Nooooo, why are you reversing?”

Sound a little familiar? Most of us have been here. At this point, it is easy to get nervous and bail out of your trade, only to have it hit your 40 pip target 20 min after you exit. Then leaving you feeling rubbish because you got 30 pips less than you should have.

This is a very common mistake and it all comes down to fear and nervousness. As a newbie, it is very easy to get scared when in a trade. I know this because it used to happen to me too. I had a chronic case of Forex Jitters. As a newbie, there were many times when I would exit a trade with only 10 pips when I was targeting 70 or more pips.

So I had to put a serious plan in place, to fight fear, while I traded otherwise I knew I would end up as part of the 90% who fail in Forex. Here is how I overcame my fear.

Step Away From the Trade

The very first step I took was a backwards one. I realised pretty quickly that one of the biggest causes of in-trade fear was pip counting. I used to watch every pip movement like a hawk. Just as above, I would become ecstatic as the price moved in my direction and I would freak out as soon as it reversed.

For this reason, I decided my best bet was to step away from my charts after taking a trade. So upon taking a trade, I began to set alarms 5-10 pips before my stop loss and target price. I would then step away from my computer and go do something else. Either read a book or move to my second computer and play a computer game.

This disconnection, between me and my trade, did wonders for my trading. I was able to consistently hit my targets and remove all the stress of watching pip by pip.

As time went by, I became comfortable in my analysis and my method as it was making consistent profit. I was then able to start actively managing my trades with a new level of confidence, I had previously lacked.

Trading to Trade

Newbie traders tend to have an insane urge to jump into a trade just because they feel they need to be in the market. They think to themselves, ‘a traders job is to trade so I have to take a trade to today’. I know this because I spent the first 6 months of my trading career doing this. I would trade just because I thought I needed to be in the market.

This means I would go into a trade without a plan or strategy. I would go in blind and if the trade went negative I would freak out. The way I solved this was by writing three questions into my plan and asking myself those questions, before I entered any trade.

1. Have I done my analysis and do I have valid reasons to believe this trade will work out?
2. Does this trade fall within the guidelines set out in my trading plan and method?
3. At what levels are my first target and my stop loss?

If I answered no to any of these three questions I would not enter the trade. This gave all my trades structure and ensured that they were real trades. As long as I asked myself these three questions I would no longer rush in blind, by taking a trade just for the sake of trading.

Picked a Single Pair

When I first started trading, I watched five to six pairs every day. This made it very hard for me to become familiar with any one pair. Now that I have been trading Forex for six years I have built up a certain degree of familiarity with several pairs. When I enter a GBP/JPY trade I expect to be in for a bumpy ride; down 20 pips and up 10 pips, down 30 pips and back up 40 pips. If I enter EUR/USD I know to expect my trade to move into profit at a slow trickle. I also expect some minor support or resistance at every psychosocial level.

This familiarity removes much of the fear I would have had previously while trading. If I know that GBP/JPY could be in profit 40 pips and in seconds reverse 20 pips I am not as surprised or shocked when it happens.

So the answer was simple. I limited myself to trading a single pair. Once I became familiar with that pair I added another pair and then another. Starting off with a single pair allowed me to become familiar with that pair.

Are You Going to Use These Tips?

Do you suffer from Forex Fear? If so, are you going to implement any of these techniques? I would love to hear your opinion so please leave a comment below. Also, if you have any other fear busting techniques share them by leaving a comment.

Falling Average Daily Ranges in Forex

Posted by Nick 9 Comments

Recently I have been making some changes to the way I trade. My method has always consisted of two trading techniques; break out trading and reversal trading. I use both of these techniques, in my day to day trading, but there is always a more dominant technique.

From mid-2005 through to 2007 reversal trading was my dominant technique. Strong break outs were not as common during this time. The market had a tendency to have mini-breakouts and then reverse. However, in 2008 through to mid-2010 break out trading became my dominant technique. In this period, strong break outs were common and you could easily make 50 pips on a GBP/USD scalp line break.

Mid-way through 2010 the Forex market changed again and I had to change my dominant technique back to reversal trading. This was all because of changes in the average daily range.

The Forex market has cycles and, as traders, we need to adapt to the changing cycles of the Forex market or perish. So let’s look at some average daily range statistics, for the most popular pairs.

As you can clearly see, in 2008 we had a massive explosion in average daily ranges leading to a golden era for break out trading. Pairs like EUR/USD more than doubled their average daily range between 2007 and 2008. Some pairs not listed here quadrupled their average daily range in that time period. You can read this post from Kathy Liens blog. She wrote it in 2008, as the market explosion was happening.

Implications of Changing Average Daily Ranges

From 2009 to 2010 the average daily range of EUR/JPY decreased by 44 pips. This number may seem small until consider, that in 2009, I would generally have targeted 40 pips on a EUR/JPY trade. In this context, the change in the average range for EUR/JPY is bigger than the size of my total target.

Changes in the average daily range can have a severe impact on the profitability of a trader. Imagine it is 2009 and you have spotted a great EUR/JPY set up. Let’s assume that the pair has already ranged down 80 pips. So on average EUR/JPY will move an extra 111 pips beyond what it has already ranged (191 – 80 = 111). However, if this exact same set up and trade occurred in 2010 it would only have moved an extra 67 pips on average. So in 2009 your trade would have been less risky, the upside potential would have been better and you would have had the opportunity to target more pips.

This is one example that illustrates the difference between a small change in the average range. However, just a 40 pip change can be very significant over the course of a year, let alone a change of 100 pips on the average range.

How Drastic the Changes to My Method Will Be

I never completely stop trading a part of my method. Usually I have a front runner and a runner-up. The front runner is what I use for 60%-80% of my trading. The runner-up is what I use for the rest of my trading. For a few years, break out trading has clearly been the front runner. Now breakouts are taking a few steps back and reversals are becoming the front runner.

So I will not completely give up on trading break outs. However, I will not trade them nearly as often and the set-up will have to be very solid for me to consider trading it.

Why Now?

Some of you may be asking why now? The changes started in 2010 why am I adjusting my method now? Well, first of all, I haven’t just started adjusting my method now. If you look back, for the past several months, I have been saying consistently that reversal trading is becoming more profitable than break out trading. This is simply the first time I posted an explanation as to why.
It takes time to analyse the market and make sure these changes are for real. There are always some months here and there that have high or low ranges. So I have to be sure that ranges actually changed significantly before posting about it.

How Fast Can You Notice Changes?

You can notice these changes within days. However, to notice changes quickly you cannot only use the 365 average daily range. I use two range statistics, the 365 day average daily range (Yearly ADR) and the 10 day average daily range (10 Day ADR).

Yearly ADR – The Yearly ADR is used as above to detect large changes in the average daily range. Changes like the explosion we saw in 2008 are large changes.

10 Day ADR – The 10 Day ADR detects recent changes in the average daily range.

The 10 Day ADR is what allows you to react quickly to changing conditions. For example, if the Yearly ADR for GBP/USD is 150 pips but the 10 Day ADR is 250 pips GBP/USD is ranging above its Yearly ADR. So in this case, you can make quick changes to your technique. Quick changes would be things like targeting more on trades as GBP/USD now has the potential to move much more.

The Yearly ADR cannot be used to react to recent changes, as it only shows you long term changes. So I only use the Yearly ADR to adjust the overall goals of my method. As I said earlier, break out trading has been my focus since 2008. With recent drastic changes to the Yearly ADR my focus is switching to reversal trading. So the Yearly ADR helps me adapt my long term trading strategy.

The 10 Day ADR is extremely important as it allows you to react very quickly to changes. Having different techniques in your method that work in different conditions helps keep you current. So use the 10 Day ADR for quick changes to techniques and targets and the Yearly ADR for overall goal and strategy changes.

When Will Ranges Come Back?

The answer to this is unknown. The fact is that the Forex market is constantly changing. We could return to high average daily ranges this year or in five years. However, none of that is really important. What is important is that you learn to adapt to changing conditions. More likely than not, changes in the average daily range will impact your trading style significantly. At the very least, you will need to lower your trading targets as it will become hard to make as many pips, per trade, as it used to be.

What Now?

Well it is up to you what you do with this information. If you have any questions feel free to join me in the Forex chatroom. I am in there every London session. You can also leave a comment on this post with any questions. I will try to make a follow-up post depending on how many questions I get.

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