What follow are 4 tips that will improve the way we look at charts:
Is all about the Waves
The market moves in waves. While everybody always talks about trends and riding the trend to maximum profits. The truth is that no trend shoots straight up without retracing on the way up. Think of it as taking four steps forward and two steps back. You will see this type of movement even in the strongest of trends. People make profits and people take profits along the way as the trend continues to go up or down. A lot of traders leave of the profit on the table because get out of a trade too soon, not realizing that trends is still going strong and what they are seeing is a retracement. Ranges also develop in waves. To that end, the interpretation of ranges and trends in your chart is critical. When trading, always keep in mind that trend will move up/down, pullback a little, and then continue the trend to pullback again and so forth and so on.
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Learn to identify when the Trend Reverses
While a lot of money is made riding a trend, the great paradox of trading is that traders give most of it right back when the trend reverses. This sounds almost like a contradiction to the ride the waves to profit rule above. Obviously, a pull back is very different than a trend reversal thus the importance for traders to be able to interpret their charts correctly. Where we should ride a pullback to more profits, we must exit a trade when the trend reverses.
The easiest way to identify a trend reversal is through the use of trend lines. For example, in an uptrend, the lines are going to be drawn using the higher highs and at the higher lows. These two lines should create an upward channel. When you start seeing a few of lower lows combined with lower highs breaking support, a trend reversal may be developing. Also look for when the uptrend reaches a resistance point to the higher highs and lower lows develop with it, look for a possible trend reversal developing. Trend lines are not perfect, but are a helpful tool.
The Coiled Spring may wipe out your profits
Currency pairs, often go from big moves to being flat to big moves again. When the currencies are in the consolidation stage or flat mode, many traders try to profit at this stage. Remember that we discussed in previous posts that this stage happens 60% of the time. The profits made at this stage are small and, depending on the duration of this stage, may all be wiped out when the market breaks out of this stage. This breakout is like releasing a coiled spring, breaking hard out of the flat mode and wiping out all your profits. Only very experienced traders should trade at this stage. A safer strategy is to wait for a breakout and to trade with the momentum that the breakout generates.
Always keep an eye on the Spread
By now, you should know that, in Forex, spreads cost money. Without volatility the spread usually cost more because there is less profit to be made. My advice is to avoid trading when volatility is absent. Try to trade during the times of higher volume like, for example, when the US and the European markets overlap, the USDEUR pairing is on the move. Conversely, when those markets are closed, the same pairing is much quieter.
Following these 4 simple rules will simplify and improve the interpretation of your chart and, by default, give you an unfair advantage of the many other traders that don't follow these simple rules.