Forex

Well THAT Looks Familiar

rickwright200
Rick Wright
Instructor

Hello traders! It has certainly been an exciting time in the forex market since my last article! Exciting in that some of our Yen pairs (AUDJPY, USDJPY) broke out to new multi-year highs, while the EURJPY and GBPJPY have merely retraced (76% and 62% as of the time of this writing). Each has moved several hundred pips, hopefully you picked up a few!

The purpose of this week’s newsletter is not to talk about a few pairs that have had great moves, but to show you how trading is boring and predictable. About as boring and predictable as driving your car from home to a familiar destination – and for this example, you will be imagining driving on a familiar highway. For fun, you are driving to your local bank, let’s call it Bill’s Bank. Since you have driven this route dozens of times before, the basics of the drive are very familiar to you. Going past the same buildings, same large, old trees, taking the same turns, even the same exit off the highway. What will be the major differences when driving to Bill’s Bank on a quiet Sunday morning vs. a busy Monday morning? If you answered traffic, and perhaps a bit slower travel time, you are correct! But the basics of the drive remain the same. So how in the world does driving to Bill’s Bank relate to trading forex?

You may have heard your instructor at Online Trading Academy or read in these Lessons From the Pros newsletters something about “trading styles.” What we are generally referring to is how long a trader expects to be in a trade after they enter – also, how many pips are you trying to make. A very short term trader/scalper may be trying to capture 5-20 pips on a trade, while a medium term trader may be going for 50-200, and a longer term trader may be going for 200-500+. The main differences among these styles is the amount of time examining charts and frequency of trades.

In most classes that I teach, one student will ask if they have to learn new techniques for every style of trading. Thankfully, the answer is no! Charts are what we call “fractal.” Webster’s Dictionary defines fractal as, “Any of various extremely irregular curves or shapes for which any suitably chosen part is similar in shape to a given larger or smaller part when magnified or reduced to the same size.” What this means in trading is that someone who trades off of a 20 minute chart is looking for the same things as someone who trades off of a 360 minute chart or even a daily chart. Don’t believe me? Let’s take a look at three charts with three different time frames and three different currency pairs.

lftp 20130319 fig 1

 lftp 20130319 fig 2

lftp 20130319 fig 3

Notice anything similar? All three charts are showing a clear uptrend (rally), a topping pattern (base), and a clear downtrend (drop). Inside of each wave or move are other forms of rallies, bases, and drops as well. So the path was very similar, but some of the minor turns – or traffic, to keep with our driving theme – was a little bit different on each chart.

Our basic core strategy is to buy in qualified demand zones in uptrends and sell short in quality supply zones in downtrends, which sounds simple enough. The main trick is learning to recognize the quality levels. One of the many things taught in our five and seven day classes, and expanded in our Extended Learning Track online classes, is the importance of finding a trading style that works for you and your lifestyle. Not everyone has the time or desire to watch a 20 minute chart during the day, and not everyone wants to wait around days or weeks for a daily chart trade to show up!

Back to another driving analogy. When you first learned to drive, of course things were a little bit scary. Most things you saw on the road were new to you. Remember the first time you got cutoff by another driver while on the highway? It probably caused quite a bit of panic, for at least a few minutes! What about now? Can you now almost know ahead of time that someone is going to cut you off? You are in the middle lane, an off-ramp is coming up, and the driver in the far left lane is driving a little erratic. You just know that he is going to cut you off and try to make it to the off-ramp. Sure enough he does. How did you know? Because you have seen his driving pattern before, perhaps you’ve seen it dozens of times before! Knowing he is going to cut you off doesn’t make you psychic – it makes you experienced. The same process applies to trading. Every chart is a little bit different, much like daily traffic is a little bit different. But there is nothing on the charts that is completely new and unprecedented. Odds are, you have seen the same or similar pattern before. If you expect the driver to cut you off, tap on your brakes and be safe. If the chart is looking like one you have seen before, trade the chart the same way!

One way I recommend students to more quickly familiarize themselves with chart formations is called the “Hard Right Edge” game. I’ve mentioned this in other newsletters, but to reiterate, the game is played like this: pull up a chart, and scroll back in time to the beginning of the chart’s history. Don’t squeeze the candle so you can see every bit of price action, but drag back in history so you can’t see what is coming up on the chart’s right edge, the “future.” Then move the chart forward in time candle by candle, recognizing the supply and demand zones, patterns, etc. This is like learning to drive on a simulator; the main point is to become familiar with the surprisingly few possibilities that exist in the market, and learn to trade accordingly.

So keep your eyes open for the familiar patterns, they are out there every day/every week/even every month!

Until next time,

Rick Wright

rwright@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.