Forex Trading - Why Trying To Determine Overbought And Oversold Positions Is A Dangerous Game

There are many different methods used by traders to trade the forex markets. One of which is to constantly be on the look out for overbought and oversold positions, but is this really the best way to trade?

If you have any experience at all of trading, whether it's forex trading or stock market trading, you will know that it's virtually impossible to consistently enter a position at the exact top or bottom of an instrument's trading range.

Even with the use of multiple technical indicators it is extremely difficult to do. Sure you may get lucky every so often but the reality is that most of the time you will enter a position too early and sometimes the price may just race through what you perceived to be the top or bottom.

It's important to realize that a currency pair can remain overbought or oversold for a very long time, and just because tried and tested indicators like stochastics and RSI, for example, indicate that the price is overbought or oversold does not mean that the price cannot go a lot higher into an even greater overbought or oversold position.

This is true in both short and long time frames, and can often result in a trader's stop loss being quickly hit as the price continues to become even more overbought or oversold.

For this reason my own personal preference is to follow the overall trend and not try and second guess the market, because this is what you're ultimately doing when you're trying to call tops and bottoms all the time. You're effectively going against the trend and over time this is not the most profitable way to trade in my opinion.

A more effective way of trading is to wait for confirmation of a reversal before entering a position. Yes you may not yield as many points trading this way, but it's much easier to go with a trend than fight against it.

For example as well as using traditional overbought and oversold indicators you could use crossover indicators such as MACD, TRIX and EMAs to indicate that a true reversal is taking place. You can also wait until short term support and resistance levels are breached for additional confirmation.

The main point I want to get across in this article is that if you're just using certain indicators to call the top or bottom of a market, or worse still just using your own intuition, you are playing a very dangerous game, and you are unlikely to make consistent profits in the long run.

If you do choose to trade this way you're much better off sacrificing a few points by waiting patiently for additional confirmation that a true reversal is taking place.

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Forex Trading - Determine Forex Trend

Successful forex trading has a lot to do with determining the overall trend. Without trend awareness, a trader is most likely to suffer unnecessary losses. The trick is to trade in the same direction as the trend, however in most cases it is easier said than done. What is the best method of determining forex trend?

The trend is very relative and highly dependent on a forex trader's understanding and a perspective of the market. Every trader has an individual approach to forex, and therefore a time frame in which one trades vary from one person to another.

A trend is a fragile term. With a wrong set of frames, the trend can emerge and disappear within seconds, or what seems to be a trend might quickly surrender to any possible world events.

Since trend is relative, it might be a good idea at least to use Long Term, Outer and Inner Trend Lines with frames starting from 1 month and up. Determining the trend is not easy, especially when the majors have a tendency to fluctuate and cause the daily and weekly forex charts to differ greatly. Keep in mind that sometimes a trader is faced with a condition called ranging - that's when the currency pair is not really trending within a selected time frame.

There are many ways to figure out the trend, but the basic one is to examine the price charts and see which way the price is turning to. If the price is rather higher on the right side of the chart - that shows the upward trend. And in case the price is rather lower on the right side - you have got a downward trend.

Of course, if it is that simple, we all would have earned millions by now!  Sometimes there are "fake" trends and a forex trader needs to know not to fall for it!

The best way to figure out the trend is via technical indicators. RSI (rate of stochastic increase) is successfully used by many traders on daily charts. By tuning RSI to 35 makes this particular indicator fairly predictable:

- The upward bias is when the rate climbs above 50

- The downward bias is when the rate slides down below 50

However, there is a disadvantage with this particular setting - in case there is a "ranging" condition, the rate will jump above and below 50, confusing a forex trader and giving false indications of a missing trend.

The best solution to the ranging problem is accepting upward bias when the rate is slightly higher than 50 (let's say, above 53) and accepting downward bias when the rate is slightly lower than 50 (let's say, below 47).  It is true that this limits profit opportunities, however at least a trader can be more certain about the trend!

Another great forex indicator is the moving average indicator, for example exponential moving averages (EMA's). Keeping an eye on 20, 50 and 200 period EMA's will eventually show the trend. If all the periods show upwards, then the new upward trend is being born! And, on the other hand, if all periods begin to slide down, you have yourself a downward trend.

Basically, there are lots of ways to determine the overall forex trend. Whatever indicators you choose to apply, when you see the trend going down in your long term charts, check out the middle and short term charts as well to figure out patterns to confirm the trend or discard the false alarm.

Read more...

Forex Trading - Determine Forex Trend

Successful forex trading has a lot to do with determining the overall trend. Without trend awareness, a trader is most likely to suffer unnecessary losses. The trick is to trade in the same direction as the trend, however in most cases it is easier said than done. What is the best method of determining forex trend?

The trend is very relative and highly dependent on a forex trader's understanding and a perspective of the market. Every trader has an individual approach to forex, and therefore a time frame in which one trades vary from one person to another.

A trend is a fragile term. With a wrong set of frames, the trend can emerge and disappear within seconds, or what seems to be a trend might quickly surrender to any possible world events.

Since trend is relative, it might be a good idea at least to use Long Term, Outer and Inner Trend Lines with frames starting from 1 month and up. Determining the trend is not easy, especially when the majors have a tendency to fluctuate and cause the daily and weekly forex charts to differ greatly. Keep in mind that sometimes a trader is faced with a condition called ranging - that's when the currency pair is not really trending within a selected time frame.

There are many ways to figure out the trend, but the basic one is to examine the price charts and see which way the price is turning to. If the price is rather higher on the right side of the chart - that shows the upward trend. And in case the price is rather lower on the right side - you have got a downward trend.

Of course, if it is that simple, we all would have earned millions by now!  Sometimes there are "fake" trends and a forex trader needs to know not to fall for it!

The best way to figure out the trend is via technical indicators. RSI (rate of stochastic increase) is successfully used by many traders on daily charts. By tuning RSI to 35 makes this particular indicator fairly predictable:

- The upward bias is when the rate climbs above 50

- The downward bias is when the rate slides down below 50

However, there is a disadvantage with this particular setting - in case there is a "ranging" condition, the rate will jump above and below 50, confusing a forex trader and giving false indications of a missing trend.

The best solution to the ranging problem is accepting upward bias when the rate is slightly higher than 50 (let's say, above 53) and accepting downward bias when the rate is slightly lower than 50 (let's say, below 47).  It is true that this limits profit opportunities, however at least a trader can be more certain about the trend!

Another great forex indicator is the moving average indicator, for example exponential moving averages (EMA's). Keeping an eye on 20, 50 and 200 period EMA's will eventually show the trend. If all the periods show upwards, then the new upward trend is being born! And, on the other hand, if all periods begin to slide down, you have yourself a downward trend.

Basically, there are lots of ways to determine the overall forex trend. Whatever indicators you choose to apply, when you see the trend going down in your long term charts, check out the middle and short term charts as well to figure out patterns to confirm the trend or discard the false alarm.

Read more...