Trade the Diagonal Pattern in Forex Trading

Diagonal patterns are one of my favorite patterns to trade because the method to trade them is fairly straight forward and you can identify clear risk and reward parameters. This piece will outline what a bullish diagonal looks like and how you set your entry and exit parameters for the potential trade.
The Anatomy of a Bullish Diagonal
The ideal diagonal would consist of five waves. Each wave of the three waves to the downside would be smaller than the previous alternating wave. The alternating waves of the wave move are waves This becomes the basis of the bullish diagonal pattern.
This pattern tends to fool trend traders because it continues to produce lower highs and lower lows. Trend traders would see this as a bearish trend. However, there are a couple of clues that can tip us off that the trend is likely to correct or possibly reverse.
Measure the waves – In the idealized pattern above, see how wave 5 is shorter than wave 3 while wave 3 is shorter than wave. This indicates the trend lower doesn’t have the strength it used to. Each subsequent push lower in price travels less distance than the previous leg. The trend has moved too far and too fast to the downside and is likely to correct upward.
Look for simple indicator divergence – determine if divergence is showing up in the formation of wave 5. Divergence is another clue of a tiring trend and momentum is slowing to the downside. Absent a healthy correction to the upside, this pattern is losing momentum and at risk of a sharp move up.

Simple Breakout Strategy in Forex Trading

Breakout is a common forex trading strategy used by many traders. Learn why breakouts work, what conditions are needed to make them higher probability and how to apply a breakout strategy to the Euro.
Why Trade Breakouts
We are often taught to buy low and sell high. However, in breakout trading, we actually do the opposite of buying high and selling low. How can this type of strategy actually work in the financial markets?
The fear of missing something is a powerful emotion. If you think a strong trend is going to develop, but don’t trade it, watch what happens to your emotions as you see the trend eventually move in the direction you thought it was going to go. That is the fear of missing something. At that point, traders generally feel compelled to enter into the trend because they knew they were right.

Trading breakouts plays off the emotion of missing something. As a strong trend develops, everybody wants to hop on board which adds more fuel to the trend. By waiting for higher prices and strategically entering above resistance forces the market to dictate to you when it is ready to trade at new levels not seen in a while.

What Ingredients Are Needed for Follow Thru
Higher probability breakouts need strong trends or volatile conditions behind the market. Strong trends are more likely going to have the force to successfully break through. Think of a strong and muscular person punching a wooden board. They can generate enough force (think strong trend) to push through those support and resistance levels.

Benefits of Liquidity In Forex Trading

Forex liquidity is confusing to the new trader. 

a market be seemingly volatile and liquid at the same time? This article will be a primer to understanding just that.

As one gets started in forex trading, one of the first benefits they’re likely to hear is how much liquidity the FX Market offers over other markets. The latest figures are roughly $4 Trillion in daily volume as per the Bank of International Settlements. But what does that mean to you and your trading?

Why Should You Care About Liquidity?
Ask anyone during the 2008 credit crisis who was trying to sell their home what are the benefits of liquidity? Or maybe a stock trader who is on the wrong side of a trade when it’s been announced that the stock they’re shorting is rumored to be acquired by a much larger company at a premium in afterhours trading. These people were at a financial stronghold because they could not exit their trade when they wanted to and were subject to illiquid conditions in the market.

Forex Trading Commodity Correlations

The trading setup below would be indicative of a trader who is bearish on the price of USOil. By expecting prices to decline on USOil, it would be predicted that the USDCAD would break higher in line with our mentioned inverse correlation. Traders can use the 1.0100 resistance level and plan for a breakout to higher highs in an established uptrend. Entry orders can be set below this point while a stop loss can be placed under current resistance.

Remember there are always two sides to every trade. Traders expecting USOil to increase in value would expect the exact opposite. If resistance holds and price remains beneath 1.0100 traders may reasonably expect the USDCAD to turn lower.

Forex Trend Trading Rules with Moving Average Crosses

Moving Averages (MA): The average price over a determined number of periods (e.g. 50, 100, 200). If the market is in a significant uptrend, the average price over a determined period should rise and price should not weaken below the average.
Moving Average Crossover: The point on a chart when there is a crossover of the shorter-term or fast moving average above or below the longer-term or slower moving average.

Many traders have been to the moon and back working to find the strategy that works best for them. However, most traders’ strategies originate and end with a moving average crossover to time entries and exits. In fact, this simple system has created time-tested names for crosses like the ‘Golden Cross’ and ‘Death Cross’ because the market tends to honor when a crossover takes place.

The first thing to appreciate when understanding a moving average crossover is the simplicity. Markets tend to oscillate and trade within a well-defined range or trend. Traders soon learn that following trends can offer the most reward for the least amount of work and moving average crossovers benefit from that realization.
Also of importance is that many currencies and tradable instruments do not trend. However, when you find a currency pair that has a history of trending and you see a moving average crossover, you can then look to enter a trade with a well-defined risk by setting your stop above or below the crossover.
Benefits of using a Moving Average Crossover Strategy.

The moving average crossover trading strategy brings together a shorter term moving average with a longer term moving average. Common examples are a 10 MA and a 30 MA for shorter term entries or a 50 MA and a 200 MA for longer term entries. When you enter and exit based on crossovers you are allowing yourself to take objective signals that are reflective of market strength.

Risks of using a Moving Average Crossover Strategy

• Although this is seen as the simplest trading strategy, the Moving Average Crossover for following trends is not without draw backs. The moving averages give equal weighting to all prices within the period selected when applying the indicator so there is a lagging nature to the indicators ability to respond to changes in price. When there is a slower response time, this could mean that you’re sacrificing less reward and opening yourself up to greater risk.
• As you can imagine, there are more than one type of moving averages. Some moving averages like the Exponential Moving Average put more emphasis on the most recent price to help you react quicker to possible trend shifts. Whichever type of moving average you use, the rules for entries and exits remain the same.

Advanced Uses of a Moving Average Crossover
When looking at advanced trading systems, many traders come upon the initially confusing but fully inclusive Ichimoku Trading System. At the heart of the Ichimoku Trading System is a Moving Average crossover of the 9 and 26 period moving average. The system only looks to take buy signal crosses if price above the average of the high and low price over the last 52 periods or sell signal crosses if price is below the average of the high and low price over the last 52 periods.

Closing Thoughts
Moving Average Crosses bring the trader the benefit of time confirmed trend entries and exits while avoiding whipsaws in prices that can hurt other traders who are too quick to act on a premature move. Because there can be a lot emotion behind trading and risking money, there is a natural benefit to an objective and simple strategy. If you’re a new trader, this is a great place to start to ensure you don’t miss the big moves.

Trading Trendline Breakouts in Forex

Breakout traders have been waiting patiently for their opportunity to enter the market upon the conclusion of the established trend. A breakout entry by design is a technical strategy developed to trade as price breaks through an established support and resistance level. In a downtrend Entry orders can be placed above resistance waiting for a new high to be made. Pictured below we can see this plan put into action with a potential entry to buy the USDCHF on a break above resistance at .9380. To complete the trade idea, traders can also limit their risk using a stop under the previous line of resistance. In the event of a false breakout, traders will wish to exit their positions on a return to lower lows.

My preference is to set entries to buy the USDCHF on a trendline break above .9380. Stops should be set under new support near .9330. First targets can look for 100 pips profit at .9430 for a 1:2 Risk/Reward ratio.

Alternatives include the USDCHF trendline holding with price breaking to lower lows.

Forex Trading Using Support and Resistance

Supply is the amount available at a particular price, while demand is the amount that is wanted or desired at a specific price.
As we saw in The Forces of Supply and Demand, the price of a product (or instrument) can have a huge impact on the amount that is demanded from the marketplace, or the amount of supply that might be available.
As prices increase, seller’s willingness to get rid of their products will also increase. This is called a supply curve, and it illustrates how additional units become available (on the vertical axis) as prices increase (horizontal axis).
Supply curve, taken from The Forces of Supply and Demand
And on the other side of that equation, buyers will demand more at lower prices; as price increases we will generally see that demand fall as illustrated below in a typical demand curve. Once again, # of units is on the vertical axis, with price on the horizontal axis:
Demand Curve, as shown in The Forces of Supply and Demand
Supply and Demand in the Real World
Let’s imagine, for a moment, that you have been tasked with the job of purchasing groceries for your family. And as most families, a top-line item on that grocery list is steak for weekend grilling.
You go to the market one day, and notice that the price on steak has doubled! It’s now going to cost twice as much to pursue your weekend grill-master activities, and you quickly begin to think how valuable that steak might be. You begin to look for alternatives, such as hamburger or chicken; replacement products with which you can derive similar value; albeit at a far more comfortable cost.
While you, individually, may decide to pay the doubled price of steak – we have to think of the market dynamics at work. Not EVERY steak buyer would be interested in doing this, and many would opt for replacement products.
This is a living example of a demand curve. As price increased, demand decreased.
But, let’s say the next week you go to the grocery store, you notice a different phenomenon. Now, instead of steak being twice what your used to paying – it’s half of what your used to paying, or 75% off of last week’s price.
Now you begin thinking in a different direction than you had last week.
You start to think that having steak during the week, on top of your weekend grilling festivities, can bring some additional enjoyment to yours and your families lives.
You remember how much your wife loved that steak salad the last time you took the family out for dinner, and you decide to load up while price is cheap.
But while you’re pontificating the wonders of steak in the grocery store, you witness a rush of people running with baskets full of steak. Customers are loading up while price is cheap, and you realize that if you don’t act fast all of the discounted meat will be gone before you know it!
This is, once again, demand at work. And as price has moved lower, we’ve seen how demand increased; not only for you, but the market in general.
Supply and Demand Playing Out through Support and Resistance
The example of discounted steak isn’t all that different than what we can see on a currency chart. Let’s take ‘The Cable,’ for example (GBPUSD).
Since July of 2010, we have not seen price below 1.5230. There have been multiple instances in which price has approached this level – but as of yet, this line in the sand has not been broken.