Showing posts with label Risk Management. Show all posts
Showing posts with label Risk Management. Show all posts

How to Use Trend Lines in Forex


Trend Lines 

A bull trend line is a line drawn across the lows of a bull trend, and a bear trend line is drawn across the highs of a bear trend. A trend line is most helpful when looking for entries in the direction of the trend on pullbacks and in the opposite direction after the trend line is broken. Trend lines can be drawn using swing points or best fit techniques such as linear regression calculations or simply quickly drawing a best approximation. They also can be created as a parallel of a trend channel line and then dragged to the trend line side of the bars, but this approach is rarely needed since there is usually an acceptable trend line that can be drawn using the swing points. Sometimes the best fit trend line is drawn just using the candle bodies and ignoring the tails; this is common in wedge patterns, which often do not have a wedge shape. It is not necessary to actually draw the line when it is obvious. If you do draw a line, you usually can erase it moments after you verify that the market has tested it, because too many lines on the chart can be a distraction.
Once a trend has been established by a series of trending highs and lows, the most profitable trades are in the direction of the trend line until the trend line is broken. Every time the market pulls back to the area around the trend line, even if it undershoots or overshoots the trend line, look for a reversal off of the trend line and then enter in the direction of the trend.

How to Draw and use Trendlines

Generally speaking, it is advisable to wait for three confirmed points of contact before you start putting further attention to a trendline. Most traders make the mistake and connect the first two highs or lows and then get overly excited once the price gets there again. However, a trendline is only confirmed if you can get three points of contact because you can always connect any two random points on your charts.

Upper and lower trendlines

The next question that comes up is whether you draw trendlines connecting the lows or the highs, The answer is very straight forward. During a downtrend, I use the highs and during an uptrend, I use the lows to draw a trendline. This has two benefits: You can use the touches to get into trend-following trades and when the trendline breaks we can use that to trade reversals.
The slope and angles: trend strength
The slope or the angle of trendlines immediately tells you how strong a trend is. A large angle on a lower trendline in an uptrend means that the lows are rising significantly fast and that the momentum is high. The screenshot below shows an uptrend with steadily increasing angles of trendlines. The trend is gaining momentum and the trendlines visualize it perfectly.
Some people will call this the bump and thrust pattern when you see that a trend is suddenly gaining even more strength and then the trend becomes unsustainable at one point.

Reading trend structure

The screenshot below shows a primary downtrend as indicated by the red arrow.
During the primary trend, one can start looking for weak consolidation phases and apply trendlines to those price movements. The low angle of the trendlines indicates that the consolidation does not have a high chance of turning into a real bullish reversal. The sellers still keep pushing the price very close to the bottom of the move, the higher lows are very shallow and the buyers cannot take over the price action. One then just has to wait until the trendline is broken and the downtrend is resumed.

Of course, you won’t always be able to draw a trendline
but if you can find one, they can be high probability trade setups.

The Market does not have Emotions

Risk Management

The market does not care if you win or lose your money "The market does not have emotions" but the market will tell you what it is going to do if you will follow the rules of your trading system.

Start Small

Start forex trading with a small amount of money you can afford to lose. If you make winning trades early on, take that money off the table. Don’t let early success fuel overconfidence and bigger, riskier trades.

Broker Risk

Prior to handing over your capital, you want to make sure you do your homework and find a reputable forex broker.  Broker risk, can impact you and your working capital in numerous ways. Some forex brokers are not regulated and unfortunately some do not have you best interest in mind.



Build a Good Trading Plan

A trading plan can help make your FX trading easier by acting as your personal decision-making tool. It is extremely important for your forex trading plan to be personal to you.

Set a Risk Reward Ratio

In every trade, the risk you take with your capital should be worthwhile. As part of your forex trading plan, you should set your risk reward ratio to quantify the worth of a trade.

Use Stops and Limits

Because the forex market is particularly volatile, it is very important to decide on the entry and exit points of your trade before you open a position.

Manage your Emotions

Volatility in the FX market can also wreak havoc on your emotions, and if there's one key component that affects the success of every trade you make, it’s you. Emotions such as fear, greed, temptation, doubt and anxiety could either entice you to trade or cloud your judgment.

Keep an eye on News and Events

Making predictions about the price movements of currency pairs. Make sure you’re not caught off guard, keep an eye on central bank decisions and announcements, political news and market sentiment.

Start with a Demo Account

The main difference between a demo and a live account is that with a demo, you won’t lose any real money, meaning you can build your trading confidence in a risk free environment.




Summary

If you have a particularly effective risk management strategy, you will have greater control over your profits and losses.