7) “Smoothing Out” other Indicators ie. Stochastic Oscillator:

The construction of the Ichimoku shows that we don’t have to use the MA of the close price. In fact if you think about what the moving average really is, it is simply a look at a series of data and smooths them out. Therefore, another use of the MA is to smooth out not only price data, but indicator data. For example, the stochastic oscillator uses a smoothing out process in its calculation:

Here is the formula as well as an image of the stochastic oscillator copied from the FXTimes glossary:

When plotted on a chart, the indicator is usually plotted as 2 lines: %K and %D. %K is the main (fast) line and %D is the signal (slow) line.

A component of the stochastic formula is as follows:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
%D = 3-period simple moving average of Fast %K (This basically smooths out the Fast%K line)

The stic Oscillator is calculated by the formula:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
Slowing %K = N-period moving average of Fast %K
%D = N-period simple moving average of Slowing %K

You can see in the example that the “full” stochastic has a smoother, rounder path, while the “fast” stochastic has a more jagged one.

Note: technical indicators are all derived from price data.

1) As an indicator of general trend relative to price
2) As an indicator of general trend based on the 2 different moving averages
3) Other multiple moving average systems

In construction of other indicators:

4) MACD
5) MA envelop – Bollinger Band
6) Horizontal shift; in Ichimoku Charts
7) “Smoothing Out” other Indicators ie. Stochastic Oscillator

NEXT: Channels, Bands, and Envelops (Intro)

Fan Yang CMT is the Chief Technical Strategist FXTimes – provider of x News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

19 Trading Rules to Beat the Markets

(Watch the Webinar for this article)

Since entering the financial markets in 1969, Martin J. Pring has become a leader in the global investor community. He is the chairman of a conservative money management firm, Pring Turner Capital. He is known for developing economic indicators and also well known for his contribution in educating traders and investors. In fact some of his books are requirements for those seeking the CMT (Chartered Market Technician) designation. In one of these books, Investment Psychology Explained – Classic Strategies to Beat the Markets, he lists 19 classic trading rules. Below is a summary and my interpretation of his rules and how I think they can be applied. Rule 1-10 are psychological management rules while 11-19 are risk management rules.

Rule 1: When in Doubt, Stay Out – Sure, you can’t ever get rid of all uncertainty. However, if you are going to do the research and come up with a trade idea, you need to have confidence in the reason you are entering the trade. Otherwise, you will not have the conviction to stick with a trade and might get “shaken” out by noise. On the other hand if you do have a sound reason to enter the trade, but that reason becomes invalid, you no longer have the justification to stay in. In this case, an exit is warranted because otherwise it is simply a gamble. You are not in this business to gamble, but to invest or trade into sound market research and analysis.

Application: make a list of setups, or events that need to happen before a trade should be considered.

Rule 2: Never Invest or Trade Based on Hope – This complements rule 1. If you are not confident in your analysis and reason for trading, you invite hope into the picture. When you start praying to your God or lady luck, you have become a gambler, and not a trader/investor. Because in both gambling and investing,  there is uncertainty, there is a thin line between the two “fields”.

Application: Try to be as mechanical as possible when it comes to entry and exit methodology. Don’t leave room for hope when the market is against you and hit your stop level.

Rule 3: Act on Your Own Judgement or Else Absolutely and Entirely on the Judgement of Others - Basically, what Pring is saying here is to have consistent method in your trading, and have confidence in it. Your sources of information from which you derive a strategy should be sound, and if you trade frequently, they should not vary from trade to trade. You don’t scrap all your analysis just because some analyst somewhere offers his or her expert opinion. If you try to resolve what all these “experts” are trying to say, you might end up with analysis paralysis. Find a consistent method and stick to it, otherwise keep working on your method, OR let a professional manage your account. (In this scenario, make sure you do the research on your money manager).

Application: Make a checklist of resources that you based your information on. ie. economic releases, technical analysis, opinions of analysts you follow consistently. If someone offers analysis you have not encountered before, take time to work it into your routine decision making instead of just taking it face value.

Application: In a range bound market, define areas of support and resistance. Look for selling opportunities at resistance and buying opportunities at support. In a trending market, say bullish, only look to buy on dips. Vice versa during a bearish market look to fade rallies. Again, this is just a general concept and the actual decision to trade should be determined along with other factors.

Rule 5: Don’t Overtrade – The only reason to trade is if the market is giving you the signals you believe to provide trading opportunities. However, there will be times when being objective is difficult. Other reasons can cloud your judgement. For example if you had a disappointing week, you might pin your hopes in trading to pick yourself up. Or subconsciously trading might be an entertainment and provide emotional fulfillment.

Application: Making the trading process as mechanical as you can will eliminate some of the “garbage” factors in trading. It is also important to prepare yourself mentally and emotionally before your trading sessions. Get your mind cleared up of outside influences. Treat trading as a professional endeavor, because as soon as you don’t, it becomes gambling.

Rule 6: After a Successful and Profitable Trading Campaign, Take a Trading Vacation - This rule helps to eliminate overconfidence and addresses the fact that trading performance is cyclical. Besides, don’t you want to have a life?

Application: Knowing when NOT to trade is as much a discipline as knowing when to trade. Therefore you need to define what it is to have a profitable campaign and what it takes to return to objectivity after gaining confidence. When you feel like you’re superman, and when you start making projections into the future based on your recent period of success, you should be alarmed that you are near that peak of your cycle.

Rule 7: Take a Periodic Mental Inventory to See How You are Doing - This rule basically reminds you to stay objective, and understand that trading is a very cerebral process.

Application: Create a checklist of questions before you trade ie. Am I emotionally stable at the moment? Am I overtrading? Am I sticking to my trading plan? Can I afford the risk if the market does not go the direction anticipated?

Rule 8: Constantly Analyze Your Mistakes – Understanding yourself is very important in a world full of uncertainties. When you win, it is very likely that you attribute success to hard work, and when you lose the tendency is to attribute it to bad luck. Knowing this bias, you should look deeper to recognize mistakes in judgement.

Application: There are different types of mistakes. 1) Bad execution – Did you make a trade that is not part of your system? If so ask yourself why. Did it come from an emotional trigger like fear of missing a trade. 2) Bad trade management – It is one thing to make the wrong call, it is another to allow the bad call to become a major drawdown. Ask yourself if the mistake was contained. Were you hoping the market comes back? Did you exit due to despair after loss of hope? If so, you probably entered the trade without enough consideration of the risk and only looked at the prospect of profit. Lack of preparation therefore can lead to inability to manage your loss. 3) Systematic – Only when you can rule out the first 2 types of mistake, can you truly be objective in analyzing your method. If losses are piling up despite sticking to your plan and containing losses, it is time to get back to the drawing board. Step away and look at your trading strategy.

Rule 9: Don’t Jump the Gun - Be disciplined. That’s all. If you have a specific trading strategy, you have to wait until the signals are there. Otherwise, what’s the point of having a strategy. Unless you have been in this profession for 20 years and still surviving, don’t rely on “intuition”. This is something you have to build through countless trades, and the only way to gain intuition is to begin with discipline.

Application: Be as mechanical as you can. Refrain from the temptation of justifying a trade without your signals simply because you believe it is an exceptional situation. There can be exceptional factors everyday, so if you go on these reasons, you might as well not have a trading plan at all. So again, a checklist of signals required might be helpful in making the trading process as mechanical as possible.

Rule 10: Don’t Try to Call Every Market Turn – Yes we want to buy into weakness and sell into strength. But that does not mean picking tops and bottoms. It might be emotionally satisfying to be able to call the top, then pick the bottom, but to be able to do this is an unrealistic expectation.

Application: You might want to set up for counter-trend trades near some major market tops and bottoms, but trying to get in at all the twist and turns will make you overtrade and be chopped up by the market.

Rule 11: Never Enter into a Position Without First Establishing a Reward to Risk- Pring suggests trading at least 3-1 reward to risk ratio. Also, knowing what type of risk is involved helps with position sizing and limiting losses to level that won’t devastate your account. This also provides emotional preparation in the case of a bad call.

Application: Be careful not to give false expectation of reward to risk in order to justify a trade. You have to define where your trade idea becomes invalid. That is your projected stop. You also have to define where you can expect the market to go in your favor by looking at some pivots (support and resistance). Now just because you made these assessments, it doesn’t mean you should always just set your stop and limit and walk away. There will be times where you have to adjust and maybe lock in profits before the market reaches your target. Sometimes you might have to make an emergency exit before reaching your stop. While your exit might require more agility, your entry should follow a more rigid reasoning and having a minimum reward to risk is important. While 3-1 is a good reward to risk ratio, a minimum could probably be 2-1.

Rule 12: Cut losses, Let Profits Run – This is another one of those sounds easier said than done type of rule, but it is probably the most important as far as trade management is concerned.  Cutting losses requires discipline and leaves no room for hope. Don’t justify staying in the trade if the market action already invalidates your reason of entry. This does not mean to abandon a trade at the first sign of failure. You will often need to give the market some “elbow space” to have a chance to go in the direction you anticipated. Cutting losses means your original reasoning is invalid AND the risk is no longer acceptable. Of course, you would have ad to establish what risk is involved before hand. Letting profit run is also a difficult task. You have to define before hand what signals you look for in exiting. If these signs are not there, letting the profit run is the prudent action. But you also have to consider locking in profits.

Application: Again, in reality this process is more difficult then it sounds. Knowing when to cut your losses and how to let your profit run will require experience with your trading methodology. Spend as much time if not more in developing exit strategy as developing your entry tactic. A trade is not over until the exit and it is the exit that defines the performance of trade, not the entry.

Rule 13: Place Numerous Small Bets on Low Risk Ideas – Statistically, the more you trade your system, the more likely the performance will reflect that of the system. There will be inevitable losses and in having few trades with large exposure, you risk being in the period of drawdown in your system. Allowing more trades means allowing more chance of your trading system to show its true nature. This means limiting the exposure for each trade.

Application: Pring and the conventional suggestion for exposure per trade (EPT) is 5%. I would say even lower EPT is better especially if you plan on having multiple positions open because there could be a period where you will actually have exposure up to 10%. If you do, make it a point to reduce that exposure at specific times. For example if you are a intraday trader, you might want to close some positions that are not looking as good as others  during the end of a trading session for the region ie (end of the US trading session). Or if your positions are already in the black, you might want to move your stop close to lock in a profit and thereby reducing exposure. Remember, exposure is how much you are willing to risk and can be defined by where you place your stop.

Rule 14: Look Down, not Up – Pring reminds traders that the decision to trade is not just based on potential profit, but also potential of loss and acceptability of this loss relative to expectation of the profit.

Application: Also start a trade decision with consideration of loss. Then look at what the potential reward is. This is important because if you look at the potential reward first, you might become too optimistic and overlook the real risk involved.

Rule 15: Never Trade or Invest More Than you Can Reasonably Afford to Lose - Only trade your risk capital. Not diaper money, not grocery money. If you trade money that if lost will devastate your living standard, you will have too much emotional attachment to each trade and that can cloud your judgement.

Application: I think this is quite clear – only invest risk capital. This is why brokers will ask you about your income and such. Regulatory agencies have made it the broker’s responsibility to deny accounts to people that are not suitable in terms of having risk capital. As a trader though, this responsibility should be all on your shoulder.

Rule 16: Don’t Fight the Trend – The trend is your friend is a common saying in the trading/investment community. While there are times to be contrarian and play major tops or bottoms, it wouldn’t be wise to always be a contrarian. Most of the time you want to run with the herd. Don’t try to catch a falling knife is another saying warning you from trading against a sharp move.

Application: You might ask, doesn’t this go against the buy into strength, sell into weakness rule? f you can resolve these two rules you understand the uncertainty of the market and how you have to juggle contradicting ideas. As mentioned in the application of rule 4, trade in the direction of the trend, after noise against the trend. In order to do all these, you have to define what is a trend, and what is noise. That is a topic for another day.

Rule 17: Whenever Possible Trade Liquid Markets – A Liquid market as Pring defines it is one that has many participants with differing opinions so there are traders on each side of the market willing to take positions. In this case, your trading cost will be lower. Although forex is the most liquid financial market, especially in popular instruments like EUR/USD, the spread can widen in event of economic releases or important press conferences and speeches. Trading during these events can be costly not only because of the wider spread, but also because it is often impossible to determine how the market will react, and react to the reaction, and so forth. For the short-term trader, it is probably more prudent to stay away from these event risks, and wait for the dust to settle before getting in.

Application: Avoid trading 30 minutes before or after an important release. This means you will inevitably miss some moves. But if you look at it objectively, you are always missing moves. When you happen to be right and miss a move, you might kick yourself. But is your emotional impact the same when your opinion is wrong and instead of missing profit, you avoided a loss? You’re likely to give the latter the same weight and therefore have a faulty bias that you are always missing good calls. Now, if objectively you do find yourself to always make good calls in terms of reactions to risk events, go for it. But the wiser thing to do is probably to first see how the market reacts to them before making a decision to trade these events.

Rule 18: Never Meet a Margin Call - “Never meet it by sending in more money” is Pring’s advice. If you are meeting a margin call, something very wrong is happening. Either you are overleveraged or overtrading, or both. Also, it means you are not monitoring your EPT. Whatever the reason, adding more funds immediately to remedy a margin call is like pouring more gas into a leaking tank. You have to first fix the leak.

Application: In this unfortunate time, Pring suggests taking a vacation. Your emotional state is probably not right for trading at the moment and you will have to step away from the market to regain clarity before deciding to add more funds. If you have enough funds, and it was solely overleveraging and overtrading, you might have to make a request to your broke to lessen that leverage, and also get it in your head to limit your EPT.

Rule 19: If You Are Going to Place a Stop, Put it at a Logical, Not Convenient Place - The position of the stop should be based on fundamental and technical reasons, and not based on how much you can afford to lose. For example, if you determine that you can only expose $300 in the trade, don’t place the stop simply where the market would give you that loss. Instead, after determining the stop placement, and with the understanding of your EPT, decide on your position size.

Application: Here are a couple of links for risk management applications that deal with stop placement and position sizing among other issues:
Basic Risk Management
Risk Management II

This summary and interpretation was provided by Fan Yang CMT, Chief Technical Strategist

Traders new and seasoned deal with many common emotions while trading. These might even linger when they are not trading. The experts differ from the rest by recognizing these emotions and developing methods for dealing with them. Let’s take a look at some common emotions. See if you can recognize them while you are trading.

The Common Trading Emotions

1. Fear (of financial failure, can’t support family, etc.) – Fear is a natural response towards the unknown. Your mind is seeking for end-results and trying to see if the scenarios are acceptable. If one of those scenarios is doom to your finance, you should naturally fear trading. But there are ALWAYS unknowns in the market, and factors out of your control, so how can you beat fear?
2. Greed – The want of more than should be realistically expected. This usually happens after positive experience with the markets, and is a major factor that breaks down ones discipline in risk management. Greed can also occur after some flat periods when a trader feels that he is mostly right, but hasn’t been placing a large enough position to make it an “exciting” or a “meaningful” gain. Position size increases. Stops aren’t planned out with due diligence, aggressive targets are regarded as if they were conservative targets. All this leads up to breaks down your strategy, and you are left with basically a gambling habit.
3. Desperation – You win some you lose some. Many beginning and even seasoned traders fall in the trap of trying to make back what they lost. This is a desperation move to get back to the starting level, or maintain a certain profit-loss ratio. Without carefully planning positions sizing, changes in position out of desperation usually means adding a larger and larger position. What’s worse is that sometimes, this works! But over time, the odds are your desperation moves will harm you more than cover your last few bad trades.
4. Euphoria/Pride – Hubris. It is a feeling almost that one is superhuman, or has a special gift. This is usually generated by a string of winners. Winners build confidence, and without any losers to shape character, the trader can develop so much pride that he or she forgoes disciplined steps. What ends up happening is a cycle of a bad trading life where – the winners build confidence – confidence builds bad habits – greed will amplify bad habits eating up the gains – and finally desperation causes an even quicker decline. The fall from great heights to dismal lows are easier than you might think, especially if you are not aware of these emotions.

If you trade long enough you should experience all these emotions. Going through them the first time while trading live can be a roller coaster, I have been there, but it was anything too serious. I want to talk about how to deal with these emotions, but it is time to make dinner and socialize a bit, so I will continue in our next article.

For now try an exercise. Can you recognize the pattern of WHEN these emotions come up? After a gain of 200 pips do you feel Greed? After winning 5 consecutive trades, do you feel Euphoria? What about after 5 consecutive losses? Do you feel desperation? Or fear? It might be helpful to create a journal.

Next: How to Deal with Fear, Greed, Desperation, Euphoria and Pride

Fan Yang CMT
Chief Technical Strategist
FXTimes

This implies that even in the event of a dovish Ben Bernanke’s speech today, the reaction would be less muted with market already pricing in the scenario earlier. Of course this doesn’t mean that there wouldn’t be a positive reaction at all, but rather we need to ask ourselves what is the percentage of market that has already discounted such a scenario, considering that stock prices have just rallied significantly from a 13th Jun low. This increase the possibility for a “Buy the Rumor, Sell the News” outcome, and should Ben Bernanke surprise market by even outlining any potential exit plans for QE, market seeking dovish signals may be highly disappointed, with the likelihood of a sharp decline increasing.

Dow 30 Hourly Chart

Looking purely at technicals, Dow 30 is currently on a strong uptrend with 15,300 broken. Futures prices are trading slightly lower despite a stronger Asian market (which is led by the bullish US stocks). The decline is not surprising and can be construed as a mere technical rebound if 15,300 ultimately holds. The rising trendline is still in play and likely to provide rebound/support if price maintain current levels during US trading session. Stochastic readings suggest that a new bear cycle may be in play soon with both Stoch/Signal line pushing towards 80.0. However a proper bear signal may only emerge if both lines break below 80.0, which is likely to correspond with price pushing below 15,300 and the rising trendline. However given current rally, it is possible that Stoch indicator may be able to form an interim trough within the Overbought region, similar to what we’ve seen on 15th June, which is in line with a successful holding of 15,300 from current bearish test.

S&P 500 Hourly Chart

The same could be said about S&P 500 with Stoch indicator exhibiting the same characteristics. However, unlike Dow 30, price is currently under the rising trendline, which suggest that any sharp rallies from here may be capped. This may not be a primary concern right now considering that a sharp rally is not high on the radar given the analysis above. The level to watch for S&P 500 would be 1,647 – 1,650, and follows similar analysis to Dow 30′s 15,300.

More Links:
GBP/USD – Pound Falls as UK Inflation Remains High
USD/CAD- Greenback Edges Higher, Crosses Above 1.02
AUD/USD – Sharply Lower after RBA Statement

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Overseas shipments increased 10.1 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 29 economists surveyed by Bloomberg News was for a 6.4 percent gain. Shipments to China are recovering after tumbling last year during a flare-up in tensions over a maritime jurisdiction dispute, the report showed.

Today’s data may help to sustain confidence in Abe’s efforts to jump-start the economy with fiscal and monetary stimulus and a rollback of regulations restricting business. Volatility in stocks and bonds has threatened to damp sentiment as Abe and central bank Governor Haruhiko Kuroda seek to pull the nation out of a 15-year deflationary malaise.

Currency weakness “will keep fueling Japanese exports,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. At the same time, weakness in the Chinese and European economies may cap the nation’s trade gains, the analyst said.

Bloomberg

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Japan’s Toyota Motor Corp. , the world’s biggest carmaker, added 0.9 percent. Mitsui O.S.K. Lines Ltd., the largest operator of merchant shipping fleets, jumped 4.7 percent in Tokyo after a gauge that tracks the cost of shipping commodities rose for a ninth day. Rio Tinto Group gained 2.2 percent after a report the world’s No. 2 mining company will cut more jobs at its iron-ore operations in Australia.

The MSCI Asia Pacific Index gained 0.7 percent to 132.71 as of 9:43 a.m. in Tokyo, with more than three shares rising for each that fell. More than $2 trillion has been erased from global markets since Fed Chairman Ben S. Bernanke said May 22 U.S. policy makers could scale back stimulus efforts if the employment outlook shows “sustainable improvement.”

Bloomberg

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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Good Afternoon,

When I said "up week" in yesterday's blog, I wasn't thinking it could be this big. But, then again, we do have the Fed tomorrow. What does the market like to do ahead of the Fed? It tests it. Remember all of the "stress tests"? Well, the Fed has passed every one. Will they disappoint this time? I doubt it. So there should be some type of accomadative rhetoric that takes back any "when" scenario for tightening. If for some reason, the rhetoric does come across with an "end in sight", then the markets could very well be very, very overvalued.

read more

EUR/GBP daily chart 3:34PM EDT 6/18/2013

(Click to enlarge)

Consolidation: EUR/GBP  has been in consolidation since April. The daily chart shows a market that has been in a triangle. Today, EUR/GBP broke above a short-term falling channel with a strong bullish candle and is testing the triangle resistance. Outside of the triangle, there is resistance up at 0.8636 and support at 0.8397.

Breakout scenarios: Direction will be a bit more clear if the market can push above 0.8640, and hold above 0.86 upon any subsequent throwback. This would be a bullish scenario, opening up the resistance around 0.8790 and above. Below 0.8397, the market will likely also break below the 200-day SMA, which could be a game changer. It could reflect reversal from a market that has been bullish since July 2012.

Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

I recently subscribed to Autochartist’s latest e-mail feature and received this trade opportunity alert this morning. Autochartist’s latest feature provides traders with a quick morning technical outlook of the markets.

EUR/NZD continues to rise after the recent breakout of the Flag chart pattern identified by Autochartist on the 4-hour charts – as you can see from the following trade opportunity alert that I received recently for this currency pair. EUR/NZD is expected to rise toward the target level 1.6880 (point B) in the next 16 hours. This target level corresponds to the last reversal point of the upper resistance trendline of this chart pattern (point B). Autochartist sets the stop-level for this forecast at 1.6388 (point A, the bottom of this Flag). This point formed earlier – when the pair corrected up from the support zone lying between the former monthly high 1.6355 (from the end of January) as well as the 38.2% Fibonacci Retracement of the preceding upward price impulse (serving as the “flag-pole” of this Flag).

The following daily EUR/NZD chart shows the aforementioned support levels:

To subscribe to the e-mail alerts feature is quick and easy. Log into the Autochartist platform, click on ‘Alerts & Messaging’, enter your email address, select the market you want covered, select your language, and the time you want to get your report, and you’re done! You will now receive a quick morning technical outlook of the markets.

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