This week’s FX Trading lesson focuses on the use of ‘bullish confirming price bars’ to give traders reliable signals to buy into trending FX pairs.

While there are a plethora of bullish reversal bars patterns, with various uses and definitions, this article will focus primarily on one of our favourite price bar reversals – the ‘Pinocchio Nose Candle.’

Some argue that a simple daily price chart, say a bar chart, is all a trader needs to be successful in the markets.

A price chart is like the market’s own personal diary.

It holds all the secrets and clues to what the market is thinking. In a nutshell, price bars are the market’s heartbeat and, like a human, they often behave in predictable and repeatable patterns.

We as traders must use the statistical probability of profitable price patterns to make money in our trading. This article will describe one logical and workable strategy that exists in FX markets in particular.

What does it look like?

The ‘key reversal day’ or ‘Pinocchio Nose Candle’ has a lower shadow (tail), where prices moved lower within the trading session but quickly rejected these lower levels and moved higher to close near or above the opening price.

This trading action forms a candle that looks something like the fictional character Pinocchio’s long nose.

How to trade a key reversal?

Whilst there are going to be many areas on a chart where these signals just appear, we usually see key reversals at important technical points on a chart.

Often it is the case that a signal to trade will work better at these reference points.

Some important technical points where we often see reversal patterns are;

1. At an obvious support/resistance point.
2. At a Fibonacci retracement level.
3. At an important moving average.

We will for this article, refer to the moving average as our technical reference point.

The rules for entry are simple. After a signal has occurred, traders buy on the very close of the signal day or on the next day’s open.

The trader would then place stops under the lows of the signal bar.

Reliability of the signal depends on several things, with the most important being the underlying trend. Signals have a greater degree of success if they occur in the same direction as the prevailing trend.

The longer the trend has been in place, the greater the probability of success of the signal. If at the very least, the mid-term trend confirms the signal, it then has a higher degree of paying off.

As we stated above, if the signal occurs near a moving average, on either the daily or weekly chart, its chances of success are also improved.

To learn more, attend a FOREX Trading Course.

FX Trading Lesson: Pin-bars & Pinocchio’s Nose is a post from: Australian Stock Report Forex Trading News

This week, we thought we’d provide you with an overview of four of the most commonly used technical indicators.

Please note that the most used – and many would say the most effective indicator, the moving average – will be excluded.

The indicators we’ll look at today were really the indicators that developed throughout the 1970s and 1980s as computers became more prevalent in trading.

It is worth noting also that whilst these indicators might be sophisticated, they can’t predict the future.

Remember, all that these calculations can do is to tell you what’s happened in the past and provide with the ability to make an informed judgment call about what might happen in the future.

We’re not going to discuss these indicators in any detail – this is just an overview.

Relative strength index (RSI): The RSI measures the strength (or upward momentum) on positive days against the weakness (or downward momentum) on negative days.

When calculated, this produces a number between 0 and 100. A number over 80 can show the price is moving too fast, and needs to pause. A reading below 20 can signify the opposite.

Moving average convergence/divergence (MACD): The MACD produces a reading that indicates the distance between moving averages. As these moving averages move closer, this is a signal that the trend is changing.

When moving averages cross, this is often the beginning of a new trend. As such, the MACD can signal the beginning and ending of trends.

Stochastics: This indicator attempts to measure whether prices have closed near highs, which is a positive signal, or near the lows, which is a negative signal.

Like the RSI, this indicator measures on a scale of 0 to 100, and also uses the 20 and 80 levels as key signals for entering or exiting trades.

Directional movement: Finally, the directional movement indicator attempts to identify times at which prices are trending and therefore worth trading, or, whether prices are in a lull and therefore best avoided. This indicator both tells us whether prices are trending and, if so, which direction prices are moving.

As we discussed earlier, there are hundreds of indicators developed and refined over the last 30 or so years.

This is a very brief overview of some of the more commonly used indicators.

Before utilising any of these indicators within a trading strategy, more research should be conducted.

Learn more about FX Trading at our FOREX Workshop, click here.

Forex Lesson: FX Trading Indicators is a post from: Australian Stock Report Forex Trading News

ALWAYS USE STOPS……ALWAYS!!!

Do you want to know why most novice FX traders fail?

It’s because they don’t use stops to manage their risk.

Now, traders may either simply not know that they exist, or choose not to use them. Either is a recipe for disaster.

Other traders try to do the right thing by using stop losses, only to end up with frustrating results. It seems that every time they set a stop loss on a trade, the price make a b-line straight for their stop loss – then simply goes back up again!

Certainly it may feel like this is what is happening but let us assure you that the market does not have a master plan to trigger your stops for fun and out of sheer spite!

After firstly saying – Always use stops…..Always! We also have to mention that there is a definite art to the placement of stops to reduce the chance of the market seemingly unscrupulously hunting down your stops losses.

This lesson seeks to introduce some concepts which traders need to know about setting stop losses.

Always use stops!

Why do we use stops?

Because the most important aim of any trader is to preserve capital.

Stop losses play a key role in helping you to reduce your losses; they also help eliminate the emotional component of trading. Setting the right stop is as simple as saying “I only want to lose this much”, but it is a process that needs to be learnt over time, through experience.

A stop loss is a pre-determined exit price that, once hit, will automatically exit you from the market. Without a stop loss you will be tempted to hang onto a trade in the vain hope that it will reverse the trend and your original assessment will be validated. The market is not the place to exercise your ego – unless you have unlimited funds.

There are a few different methods for setting your stops and we’ll look at three of them today.

Entry price

The most simple stop loss method is your entry price minus a certain percentage. The percentage you chose is entirely up to you but what you are effectively saying is “I can afford to lose this much money on this trade before I walk away.”

The percentage you chose may vary according to the instrument you are trading, the amount of funds you have available, and the type of security you are trading. Typically a straight percentage stop loss will be anywhere between 5% and 20% of the value of your trade.

Most importantly, you SHOULD never risk more than 5% of your total capital. We are more conservative and prefer to only risk 2%.

Technical levels

If you are a technical trader, a stop loss based on key levels is another method for setting stops.

Using the concept of support and resistance as a guide, it would make sense for a trader to put their technical stops just outside of either zone depending on whether you are long or short in the market. If you’re trading an established trend, a break of the trend line is another point to put a stop.

Range

The third method for setting stops is by observing the usual performance of an individual security.

If, for example, an FX pair is prone to moving in 100-pip blocks on a normal day, you may wish to put your stops 200 away from your entry position. This way you can gauge that the price action is really moving in the wrong direction before exiting the trade.

Mix ‘n’ match

Smart traders will use a combination of all three methods but the actual stop will depend on the individual situation.

At Australian Stock Report for example, if the “technical” stop is outside the level of our “comfortable” or trading system stop (simple “entry price” stop), then we will adjust the trade size accordingly so we can use the technical stop, but still risk the same dollar amount.

You should NEVER move your stop loss lower. If you are going to move your stop, it should always be in the direction of your trade to lock in profits.

Learn more about FX Trading at our FOREX Workshop, click here.

FOREX Trading Lesson: Always Use Stops!!! is a post from: Australian Stock Report Forex Trading News

Some of the most volatile periods in FX markets coincide with the release of significant economic data.

Some traders prefer to have open positions when new releases hit the market, whilst others avoid trading during these times.

For your convenience, we have outlined some of the common releases that can materially impact currency markets.

As with company earnings releases, economic releases tend to have the most impact when the numbers reported differ significantly from market analysts’ consensus expectations.

1. Gross Domestic Product

Gross Domestic Product, or GDP, is the total value of goods and services produced by a particular economy.

Figures are quoted quarterly and strong results are usually bullish for the currency of the economy in question.

2. Interest Rate Decision

This category of economic news refers to the actions of central banks (in Australia, the RBA) in setting official interest rates.

Decisions are usually made on a monthly basis.

Depending on the circumstances, a decision that shocks the market can be either bullish or bearish for a currency.

For instance, a central bank might raise rates unexpectedly, which will be good for a currency if the market focuses on the strength of the economy or growth that caused the rise.

Conversely, if the market focuses on the contractionary effects of the rate rise itself, the same figure may weaken a currency.

3. Unemployment

The unemployment rate, or ‘unemployment claims’ in the US, is a leading indicator of the health of an economy, with repercussions for interest-rate and government policies.

Depending on the circumstances, a decision that shocks the market can be either bullish or bearish for a currency, although a poor employment result is usually bad for a currency.

4. Inflation

Inflation figures, which indicate the rate at which prices are rising, are another key barometer of the health of an economy.

The Consumer Price Index, or CPI, is the most widely quoted inflation statistic and is reported on a monthly basis in most countries.

Again, a figure that shocks the market can move the market either way depending on what traders are focusing on.

5. Retail Sales

Retail sales numbers, usually quoted monthly, are important given the large proportion of modern economies that derive from the spending patterns of consumers.

In the current context, these figures have a high level of importance as economists are looking for signs of a consumer-led economic recovery.

6. Consumer Confidence

Closely aligned with retails sales is consumer confidence data, which is an important barometer of how consumers are generally feeling, with obvious implications for retail spending.

This data are usually released monthly.

In Pictures

Let us examine a chart to see just how economic releases can move markets.

Below, you will see how the US dollar was sold off when retail sales, which the market was expecting to show signs of growth, actually fell.

USDJPY 5 minute chart

The effect on the US dollar was immediate and severe.

To learn more trial our FX Report FREE, click here.

FOREX Lesson: Economic Releases & the FX Markets is a post from: Australian Stock Report Forex Trading News

Here at Australian Stock Report we reference Japanese candles in our charting. Since there’s so many different types of Japanese candlestick patterns, with very different – and often long! – names, it can seem like quite an overwhelming technique for new investors.

Let’s have a look at the basics involved in Japanese candlesticks and discuss why they’re so important in chart analysis.

Early origins

The Japanese first implemented technical analysis in rice trading in the 17^th century. These rice traders stuck to a number of important trading principles that still hold very true today.

The Japanese rice traders acknowledged that when it came to technical analysis, price action is more important than reasons for movement. All of the knowledge one needs to know about a trade is reflected in the price.

These traders also understood that markets are of a changeable nature, with buyers and sellers driving sentiment.

They also wisely acknowledged that actual prices are not necessarily indicators of underlying value.

What is a candlestick chart?

Candlestick charts show data describing the open, close, high and low values for a specified time period.

The chart below shows what the Aussie dollar has done over the past year. Each candle represents one week’s movement for the market.

The box of the candlestick is known as the body. The body of the candles show where the security opened and closed for the period.

We use green and red candles, although many programs use black and white. A green candle simply means the security closed the period higher than it started. In this case, the bottom of the body indicates the opening price, and the top of the body is the close.

Conversely, a red candle means the security closed lower than its open. In this scenario, the body top shows the open price, and the body bottom is the close.

The lines spurting from either end of the box are called shadows, and they show the high and low ranges.

In other words, the top of the upper shadow shows the high; the low is at the bottom of the shadow.

Hopefully the picture below clearly explains how candlesticks display the open, high, low and close.

Why candlesticks?

We at Australian Stock Report use candlesticks a lot because they are much more visually appealing than the average bar chart. They also convey a lot of information in an easy-to-understand manner.

Unlike bar charts, candles can tell you straight away what the trend is, depending on whether a candle is clear or coloured in.

Candlesticks also have the ability – once you get the swing of them – to warn you of impending changes in trends. Advanced proponents can use combinations of candles, or rare-patterned candles to identify trends and reversal points.

Click to Learn more with your FREE FX Report.

FX Trading Lesson: Japanese Candlesticks is a post from: Australian Stock Report Forex Trading News

Much has been written about Leonardo Fibonacci, the gifted thirteenth-century Italian mathematician. Born in Pisa around 1170, Fibonacci not only introduced the modern use of decimal points, but also discovered the so-called Fibonacci sequence.

The sequence begins with 0 and 1, and then adds the previous two numbers to produce a third. The sequence then continues onwards to infinity.

These numbers are seen as the “key” to nature, with the reproduction cycles of rabbits, branching patterns seen in plant life, and the “golden mean” used in art and architecture all corresponding to this mathematical sequence.

From rabbits to robots

Fibonacci discovered that the ratios in this sequence not only recur in nature – the most common being 38.2%, 50% and 61.8% – but can also be seen in markets to indicate likely retracement levels.

Moreover, the Fibonacci sequence of numbers is also referred to by Ralph Elliot as the mathematical basis for the “Elliot Wave” principle.

As complex as this trading concept can be in theory, in practice it is readily understandable. A trend is not broken unless the share price has moved by more than 61.8%. So, if in an uptrend the share price falls (retraces) by more than 61.8%, then in theory the uptrend is reversed.

If the share price only retraces by 38.2% or 50%, the pull back is temporary and the trend will continue. Logically, the less the stock retraces the stronger the trend so a 38.2% retracement is not as significant as 50%. The same applies in downtrends.

As the study of Fibonacci numbers has become more accepted, these areas of support/resistance have become more important.

Even if some investors doubt that these numbers occur naturally in the market, many traders give the trading methodology strong credence and, subsequently, the impact of Fibonacci has become self-fulfilling.

In practice

As we have seen, by applying Fibonacci ratios on past trading results, areas of previous share price support and resistance have been readily identified.

We now need to work with the Fibonacci ratios as means of predicting where future areas of possible share price support and resistance lie.

Firstly, the trader needs to have an opinion of what the share price has done in the recent past. The key question is, “has the share price broken out of a recent uptrend or down trend?”

Once this break has been identified, then the trader/investor can apply the Fibonacci ratios to see probable future areas of resistance and/or support.

Looking at a daily chart of the recent action on the GBPUSD, we can see that the Fibonacci retracement levels work effectively in defining the overall trends and much of the price action.

We have drawn the Fibonacci retracement zones from the high in late May to the low this week.

However, you can draw Fibonacci lines in many and varied ways – all that really matters is that you start with a significant low and significant high.

This one example provides the trader with possible key target points that they can apply to their individual trading strategies.

In this example, GBPUSD has fallen heavily in the last six weeks but has bounced back strongly earlier this week.

This surge from the lows has now temporarily stalled, with the currency having topped out at the 50% Fibonacci retracement level.

According to pure Fibonacci theory, the GBPUSD pair is still in a downtrend until it breaks above the 61.8% retracement level, but we would pay attention to formation of support or resistance around any of the key Fibonacci levels.

Some studies have challenged Fibonacci’s effectiveness for stocks, however it is generally accepted that Leonardo Fibonacci’s magical ratios are a valuable tool for trading currencies.

Learn to Apply Fibonacci’s theory with your FREE FX Report.

FX Lesson Fibonacci Ratios is a post from: Australian Stock Report Forex Trading News

Do you want to know where 9 out of 10 novice traders fail?

It’s from the lack of use of stop losses.

Now, traders may either simply not know that they exist, or choose not to use them. Either is a recipe for disaster.

Other traders try to do the right thing by using stop losses, only to end up with frustrating results. It seems that every time they set a stop loss on a trade, the price makes a b-line straight for their stop loss – then simply goes back up again!

Certainly, it may feel like this is what is happening, but let us assure you that the market does not have a master plan to trigger your stops for fun and out of sheer spite!

After firstly saying – Always use stops, Always! We also have to mention that there is a definite art to the placement of stops to reduce the chance of the market seemingly unscrupulously hunting down your stops losses.

This lesson seeks to introduce some concepts which traders need to know about setting stop losses. We have other, more advanced lessons on stop losses in our archives which we refer you to after reading this one.

Always use stops!

Why do we use stops? Because the most important aim of any trader is to preserve your capital.

Stop losses play a key role in helping you to reduce your losses; they also help eliminate the emotional component of trading. Setting the right stop is as simple as saying “I only want to lose this much”, but it is a process that needs to be learnt over time through experience.

A stop loss is a pre-determined exit price that, once hit, will automatically put your trade on the market. Without a stop loss you will be tempted to hang onto a trade in the vain hope that the stock will reverse the trend and your original assessment will be validated. Financial markets are not the place to exercise your ego – unless you have unlimited funds.

There are a few different methods for setting your stops, and we’ll look at three of them today.

Entry price

The most simple stop loss method is your entry price minus a certain percentage. The percentage you chose is entirely up to you, but what you are effectively saying is “I can afford to lose this much money on this trade before I walk away.”

The percentage you chose may vary according to the type of security you are trading (eg, FX), the amount of funds you have available and the timeframe your trade setup is based on.

Taking into account all of these factors, when we trade FX we typically have stops around 1-3% away from entry.

Most importantly, you should NEVER never risk more than 5% of your total capital. We are more consevative and prefer to only risk only 2-3% of our total capital on an individual trade.

Technical levels

If you are a technical trader, a stop loss based on key levels is another method for setting stops.

Using the concept of support and resistance as a guide, it would make sense for a trader to put their technical stops just outside of either zone depending on whether you are long or short in the market. If you’re trading an established trend, a break of the trend line is another point to put a stop.

Range

The third common method for setting stops is by observing the usual performance of an individual security.

If, for example, an FX is prone to moving in 100-pip blocks on a normal day, you may wish to put your stops 200 away from your entry position. This way you can gauge that the stock is really moving in the wrong direction before exiting the trade.

Mix ‘n’ match

Smart traders will use a combination of all three methods, but the actual stop will depend on the individual situation.

At Australian Stock Report, for example, if the “technical” stop is outside the level of our “comfortable” or trading system stop (simple “entry price” stop), then we will adjust the trade size accordingly so we can use the technical stop, but still risk the same dollar amount.

You should NEVER move your stop loss lower. If you are going to move your stop, it should always be in the direction of your trade to lock in profits.

Get More FX Lessons and Daily FX Trade Recommendations with a FREE FX Report.

FX Trading Lesson – Always Use A Stop Loss! is a post from: Australian Stock Report Forex Trading News

So if we are looking to trade the EURJPY, the EUR is the base, and the JPY is the term. The size of one contract of the EURJPY is thus 100,000 EUR.

Contracts are further divided into “minis”. Minis are as the name suggests, are simply fraction of a normal contract. A mini is always 10,000 units of the base currency or 10,000 EUR in the above example.

At Australian Stock Report, all of our trading suggestions use minis. This makes it easy for retail traders to be able to trade what the ‘big boys’ trade, without having to have millions in the bank.

To learn more about Trading Forex try our FX Workshop.

Forex Trading Contract Sizes Guide is a post from: Australian Stock Report Forex Trading News

Click the EUR USD Chart Above to Enlarge

The EURUSD is looking quite bullish.

The shorter-term EMAs are crossed higher and the price action is above the longer-term EMA filter, which is positive.

After retreating from nearly 1.500 in early May to a low just below 1.4000 in late May, the price action has turned higher and is currently trading around 1.4600.

As a pure momentum play, there is an opportunity to buy now a ride a move up to the recent highs, around 1.4900-50.

Click to Attend a FX Trading Workshop

EURUSD Currency Pair News is a post from: Australian Stock Report Forex Trading News

Click the GBPCHF Chart Above to Enlarge

The GBPCHF pair has been in a downtrend for an extended period of time now.

In recent months, whenever the price action has tested the value zone defined by the 100-, 150-, and 200-period EMAs is has been rejected strongly.

The price action is now extended away from the value zone but this does not mean that there aren’t still selling opportunities available.

The 1.4000 region is a big round number and the previous point at which the bulls provided some support.

This becomes the logical region to look to sell into any strength; should the bulls push higher, the bears will likely step in at this point and provide some resistance.

Traders should be looking to stall in the 1.4000 and turn lower in order to consider being sellers.

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GBPCHF Currency Pair News is a post from: Australian Stock Report Forex Trading News