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Trading rules

Fri, Sep 5 2008, 15:29 GMT
by Tomas Cedavicius

Forex-Trends.com

This is the first of the series of the articles about my technical analysis and trading method. I hope it will be useful for novice traders.

First of all we need to find out what we are going to do. We need to analyse market direction and take the decision are we going to sell or buy. To take the decision according direction of the market is easy: if market is going up – we buy; if down – we sell; if sideways – we wait for opportunity to buy or sell, or could enter the market on chart patterns. But how to find out where market is going?

My trading method is based on support, resistance and trend lines. Analysing the market we will take one step at the time.

FIRST STEP. First of all we should choose time frame: 5minute chart, 30 minute chart,1 hour chart, 4hour chart or bigger , according to traders personality and money management. How to choose time frame I will talk in the next article about psychology of the market. Reason is – choosing the time frame is more psychological than technical factor. I am personally using 4 hour time frame as a major. So, I open 4 hour chart of currency pair I wish to trade.

SECOND STEP. Find the support and resistance. If somebody will take a look at any chart, visually there is no problem to see significant supports and resistances. But description of such things could become quite complicated. I do not think that exist strict rules to describe support and resistance (or simple I have not found yet such strict rules), but generally and I would say not very satisfying description would be this: place (or price) where market stops and starts moving in opposite direction of the current trend. Please, do not take it as complete truth, but I follow this description. Why? Because, my trading method is based on simple facts, that we do not know and hardly will ever know what market is going to do next, and I accept everything what is going in the market as correct events. I never say:”Market should go up! Why it is going down?” Market always goes in the right direction, question is: are you going in the same direction? So, for me the resistance will be when the first candle (I am using candlesticks charts) is positive and the next - negative, resistance will highest price of those two candles. And support will be when the first candle negative, the second positive and lowest price of those two will be the support. Too simple? Maybe, but it works for me. So I will find all support and resistances, but all the supports and resistances have different levels of importance. This everybody determines for themselves, probably this is the reason, why is very hard to have strict rules for support and resistance.

THIRD STEP. For now we have support and resistance lines on the chart. Important thing is to have just those supports and resistances which are significant for you. Less important ones is better to delete.

We see lots of places where we can consider as a support or resistance. Which one is correct? Answer is – all of them. So where to buy or sell?

After we found all support and resistance, we are going to take just last few of them and draw the lines, connecting most significant resistances and supports.

Now we have few lines, but for trading we going to use just one. Let's delete the lines which are crossing the price and leave just one which connects resistances or supports, but do not cross the price.

So now we have a direction. So until this trend line is not broken, I will sell on any movement up,close to the resistance. My stop will be when prices will cross the trend line. And until this trend line will not be broken I am taking just short positions.

Well, looks easy. Draw trend line, sold or bought, sit and wait for the profits. To cool your enthusiasm little bit I will say this: do not forget that trend line could be broken and eventually it will be. So entering the trade you must consider where your going to exit if market will turn around. You must be positive about your trade, but at the same time – careful.

In the next article I will show where I am entering the market and where is my stop loss. One more very important point about the trend lines: incorrect trend line leads to loss. Don't just draw any line you like, always remember if badly done job, bad results shows up. If you have any questions please send them to fxquestions@forex-trends.com.

For now I wish you success.

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Published on  Thu, Sep 11 2008, 15:38 GMT