Practicalities and philosophy of trading from a profitable trader

[delgrodel]

I'm not taking anything away from what Goldenmember wants to contribute its his time I guess, I just haven't seen anything practical yet. As for 300% profit on myfxbook..guys you can just keep a trade open and never post a loss if thats what you want, 300% doesn't mean anything really does it? if it did, follow the 1000% myfx'ers see how far your money goes then.

Anyway, its not my thread and I keep on hijacking Goldmember so I apologise and shall promise not to post on this topic again until something really needs commenting on, and it will be constructive..

Thank you for the comment, although I saw no indication from his equity curve that he's keeping trades open to maintain profitability. At least not within the past year and a half. This is why his account in particular is so much more impressive than virtually any other myfxbook account I've seen to date. I'm also skeptical on how much longer he can keep it up, but it might not hurt to keep an open mind.

 

[bismillahwd]

i would love to had 3 years "keep opened trade" that continued making me rich consistenly

But agree, still not touching the deeper ground of "practically". Keep going goldenmember

Cheers,




Sent from my iPad using Tapatalk HD
Sorry for any typo

 

[goldmember1]

I have actually already provided a lot of practical information. Its interesting that some people regard tips such as ensuring you have enough equity to trade is regarded as philosophical as opposed to practical.

Since someone mentioned lets talk about candlesticks: They are one of the tools that is often used - but really how useful are they? The daily timeframe or 'candle' is considered by many to be the most accurate, and the 4 hour candle is also very popular to mark out "the higher timeframe."

Of course there is some information to be obtained by candlesticks or open close type bars over a line chart, but some people have developed this directly into a candlestick type charting. Others have refined this and trade pinbars, or term certain candles "fakies" - I am not too keen on these ideas (but of course candles do provide some information but just not how they are traditionally taught).
Taking a look at daily candles for instance: I'm sure you have noticed that different metatraders have different timezones. For instance, Oanda uses Eastern Standard Time. Some UK brokers use GMT time. Alpari uses GMT+2. FXDD is an hour later etc etc.

This means that 'candlesticks' look different from broker to broker, and a 'pin bar' in one broker could be something very different in another.

This situation also applies to the 4 hour chart - a GMT+2 4 hour candle is different from a GMT candle for instance. Waiting until candle closes, or pinbars to appear or engulfing patterns is highly dependent on your broker - and I do not think that the true interbank market really cares whether an engulfing pattern, dark cloud cover etc has been produced.

There is coverage of patterns and candlesticks from Thomas Bulkowski's encyclopedia of candlestick charts that covers reversal probabilities, but I don't really see many forum candlestick traders using them - instead they apply what they see through candlesticks into real life. ie: There is a pinbar coming off the resistance indicating that there was rejection of that level pointing the way to price going down.

I think this way of thinking is wrong (of course others think they are correct). Price movements causing those pinbars to appear matters, but not the pinbar itself - instead of trading off the pinbar, examining why the price fell from that level is much more important than a pinbar.

Importantly candlesticks, OHLC bars tell you what happened in the past. No matter what people say, they are lagging indicators and do not reflect future events. A pinbar does not mean price is going to reverse. However the reasons behind the price movement can contribute to your knowledge of what market events are occuring to cause price movements and your experience and general knowledge can tell you whether this price movement will lead to a reversal or whether its an opportunity to buy a pullback.

There are provisos of course - some people trade exclusively technical set ups but what I look for is any clue behind market events and relate that to events that provide good buying or selling opportunities.

 

[kye]

Your track record is very impressive I have to say, two years is not enough data but still it is outstanding

What you wrote below caught my attention and I had to ask, I think I am familiar with what you said in the first point but not the second so I appreciate it if you could elaborate more on the reversion to mean concept that would really nice from you

What value do charts have then? They provide you with old and incomplete information about the following:

1) They inform you where some speculators have traded long or short (note they do not tell you how many speculators or what their intentions are)
2) Since prices are mean reverting in the long term, they give you a framework for calculating that mean/median/mode and the possible deviation

Of course, 1) is the concept behind support and resistance and 2) is the concept behind indicators

as to what trading is about here is my two cents :

- A trader learning curve starts by learning the basics of the market then moves to developing an edge (a trading method) and finally learns how to manage his trades this last phase is the most important

- Trying to guess exactly where the market will turn is a fools game the focus should shift from trying to perfect entries to managing trades according to the different scenarios that could play

- Trading is about managing probabilities not forecasting the future

- Trading lower time frames exclusively have low Risk Reward ratio and to compensate you have to have high wining rate which is hard to maintain and unsustainable on long run

I am sure I forgot some maybe I'll add more as they come to me ...

 

[bruce_loco]

So I was looking at your 2012 May entries on EURUSD
A staggering amount of pip losses, not real big losses as your lot size was really small.

05.17.2012 18:15 06.01.2012 09:12 EURUSD Buy 0.01 1.27135 1.23196 -393.9 -25.76 14d -0.13%
05.11.2012 17:57 06.01.2012 09:12 EURUSD Buy 0.01 1.29237 1.23189 -604.8 -39.56 20d -0.19%
05.09.2012 08:57 06.01.2012 09:11 EURUSD Buy 0.01 1.29705 1.23211 -649.4 -42.47 23d -0.21%
05.09.2012 08:36 06.01.2012 09:11 EURUSD Buy 0.01 1.29803 1.23216 -658.7 -43.08 23d -0.21%
05.09.2012 07:34 06.01.2012 09:11 EURUSD Buy 0.01 1.29831 1.23211 -662.0 -43.29 23d -0.21%
05.08.2012 14:37 06.01.2012 09:11 EURUSD Buy 0.01 1.29887 1.23210 -667.7 -43.67 23d -0.21%

Was this a testing phase? experiencing a new system? I looked back and this is when the greeks said no to austerity so all and all bad news for the euro.
You opened the first position based on a support level with no confirmation after that ugly weekend 90 pip window and it found resistance at the closing price of Friday.

And this is probably where you would say "One trader sees a buy and the other a sell based on their systems"
But please enlighten me.

Thanks

 

[bruce_loco]

TAlso these incredibly long positions holding on to a loss:

11.18.2011 14:38 05.18.2012 19:23 EURUSD Buy 0.01 1.35593 1.27600 -799.3 -49.41 182d -0.27%
11.18.2011 14:00 05.18.2012 19:23 EURUSD Buy 0.01 1.35828 1.27604 -822.4 -50.88 182d -0.28%
11.14.2011 08:54 05.18.2012 19:23 EURUSD Buy 0.04 1.37302 1.27605 -969.7 -240.14 186d -1.29%

But the strange one for me is this highly correlated pair:

04.03.2012 11:21 05.15.2012 18:45 EURCHF Buy 0.01 1.20348 1.20094 -25.4 -1.62 42d -0.01%
04.03.2012 11:07 05.15.2012 18:44 EURCHF Buy 0.01 1.20366 1.20094 -27.2 -1.74 42d -0.01%
03.30.2012 16:08 05.15.2012 18:44 EURCHF Buy 0.01 1.20366 1.20094 -27.2 -1.74 46d -0.01%
03.30.2012 15:49 05.15.2012 18:44 EURCHF Buy 0.01 1.20368 1.20094 -27.4 -1.75 46d -0.01%
03.30.2012 15:43 05.15.2012 18:44 EURCHF Buy 0.01 1.20368 1.20094 -27.4 -1.75 46d -0.01%
03.30.2012 16:00 05.15.2012 18:44 EURCHF Buy 0.01 1.20369 1.20094 -27.5 -1.77 46d -0.01%
03.30.2012 15:45 05.15.2012 18:44 EURCHF Buy 0.01 1.20375 1.20094 -28.1 -1.80 46d -0.01%
03.30.2012 15:40 05.15.2012 18:44 EURCHF Buy 0.01 1.20378 1.20094 -28.4 -1.82 46d -0.01%
03.30.2012 15:34 05.15.2012 18:44 EURCHF Buy 0.01 1.20382 1.20094 -28.8 -1.85 46d -0.01%
03.30.2012 15:29 05.15.2012 18:44 EURCHF Buy 0.01 1.20383 1.20094 -28.9 -1.85 46d -0.01%
03.30.2012 14:29 05.15.2012 18:44 EURCHF Buy 0.01 1.20385 1.20094 -29.1 -1.86 46d -0.01%
03.30.2012 14:26 05.15.2012 18:43 EURCHF Buy 0.01 1.20392 1.20094 -29.8 -1.91 46d -0.01%

Constantly adding to losses of about 300 pips here

This is no way a critique of your good profitability, again, just trying to understand what influenced these trades.
Most of your big loosing trades(pipwise) look like experiments, because the lot sizes are so small.

Thanks

 

[random12345]

Shame the thread died as I was actually going to read the stuff about scaling in as was implied to be presented at a later date.

I have never used scaling on forex because, though currency escapes its mean better than most of the heavily speculated futures, it tends to exhaust at very similar levels of mean escape, and said moves tend to happen in short bursts to boot, making scaling something of an oddity to me.

 

[Liquid validity]

Shame the thread died as I was actually going to read the stuff about scaling in as was implied to be presented at a later date.

I have never used scaling on forex because, though currency escapes its mean better than most of the heavily speculated futures, it tends to exhaust at very similar levels of mean escape, and said moves tend to happen in short bursts to boot, making scaling something of an oddity to me.

Agree, it may work for some, for me its a throwback to continual
80's type bull runs though.

 

[D70]

Goldmember...... where you at?

 

[goldmember1]

Hi, not really been keen on posting since I received some nasty private messages - I think if it continues after this post then I will stop posting altogether as its not that enjoyable to receive those kind of messages. Depending on the response I will continue/desist.

I've also been spending some time testing an automated system on a small account. Its going well, but is a small edge/low expectancy/frequent trading/pure technical system so once I add that to my account I will be closing my history (I expect around November time) as I do not want to lose any edge.

As for some trades being losers/being held too long etc, then yes, I made some, and still make some errors when trading. I'm going to talk more about charting:

Charting (more)

I thought I would do a piece on candle charts since they are quite popular. Lots of people trade candlesticks by themselves, and this particularly applies to price action type traders. For instance, a long wick on the 4 hour chart meaning that price is rejected is a typical price action set up. Although it can give you a setup, and some traders can make money on it, its quite often a false signal.

Let me explain why by giving a bit of background:

Last time I wrote a bit about timeframes being different for different brokers, which is very important on the make up of a candle or a OHLC bar. So lets have a few examples of brokers (they may have changed since I last looked at them):

DF Markets 0 GMT
FXCM +2 GMT
Alpari +3 GMT
Oanda US -5 GMT

Adapting that to the chart, you can shift the 4 hour candle 1 hour either way depending on the broker you use to form a variety of different candle shapes. You can make lots of rejections and wicks appear on one broker and not appear on another broker just by selecting the server time.

Now looking at a ‘typical day’ as described by a ‘trading guru/expert’ (not that there is a typical day, this description that follows is an oversimplification that itself is a marketing ploy to make you believe trading is simple and predictable).

London opens and the eurusd is sold. There is some ‘consolidation’ at New York and then eurusd is sold again until the London Close where’profit taking’ takes place around some area of support so price comes back to the 38% fib line for the day. A “typical trending day” (not that this actually happens that often unlike some people would have you believe). And in a downtrend, the same pattern repeats itself again and again. However, that profit taking can be made into a ‘rejection’ candle depending on which timezone your server is in. Obviously this makes ‘rejection’ candles very unsatisfactory – the example of the downtrend I described is a ‘rejection off support but in the longer model, does not mean rejection at all, and is a ‘false signal.’

You can formulate the same hypothesis for any candle. Candles are a representation of price (obviously). There are a few gurus who say: I just trade trade price action(rejection, candles, S/R) and ignore everything else because “its all in the chart” are missing so much of the picture. Its not to say that ‘candles’ are entirely useless, but they only provide part of the puzzle. Candles, OHLC bars all represent buying and selling in the market and to be able to predict whether price is going to go up or down you need reasons behind the buying or selling, or reasons behind the candles or price (or you could ignore candles and just use reasons of course) rather than just ‘price’ itself.

 

[Shakone]

Report any abusive private messages

 

[0007]

Hi, not really been keen on posting since I received some nasty private messages - I think if it continues after this post then I will stop posting altogether as its not that enjoyable to receive those kind of messages. Depending on the response I will continue/desist.

Gold - really sorry to hear of your experiences with private messages. There's no excuse for that sort of thing and there is never any need to be abusive when questioning or discussing an alternative point of view -- but we all know that's obvious to all decent people. I hope you will report such instances and that T2W will act appropriately.

I've really been enjoying your posts -- they're a little bit different, they make you think and even (!) encourage you to see things from a different point of view. I suspect that's what many traders need to do because if you're not trading successfully then you do need to change something.

So do please keep posting -- you have at least one enthusiastic listener.

 

[bruce_loco]

Anyone with public exposure drawing attention is bound to receive criticism, put up with idiots and what not
It's the price of the internet total freedom of expression - it cuts both ways
You came here with the purpose to teach/maybe gather clientele/enjoy attention. So a couple of bad bad words shouldn't get in your way, don't get too offended, that is what the delete button is for.

Keep on

 

[goldmember1]

Charting (more)


Looking at the charts one of the most popular 'indicators' is support and resistance. As I've emphasised I only trade what makes logical sense. I don't trade random 38% fib lines or GMT pivot lines because there I don't think I can attribute any real reason why they should be areas of buying and selling. This goes against what a lot of traders say - a few traders I've spoken to swear to their fibonacchi lines, and other traders swear by pivots saying thats what pit traders used to use to scalp with. Well, I don't use them because I cannot really say why someone would be buying/selling there, or how much is being bought/sold there. Of course, if someone has found statistically that they can take X pips with only risking Y pips and getting a Z% of wins over a long time period, I am not against it, but I don't expect these lines and levels to guide me as to where the market is going to go.



So onto support and resistance. This has a reason behind it - it is effectively where traders who are caught in the wrong direction liquidate their trades. If they are long, and the market drops, then there will be some traders who will get out at break even when the market goes back in their favour. This forms sell orders at a certain price level, and people with access to the order book will naturally place sell orders at the same place.



There are different ways to work out the support and resistance - (I don't just use the chart, but others do: its the most simple way) and just line up highs and lows). However, there are some limitations. When does the trader with a trade in the red decide to set his trade to break even? Is it when the trade goes 10 pips against him? 50 pips? 100 pips? How much money has he traded in the wrong direction? How many traders place orders with him - and do they place it 5 pips away to be filled, 10 pips away? And is the trade willing to take a small loss of 5-10 pips, or is he aiming for +1 pip to make his trade worthwhile? And of course, what is the prevailing reason why the price has returned? None of these questions are simply answered by the chart. And of course, support and resistance lines by themselves do not predict overall direction.



If you bother to do any statistical study of support and resistance, the actual edge is quite slim. Of course, the edge depends on whether you use a 15 minute, 1 hr, 4 hr, or daily timeframe (some people use 5 minute but I have not really tested it for any time period >3 months so my results are worthless here), and whether you take a 1:1 take profit: stop loss ratio, or a 2:1, or a 3:1 etc etc. It may surprise you to learn (well, it certainly surprised me) that the win rate of a 1:1 ratio is pretty close to 50%. Depending on the "timeframe" (I'm not a fan of tmeframes as I have mentioned, but this was for testing purposes) and the take profit target it may vary by a 2-4%, but thats what I found testing (over 10 years on the EURUSD, AUDUSD, GBPUSD pairs). With a 2:1 the win rate is less (30-40%), and 3:1 less again (about 30%), and it is a narrow edge. But what surprised me was that on a 1:1 ratio at a line of support and resistance, the edge given by this 'support and resistance' was slightly more than flipping a coin. Sure, you can make money this way, but I pretty much came to see that it was a laborious and generally unrewarding task (unless automated).

So next time you run into a vendor or thread spouting how great support and resistance is, I hope this post is of interest. I am not saying it is useless - I have mentioned it has a real basis, but there are limitations - however, it can be improved if those limitations can be supported by other methods.

 

[goldmember1]

Charting Part 5

One of the first things I looked at when I looked at a chart, and I expect a lot of people look at was indicators. A lot of people think that they are the worst thing ever, and that they are meaningless, but I think they are undervalued. Of course, they have their weaknesses, and just like price action or support and resistance I consider them to be poor if used to predict but they do have their uses.
First of all - very simple - what are indicators? Of course they differ from indicator to indicator, but many of them (stochastic, RSI, Moving average, CCI, bollinger band) are based by setting a range over the last periods that you determine. For example, RSI by default on metatrader 4 is set to the last 14 periods (or candlesticks, OHLC, or whatever you call them). So for the RSI based on the last 14 periods, the formula of the indicator sets a value on that range for the current price. Simplifying it further, the indicator is nothing more than setting a probability against a backdrop of the last few periods.

Commonly I read forums or blog posts where people claim the RSI/stochastic is 'more oversold than ever.' Lets say that the RSI is under 10 - an uncommon occurence, and lets say for example the formula for RSI dictates that there is 5% chance (this is not the exact figure for all you pedants out there) that it goes under 10. Instead of thinking - its impossible that it will breach 9, 8, 7, instead I think along the lines of it has 5% chance to do so, if its breached 10 then it is one of those times. I don't go along the line of thinking that a price must reverse because it is 'extreme RSI' or 'extreme stochastic.'

Its also worth noting that the range is based on the number of periods that is set as well. If you have the previous 14 candlesticks consisting 1 pip range, any movement will push the RSI into extremes.
To use indicators successfully in my opinion, a purely statistical method is required because they do not have a predictive element or a 'common sense' reason behind them like support and resistance. However I have found that the performance of indicators can have a very similar performance to price action. Of course you need to find the right set of indicators, but indicator based methods such as the 3 ducks method (I will call moving averages indicators although some might disagree) I have found are just as effective as price action from support and resistance (more to say about the ineffectiveness of price action than anything else) when backtested consistently.

There are some advantages of indicators over price action methods I have noted.

1) Support and resistance is commonly hit during volatile periods where the spread is considerably higher. The number of orders at support and resistance can also cause substantial slippage. This means that if you backtest a support/resistance system with a 1.5 pip spread and you get a 55% win rate, in reality the spread widens when support/resistance is hit so the forward tested win rate is lower. This doesn't occur so much on purely indicator based systems.

2) Indicator systems are easier to program into EAs than price action.

Overall, this means that if you trade indicators in an automated fashion, you can trade over more pairs, 24 hours a day, 5 days a week with less slippage which eclipses any advantage a price action strategy has.

Of course, I am not saying that indicators are the best, or that everyone should trade with indicators, but they certainly have their uses if you can recognise their significant limitations.

 

[zchawa1]

Hi Goldmember,

Have enjoyed following your thread - lots of thought provoking ideas...please continue!

However, as this thread has evolved you have rubbished many common trading techniques, or 'points of reference' that many traders use to help their trading (for example S+R, pivot points, etc). Im always happy to approach other's ideas with an open mind, and many of the arguments you've put forward have been logical, and I certainly agree with some of your views. It has however left me wondering what you personally do use to make trading decisions?? Whilst I in no way expect you to divulge your trading strategy, some direction towards how you do personally trade, rather than how you dont would be very appreciated! (usually by this stage in a thread I have an idea about the nature of someone's trading, what they are basing decisions on, etc, but I am at a loss to suggest the type of trading you are doing!)

Ive listed the points below to try and clarify why I cant identify how you are trading,

1) You mention being realistic in expected monthly gains early on in the thread, and this implies that you also expect losing trades from time to time. If you are having losing trades then this means your system doesnt work every time (as expected) and you have failed setups. How is this different from traditional methods, for example I could trade for a reversal from a support line and that would fail from time to time also, even if I was highly selective in which setups I was trading.

You talk about statistical analysis (of patterns at one point if I remember correctly), but

1) If you believe candlesticks to be of little value, what pattern are you analysing? (Note that Im not implying candlesticks ARE of value!)

2) In order to be able to perform analysis my understanding is there must be an 'expected event' and a reference point for that event? (for example a bounce off S+R, etc) As you have stated, traditional technical strategies such as S+R/pivot points, etc are flawed, so what type of 'events' are you applying statistical analysis to? If there is no 'event' then surely you can only be analysing random data?

Apologies if Ive misunderstood any of the concepts you've put forward, but as stated above, pointers about how you do feel the 'actions' of trading should be done (setups, entry, exit, etc) would be much appreciated!

zchawa1

 

[goldmember1]

However, as this thread has evolved you have rubbished many common trading techniques, or 'points of reference' that many traders use to help their trading (for example S+R, pivot points, etc). Im always happy to approach other's ideas with an open mind, and many of the arguments you've put forward have been logical, and I certainly agree with some of your views. It has however left me wondering what you personally do use to make trading decisions?? Whilst I in no way expect you to divulge your trading strategy, some direction towards how you do personally trade, rather than how you dont would be very appreciated! (usually by this stage in a thread I have an idea about the nature of someone's trading, what they are basing decisions on, etc, but I am at a loss to suggest the type of trading you are doing!)

Ive listed the points below to try and clarify why I cant identify how you are trading,

1) You mention being realistic in expected monthly gains early on in the thread, and this implies that you also expect losing trades from time to time. If you are having losing trades then this means your system doesnt work every time (as expected) and you have failed setups. How is this different from traditional methods, for example I could trade for a reversal from a support line and that would fail from time to time also, even if I was highly selective in which setups I was trading.

You talk about statistical analysis (of patterns at one point if I remember correctly), but

1) If you believe candlesticks to be of little value, what pattern are you analysing? (Note that Im not implying candlesticks ARE of value!)

2) In order to be able to perform analysis my understanding is there must be an 'expected event' and a reference point for that event? (for example a bounce off S+R, etc) As you have stated, traditional technical strategies such as S+R/pivot points, etc are flawed, so what type of 'events' are you applying statistical analysis to? If there is no 'event' then surely you can only be analysing random data?

Apologies if Ive misunderstood any of the concepts you've put forward, but as stated above, pointers about how you do feel the 'actions' of trading should be done (setups, entry, exit, etc) would be much appreciated!

zchawa1

Hi, I was going to go over how I approach trading, but I became a bit sidetracked. I don't think that it is possible to learn through just a couple of systems, which is the point I was getting at. I don't think that S/R is rubbish, I actually wrote a post (although I must have forgotten/been discouraged to cut and paste it to this forum) about SR and how it had its uses - but again was limited.
I was going to go over how if you want to trade purely technical you need to trade statistical systems that offer a proven edge - and the best way to do this is automated if possible. And if you apply an edge you need to aware of the boundaries it has in regards to managing your money.
I was then going to go onto how assessing factors outside technical (some people call this fundamental, but I don't like that word as I think it applies to something more specific) to find the direction. In that case with the direction then you can use technical for entry to maximise your efficiency.
Analysing so called fundamental data through various sources (not just the calendar which is a very limited view) is how I find direction, and I have found that is of primary importance. If I have no idea of direction, I normally don't trade (or I trade very small size at technical levels). Note that this form of analysis is not so amenable to backtesting because there is just not enough data, and too many datapoints to get anything meaningful. However, in my experience I have found the market is logical if you look at it the right way. Of course, once you have general direction, its useful to have technical analysis for entry (unless you are happy to take large drawdowns).
My initial postings were saying that the retail forex teaching/wisdom was far too skewed in the other direction (price action only, learn everything from a chart), especially when some price action teaching programs are aimed at making 20% a month.

 

[zchawa1]

Thanks for your reply Goldmember, that does help explain some of my questions!

I look forward to you explaining this in more detail, specifically about how you identify direction using non-technical factors...but only if you want to!

Thanks again,
zchawa1

 

[goldmember1]

Charting Part 6 (overbought and oversold)

Another common use of the chart is to see whether a currency/stock etc is overbought or oversold. Some people base this on indicators, some people just think that going up or down X amount of pips is too much, or some people's positions might just be deep in the red so they claim a move is 'overdone'. There is also a statistical basis for this, but like all statistical methods you need a sufficient population of results to make it work.

Looking at a chart is there such a thing as a overbought or oversold currency? If we move away from currency charts for a second and look at other charts then you can see that there is some basis for it.

For example if you look at an unemployment chart for a country over the years. You will notice that unemployment rates seldom fall under 1% - is this because of the chart or is it something else? 1% unemployment is unlikely and is going to be certainly a low because there will always certainly be a proportion of the adult population who are unsuitable for work. You can assume If you look at the high - at the moment for the USA and the UK the employment is 7-8%. For Japan it is 4-5%. In Greece it is 25%. If you plotted Greece's unemployment it would have been over the top for a long time. Is there a top? Is the 'top' dictated by the chart of the unemployment, or is it something "fundamental" which differs from country to country?

Lets talk about the GBPUSD pair as another example - is this oversold at 1.00 (and is that why it rebounds?) - or is there a fundamental reason? Is it overbought at 2.00 - is that why it dropped in 2009 or is it fundamental?

The answer in my mind is that there is a fundamental reason for "oversold or overbought" - a discrepency between the current price being paid and the current value. You can see the same thing in shares more clearly - stocks are bought when the company is overvalued - and that is overbought. Stocks are sold when the company still holds value, and this is oversold. In my mind you cannot work out what is overbought or oversold solely by the price. It is also highly debatable whether a 200 pip move is 'overselling' because in the grand scheme it is not really that much of a difference (unless you are already in a situation where you have judged the fundamental value to already differ from the price, and the 200 pip move exacerbates it further).

Of course, the chart is necessary to see whether something is oversold or overbought because it tells you the current price. Price action believers would have you believe the nature of the movement of the market or the pattern of the market ALONE will tell you consistently whether something is oversold or overbought - I have illustrated chart situations previously where the same chart patterns are not consistent and do not consistently give information in previous posts. Charts must be used in conjunction with fundamental analysis to bring up an understanding of 'oversold' or 'overbought' if they are to be useful and is an important part of trading.

 

[goldmember1]

Charting Part 7 - Trends on the chart

One of the most often heard trading mantra's is 'trade with the trend.' If you are not trading with the trend, then you are 'picking tops and bottoms.' Sound advice but it is often difficult to interpret (for very good reason). In fact, I would argue that trading the trend is one of my most hated forex sayings, because it does not really provide any logical basis behind it.

Firstly, when most traders mention trade with the trend, they are talking about the chart trend. If the trend is up, you should be buying, if the trend is down you should be selling. Unfortunately, trends differ depending on the 'timeframe' (I do not like timeframes as they are artificial chunks of time, but I am using this as it is a common trading term that can be understood as I don't want to have to provide another explanation about how I view time - that will come later).

For instance, a 15 min 'downtrend' could be within a 4 hour 'uptrend.' And that 4 hours uptrend, could be within a daily downtrend. And that daily downtrend could be in a weekly uptrend. Again, we come down to the highly subjective nature of 'the chart trend.' Very similar to the support and resistance example I mentioned previously, trader A will say that its a 4 hr downtrend so advise shorting, while trader B will say its a daily uptrend so advise long trades, while trader C will say "thats what makes a market (thats all folks!)".

Chart trends are a retrospective look. You can only draw a trend from a point in the past to the present. It does not dictate the future. It is even worse in my opinion than price action systems, support and resistance systems, and indicator systems because it cannot be tested on a statistical basis unless you have a set mechanism of identifying that trend. For example, if you are testing whether 'buying an uptrend works' you would have to set a fixed criteria such as (if the daily closes over previous daily close more than 3 times then that is an uptrend). If your criteria is "if the chart looks like its 'pointing up" (charts do not point by the way - they are 'pointy' because they stop at the present time forming an abrupt halt) then it is impossible to test as the nature is so subjective.

So you might think - so what, why isn't a wholly subjective method of trading valid? I have no further answers for you if you ask this question, because I think I have written 10 000+ words on this subject.

So, chart trends - be aware of them and teachers/traders/bloggers that talk about them. I do believe in trends, but I believe the trends are not to be found solely in the price chart of the EURUSD.