Forex Trading And Technical Indicators
Jeff Hughes is a self-taught technical trader of stocks who recently entered the foreign exchange (forex) market for the first time. In this Q&A, learn how and why he uses technical analysis to successfully trade the forex market. Hughes used his technical trading abilities as a first-time entrant into the forex market to win Forex.com's "Win A Mini" trading contest in June 2004. The next contest is scheduled to begin in February 2005.
FIGURE 1: DAILY CHART OF EURO FUTURES WITH MOVING AVERAGES AND TRENDLINES
What motivated you to try trading forex?
I think the main reasons were, first, that the markets are open 24 hours a day from Sunday evening to Friday evening, and second, the high degree of margin leverage. But it didn't take me long to realize that the forex markets, more than any other markets I'd traded to date, adhered to technical levels of support and resistance. This was a highly appealing trait.
What is your trading methodology?
The most important thing I've learned about trading is that it can be as simple or as complicated as you want it to be. When I first started, I believed that you could not have too much information, but this overcomplicated things for me. I would read everything I could get my hands on. Now I trade my methods using indicators that work for me, and don't worry about what the experts are saying. I am mostly a self-taught technical trader.
Why do you think technical analysis works so well with the forex market?
There are a number of reasons. A lot of the traditional traders of forex have come up through the ranks with an education in technical analysis, versus markets where there may be more untrained traders -- that is, the stock markets, where the public in general tends to trade.
The lack of gaps every day between the previous day's close and the current day's open ensures a continuous flow in the markets and therefore in the charts as well.
The sheer volume of $1 trillion in forex trading per day reduces the problem of manipulation you find in some stock markets, especially with the lower-volume, more thinly traded stocks. This size of volume greatly increases the odds that movements in currencies are due to logical, technical reasoning.
Another difference is that rather than buying or shorting shares in a company, with forex, you are buying one currency and selling another -- there's a difference. The opportunity is available for you to make money in up or down movements, and on many varying data stimuli throughout the day.
What technical indicators do you rely on most? Why?
I watch chart patterns -- I like candlesticks -- and I wait for opportunities at support and resistance levels. I've found that highly relevant support and resistance levels include:
1. Fibonacci retracement levels
2. 50-, 100-, and 200-day simple moving averages
3. Trendlines
4. Previous-day highs and lows, and
5. Double or triple bottoms and tops.These indicators have proven to be important information for my trading needs. Personally, I need to know what I am going to do before it develops and, due to my lifestyle, I need to have plenty of potential trades setting up. At any given time, there are a number of charts on my computer screens throughout the house. When I'm stalking an entry I have a number of currency pairs up on various charts. I mostly use five-minute charts throughout the day.
When I see an opportunity develop, I go into that pairing a little deeper: A longer-term chart setup to ensure my trade is in line with the longer trend, a midterm hourly or four-hour chart to set up my trade, and a five-minute or even one-minute chart to set up my entry point. I typically find that a 10-period EMA (exponential moving average) and a 40-period SMA (simple moving average) work for me, as well as a slow stochastic (14,3,3). I also keep an eye on the 200- and 100-period moving averages. I watch closely for trends. I believe Fibonacci retracements are highly relevant, as well as ideal patterns like double bottoms and tops.
When did you start technical trading?
My initial appetite for technical trading was whetted while I was a member of a trading room at Pristine.com. In a few short months I learned the basics of moving averages, MACD (moving average convergence/divergence), and slow stochastics. I also learned about the use of Bollinger Bands and the RSI (relative strength index). Eventually, I found that listening intently to a roomful of varying opinions could be counterproductive and confusing. But before I left, I learned the two most important things about trading: "Preserve your capital" and "Plan your trade and trade your plan."
Preserving my capital got me through a tumultuous first year of trading, which in my case wasn't helped by the Nasdaq Composite falling from around 4800 to 1900. In general, though, probably about 90% of novice traders eliminate themselves from trading by losing it all in that first year. And then, ultimately, it was "plan your trade and trade your plan" that directed me down the road of determining a trading methodology that suits my life and strengths. I developed this methodology to the point where I usually have my entry, exit, trailing stop (if the trade goes my way), and hard stop (if the trade goes against me) already decided before I do anything.
During the tech bubble, I basically felt that the only logical thing occurring was that many traders (perhaps a growing number of traders) around the world based their decisions on technical levels of support and resistance. Just the sheer fact that traders were adhering to these indicators reinforced their validity. I was already a technical trader by definition, but it was at this point that I really started to trade my way, and started blocking out what the so-called expert analysts, pundits, and so on were saying.
Originally published in the December 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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