FOREX FOCUS
Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS& COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.
FISHING FOR TRADING SYSTEMS
by Alexander SabodinHere's a step-by-step look at a trading system that you can incorporate into forex as well as other markets.The essence of the trading system I discuss here was already proposed by Charles Henry Dow, the founder of the Dow Jones indexes and Dow theory, at the beginning of the 20th century. Dow pointed out three categories of trends: primary, secondary, and minor. The primary trend tells you which way prices are flowing. The secondary is made up of waves that form the flow, and the minor trends look like ripples on the waves. As traders, our task is to define the major trend of the direction of prices and then to find a wave inside it as a good point of entry.
IS IT THAT EASY?
Very often while analyzing the market, we can come across contradictions. Let's point out two major ones:
1. At various time scales, you can observe conflicting trend directions. For example, on a weekly chart the trend may appear to be ascending, whereas on a daily chart the trend may be descending. And when it comes to intraday charts, the direction of the trend is usually vague.So which should you believe? Those who just start out trading often get themselves into such traps. They begin to look at charts of different time intervals and apply one indicator after another. It then becomes a complete and unusable mess. As a result, instead of rising, the deposit fades in front of our eyes. From my point of view, Alexander Elder, in the second half of the 20th century, was the best in presenting the idea of how to avoid these contradictions. He called it the "three screens." For large time intervals, you define the trend direction by trend indicators. For smaller time intervals, you identify the point of entrance in the direction of the trend indicated by oscillators.
2. Various groups of indicators may show contradictory signals. While a trend indicator may suggest that the trend is ascending, the oscillator may show that traders are outbidding and therefore give sell signals.Elder wrote that sometimes at seminars a trader will come up to him and thank him, but then add that he uses the system of three screens in a way not exactly how Elder described it. The trader would explain he corrected indicators or used ones other than what was suggested, added some functions, and made the system a winner. So the system was along the same lines as the one that Alexander Elder described, but different. ...
Continued in the August 2008 issue of STOCKS & COMMODITIES
Originally published in the August 2008 issue of Technical Analysis of
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