FXstreet.com Live Sessions Archives

Top Five Tricks of Trend Trading

Expert: Rob Booker, Currency Analyst at Piptopia

Topics to be covered during the session:

-  How to capture biggest moves
-  Five special techniques

Who is Rob Booker?
Rob is a foreign currency trader. He also trains traders around the world to be more disciplined and profitable. He has worked with traders on every continent that sustains life in any meaningful way.

Rob 'practiced' law, printed t-shirts, sold magazines, taught Italian, recruited CPAs, started an advertising firm, ran an e-commerce company and roofed houses before he realized that he was better at getting jobs than he was at staying with them.

Okay, since we're all talking in the third person, I'll let you also know that Rob was fired from every job he ever got.

Consumed with the question of why he was working at jobs that he didn't like -- and how to move past those jobs into a career that brought him true happiness -- and the ability to play video games, watch movies, and chat with people around the world while attempting to build an empire of wealth beyond any mortal's ability to imagine, Rob talked to people across the country and around the world. When he met a group of successful foreign exchange traders, he learned everything he could, until he started a full-time career trading currency.

Rob now maintains a foreign currency advisory practice close to home. He has been called the "Motley Fool of Foreign Exchange" and the "Prime Minister of Pips". His columns are read by over 3,000 people each day.

Session Material:

Guiding Principles of this eBook

1. I can teach you, in one hour of chatting together here, to identify trends.
2. You can find ways, when you identify trends, to earn consistent trading profits.

Definition of a Trend

A trend is the general, dominant direction of a market or an asset.  If we say that the trend on the EUR/USD is up on the daily chart, then we are saying that the EUR/USD has been moving upward and is more likely than not to continue to do so.

Additional Resources

The eBook you are reading right now is, hopefully, just the beginning of our discussion on this topic.  To encourage you to explore the subject more deeply, I’ve provided some additional resources.

Investopedia has a good definition and section on trend trading here:
http://www.investopedia.com/terms/t/trendtrading.asp

A discussion about this eBook can be found at Forex Factory:
http://www.forexfactory.com/

An audio podcast, and a video-cast of this eBook, including my views about the USD trend right now, can be found at:
http://www.piptopia.com/2006/10/30/5_secrets_of_trend_trading.php#more

Richard Dennis’ rules for trend trading can be found here:
http://www.robbooker.com/woodchuck/training/turtles/turtlerules.pdf

My basic trend following system can be found here:
http://www.robbooker.com/books/5_13_62.pdf

Trend Trading has a Long History

Richard Dennis, the guy I mentioned above, is not the inventor of trend-trading, but he certainly made it famous.  A famous trader named John Henry became so rich he was able to buy his favorite baseball team, the Boston Red Sox.  I traded the 5/13/62 rules for 18 months very profitably.

Do the all these trend rules work?   Sure they do.  People have made hundreds of millions of dollars following the rules.  But are there other ways to trade with the trend besides the turtles, or my EMA crossover system?  Of course!

Or you can do a search for “Trend Trading” on Forex Factory (www.forexfactory.com), which will have a zillion discussions going on about the identification and proper trading of trends.  The point is that finding a set of rules for trading with a trend is easy.  That’s the easy part!  The turtle rules, or my moving average strategy above, are both free.  No charge.  That should be your favorite price. 

But once you get your greedy little mittens on the rules, what’s next?  If the rules are so easy to find, then what makes the difference between a profitable trend trader and a losing one? 

The Tricks Aren’t Secret at All

Everything you’ll read in this eBook is probably available elsewhere.  For free.  But I’m going to try to incorporate the most important elements of a profitable trend trading system.  I am not going to talk about entry and exit rules – you can find those in the links above, and share more ideas with each other in the forex factory forum that has been created. 

But what I do share – the information below – is truly what has made the difference for me and hundreds of other traders around the world.

Trick #1:  Verify First, Then Trade
Most people totally ignore me when I talk about testing.  When I train people to trade, I focus most of the training on helping them do their testing.  I have developed spreadsheets, methodologies, statistical models – all designed to help traders realize that they must verify that a system works before they commit to trading the system with real money.
Don’t ever trade anything you’ve not tested first.

What does it mean to test?  It means that you propose some simple rules for trading.  Then you go back in time, manually or mechanically, and you find out how those proposed rules would operate over the course of hundreds of trades.  That’s right: hundreds of trades. 
Think about it for a moment:  if you are not confident about your trading, it’s most likely because you have doubts about the outcome of the trades you are taking.  And if you are doubtful about the outcome, then you need to do more testing until you have a better sense for what’s going to happen when you open a trade.

Trick #2: Become Obsessed with One Area of Focus. 
Discipline yourself to focus.  Diversification is good for your portfolio.  It is not good for your career.
Let’s look at some examples.  Think of the very best attorney or doctor that you know.  Does that person specialize in one area, or does she practice law or medicine across a huge subject area?  My guess is that she is known for one type of legal specialty, or as a doctor, she is a cardiologist (hearts), radiologist (treating cancer), or something else.
 
The highest paid professionals are specialists.  Why should that be any different for you?
You are wise to diversify the investments that you can’t watch closely.  You don’t want to commit your entire life savings to forex.  You might have money saved in the equity in your home, some in a retirement account, some money in a bank savings account, and then some in a forex trading account.
But if you are going to be a forex trader for a living, then it makes sense – with respect to your currency trading, to focus on a currency pair, a system for trading that pair, and a time frame for watching that pair.  If you focus on one currency pair to start, you can become as much of an expert as possible in that one area.

How does this relate to trend trading?  It is the heart of the issue, it is the foundation for you to become successful as a trend trader.

Let’s say that you read my 5/13/62 eBook and you decide that you’re going to focus on that system.  Becoming obsessed with one area of focus means that you set aside time every day to test 50 historical trades.  And that you only watch one currency pair to start.  And that you only watch one time frame.  And you become an expert in that system, on that one currency pair, in that one time frame.  If you look at 1,000 trades with those parameters, you are going to become an expert.
If you become an expert, you are going to trade profitably.

Trick #3:  Different Trends on Different Time Frames
The EUR/USD can be trending upwards on the daily chart, but on the 5 minute, it can be trending downward.
 
Really?  Is that possible?  Absolutely!
Think about it for a moment – if you have a long term, daily, dominant move upwards on the EUR/USD, it’s possible that in the shorter term we could see a movement in the opposite direction.  So remember, if you want to be a trend trader, you can choose to follow the trend on a variety of different time frames.
If you have a full time job, you might look at trends on the daily and weekly charts.  These trends take much longer to start and finish – but they are worth a lot of pips – even more than 1,000 pips.
If you are able to trade during the day, you might look at the very short term charts.  I have been testing a new trend following system that works even on the 1 minute charts.  I don’t trade from the 1 minute charts (at least right now) but I would be willing to follow a trend on just about any time frame.  The point is that each time frame can have its own trend.

Trick #4: Trend Trading Requires Courage & Money Smarts
If you want to become a trend-trader, you are going for the big moves.  You are NOT going to be trying to get 10 pips on each trade (I talk about that here:  http://www.robbooker.com/books/Strategy10.pdf).  You’re going to want to get 50 to 500, and maybe even many more pips, when you are trend trading.
To do this you are going to have to commit yourself to a patient process of waiting for a trend to develop, and then to stay in your trades.  Most currency traders are focused on the short term – and there are lots of jumps up and down in the short term.  Have you ever noticed that after a major economic release, a currency pair will initially move in the direction you expect it to go, but then all of the sudden it will move the opposite way?

Take, for instance, a Non Farm Payroll report where the number is low, or in other words, “bad” for the US Dollar.  And then, all of the sudden, the US Dollar grows stronger anyway!  This infuriates traders.  I get at least 50 emails every time a major economic report comes out, with questions just like this.  It’s a great question.  And the answer is often that the trend was more dominant than the news.
Let’s take the example of a recent downtrend in the GBP/USD on the 1 hour chart. 

Figure 4.1.  The GBP/USD, on the 1 hour chart, temporarily spiked upwards after a Non Farm Payroll report.  But soon after, the major trend continued.

As you can see in the chart, a small spike upward really didn’t mean anything.  It was a temporary moment of market chaos after the U.S. Non  Farm Payroll report was released.  Do you see how short term news does not necessarily have a major impact on the trend?  I say “necessarily” because I want you to know that it’s possible that the Non Farm Payroll could have started a reversal of the trend.  But it did not.  Once we saw that the previous trend was going to continue, then we could confidently trade in the direction of the dominant trend.

In the case of the chart above, the smart money stayed with the trend. 
The other element, besides courage, is what I like to call “money smarts.”  This means that as a trend trader, you’re going to keep your trade size small.  To ride out a trend, as in the example in Figure 4.1, you have to be able to take a big temporary loss in the GBP/USD before it starts trending in the downward direction again. 

Does that make sense?  As a trend trader, you’re going to have to watch a currency pair move against you, and you are going to not only require the courage to stay in the trade, but an account balance that can withstand the loss.
 
Have you ever made a great trade, but you couldn’t stay in it long enough because you took a big loss?  Meaning, you made the right call on the direction, but you got stopped out before the big move?  The answer to this is that you traded too large.  Scale back your position size if you’re going to ride the trend.

Trick #5:  TV People are Wrong
Watch out for the news.  Be wary of commentators on CNBC or Bloomberg that say things like “the trend on the USD is certainly up,” or “traders would be wise to scale back their long dollar positions because the trend is going to be down.”  These people don’t trade your account.  They have no idea what chart time frame you are watching or what trading system you follow.

In the past 4 years, I have worked with approximately 1,060 traders from around the world (as of October 31, 2006).  Most of them, at one time or another, were scared out of a really good trade because they heard something on television, received an email, or were influenced by a friend. 

If you watch TV and you see some windbag get fanatical about one trade or another, then run away from your television as fast as you can.  It is better to smash your television than it is to base your trade ideas on what you learn there.  Keep in mind that I didn’t say that you should NOT watch business news.  I just said that we need to be careful about what we allow ourselves to listen to.

Conclusion

You can get rules for entering and exiting trend trades from all over the Web.  They’re easy to find.  What makes the difference in trend trading is doing the little things right – the stuff that most traders overlook.  For me, it’s all about discipline in your testing, in your trading, in your money management. 

I try to give a lot of material away for free.  I hope you’ll stop by the Web site, and I hope that you’ll stay in touch.  Remember, the free audio and video versions of this ebook are available on my blog, at this address:

http://www.piptopia.com/2006/10/30/5_secrets_of_trend_trading.php#more

Keep in touch!

European Sesion: FX-Exotic Options

Expert: Adam Rosen, PowerCourse Instructor at FXCM

Topics to be covered during the sesion:

-  Exotic options to reduce the risk
-  Speculate on potential breakout
-  Speculate in the FX market

Who is Adam Rosen?
Adam Rosen has worked for FXCM almost 3-years now, and on Wall st. for about 8-years in a number of capacities including trading: Equities, Options, FX, Fixed Income products, etc.

Currently Adam is the senior PowerCourse Instructor, administering a number of educational products to over 8,000 alumni over the past few years. He has also published a number of articles on www.dailyfx.com including a weekly trading lesson.

Adam has also traveled quite a bit speaking on a seminar circuit for FXCM to groups of traders and investors in settings of 50-600 individuals at a time.

Session Material:

1. Learn how to speculate in the FX market, and make money if the market moves, or if it doesn't move.
2. Learn strategies in selling high volatility markets, and speculate on potential breakouts.
3. Finally, we will address hedging your FX trades with exotic options to reduce the risk, and help us become profitable position traders.

Example #1: One Touch Options:
One-Touch set up:
• Look for conditions of decreasing volatility and the potential for a significant technical event. For example, the breach of a daily trend line.
• After confirmation, buy one-touch option when the market breaks out or breaks down in the anticipated direction.
• Best used when you expect a sharp rally or sharp decline in a relatively small amount of time.
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

As a result of the price breaking below the triangle support level and having the
expectation of the price moving lower in a quick fashion, we could purchase a 1
Touch Option with a barrier several hundred pips below the former support level.
As a result of the barrier price being so far from the current market price, this
Option will offer a great risk: reward ratio with a substantial payout, should the
Barrier be reached by expiration.

Click on image to enlarge

Example #2: Double One-Touch Options:
• Look for conditions of decreasing volatility within a clearly defined range.
• Buy double one-touch options where you think the market should go within a given period of time, best used when you expect a “choppy” trading range.
• Measure the distance of the range. Take 20% of that distance and subtract it from resistance. Take 20% of that distance and add it to support. These are the barriers.
• Mark the 50% level of the range, this is the ideal entry point...
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

Once the market has established a range, we measure the distance of the range. We subtract 20% of that distance from resistance and add 20% of that distance to support. We also mark the 50% level as well. As prices approach the 50% level, we buy a double one-touch option with strike prices at the 20% levels in anticipation of the market oscillating between the two levels.

Click on image to enlarge

Example #3: No-Touch-Options:
No-touch set up:
• Look for conditions of relative high volatility when the Bollinger Bands are wide apart.
• Buy no-touch options where you think the market “should not” go within a given period of time; above resistance or below support.
• Initiate trade when the market is as close to support or resistance as possible.
• Look for confirmation through other means of technical analysis such as double tops or bottoms, divergence, and candlestick patterns.
• Expiry should reflect a proper amount of time, such as a few days based on a short term chart, or a longer-period of time based on a daily or weekly chart.

Based on the following chart the market has now formed a “double bottom” pattern as the MACD has begun to rise during the same period of time. In addition, the recent candlesticks are trading very close to the lower Bollinger Band which is relatively wide apart from the upper band. This increased amount of volatility gives the trader a higher potential payout with a smaller relative premium. In addition, based on the daily charts, the market has a good chance to remain in its current trend. Based on these market conditions, a trader may want to consider buying a no touch with a strike price just below the red support line at 1.1900 with an expiration of 4 to 7 days.

Click on image to enlarge

Example #4: Double No-Touch Options:
Double No-Touch set up:
• Look for conditions of increased or relatively high volatility, within a clearly defined range.
• Best used when you expect the market to remain range bound
• Ideal entry point is as close to support and/or resistance as possible. Just above support or just below resistance would be optimum. You may enter both legs at the same time or individually.
• Could be used in times of relatively slow news flow, such as holidays or summer months.
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

If you believe the currency pair will remain within a range, you might buy a double no touch option with strikes outside the extremes of the recent range. You would buy strike prices that you do not expect to be “touched” before expiry. This is non-directional trade and is best employed during times of relatively slow news flow, where no sudden change in fundamental data or perception is anticipated.

Click on image to enlarge

Example #5: Digital Options:
Digital Options function in a similar manner to our “One-Touch” options in the sense we can express our belief that the market reach a specific price level within a given period of time. The inherent difference between the two types of options is as follows: One-Touch options payout if the market simply ‘touches’ a certain price level before expiration. On the other hand, a Digital option pays us only if the market is ‘above’ that price level at expiration. A one-touch option will payout even if the market has subsequently fallen back below the barrier level, or back above the barrier level. As long as the market touched the barrier level at least once prior to expiration, the option will payout. Therefore on the surface, it appears easier to trade one-touch options rather than digital options due to the fact that it doesn’t matter ‘where’ the market closes. However, because the probabilities of digital options closing “in the money” are less than simple one-touch options, the digital options have a greater payout % than one-touch options, relatively speaking.

For example, let’s take a look at the following 1-hour chart of the USD/JPY. The market has continued to make ‘higher-highs’ as the market has enjoyed a clear uptrend. If we believe the market will continue to rise past the 118.00 large round figure, and accomplish even higher highs, we have two different possible trades. We may purchase a one-touch option that will payout if the market at least touches 118.00 anytime over the course of the next 5-days. In order to receive a $100 payout, we must pay almost $89.00 in premium, giving us the potential to make around 12% return on our investment. This is partially due to the fact that that the Bollinger Bands are relatively wide apart and the increased state of volatility has made the one-touch options that much more expensive in relation to the fixed payout. On the other hand, we may purchase a digital option that will also payout $100 as long as the market “closes” at or above 118.00 at expiration; 5-days from now. The additional risk in the digital option is that the market may dip below 118.00 before expiration, which will result in a loss in the options trade. However, for this additional risk, our premium will only amount to around $48. As this option pays $100, the return on investment stands far better at 108%.

One-Touch Option: 118.00
Current market condition: 117.75
Premium: $88.89
Payout: $100
Expiration: 5-days
Return on Investment: 12.5%

Digital Call: 118.00
Current market condition: 117.75
Premium: $47.86
Payout: $100
Expiration: 5-days
Return of Investment: 108%

Therefore, we should look to the charts to determine which option is more suitable. Digital options can be used when we have a strong idea as far as the current trend. Although volatility is always a factor when trading options, it is not weighted as heavily in the digital options, and therefore allows us the potential for far greater returns than a simple one-touch option. With this said, One-touch options are better suited for low-volatility conditions where we expect the market to subsequently ‘break-out’ of its current quiet state, in the near future. However if the market has already become volatile, and we expect the current trend to continue, digital options may hold the solution to the trade.

Click on image to enlarge

Trading on the change of the current market sentiment

Expert: Walid Salah El Din, FX Consultant at FX Recommends

Topics to be covered during the session:

• Trade on changes
• The current market sentiment

Summary:
I always write under this title. As I believe that is the easiest way to make money to be with the current market sentiment whatever it was. The current market sentiment can persist and you may not know to where it can lead you. This sentiment changes and so you should trade on these changes. The change can be by events, data, a serious strong technical level... And surely it changes the best to buy and the best to sell.

Session Material:

There is always a current market sentiment contains the market and this sentiment can persist forming the trends and any changes in this sentiment can cause profit taken waves in this trend. the market can start discount these new changes making new pricing and changing the best to buy and the best to sell. See this example of what has been happened on the non-farm pay roll release. There was a sentiment before the data and interest rate outlook and these all have been changed after the data.

Click image to enlarge

You can see how the market has reacted clearly to the US labor report. the market was expecting the US labor report to come at 200k for November 2004 but it has came lower than expected at just 112k.

GBPUSD has made the spike on the data and here you can see clearly that in spite of the main dovish sentiment that was containing the market the profit taken has happened on the data clearly as most of the buyer are taking profit right there on this new level that has been caused on the data which has lead the pair to come back again lower than 1.93 level but the current market sentiment has been changed on this new data causing new buying for the pair on a third wave after the data and this has caused a new high breaking above the resistance at 1.936 and this was helped by more strength on the main trend of the USD dovish market sentiment.

Also it is clear on the chart the squaring of USD selling that what has been done in the day before the data. There was also an increasing of USD selling before the data on the market tendency to sell USD on the data anyway especially as the market was already discounting good data and the main bearish trend of dollar can give much more strength to the profit taken wave on the data.

But it is not welcomed as we have said before to take risk before this important data and as you have seen that it is very good to wait for the data to take profits and even on this dovish market sentiment of USD as it is not just the main market sentiment before the data or the main trend or what is the market discounting but it is also the significance of the data what can determine the end of the spike of the first wave on the data or the profit taken wave or the third wave on the change of the current market sentiment on these new data.

Trading on the third wave or on the change of market sentiment after taking profits on the data, should be lighter than the profit taken trading. As here you start for the anticipation of an end of the profit taken wave and you should cut loss if there is breaking of the level of price that was before the data as this means that the profit taken wave can persist and this can be done if there is a high discounting level of the data or the data was against the main trend of the market and the main sentiment should persist by bargain hunters.

Confessions of A Forex Trader - Part IV: Charting the Anomalous - The 2B Reversals

Expert: Mihai Nichisoiu, Private currency speculator at Mihai Nichisoiu

Topics to be covered during the session:

• Charts and psychology of the 2B reversals
• The 2B reversals: technical anomalies within solid establishment of trends
• Technical analysis in its purest form

Who is Mihai Nichisoiu?
Mihai Nichisoiu started to trade currencies first in the local futures market, then in early 2002 moved to dealing in the wide foreign exchange. Since the beginning of 2004, Mr. Nichisoiu has become mainly engaged in building a personal long-term track record in the sense of posting high rates of return only if at the expense of tight and rigid approaches of risk. Mr. Nichisoiu won the August 2005 edition of a popular global demo trading contest, after constantly achieving top rankings during an 11-month long participation.

As a currency speculator, Mr. Nichisoiu is also actively involved in managing and consulting a small number of long-term private connections.

FXstreet.com has been hosting a short, frequently updated market report signed by Mihai Nichisoiu eversince January 2004. Mr. Nichisoiu can be contacted via his recently established, personal website MihaiNichisoiu.com.

Session Material:

From my incidental experience of observing other market participants, I have come to believe that increasingly more sophisticated technical analysis is nowadays being put to work and serve the industry's same, decades-long purpose: comprehending the market in its smallest details and gestures, and controlling it around-the-clock.

In the way I look and deal in the markets, however, I hold a different approach: I let the market meet a rigid set of principles and infrequent intuition, rather than the other way round. My one and only agenda is to speculate, not to control.

With me, technically speaking, everything starts with the simple act of observation - that is what I do for most of the time. I have a strong observing interest for markets (conditions) which get overextended, even becoming parabolic at times, that fuel an increasingly more severe disequilibrium between market forces and interests, giving either the bulls or the bears a status of overstretched confidence.

However, a constant interest for making observations still translates into zero interest for stepping in betting. It is not until I am spotting an 'anomalous' element in the otherwise well-established order of a trend, that I may decide to bet against that trend. Such 'anomalous' element may be a predecessor of a swift and dramatic change of market direction - particularly in that the supply and demand could rearrange themselves in a tectonic shift with little or no interference from 'external' triggers (regular economic releases, for just one example). That is why I regard exploring such extremely peculiar and infrequent situations as technical analysis in its purest form, since a change in price is caused mainly or exclusively by the very extreme conditions that have grown embedded in the price itself.

Consistent with the framework just described and as in my own technical perception, a '2B bottom' reversal can be considered an 'anomaly' insinuating within the generally accepted, solid establishment of a trend.

On a reference daily chart and in the way I define it myself, the '2B bottom' sort of reversal is produced as a particular chart formation in a market that had already been extending downwards for a notable period of time. The market establishes an initial low, then swiftly recovers yet only for a few days, just to quickly resume falling back down re-engaging into testing that recent low. At this point, as the bears are getting overconfident themselves and the selling pressure appears as huge - there comes the day when price marginally penetrates the market's recent low, yet again it surprisingly recovers and closes that same day marginally above that low just tested.

So basically during a rather short period of time the speculator comes to observe a particular variation of the 'double-bottom' classic chart pattern (or even of the just as popular '1-2-3 reversal') on which at the level of the second bottom the market ignites an all the more surprising and generally un-expected bullish attitude. The bout of buying that erupts is so unexpectedly strong, that I often see the financial media 'questioning' it for a significant period of time in spite of the positive recovery that gradually becomes apparent on the reference chart.

Notable '2B bottom' reversals in spot forex were seen, for only the first of the notable instances that will be mentioned, in the USD/CAD on May 31st (of this year), or in the GBP/USD on July 20th of last year (see the following, zoomed-out and zoomed-in charts of the GBP/USD ; copyright: www.netdania.com).

Click on image to enlarge

Click on image to enlarge

Another '2B bottom', although not that recent, occured in the EUR/USD on August 4th, 2004, that was followed by a stunning recovery of the currency pair only 48 hours later. If I remember it well, the setup exploded northwards on August 6th, also a Friday of US non-farm payrolls release ; the buying spike that took place during that day's early US transacting time happened to be so terribly strong, that price gapped through my firmly in place and already ambitious take-profit order and I had to face a lot of execution problems with my broker in order to get myself out.

Particularly remarkable and perhaps not only in my own consideration was the '2B bottom' stamped by the USD/CHF - in the larger, weekly chart timeframe as per the currency pair's close of the last week of December 2004  - back at the time charting a sudden threat to the multi-year strongly established USD bearish ground.

That 'anomalous' technical sign was followed by an one-year long positive correction of the US Dollar not only against the Swiss Franc, but widely across the board as well (see the following USD/CHF chart ; copyright: www.netdania.com).

Click on image to enlarge

There can be seen also variations of the '2B bottom' where - for one example - the market does not ignite its swift recovery off the pattern's second bottom on the same day that bottom occurs, although it does so very soon in the afterwards.

An illustration of a '2B bottom' variation could in my view be linked to the price behaviour observed in the EUR/JPY during June of last year (see the following EUR/JPY chart ; copyright: www.netdania.com).

Click on image to enlarge

To my knowledge, there happens to be very little amount of literature about what I have described and illustrated above.

Interestingly enough, I made and entered my first '2B bottom' observations and effective bets during the year 2004 as an intraday player in the USD/CAD market - and back at that time in my public as well as private communication I was referring to the setup naming it 'bear trap', not knowing that was too a just as well established 'terminology'.

The all too often dramatically swift change in the market direction that follows a '2B bottom' reversal is triggered by a shocking wave of buying that catches an overextended, ultra confident pack of bears on an awfully wrong footing. As the bears suddenly start feeling and acting like 'trapped', heavy layers of stop orders placed in the immediate vicinity of the '2B bottom''s second bottom become extremely vulnerable to a surprising and self-reinforcing price recovery.

By 'inverting' the chart and psychology of the '2B bottom', the so-called '2B top' reversal is revealed.
One quite recent '2B top' observation could be made only a few weeks ago in the EUR/USD, on June 5th - upon a widely media commented, failed new test of the bulls in the immediate vicinity of the round 1.30 level (see the following EUR/USD chart ; copyright: www.netdania.com).

Click on image to enlarge

The '2B bottom' / '2B top' technical appearances are far from being exclusively linked to foreign exchange dynamics. I have myself been observing these two particular setups in various, highly liquid futures and stock markets.

You will find below an illustration of a '2B bottom' reversal displayed in the spring of last year in one of the major US stock indices (see the following chart of Nasdaq Composite ; chart courtesy of StockCharts.com).

Click on image to enlarge

Just like other technically 'anomalous' signs which - at infrequent times - may enforce me to overleverage personal bets, the '2B bottom' and '2B top' reversals can be extremely rare appearances. Even when these setups do show up on the reference charts, the one speculator willing to use them as technical rationale for constructing counter-trend bets must assume a contrarian attitude which is not easy to get or maintain.

Of course, there can be no guarantee of actually recording any buying or selling success necessarily associated with the particular kind of observations as above described.

Simple Systems

Expert: Robert Firestone, Broker at Alaron

Topics to be covered during the session:

• Position sizing
• Exit rules
• Simple entry

Who is Robert Firestone?
Robert is a broker with Alaron Trading. As a broker he has spent the last four years working with individual traders to improve their trading skills and strategies. Currently he teaches several classes a week for commoditytradingschool.com & sister site fxtradingschool.com covering topics from the basics to technical analysis and system trading.

Summary:
For most people the idea of a trading system revolves around buy and sell signals. Finding the combination of indicators to generate the highest winning %. Anything beyond that is unnecessary. We will talk about what makes a complete system. The use of simple entry and exit rules with money management and position sizing to create a complete trading system.

Fibonacci retracements and the Elliot Wave concept

Expert: Joseph Trevisani, Analyst at FX Solutions

Topics:

- Elliot Wave Theory
- Fibonacci retracements

Who is Joseph Trevisani? Joseph Trevisani has 18 years of experience in Forex trading and management and is a partner at FX Solutions. He is currently Senior Vice President and Chief Market Analyst; before assuming this position he was Head of Institutional Sales. Prior to joining the online trading industry Mr. Trevisani worked at Credit Suisse for 12 years in New York and Singapore as an interbank currency trader and trading desk manager. Returning from Asia he managed the Asian Trading desk and was a proprietary trader for The Bank of Bermuda in Hamilton Bermuda. He has a Bachelor and Masters Degree from Columbia University in New York City. He has been quoted in Reuters, Bloomberg, and the Wall Street Journal, written currency analysis for several internet websites and publications, and spoken at many conferences and industry events.

Summary:

Live discussion with Josep Trevisiani where you can ask him the kind of questions you would like to know but never dare to ask. Don’t miss the opportunity to know more about; ‘Trade de News´, ‘The Contrarian’ and ‘Fibonacci retracements and the Elliot Wave concept’.

A Study of price Behavior

Expert: Mike Baghdady, Head Trader at SpyGlass

Topics to be covered during the session:

• What creates trading opportunities
• Behavior of Trends

Who is Mike Baghdady?

Mike Baghdady is a 25 year veteran of the financial markets. He is a graduate of the American University at Cairo in Egypt. He is a Market Technician Association member and has held NASD licenses series 3, 7, 55 and 63.

Mike began his career as a physical grains trader in a commodity trading house. In 1989 he moved to New York and can proudly boast as being one of the fortunate few to apprentice at the hands of Mr. Alan R. Shaw CMT, widely considered the father of modern Technical Analysis at Solomon Smith Barney. Since then he worked as a Commodities broker, Stock broker, Futures analyst, Options trader, and as an instructor for both Foreign Currency Exchange and Equities Markets.

Mike has had extensive experience in teaching and mentoring hundreds of traders. His financial acumen and love of teaching fosters a unique symbiotic relationship for both his students and himself.

Session Material:

Introduction:

In this presentation I will try to show how a proper understanding of price behavior can assist the new trader to stay on the right side of the market and avoid some possible whipsaws. I will discus the Behavior of Trends, What creates trading opportunities; the questions a Technical Trader should ask before taking a trade.

By Understanding the price behavior and proper implantation of technical indicator, and developing the skill of combining multiple time frames a trader can eliminate at least 50% of his losing trade I will also share a proprietary trading technique which I teach at Online Trading Academy".

A Study of Price Behavior

Price Behavior and analyzing Price Structure are some of the most important aspects of Technical Analysis and of trading, and yet they are the most overlooked. Understanding Price Behavior and Structure will put the ODDS on the trader’s side so that he can make better decisions, trade more successfully and with better results.

Today, more and more traders and sophisticated investors use some type of technical application that he or she use in their investment or trading decisions.  Trading has become a function of taking “buy” and “sell” signals off technical indicators rather than applying the basic principles of Technical Analysis and the study of price behavior and chart structure.

Take a look at (Fig 1) & (Fig 2) and try to decide which would be the high probability trade? Should we Buy?   Or Sell?

Click on image to enlarge

Click on image to enlarge

I know that FXStreet.com  audiences are a very sophisticated group of traders, and we also have a large number of aspiring new traders attending today’s session , so I will try to present the material in a way that is clear to the novice and  the experienced alike.

This session is too short to completely cover this topic in detail –

Today I will be focusing on Trending Markets

How to study Price Behavior & Structure?

There several rules and as simple as they may seem, they are the tenants of TA

1) The Market is a discounting mechanism, events are usually discounted in advance with movements likely the result of the so called “Smart Money” or the “informed” buyers and sellers.

2) Price moves in trends, trends move in waves – we have “impulse” waves in the direction of the trend, followed by “countertrend moves” better named “corrective waves”.

(Just by accepting this simple truth that prices NEVER move in a straight line, you will stop trying to pick tops or bottom and view the corrections instead as an opportunity to take a trade in the direction on the trend)

3) Trends are created by an imbalance in supply/ demand and that moves price.

4) Usually, movements in the market tend to have a relationship to each other.  Price will alternate between areas where prices have been marked up to a new higher level or marked down to a lower level, and after a big move in either direction price will consolidates at that new price level  (see Fig 3)

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5) Trends usually begin from low volatility sideways or contracting price zones. Trends start from an area of price equilibrium. Once there is an increase in demand, prices breakout of this equilibrium area and are bid higher or “marked up” to the next level where the market consolidates at the new equilibrium zone. ( the opposite is in a down market)

6) Trends do have greater odds of continuation rather than reversal. A trend in motion will tend to continue in motion until a major event takes place that would cause it to change its direction.

7)  Trends in most cases do not change direction without giving signals or warning signs that it is about to change. These signals are usually a price patterns and sometimes accompanied by a buy or sell Climax. It takes time for a trend to change.

8) Momentum precedes price, this is a very important concept. I can not emphasize this enough. Momentum is what confirms the trend and it usually precedes the price. Momentum tends to accelerate as the trend develops. So if you are just looking at the chart and see momentum increasing and making new highs or new lows, the odds are that higher prices or lows will probably follow.

9) This breakout out of an equilibrium zone would be evidenced by increase in volatility and momentum until prices reaches the next level of equilibrium where volatility will decline and momentum will decrease.

10) A loss in momentum is NOT a sign of trend reversal, it is merely a pause. The loss in momentum and volatility is because buyers and sellers now agree to the new established price level or the new level of equilibrium. They will continue to buy and sell within a narrow range which is known as backing and filling, thus forming some of the known patterns like triangles, ledges, flags etc. 

11) The breakout in between equilibrium zones offers the trader the biggest profit potential.

Let’s go back and review the charts (fig 1 & fig 2) and let us apply what I have just mentioned above, and together let us decide which trade we should have taken?

Here are some questions we should be asking ourselves:

a) What is the market condition? Trending or consolidating?
b) Is momentum increasing or decreasing?
c) What is the major trend?
d) Do we have a Trend changing pattern and /or a buy /sell Climax?
e) Where is Support & Resistance?

Look at Fig 4            Box 1

Click on image to enlarge

We can answer the above questions?

a) Yes the market is trending up, series of higher highs and higher lows
b) Yes, momentum was increasing all the way to the top. You can see that the blue price bars have bigger ranges and are more explosive in the direction of the trend, the magnitude of the price swings are bigger in the direction of the trend than the corrective swings; thus indicating that higher prices will follow.
c) The major trend is up
d) Yes, at the top, we do have a buy climax followed by a failure of prices to make higher highs, prices then gapped down taking out support. That would be our  First signal that trend has changed and for us to go Short

Fig 5    Box 2

Click on image to enlarge

Now let us examine the next swing down Box 2 answering the same questions

a) Taking it from the Top– we had a buying Climax followed by a Failure to make higher highs and then prices broke down through support.  The market is now trending down.
b) Momentum is increasing to the downside evidenced by bigger down swings and red price bars. The final push down, as you see, is indicating a loss in momentum – but that does not indicate a trend change – it could be a profit taking area for us –  and we would be still expecting  a new lower low to follow .
c) The trend is Down – Lower highs and lower lows
d) The next swing down made a higher low and consolidated at an area marked with low volatility  - Coiling  and followed by a breakout to the upside and an increase in momentum indicating a new trend to the upside.

Fig 5 Box 3

Click on image to enlarge

Now let us examine the next swing up Box 3 – apply the same rules and answering the same questions, let us see if we can choose the high probability trade

a) The market broke out of a consolidation and is trending up – Trend change is evidenced by prices failing to make a lower low. Actually making a higher low.
b) Momentum is now increasing to the upside, large upswings – small corrective down swings, an increase in momentum is evident on the charts.
c) The trend is now up. Indicating that new price highs are yet to come.
d) The last corrective swing down at the top of the chart is shallow, moving sideways for about 7 days; holding support.

To say the least, we have no reason whatsoever to go short, even though all the indicators (fig 2) are giving sell signals, and by the information we get from the price action I think we can all conclude that the high probability trade is to be go LONG.

See fig #7 & 8

Click on image to enlarge

Click on image to enlarge

As you see by studying the price behavioral and applying the principals of technical analysis you would have been on the right side of the market and would have also taken several profitable trades.  And if you choose to use some technical indicators, they should be used as tools to confirm your trading decision rather depending solely on them to initiate a trade.

I am attaching more charts in different markets to show you that the same type of analysis and rules do apply in all markets and on any time frame

Click on image to enlarge

Click on image to enlarge

Simply taking trading signals off an indicator, or analyzing several indicators at the same time usually would have a negative effect on trader’s bottom line.

Most of the traders whom I trained and who have worked along side of me know that I rely mostly on the charts and seldom use indicators while I was trading live. I use indicators to confirm my bias. These are skills that you will develop over time, studying the chart and gaining experience.

It is very important that you to be able to make a trading decision based on your observations of the price action and by what you see on the chart. There is a great deal of information you can derive from the charts that will put the odds on your side and add to your confidence level and you will have a reason to get into a trade and stay in it  longer – give it more room - if you so choose.

And if prices do not act in the way you expect them to act, then get out of the trade and re-study the chart. Take in the Big Picture; Make sure that you have enough price data on your charts. This is how and what we teach at Online Trading Academy.

Let me emphasize NO one knows where the next tick in price is going to be. Our job as traders is to put the odds on our side and to Identify and Quantify our risk; i.e. where is my exit on that trade if I am wrong? And then decide if that level of risk is acceptable to me.

At Online Trading Academy, where I teach, we emphasize that the key to making money is minimizing our risk and taking small losses, try to never take big losses and put the odds on your side.

Profits will then take care of themselves.

Click on image to enlarge

Good Luck and Good Trading
Mbaghdady@tradingacademy.com

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Forex taxation: IRC 988 versus 1256 60/40 treatment, trader tax status, forex funds and more!

Expert: Robert Green, CPA, CEO at Green Trader Tax

Topics to be covered during the session:

• Low your Tax Rates
• Tax Saving Strategies
• Tax Code
• Maximize Tax Refunds

Who is Robert Green?
Robert A. Green, CPA, is CEO and founder of Green & Company CPAs, LLC (GreenTraderTax.com), a CPA firm; Green & Company Inc., a publishing company; and GTT Alliance for Traders, an advocacy alliance for traders. Robert A. Green is the leading authority and content writer on trader tax.

Robert Green's "The Tax Guide for Traders" (hardcover published by McGraw-Hill in the fall of 2004) is the top book on trader tax. Green also is well known for writing the monthly "Business of Trading" section for Active Trader magazine since March 2001 (he focuses on traders and hedge funds). He is also the main contributor on trader tax to SFO magazine and other publications. Green is usually the only invited tax speaker at the Online Trading Expo, Forex Trading Expo and Currency Expo events and has been an instructor at trading schools.

He is frequently interviewed and appears in Fortune, Barron's, Forbes, and promient brokerage firm newsletters, and many other media. Green has appeared on CNBC, Bloomberg Television, VoiceAmerica and "The Trade," Internet radio shows.

Session Material:

The tax code is uncertain and confusing regarding forex trading taxation, and that makes tax filings difficult for forex traders. The tax problem is that some types of forex are treated as IRC 1256 contracts with lower 60/40 tax treatment, while other types of forex are treated as IRC 988 foreign currency transactions with ordinary gain or loss treatment.

Furthermore, IRC 1256 and IRC 988 are dueling and conflicting tax code sections. In this workshop, Green will simplify the rules and show you how to lower your tax rates on forex gains by up to 12% by electing out of IRC 988. He also will show you how to maximize your tax refunds from forex losses. You will learn how to use important tax savings strategies in connection with trader tax status (business treatment) and how to qualify to claim that status.

Business traders will learn how to deduct all business expenses safely, without having to form an entity. Since a trading entity is sometimes a good idea because it allows the deduction of health insurance premiums, retirement plan contributions, and other fringe benefit plans, this session also will cover the formation of trader entities. Learn how to get huge tax refunds from net operating losses (NOLs).

We will show you how to avoid IRS exams and, if examined, how to win before the auditor even gets started. Finally, you will learn how easy it is to set up and operate your own forex hedge fund.

Profiles of the Major Currenies Part 2: The Euro

Session Material

   - Factors affecting the Euro

   - Monetary Policy

   - Economic indicators to watch

   - The future of the Euro

Find specific information about all the futures contracts made on the trading floor.

You will be able to trade commodities or future contracts after receiving the most accurate data from the markets and the trading pits.

Who is Dan Blystone?

Dan Blystone is founder of TradersLog.com - a website that focuses on technical and fundamental analysis of the financial markets. Dan was previously a professional futures trader and is based in Chicago.