Currency Trading for Dummies

[expiated]

I've considered this resource elsewhere, but it took me forever to find the information, so I'm taking another look at it here so that next time, I can track it down by title using this forums search field.

Also, I have another book "in the wings" that I want to assess as an educational resource thread too, so that I can find both books in this same general location.

 

[expiated]

THE RED ZONE STRATEGY

Having completed the process of developing my own system for trading foreign currency pairs, I'm now going back and reading instructional books on the topic (which I'm checking out from my public library) just for the fun of it, starting with Currency Trading for Dummies. The "fun" is in comparing and contrasting what these authors have to say with the methodology I've adopted for myself, which I call Numerical Price Prediction (NPP).

This first book lists a number of strategies to help readers choose a trading strategy that fits them personally and provides them with tips on implementing those strategies.

Again, since I have absolutely no intention of abandoning my own system to implement any of the strategies they describe, I plan to instead compare and contrast them with my approach to evaluate WHY it is that I prefer to continue utilizing my own ideas.

The fist strategy I'm going to look at is what they call The Red Zone Strategy.

It evokes the analogy of an American football game, and refers to the final 20 yards before the end zone, where good teams supposedly have historically scored a touchdown 50% to 70% of the time (analogous to the penalty area in what the rest of the world calls football, but Americans call "soccer").

The claim is that the same can be applied to trading, where an instrument is more likely to continue progressing until it reaches a round number if and when it come to within 20 points of that figure (i.e., markets tend to gravitate toward round numbers). It is supposedly a potentially effective strategy when applied to buying and selling around high-impact economic data (i.e., news trading).

However, the first problem I have with this strategy is that, unless an individual is going to go through the rigorous, time-consuming process of verifying these numbers for himself or herself, or is able to hunt down objective studies which bear this out (which I acknowledge, might be out there, but if so, were never cited in the book) then one must take in on faith that this is actually the case.

Second, even if this is an actual phenomena, whose to say that there won't come a day when the Red Zone increases up to 30 points, or shrinks down to 10 points. How would one know if and when this happened? So, you run into the potential problem of a strategy that used to work no longer working; whereas Numerical Price Prediction (NPP) relies on the assumption that, unless something goes horribly wrong with the universe, up shall remain up and down will continue to be down. In that this is what NPP is designed to measure, unless these properties change, the system should continue to yield positive outcomes, regardless of the changes that take place in the market(s).

Third, if you look at the first example pictured in the book, it is obvious that picking a price 20 points from the next round number resulted in an entry level that left a lot of potential profit on the table by executing the trade long after the rate had broken out of its "normal" range, something which NPP would have picked up on (or recognized) immediately.

In the second example, in addition to the above mentioned problem (which is repeated) there is a 20 pip loss when the rate fails to hit the take-profit target. But, had the NPP system been in use instead, the trader could have theoretically exited the position as soon as the forecast model detected a reversal in the intraday trend, thus holding on to at least a few pips profit, or at a minimum, getting out of the trade at break even.

 

[expiated]

OPENING RANGE BREAKOUT STRATEGY

A strategy that the authors of the above publication say is supposed to identify higher-probability trading opportunities (Isn't that what ALL strategies are supposed to do?) is the Opening Range Breakout Strategy. They mention that it typically focuses on EURUSD, but could be applied to any of the European majors.

It works by identifying the high and low during the half-hour just prior to the London open. This is 11:30 PM to 12 o'clock midnight where I live here on the Pacific Coast. Having done so, traders then watch for a breakout of this range +/-10 pips or 1/10 of the daily Average True Range (ATR) and maintain above/below this level for 10 to 15 minutes. The idea is to try to detect a direction of the "flow" for the remainder of the day.

From there, one needs to look to manage the bullish or bearish bias by focusing on one-, two- or five-minute charts and using a combination of moving averages (13-SMA, 144-EMA, and 169-EMA) and oscillators (RSI, stochastics, and CCI).

Other factors to include are major news announcements (usually in efforts of avoidance) and the time of day (when major markets open/close, option expirations, fixings and so on).

If price is struggling near these events, usually spotted by a bullish/bearish divergence with an oscillator, it could be prudent to reduce the position size ahead of time. Additionally, this type of approach might help to minimize the emotional aspect to trading, because there is an identifiable area to know where you're wrong (the opposite side of the breakout's high and low).

As an example, the book uses the above mentioned moving average on a two-minute chart. But, since the platform I use doesn't have two-minute charts, I converted the measures to fit a five-minute chart, which turned out to be SMA (5), EMA (58) and EMA (68). I did NOT use SMA (13), EMA (144) and EMA (169) on the five-minute chart, because failing to adjust for the changing time frame makes absolutely no sense to me!

In any case, compared to the forecast models I use with Numerical Price Prediction, these are very good measures! (Though I feel the use of exponential moving averages could lead to confusion [i.e., headfakes], because if you look at the example below, you will see that there are times when the EMAs turn slightly upward when, in reality, the rate is ultimately still headed south.)

I would note however that sometimes rates begin moving as early as ninety minutes prior to the London open, so I don't know if this would screw things up (or perhaps the pairs that do so typically are not the Euro majors). Moreover, since NPP is always focused on breakouts that breach the 60- and 20-minute price range envelopes at designated levels, there is no need for identifying the high and low during the half-hour just prior to the London open, and there is no problem if these breakouts occur at 10:30 PM as opposed to 11:30 PM, or any other time during the three primary trading sessions for that matter.

I've also noticed that currency pairs have a tendency to reverse direction in the middle of the London session, so in my opinion, one had better not count on the initial breakout indicating the direction of the "flow" for the remainder of the day. Consequently, monitoring the bullish or bearish bias by focusing on SMA (13), EMA (144) and EMA (169) on two-minute charts, or SMA (5), EMA (58) and EMA (68) on five-minute charts, would indeed be wise. But, from my perspective, this should be good enough. I see no need to ALSO consult oscillators such as the RSI, stochastic, or CCI.

On the other hand, what I WOULD do is remain cognizant of where the limits of the two-, four-, eight-, and 24-hour price ranges are located, because these are the levels where reversals during the middle of the London Session are most likely to be observed—especially the 24-hour statistical AND temporal support/resistance levels, not to mention the eight-hour pullback level.

One OTHER thing I would keep in mind is the direction of the day-to-day trend, because if a pair begins the London session on a trajectory contrary to this indicator, there is a significant probability that the asset might make a mid-course correction sometime during the European (or American) session(s).

 

[expiated]

Both of the book's authors work (or did so at one time) at Forex.com. Accordingly, rather than continue to summarize the strategies they put forth myself (as I did with the two [scalping] systems described above), I'm going to track down where I can find each methodology already explained online, beginning with the following swing trade strategy:

The "Favorite Fib" Approach

https://www.forex.com/en-us/trading-academy/courses/advanced-technical-analysis/our-favorite-fib/

This strategy seems perfectly fine to me, so there's not really much I have to say about it, except that from a Numerical Price Prediction (NPP) standpoint, I find it rather limited. It's like there's just one thing you're looking to do, and you're always looking to do it under pretty much the same set of circumstances, and in more-or-less the same way.

It's not so much about analyzing price "behavior" and what that's communicating to you as it is about just waiting for price to hit certain predesignated numbers, like a stage actor having to always hit his or her mark before delivering their lines.

Personally, I like the flexibility that comes with also understanding the "story" being conveyed by price action, and being able to react accordingly, whatever set of numbers happen to be caught in the cross hairs, or are enjoying the spotlight at the time.

 

[expiated]

ANOTHER SWING TRADING STRATEGY
MOVING AVERAGE CROSSOVER

https://www.forex.com/en/education/education-themes/technical-analysis/moving-average-crossover/

Like the Favorite Fib strategy, this one seems perfectly fine to me. The 4-, 9- and 18-period moving averages are very much in harmony with baselines employed by Numerical Price Prediction (NPP). However, I personally would multiply them by the appropriate associated "common factor" to evaluate or analyze a particular trade on lower time frame charts.

On the other hand, as the authors themselves point out, the exits are very subjective; whereas NPP has temporal support/resistance levels AND statistical support/resistance levels (i.e., typical price ranges/price range envelopes) to assist in this regard.

 

[expiated]

Ichimoko Cloud

Currency Trading for Dummies suggests only one (rather than two) strategies for position traders: the Ichimoku cloud.

I don't really have any big problems with this suggestion, especially since they specifically state it is best utilized on daily or weekly (longer-term) charts.

It omits the 4-period SMA included in the moving average crossover swing trading strategy. But, that's not a major problem as far as Numerical Price Prediction (NPP) is concerned, given that the comparable measure from that prior system, when it comes to NPP, is only a minor player. However, like the MA crossover approach, it DOES use the 9-period SMA, which NPP would regard as critical. (Note that Ichimoku cloud generates the moving averages by basing calculations on the average between the high and the low rather than use the close.)

On the other hand, Ishimoku SKIPS the 18-period SMA (which NPP would not recommend doing), though it does include SMA (26), which approximates one of the three main measures (along with the 9- and 18-period lines) NPP would regard as most important.

Like NPP (which plots a temporal support and resistance channel) the Ichimoku cloud factors in time by projecting the average of the 9- and 26-period SMAs from 26 periods ago into the present, along with the 52-period SMA from 26 periods ago. (It is the region between these two measures that forms the cloud).

Nonetheless, the time-factoring manners in which NPP's channel and Ichimoku's cloud are utilized share almost no similarities whatsoever, and to be honest, I don't really see the necessity of waiting 26 periods before factoring the slower measures into the mix.

For the authors' description on how to apply the Ichimoku cloud, I was going to suggest that you navigate to a particular Forex Factory web page, but I was unable to find anything that looked like an "official" instructional page.

 

[Tradess0610]

Love this topic, thank you for your contribution. I was just thinking in the last days that I need to brush up on the knowledge of the "traditional" indicators and started googling things randomly. Your topic popped up perfectly!

 

[virtusa]

Love this topic, thank you for your contribution. I was just thinking in the last days that I need to brush up on the knowledge of the "traditional" indicators and started googling things randomly. Your topic popped up perfectly!

I am afraid that the result will be disappointing. If these free indicatoors would work very well, they would no be available on internet. And surely not for free in any trading software package.
The oinly people making money with these indicators are the writers of the books.

 

[maxinger]

I am afraid that the result will be disappointing. If these free indicatoors would work very well, they would no be available on internet. And surely not for free in any trading software package.
The oinly people making money with these indicators are the writers of the books.

Right mister.

When I was a newbie, I looked forward to free and also paid materials.
After many years of absorbing those contaminated things,
I had to spend many many more years decontaminating my mind.

 

[expiated]

I was just thinking in the last days that I need to brush up on the knowledge of the "traditional" indicators and started googling things randomly.

I do AND don't agree with virtusa. This is based in part on my having followed traders like AJ Monte and Anne-Marie Baiynd, who at least appear to be successful using standard indicators. (I can't swear to this because I don't pay for anyone's service, so I've never followed their entry and exit levels in real time.)

However, it is also based on first-hand experience. For example, I make a profit nearly every day as a retail trader, and this is (one of) the chart configuration(s) I will be using this week...

It consists of nothing more than four basic simple moving average envelopes, and yet, it can be used quite successfully, though for the sake of full disclosure, there IS one proprietary indicator I plot on the chart which has been omitted from this image. Still, this chart setup CAN be used profitably without it.

Also, I compliment this main window with lower panel indicators. However, they are generated FROM the envelopes themselves, and do NOT come with any software package, as does the CCI, RSI, stochastic oscillator, MACD, etc. But again, the main chart CAN be used without them. (They are merely an additional visual aide.)

And finally, these standard moving average envelopes were identified in part by finding the closest approximations to my proprietary dynamic/adaptive price range envelopes, and in NONE of the above descriptions was their an approach based on trading using nothing but simple moving average envelopes, so even though it is possible (in my experience) you would be hard pressed to find anywhere on the Internet that might teach you how.

Oh... and I do have one other point. Let's say that one CAN make a living trading using standard indicators. From what I've seen, that probably doesn't matter because MOST people (including a number of professionals) are incapable of trading like professionals. Examples are folks I've run into who want to trade during the hours that are convenient for them rather than the hours that the markets are most conducive to profitable trading; or who don't stick to their trading plan, even though they know they should; or who don't spend the years of practice it might take to become a competent trader; or who use indicators blindly without understanding the theory behind their use; or who can't control their emotions; or who don't apply risk/money management properly; etc., etc., etc.

Note also that I identified what I see as certain problems with more than just one of the techniques described in the book, and if a trader does not come up with his or her own way to compensate for those problems...well...good luck.