This may seem odd as it's an accepted wisdom, but if you try and apply it in your forex trading strategy you will lose money.
If you don't realise why this is - read on and we will explain why.
Of course, the aim of all traders is to buy in at the bottom of trends and sell out at peaks - but it's impossible to do and the way most forex traders do it means they lose.
The key to understanding why you can't do it, is to realize that you have to predict in advance where prices will go or buy into a low or sell into a high and "hope" the levels hold.
Fact is you can't predict where forex prices are likely to go and if you rely on hope then you shouldn't be trading forex.
What you have to do is not predict but get confirmation of price momentum changes, above the level of support - BEFORE executing your forex trading signals.
A simple example will show you how to do this.
Many Forex traders watch a support level such as, Fibonacci level, pivot point etc, and as prices come to perceived support; they simply buy into it just above the level.
There logic is, they are in at a low "if" the level holds - of course the important word here is "if".
Support lines, Fibonacci levels, pivot points break frequently, so if you try and buy into them just hoping they will hold you will buy the low will see you lose.
A better way to trade:
Is to use price momentum to check that support and resistance will hold - and then trade on confirmation.
Trading on confirmation gets the odds on your side trying to predict will see you lose it's as simple as that.
So how do spot changes in price momentum?
Great indicators to use are the stochastic and relative Strength Index (RSI)
You simply watch for prices to move to support and then turn up supported by RSI or stochastic.
You won't buy the bottom you will miss a good bit of the move, but by trading in this way you will get stopped out less and always trade with the odds - this means bigger forex profits longer term.
"Buy low sell high" is an accepted investment and many traders accept it at face value trade and lose.
Over 90% of forex traders lose and "buying low selling high" without confirmation will see you join them, don't fall into this trap.
by Sacha Tarkovsky
Sunday, June 03, 2007
Forex Education - Understanding Standard Deviation for Bigger Profits
In forex trading the vast majority of novice forex traders don't understand the concept of standard deviation, but they should - as its essential Forex Education and will lead you to bigger profits.
You will greater insight into price movements and how to trade these currency trends for profit.
Let's look at the concept of standard deviation and how it can help you in your forex trading strategy.
Let's do the technical bit first and how to apply it, later we will look at how to apply it and it's advantages.
Defining Standard Deviation
Standard deviation is a statistical term that provides an indication of the volatility of price in any investment and that includes currencies.
Don't worry if you find the next bit confusing - it will become clearer as we get to the end of the article.
Standard deviation measures how widely values (closing prices) are dispersed from the average price. Dispersion is the difference between the actual value (closing price) and the average value (mean closing price).
The larger the difference between the closing prices and the average price, the higher the standard deviation will be and therefore the volatility of the market.
The closer the closing prices are to the average mean price, the lower the standard deviation and the volatility of the currency is.
Standard deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean.
High Standard Deviation values occur when the data item being analyzed is changing dramatically and volatility is high.
Conversely, low Standard Deviation values occur when prices are more stable and moving within tight ranges.
Major tops and bottoms always feature high volatility as investor emotions are to the fore and greed and fear drive prices.
Using standard Deviation
Most short term price spikes that move to far from the mean price are unsustainable and prices normally "blow off" at highs or lows and return to the mean average.
High standard deviation can be a great way to spot important market highs or lows.
You can then use other technical indicators to generate trading signals to enter the forex markets when the risk is lowest and the rewards are highest.
A big rise in volatility away from the mean, i.e. a spike is normally driven by human emotion and the odds of prices returning to the average are high.
It's therefore a great way to generate contrary trades.
It also great for trend followers to.
For example, if you have a market that features low volatility and you see an important price break accompanied by a spike in volatility, then chances are the trend will continue.
Again you enter the trade with the odds on your side.
Standard deviation can also be used to buy into support (the mean) and can generate profit taking signals and can also help you set stops.
If you understand volatility and standard deviation of forex prices, you will be able to trade with higher profit potential and lower risk.
Bollinger Bands
A simple way of looking and taking advantage of standard deviation when trading currencies is to use Bollinger bands.
If you incorporate them in your currency trading system you will gain an extra edge in your quest for forex profits.
Check out our article on Bollinger bands and how to use them - if you have never used them before, you will be glad you found them.
by Sacha Tarkovsky
You will greater insight into price movements and how to trade these currency trends for profit.
Let's look at the concept of standard deviation and how it can help you in your forex trading strategy.
Let's do the technical bit first and how to apply it, later we will look at how to apply it and it's advantages.
Defining Standard Deviation
Standard deviation is a statistical term that provides an indication of the volatility of price in any investment and that includes currencies.
Don't worry if you find the next bit confusing - it will become clearer as we get to the end of the article.
Standard deviation measures how widely values (closing prices) are dispersed from the average price. Dispersion is the difference between the actual value (closing price) and the average value (mean closing price).
The larger the difference between the closing prices and the average price, the higher the standard deviation will be and therefore the volatility of the market.
The closer the closing prices are to the average mean price, the lower the standard deviation and the volatility of the currency is.
Standard deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean.
High Standard Deviation values occur when the data item being analyzed is changing dramatically and volatility is high.
Conversely, low Standard Deviation values occur when prices are more stable and moving within tight ranges.
Major tops and bottoms always feature high volatility as investor emotions are to the fore and greed and fear drive prices.
Using standard Deviation
Most short term price spikes that move to far from the mean price are unsustainable and prices normally "blow off" at highs or lows and return to the mean average.
High standard deviation can be a great way to spot important market highs or lows.
You can then use other technical indicators to generate trading signals to enter the forex markets when the risk is lowest and the rewards are highest.
A big rise in volatility away from the mean, i.e. a spike is normally driven by human emotion and the odds of prices returning to the average are high.
It's therefore a great way to generate contrary trades.
It also great for trend followers to.
For example, if you have a market that features low volatility and you see an important price break accompanied by a spike in volatility, then chances are the trend will continue.
Again you enter the trade with the odds on your side.
Standard deviation can also be used to buy into support (the mean) and can generate profit taking signals and can also help you set stops.
If you understand volatility and standard deviation of forex prices, you will be able to trade with higher profit potential and lower risk.
Bollinger Bands
A simple way of looking and taking advantage of standard deviation when trading currencies is to use Bollinger bands.
If you incorporate them in your currency trading system you will gain an extra edge in your quest for forex profits.
Check out our article on Bollinger bands and how to use them - if you have never used them before, you will be glad you found them.
by Sacha Tarkovsky
Forex Education - Bollinger Bands Can Give You a Huge Trading Edge Here's why
One of the critical pieces of forex education for any Forex trader is to understand the concept of standard deviation of price and how to use volatility to their advantage.
If you understand the concept you can easily apply it with Bollinger bands which are an essential tool for all forex traders.
Let's look at why Bollinger Bands are so useful and profitable, when incorporated in your Forex Strategy.
If you don't know what standard deviation is simply check our article on the concept - right, let's take a look at Bollinger bands.
Bollinger Bands Defined
Bollinger bands are simply volatility bands drawn either side of a moving average.
You calculate Bollinger bands using the standard deviation of price over the same period as moving averages the mean price, then the volatility bands are plotted above and below the moving average.
Moving averages are used to identify the underlying trend of currencies and Bollinger bands take this one step further by:
Combining the moving average of the currency with the volatility of the individual market (or the standard deviation) - this then creates a trading envelope - with a middle mean price (moving average and 2 x bands (expanding or contracting) either side that reflect volatility or standard deviation.
As prices move away from the longer-term average, the standard deviation rises - and thus the bands will fluctuate in varying amounts, away from the average.
Why they work
In any market, the value of a currency traded tends to rise slowly over the longer term.
Prices can and do spike quickly in the short term, but will normally return to the longer term moving average - which represents fair value.
The standard deviation of the outer bands (how far they are from the mean) shows how far prices are from longer-term value.
Most price spikes are caused by trader psychology with greed and fear to the fore and this can be graphically seen with Bollinger bands.
So how should you use Bollinger bands?
There are 3 main ways to use them.
1. Spotting price spikes When the bands are a long way from the mean you can use Bollinger bands as profit taking signal on existing trades or use them to spot contrary trades.
2. Enter exisiting trends If you have a good trend in the forex markets then you can use dips to the middle band to buy at fair value.
3. Entering new trends When prices are trading in tight range and start to breakout with a change in volatility a great new trend could be emerging.
Bollinger bands can certainly give you a new dimension to your forex trading strategy and any currency trading system can benefit from the extra insight that they can give you.
A word of warning
Like all technical indicators you should not use Bollinger bands in isolation to enter trades, however combined with timing indicators such as, the stochastic or RSI, then you have a powerful combination for greater FX profits.
With regard to forex education, knowing what standard deviation is and how to apply the concept through Bollinger Bands, will give you a huge trading edge, so make sure you use them.
by Sacha Tarkovsky
If you understand the concept you can easily apply it with Bollinger bands which are an essential tool for all forex traders.
Let's look at why Bollinger Bands are so useful and profitable, when incorporated in your Forex Strategy.
If you don't know what standard deviation is simply check our article on the concept - right, let's take a look at Bollinger bands.
Bollinger Bands Defined
Bollinger bands are simply volatility bands drawn either side of a moving average.
You calculate Bollinger bands using the standard deviation of price over the same period as moving averages the mean price, then the volatility bands are plotted above and below the moving average.
Moving averages are used to identify the underlying trend of currencies and Bollinger bands take this one step further by:
Combining the moving average of the currency with the volatility of the individual market (or the standard deviation) - this then creates a trading envelope - with a middle mean price (moving average and 2 x bands (expanding or contracting) either side that reflect volatility or standard deviation.
As prices move away from the longer-term average, the standard deviation rises - and thus the bands will fluctuate in varying amounts, away from the average.
Why they work
In any market, the value of a currency traded tends to rise slowly over the longer term.
Prices can and do spike quickly in the short term, but will normally return to the longer term moving average - which represents fair value.
The standard deviation of the outer bands (how far they are from the mean) shows how far prices are from longer-term value.
Most price spikes are caused by trader psychology with greed and fear to the fore and this can be graphically seen with Bollinger bands.
So how should you use Bollinger bands?
There are 3 main ways to use them.
1. Spotting price spikes When the bands are a long way from the mean you can use Bollinger bands as profit taking signal on existing trades or use them to spot contrary trades.
2. Enter exisiting trends If you have a good trend in the forex markets then you can use dips to the middle band to buy at fair value.
3. Entering new trends When prices are trading in tight range and start to breakout with a change in volatility a great new trend could be emerging.
Bollinger bands can certainly give you a new dimension to your forex trading strategy and any currency trading system can benefit from the extra insight that they can give you.
A word of warning
Like all technical indicators you should not use Bollinger bands in isolation to enter trades, however combined with timing indicators such as, the stochastic or RSI, then you have a powerful combination for greater FX profits.
With regard to forex education, knowing what standard deviation is and how to apply the concept through Bollinger Bands, will give you a huge trading edge, so make sure you use them.
by Sacha Tarkovsky
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