Follow The Fractal Tool Toward Better Breakout Entries

Many traders spend too much time looking for the best possible entry. However, the entry can be based on any number of technical indicators. For traders who are a fan of price-action, you could do no worse than finding triggers based on a fractal breakout in the direction of the trend. 

 

Fractals Defined

Let’s start with an introduction to fractals. The actually are applied to trading from nature and not the other way around. It may be helpful to know that fractals are effectively a way of looking a sub-sets of large pieces of data to understand what developments are being created in real-time. From a trading / market perspective, fractals are an indicator highlighting the chart’s local highs and lows where the price movement reversed marking a 5-bar high or low. These reversal points are called respectively Fractal highs and lows.

 

Learn Forex: The Hand is a Perfect Fractal

Before we take this natural reoccurrence to the market, you should see how your hand, with fingers pointing up is the perfect up fractal and with your palm facing you, is a perfect down fractal. A Market swing Fractal shows a price extreme in the middle of 5 bars whereas an up fractal has the middle bar with a highest high in the middle with two lower highs on the left and two lower highs on the right. A down fractal will have a low price extreme in the middle bar of a 5-bar sequence with the higher lows on the left and two higher lows on the right. 

 

How Traders Can Use Fractals

Volatility is a key determinant to trading opportunities. One of the common triggers that volatility is in play is when a prior high or low is taken out and a new trend begins. Fractals can be applied to the chart so that you can see when a recent key level has broken which can lead to a price-action trading opportunity. 

 

Learn Forex: Pinpoint Key Price Action Swings With Fractals

Presented by FXCM’s Marketscope Charts

Fractals revolve around price action highs and lows and can easily pinpoint places for a breakout entry or tight price action based stop.

Fractals can be used in a variety of ways. Most commonly, traders will look for a bar to close above a prior up fractal to show an upside breakout or a close below a prior down fractal to signal a downside breakout that is potentially worth trading. Another positive aspect is that when you have a comfortable view of a strong trend in play, you can use fractals as a trailing stop from a prior counter-trend move which made a fractal. 

 

Learn Forex: USDOLLAR down Fractals Have Been Stair Stepping Higher since Recent Reversal

Presented by FXCM’s Marketscope Charts

Real-Time Fractal Set-Up

For purpose of review, fractals mark price changes or pivots in the market. For reasons known or unknown, they are reaction points that can help you spot key places to place an entry order or stop. From a trader’s stand-point, they allow you to enter on a confirming view of your analysis vs. a hunch that a market is oversold or overbought and is time to enter like this trade set-up on the Australian Dollar.

Learn Forex: A Fractal Based Entry on AUDUSD

Presented by FXCM’s Marketscope Charts

Every trader should embrace the following seven words:

I don’t know what will happen next

This isn’t meant to disregard your analysis but tell a simple fact about trading. Anything can happen in the market place and an infinite number of possibilities are plausible. As a trader, we can develop a strategy with set rules that work with our psychology to give us an edge but it will not predict the future. Therefore, we can use fractals as a trigger to put us into a trade or out of a trade and we may not know if the trade will end in a profit but we can now that we’re only acting on objective evidence.

How to Trade Gold in an Oversold Market

The Relative Strength Index (RSI) is a poplar oscillating indicator designed to help us determine market momentum and pinpoint entries during a variety of trading conditions. However, depending on if the market is ranging or trending, traders should approach the overbought and oversold RSI values seen below very differently. Today we are going to review the trend developing in gold (XAU/USD), and how RSI can be used to enter into strong moving trends.

RSI Crossovers

Normally traders will use the RSI indicator for what is known as a crossover. A crossover occurs when RSI swings through an overbought or oversold value, then cross back through the selected value. The idea behind this is to enter new trades when momentum returns to the market. This can be a great strategy and normally will work when the market is in a range bound environment used in conjuncture with a support and resistance levels. Ultimately, traders using crossovers are looking to buy when prices are low or sell when prices are relatively high.

However, at the moment this strategy is not conducive for trading strong trends such as gold. Due to the market being in a downtrend, traders should absolutely avoid entering trades when RSI crosses back above oversold values. While traders may be inclined to buy low at these points, the chart below shows in most instances prices continuing toward lower lows. So the question is, how can RSI be helpful in directional markets.

Learn Forex – XAU/USD with RSI Crossovers

Using RSI Momentum

When it comes to trending markets, it is important to remember that RSI is a momentum oscillator. Because of this, it is normal for RSI to remain oversold in a downtrend for some time. This can often be disheartening for swing traders as they wait for RSI to move back above oversold values for a chance to sell a RSI crossover in a downtrend. The good news is, this is not the only way to trade using RSI! Let’s look at another way of trading the indicator.

One of the most overlooked ways we can use RSI in trending environment is to sell into oversold values. This style of trading may seem counter intuitive at first, but it is very similar to trading a breakout strategy. As price continues to decline and work to create new lows RSI should move to lower lows as well. Traders watching this momentum can actually institute new trades when RSI moves below 30 (Oversold). The Daily Gold chart below is an excellent example of this technique at work. Instead of buying an oversold crossover, traders will look to sell as soon as RSI becomes oversold.

Learn Forex – XAU/USD with Oversold Entry

The key to using RSI in this manner is that markets must remain trending. For gold, this can continue as long as fresh lows are put in place. It is important to remember that market conditions are always subject to change. In the event that the current trend ends, RSI traders can then shift gears and begin using RSI in another format.

As you can see, RSI is a versatile indicator for timing entries in a variety of market conditions. To learn more about RSI and how it can be used in an active trading plan, sign up for the DailyFX RSI training course linked below. Registration is free, and the course will include videos, checkpoint questions and access to an advanced RSI strategy. 

Strong Weak Analysis for Scalpers

Forex traders have a variety of options when it comes to trading. However, those traders who are looking to peruse scalping opportunities will most directly benefits from identifying the strongest and weakest currencies, while identifying inter day price action including levels of support and resistance. To help us with this task today we will be using the Strong Weak app coupled with Camarilla Pivots. Let’s begin! 

 

Picking a Currency Pair

 

Scalping is all about momentum and market conditions. This means traders should be actively looking for pairs where a strong currency is pitted against a weaker one. The reason for this is to identify an active market trend in witch to participate. Below we can currently see the GBPJPY listed as a weak currency using the Strong Weak Application from the FXCM App Store. Knowing this, traders will look for opportunities to sell the pair while looking for scalping opportunities.

If you are unfamiliar with Strong Weak analysis, that is ok. You can review the app along with two of its uses through a series of videos linked below. After clicking on the link, you’ll be asked to input information into the ‘Guestbook,’ after which you’ll be met with a series of videos along with additional information regarding the Strong Weak application.

 

Risk Management App and Review via Brainshark

 

Learn Forex –Strong Weak App

 Scalping A Retracement

 

Once a currency pair has been selected for trading, it is time to pick a strategy for trading. To help aid in this decision, traders can use Camarilla pivots to identify key technical levels for trading. Below we can see these pivots in action with key levels of resistance labeled R1-4 and support labeled S1-4.

The first methodology of trading pivots is to look for a retracement. Retracement traders will look for pullbacks in the trend and look to enter the market near a point of support and resistance. If price is in a downtrend, such as the GBPJPY, traders will look for price to move to resistance and then enter fresh sell orders. Below we can see price action from this morning’s trading of the GBPJPY. First price moved up to resistance (R3), before momentum returned to the market and offering traders their first opportunity to enter fresh orders. 

 

Learn Forex – GBPJPY with Camarilla Pivots

 

(Created using FXCM’s Marketscope 2.0 charts) 

 

Trading a Breakout

The second methodology of trading Camarilla Pivots is by looking for a breakout. Above we can see a breakout occurring today on the GBPJPY at the S4 support pivot. S4 represents the last line of daily support for a currency and in a downtrend and can offer a distinct area to enter new sell orders. This process can be inverted for an uptrend, looking to sell a breakout above the R4 resistance pivot.

These are just two of the most popular ways to approach scalping Forex pairs with pivot points. Now that you are more familiar with this methodology, you can practice what you have learned using a demo account. You can get started by registering for a Free Forex Demo with FXCM. This way you can develop your trading skills while continuing to track the market in real time.

3 Tips to Better Risk Management

While the question of money management may seem fairly straightforward, it remains the most critical component of any trading plan. Before placing a trade, traders should examine exactly what the risks associated with that trade. This includes asking some tough questions about stop placements, risk totals, as well as risk reward levels. To help answer some of these concerns today we will tackle some tips for better risk management. Let’s get started!

 

Plan Your Exit

More often than not, traders have an idea of where to exit the market when a trade is moving in their favor. While a profit target is always good to have, every trader should have a contingency for when a trade moves against them. Stop losses can be set in a variety of manners, but more often than not these levels are coupled with an existing value of support and resistance.

Remember, a stop order is a point on the graph where your trade idea is considered no longer valid. If you have buy orders in place, and a key level of support is broken with price making a lower low it may be time to consider exiting the trade. As well, the opposite is true in a downtrend. If a trader is selling while prices are making higher highs it may be time to look for a new trading idea!

 

The 1% Rule

After you have planned a point of exit, traders need to decide how much to risk per trade. Since it is inevitable that at one point a trade will close at a loss, it is important to know exactly how much you intend to lose prior to that occurring. One way to determine this is the 1% rule. Simply put, this means traders should risk no more than 1% of their TOTAL balance on any one trade idea. For instance if you have a $10,000 balance at no point would you want to risk more than $100 on any 1 trading idea.

The 1% rule can also be coupled with a favorable risk reward ratio. Using a 1:2 setting, this means if we risk 1% in the event of a loss, at minimum we should look to close our trades out for a 2% profit. This would translate into a $200 profit on a $10,000 account balance. Now that you are familiar with the 1% rule, let’s look at our next risk management tip.

 

FXCM Money Management App

To help traders control and manage their risk, programmers at FXCM have created a simple indicator to help decipher how much risk is being assumed on any one particular trade. Once added to Marketscope 2.0, the FXCM Risk Calculator, as depicted above, has the ability to help a trader calculate risk based off of trade size and stop levels.

We walk through the application, as well as how to manage risk in several videos embedded into the brainshark medium. After clicking on the link below, you’ll be asked to input information into the ‘Guestbook,’ after which you’ll be met with a series of risk management videos along with download instructions for the application.

Risk Management App Download and Review via Brainshark