Article: Forex Trading

Forex trading is the epitome of liquidity when the major foreign currencies are included.  Price swings are fast and large!  These are ideal conditions for a pattern recognition swing trader.  Swing trading defines price swings from a few minutes to a few days.  Pattern recognition refers to the probability of certain patterns repeating consistently. Pattern recognition has always had a strong following among technicians but a recent book by Dr. Andrew Lo, ‘The Non Random Walk Down Wall Street’ studied over 30,000 chart patterns over 30 years and found startling correlations from the standard chart patterns such as head and shoulders, double tops and bottoms, pennants, flags and island reversals.  The results were so amazing that Business Week featured Dr. Lo’s work in the April 17, 2000 issue, soon after CNBC and Bloomberg began increasing the coverage of technical analysis techniques.  Even the “F” word, Fibonacci, is used commonly by reporters.

My favorite Forex trading vehicles are the Euro currency, Japanese Yen and British Pound.  I do very little cross rate trading although the patterns I use work quite well in these markets.

There are no secrets to Forex trading in my opinion.  They are active and liquid and provide pattern recognition swing trading opportunities.  The best place to start learning about Forex trading is from the 30-minute continuous charts.  Find the most common swing on that chart.  From this starting point you can take every other swing on the 30 minute chart and relate it to one of five ratios: 0.618, 0.786, 1.00, 1.272 and 1.618.  These five ratios will describe nearly all of the swings you can see on a 30 minute chart.

Next find similar time counts such as four hours up – four hours down for example.  Charts reveal many secrets if you study them religiously.  Also watch for similar time frames between highs and lows.  Printing out the chart and drawing in the price swings and connecting all swings to all other swings will reveal patterns you never thought existed.

A word of caution – you can find the best patterns that ever existed and you will still lose money if you don’t know how to control risk.  Winners focus on how much can be lost and losers focus on how much they can win!  Have you ever seen a slot machine that says – “I’ve taken in 1 million dollars this year” – not a chance!

The best exercise you can do for yourself as a trader is to read 3 or 4 pages of Mark Douglas’ book ‘Trading in the Zone’ each day before you start trading.  This will act like an anchor each day to focus on thinking in probabilities not certainties.  At the end of the year you will have read the entire book twice!

Article by Larry Pesavento