The FX Bootcamp Guide to Strategic and Tactical Forex Trading: 334 (Wiley Trading) - Hardcover

McDonell, Wayne

Hardcover

ISBN 10: 0470187700 ISBN 13: 9780470187708

Publisher: Wiley, 2008

Synopsis

A straightforward guide to trading today's dynamic Forex market

Written by Wayne McDonell, the Chief Currency Coach at FX Bootcamp, this book shows readers how to successfully trade the Forex market on their own. FX Bootcamp's Guide to Strategic and Tactical Forex Trading skillfully explains how to combine popular technical indicators to formulate a comprehensive market strategy. Readers will then learn how to focus on using this information to create a tactical trading plan--one that will help them pull the trigger to get in and out of a trade. Along the way, McDonell takes the time to discuss the various challenges a Forex trader faces, such as greed, fear, loss, and isolation. As a Forex trader and educator of traders, Wayne McDonell knows what it takes to make it in the competitive world of Forex. And with FX Bootcamp's Guide to Strategic and Tactical Forex Trading he shows readers how.

About this title

About the Author

WAYNE McDONELL is the Chief Currency Coach of FX Bootcamp (www.fxbootcamp.com), a live Forex training organization. He is a professional Forex trader, a member of the National Futures Association, and a registered Commodities Trading Advisor. Respected in the Forex industry as a successful trainer, McDonell is a regular speaker at major investing conferences and expos in Asia, Europe, and America. His videos are syndicated around the world on outlets including Forex Television, FXstreet.com, MoneyShow.com, and MSN. His live trading Webinars have attracted up to 1,000 traders each. McDonell has written "how-to" articles for investing magazines, such as Your Trading Edge and the FOREX Journal magazine. He has also received notoriety in the National Post, TechWeek, Interactive Week, and Inc. magazine to name a few.

From the Back Cover

Praise for The FX Bootcamp's GUIDE TO Strategic and Tactical Forex Trading

"Wayne McDonell is the most popular Forex speaker on our Web site. His live training and educational events draw large crowds of traders because he can explain complex Forex trading concepts in a common language that anyone can understand. This book does the same. I highly recommend it."
―Francesc Riverola, CEO of FXstreet.com

"If you're looking for specific strategies and methods for making money with currency trading, you need to start reading this book today. Wayne knows from experience what it takes to succeed in the Forex markets. He provides step-by-step instructions and explains in common language what to look for in charts and in the news to find profitable trades immediately. Don't make a single Forex trade until you've read this book!"
―Tim Bourquin, founder of The Forex Trading Expo

With The FX Bootcamp's Guide to Strategic and Tactical Forex Trading, McDonell shares his invaluable experience as a Forex trader and commodities trading advisor with you. Filled with in-depth insights and practical advice, this straightforward guide will teach you how to think for yourself and trade successfully―relying on your own technical, fundamental, and even psychological analysis. First, you'll become familiar with the indicators―from moving averages to price support and resistance―that form the foundation of the trading methodologies discussed in the book. Then, you'll discover how to put together a trading plan, and trade that plan for maximum profits. Along the way, McDonell also takes the time to discuss the various challenges you may face while trading Forex and explains how treating your trading operations like a business can improve overall performance.

If you want to be a successful Forex trader, you must have a firm understanding of how the global market works and how to trade it. With The FX Bootcamp's Guide to Strategic and Tactical Forex Trading, you'll quickly learn how to gather intelligence, formulate a strategy, and confidently pull the trading trigger.

From the Inside Flap

In The Art of War, renowned military strategist Sun Tzu states, "The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand." While this observation comes from one of the oldest military treatises in the world, it's an important piece of advice for traders looking to win in today's dynamic Forex market.

As the Chief Currency Coach at FX Bootcamp, author Wayne McDonell helps clients around the world excel in the Forex field by training them to develop and execute a trading plan with military precision. Why does this approach work so well? The answer is simpleâ??trading Forex is similar to war in that they are both zero-sum games, and in Forex trading, this means that one trader's gain can only come from another's equivalent loss. So, outthinking your opponent is essential to victory in both of these arenas.

Divided into five comprehensive parts, The FX Bootcamp's Guide to Strategic and Tactical Forex Trading puts this competitive market in perspective and shows you how to achieve success within it. This reliable resource opens with a detailed look at the technical indicators you'll need to use in your trading endeavors. From here, you'll discover how to combine these popular indicators to formulate a comprehensive strategy and learn how to use this information to create a tactical trading planâ??one that will help you pull the trigger to get in and out of trades.

Besides introducing you to a proven Forex trading methodology and showing you how to improve performance by running your trading operations like a business, this book also addresses some the most important psychological aspects of tradingâ??including greed, fear, loss, and isolationâ??and discusses what you must do to overcome such obstacles.

In Forex trading, patience and discipline are just as important as technical and fundamental analysis. With The FX Bootcamp's Guide to Strategic and Tactical Forex Trading, you'll discover how developing positive trading habits and the right trading skills will put you in a better position to profit over the long haul.

Excerpt. © Reprinted by permission. All rights reserved.

The FX Bootcamp Guide to Strategic and Tactical Forex Trading

By Wayne McDonell

John Wiley & Sons

Copyright © 2008 Wayne McDonell
All right reserved.
ISBN: 978-0-470-18770-8

Chapter One

Lagging Indicators

Most technical indicators are lagging, which means they are slow. They tell you what just happened ... after the fact. However, by combining historic price action with predictive price patterns, we'll have enough evidence to form the basis of a trade plan.

In this chapter, you will learn how to use technical analysis to read your charts. It is critically important to learn these concepts well. They are key to understanding the market's behavior. The technical indicators we'll discuss do not control the market, but they describe a story of how traders are trading it.

MOVING AVERAGES

A moving average (MA) is an average of a predetermined number of prices (such as closing price) calculated over a number of periods (such as 55 candles). The higher the number of candles in the average, the smoother the line is.

A moving average makes it easier to visualize price action without statistical noise. Instead of watching the up and down behavior of every candle, you are watching the relatively smooth moving average line. Moving averages are a common tool in technical analysis and they are used within all time frames: 1-minute, 5-minute, 15-minute, 30-minute, 60-minute, 120-minute, 240-minute, daily, weekly and monthly candle charts, for example.

It is important to observe that a moving average is a lagging rather than a leading indicator. Its signals occur after the new price movements, not before. Moving averages do not think ahead. They tell you what has happened, not what will happen. Nonetheless, moving averages have a critical role to play in properly planning your trades in advance. The past does not always predict the future, but it sure likes to repeat itself.

SMAs vs EMAs

There are two types of commonly used moving averages:

1. SMA: The simple moving average or arithmetic mean.

This moving average is only an average. Add up all the candles that you'd like to measure and then divide by the number of candles you added together. For example, a 21 SMA is calculated by adding the closing price of the last 21 candles and then dividing by 21. Simple, eh?

2. EMA: The exponential moving average.

The exponentially smoothed moving average takes into account more than just the previous price information of the underlying currency. It places more weight on the most recent previous candles. This makes it more sensitive to the most recent price action. For example, a 21 EMA places more weight on the last 5 candles than the first 5 candles.

The exponential moving average reacts to price changes more quickly than the simple moving average does because it pays more attention to newer candles.

I like moving averages a lot. You will see later in this book that at FX Bootcamp we use several different moving averages at once, but they offer different pieces of the puzzle when planning our trades. When the market is steadily rolling along, moving averages keep us in our trades, but if something changes, such as a moving average crossover, we'll likely get out or trade the new direction.

Moving Average Crossovers

Moving averages are frequently used as price filters. To filter choppy price action into a more reliable indication for true price action, a short-term moving average has to cross a longer-term moving average.

The trade planning methodology we teach in the FX Bootcamp training sessions is to use several moving averages on the chart simultaneously. The most obvious use for multiple moving averages is to watch for crossovers to confirm new trends.

A crossover would consists of a short-term (21 candles) EMA that crosses a longer term EMA (55 candles). Short-term EMAs (fast) are more sensitive to price changes because they are measuring fewer candles. Conversely, longer term EMAs (slow) tend to be more flat and are less likely to whipsaw up and down.

When moving averages do cross, you should take notice. If the fast EMA crosses below the slow EMA, it likely confirms new downward price action. If the fast EMA crosses above the slow EMA, it likely confirms new upward price action. However, such crosses should not prompt you to place a trade, as it often occurs too late and will put you in the market an unfavorable risk/reward ratio. The crossover should have been part of the trade plan that you created in advance, as not every crossover is the same. Moving average crossovers are great because they are easy to see and will attract traders, but they simply do not replace the work of planning your trades.

A simple use of moving averages is using them to gauge the speed and direction of the trend. If prices are held by the 21 EMA, the trend could be considered strong. If prices break the 21 EMA, you should become more cautious. This could be the sign of a reversal or a consolidating market. New rules will apply. We'll discuss this in more detail later in the book, as it is a key concept to trade planning.

MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)

Moving average convergence divergence, generally known as MACD (pronounced "mack dee") is one of the most reliable and simple indicators in our toolbox. MACD is a trend-following momentum indicator, or oscillator, which shows the relationship between two moving averages of recent prices. An example is shown in Figure 1.1.

The MACD is often made up of three components:

1. MACD Line: The actual MACD line is calculated by subtracting a slow moving average (EMA) from a fast EMA. In our example we use the 21 as the fast EMA and the 55 as the slow EMA.

2. Signal Line: The signal line represents an EMA, not of price, but of the MACD. In this case we calculate the EMA of our MACD for the last eight bars.

3. Histogram: The MACD histogram is the difference between the MACD and its signal line.

MACD just might be the most popular indicator used by forex traders. That is why we recommend that you use it. However, be aware that MACD is often misused. Like any other technical indicator, you cannot rely on it for trades. It should be part of your entire trading planning process.

How to Use MACD

There are three common scenarios to watch for:

1. Crossovers: When the MACD falls below the signal line it is a bearish signal, and indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, and suggests that it may be time to buy.

2. Divergence: When the price diverges from the MACD, it signals the end of the current trend. When the price is rising and MACD is falling (negative divergence), or vice versa, it can be considered an indication of something going on and can be used to predict changes in a trend. That's right, the lagging indicator that is supposed to follow the price is predicting future behavior.

3. Dramatic Expansion: When the MACD expands dramatically-that is, the shorter moving average pulls away from the longer term moving average-it is a signal that the currency is overbought/oversold and may soon return to normal levels.

Once again, let me be perfectly clear. All three of these scenarios are important and should not be overlooked. However, none of them are signals to trade. They are opportunities to form trade plans based on likely outcomes commonly generated by such situations.

For example, MACD divergence is tradable only when confirmed by other indicators. It does not always yield profitable trade opportunities. Therefore, if you traded every MACD divergence, just like if you traded every moving average crossover, you would certainly lose money.

However, when planned in advance and confirmed with other technical indicators, success is much more likely. This is because several things are happening at once and each is attracting the same bulls or bears into the trade you are planning.

MACD Divergence

MACD crossovers and dramatic rises are easy to spot. However, spotting MACD divergence takes a little practice. Figure 1.2 shows some examples of charts that display MACD divergence signals.

What does this divergence mean? Just that the current price trend is running out of steam. In this case, you'd create trade plans based on reversal patterns, moving average crossovers, or other indications to consider a trade in the opposite direction. It may not happen right away, but MACD divergence can be a powerful hint that the market is changing.

What you are looking for is when price action and MACD do not agree. For example, if price is making a series of higher highs and MACD is making a series of lower highs, something between the two is out of sync.

I see MACD divergence as a sign that fewer and fewer traders are in the trend. No one is trading against the trend-yet, but fewer and fewer traders are in the trend. I'd guess that traders are getting nervous and slowly fading out of their trades.

When the only traders in a trade are nervous, they are likely to exit their trade at the first sign of trouble. So if MACD is diverging from a bullish trend, as soon as the bears muster up enough guts to short, the bulls will exit and the bears will take control. This is exactly why MACD divergence can be so powerful. When it works, it often works well, but it takes time to set up.

There are two powerful keys in locating possible times where divergence is likely to represent a reversal in price.

1. Support and Resistance: MACD divergence can be powerful when price is at double tops or double bottoms. Just as you are creating a trade plan based on a bounce or break of S&R, you spot MACD divergence, which is a sign that current price action is running out of steam. This would indicate that there are not enough committed traders to break S&R, so perhaps you should focus your trade plan on a rejection reversal. See Figure 1.3.

2. Exhaustion Pullback: The second is when an oscillator, an overbought /oversold indicator, has reached its overbought/oversold range and is turning back down to normal. You may often see the MACD lines extremely overbought or oversold. This is not a reason to trade. In fact, it indicates signs of strength.

Remember this: "Of course it's overbought; everyone is buying!" Don't confuse the overbought or oversold MACD zones as trade opportunities. However, when price reaches its extreme, where it's gone too far too fast, you will see price exhaust and the MACD lines drop back into the normal zone. This is often a better signal. See Figure 1.4.

Combining an exhaustion MACD pullback with MACD divergence at a double top, you would have a second cross of the MACD and an opportunity to trade.

Those two situations, along with your other tools can provide excellent trading opportunities. It is also important to note that divergence can be found not only on the MACD line and signal line as was demonstrated in the previous examples, but it can also be found on the histogram, as shown in Figure 1.5.

BOLLINGER BANDS

As forex traders, we rely on market volatility as a means to profit. We want to see changes in a currency pair's price. When the market produces a consistent, repeatable move up or down, we want to earn pips from that change in price level.

Volatility is the relative rate at which the price of a currency pair moves up and down. In other words, it's the amount of price change over a period of time. If price moves up and down rapidly over short time periods, the market has high volatility. If the price changes very little, the market is exhibiting low volatility.

As you've probably noticed, if you've stared at your charts long enough, the forex market tends to find itself in one of two basic conditions: range bound or trending. By some estimates, the market is actually range bound about 70 to 80 percent of the time. In this scenario, the bulls and bears are in a battle that neither side is really winning or losing.

Price action is back and forth, back and forth-much like a tennis match. While in a range, the market establishes a fairly consistent level of volatility. When price is trapped in this range-bound condition, we'd like to have an idea of where it is likely to reverse from up to down (or vice versa).

Eventually, volatility kicks in and the market deviates from its range-bound state.

Think DEVIATION = TREND.

Price is deviating from the current norm-trending beyond its recent established range. When such a break occurs, we'd like to have some sort of early-warning indication that the move above or below the recent range is a significant deviation from the norm.

Volatility Indicator

The Bollinger Bands (BB) indicator was first introduced in the 1980s by John Bollinger, a longtime technician of the market. These bands, calculated based on standard statistical theory, estimate the probable high and low price of a currency pair, given the market's recent level of volatility. The bands are drawn at equal distances above and below a simple moving average.

Think of Bollinger Bands as an envelope indicator, projecting top and bottom lines around price. The bands act like mini support and resistance levels. The longer the time frame you are in, the stronger these bands are.

These bands are self-adjusting. When the market becomes more volatile, the Bollinger Bands expand or open up and move in opposite directions from each other. Whenever price enters a tight trading pattern, the bands respond by contracting or moving closer together. In a range-bound market, the bands are usually parallel to each another.

To better understand the story told by Bollinger Bands, consider a seismometer used to measure the seismic waves generated by movements in plates under the earth's surface. The seismograph's pen makes waves on a paper chart. The waves drawn vary in size relative to the size of the earth's "quake."

When the earth's surface is calm, the seismograph draws small waves within a tight range, and the width of this range is relatively small-much like the narrow and parallel Bollinger Bands during a range-bound market.

When an earthquake strikes, the ground shakes, and wide curves of varying size are drawn on the chart reminiscent of the widening Bollinger Bands one sees during a fast-trending market.

How to Use Bollinger Bands

There are three different ways you can set up trades with Bollinger Bands:

1. Range Trading: When these envelope lines, or bands, are parallel to each other, they can be used to predict levels at which to enter or exit a trade. The Bollinger Bands have identified a range within which you can consider trading.

As a general rule, when price reaches the upper band, the market is considered to be overbought. When price touches the lower band it is considered to be oversold. However, a touch of the upper Bollinger Band is not in and of itself a sell signal, and a touch of the lower Bollinger Band is not in and of itself a buy signal. Remember, you're seeking opportunities to profit not opportunities to trade!

In other words, do not predict a support or resistance level based solely on a Bollinger Band. Instead, wait for price to bounce first, and seek confirmation from other indicators before entering a trade. You may create a reversal trade plan at extreme Bollinger levels, but like any trade plan, you'll need confirmation before execution of the plan.

After entering a trade following a reversal, your can place your stop on the other side of the Bollinger Band.

2. Breakout Trading: When prices break above or below the upper or lower band, it is an indication that a breakout and trend is about to develop. To filter out false breaks, we recommend seeking confirmation of the move using a momentum indicator, such as a 5 EMA/8 SMA cross or a stochastic cross.

(Continues...)

Excerpted from The FX Bootcamp Guide to Strategic and Tactical Forex Tradingby Wayne McDonell Copyright © 2008 by Wayne McDonell. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Wiley
• Publication date: 2008
• ISBN 10: 0470187700
• ISBN 13: 9780470187708
• Binding: Hardcover
• Language: English
• Edition number: 1
• Number of pages: 256