forex waves

Forex waves mark cycles, or trends, or momentum in currency price direction. The wave is sometimes small or at other times it can be violent. Following fx cycles is easy when you use technical indicators attached to your forex charts. There are hundreds of such price movement indicators with the most common being the moving average line. The full path of an fx wave is called a swing. A full wave has a trend in one direction followed by a period of consolidation then another trend leg in the other direction. The whole foreign exchange wave cycle repeats itself over and over and over again just like every other cycle in nature.

"The trend is your friend" is a famous trading phrase which was coined by George Lane who was a technical analyst and very successful investor. A person who invests against the trend is known as a "contrarian".

Contrarians always fight the current momentum and often find themselves holding on to losing trades for very long times. This might be ok if it is done strategically as per a sound trading plan but by most standards fighting a trend is illogical. It keeps assets that could be used in other investments tied into losing trades. Taking losses on trades that get caught up on the wrong side of a trend also protects the investor from losing all of the capitol in a trading account. 

But trends exist at all levels of trading which means that a wave can be spotted on a one minute chart as easily as on a weekly chart.

So how can a trader make use of forex waves ?

Take a look at the following forex charts. The first chart is bare except for having period bars which show the low price, the high price, and the open, and the close price for a currency pair for each period. On the next chart in addition to the currency price information I have added a simple moving average of 3 periods. That SMA is the solid red line.

The simple moving average is commonly referred to as the SMA.

The math behind the SMA is simple. You simply add up the price ( open, high, or low ) of the last three price bars and divide them to get an average.

Every forex trader as to develop a style of entering and closing positions that fits their lifestyle. It not only takes money to trade but it also takes money to pay the ongoing bills that are constantly bombarding us all. 

Trading on hourly charts such as are shown above is more for long term traders who want to set up an fx trade and walk away from the computer and the foreign exchange world almost totally for long periods of time. The leg up on this latest forex wave lasted a month and the subsequent leg down is almost as long. Really long term investors would only use the daily chart as a method of increasing the size of a position that is already in the money and showing promise on the even longer time frames.

The mid term swing trader might use this daily chart as a mid term trend indicator and switch down to a lower time frame to find an interim wave.

Notice the down leg of the current cycle above and see below on the one hour chart. 

It doesn't take an economist or a Ph.D to notice the opportunities that are with the trend.

Trading on the hourly charts still takes alot of dedication to this business of being an fx trader.

Not every trend reversal set up goes all the way but when the seed is planted in a longer timeframe then the chances of following that trend on a lower timeframe and in the same direction offers plenty of hope.

Hope is an opportunity to enter a trade short at Op 1, Op 2, Op 3, Op4.

The mid term forex swing trader places these trades with proper automatic stop loss orders that execute automatically if the price moves away from the entry price. Once these stop loss orders are set up then it's a matter of walking away and letting the trade ride it's course. An understanding of odds goes good with an understanding of forex.

Another type of automatic order used by fx traders is called the tp or take profit and if these are set at a ratio of no less than 1.1 to 1 relative to the stop loss order then it is a winning combination. 1.1 is lean however. 2 to 1 is acceptable and 3 to 1 is common.

So the hourly forex wave supports a trend or cycle from a longer chart.

So you have the iron nerves of a scalper you say......

Scalpers are a breed of their own. The intraday trader is the scalper and he goes for real quick profits on really fast moves. This is a dangerous way of trading and not highly recommended by myself since I have seen so many spikes - large price shifts that occur in seconds - that would psychologically destroy most newcomers who are learning to trade. Especially if they are trading live forex accounts loaded with real money.

I stress that an fx demo account is a no brainer which is a must for not only newbies but for experts who are testing new concepts of trading. 

The following chart is a one minute chart of the last bar on the daily chart above.

Look at  it and I am certain you will find forex waves that will tempt you. But do you really want to be a scalper ? 

Intraday trading means that the time you spend looking at a broker platform is most likely time away from work. It means that you have either a good financial support system to be able to afford doing this. 

Or you have a trading plan that is successful and capital to make however much you might make at a different carreer.

Foreign exchange transactions carry a high degree of risk and any transaction involving currencies is exposed to, among other things, changes in a country's political condition, economic climate, acts of nature - all of which may substantially affect the price or availability of a given currency.