Hi! I’m Adam Lemon, I trade Forex, and almost every day I’m going to write something here to share what I do. I hope you find it interesting!
This is my very first blog post and as the days and weeks flow by I am going to talk about all the kinds of things that a Forex trader typically thinks about when they are trying to make money from the market. Once each week I plan to pick through some of your email and publicly answer some of your questions, so if you have any, please get in touch with me at firstname.lastname@example.org.
So down to the first item of business – how do I start my day when I am trading?
The first thing I do is make sure I open my laptop well before I want to start buying or selling anything. This way I can be sure that I have time to get a plan worked out before I risk any of my money.
I usually start trading at 8am London time, so I like to get started about an hour or so before that.
I usually only trade the 4 major currency pairs: EUR/USD, GBP/USD, USD/CHF and USD/JPY. I think it is a common mistake to be looking at 50 charts of every currency against everything else. You can make plenty of money more easily just with the 4 majors 90% of the time! Sometimes I also trade Gold and Silver, but that is a story for another time.
You probably noticed that what all these pairs have in common is the USD. So, I also like to check the USD Index.
I bring up the daily candlestick charts of all of these 5 instruments and ask myself if there look like being any trading opportunities today. That’s right, ANY. Sometimes things look unclear everywhere and on days like that its better to just forget about trading as you will almost always lose money.
Now let’s get down to my process. Here’s what I do:
- Identify the Long-Term Trend
I don’t ALWAYS trade in the direction of the long-term trend, but I do most of the time, and I always want to know what it is. I do this by asking myself for each currency pair, how is the current price compared to the prices 3 months ago and 6 months ago? If the price is up on both, then there is a bullish trend; if down on both, a bearish trend. If neither, then there is no long-term trend. If the numbers just barely qualify, I would also usually say that there is really no trend. For example, the healthiest bullish trend is one where the price is meaningfully higher than it was 3 months ago and even more higher than it was 6 months ago. I usually find it easiest to check this on the weekly chart.
- Identify the Short-Term Trend
This is done by looking at the daily candlestick charts of each of the 4 major currency pairs. The only indicators I like to use here are the 5 period exponential moving average and the 10 period simple moving average. As a rule, whichever side the 5 period exponential moving average is, is the side of the trend, unless the lines of both the averages are very close or twisted up, in which case I would usually say there is no short-term trend.
- Analyze the Daily Candlesticks
This is a more complicated subject that I will get back to another day soon.
So, it is probably best if I illustrate all this with an example of what is going on today. Here goes:
USD Index: No Trend
EUR/USD: Bullish, but its barely a trend so forget it.
USD/CHF: Bearish, but its barely a trend so forget it.
My analysis tells me that the only pairs I should be considering trading today are the GBP/USD and the USD/JPY. To try to show why, here are long-term charts for each of the 4 pairs below. See how the clear trends on these weekly charts only exist in GBP/USD and USD/JPY:
This means that next step is analyze the short-term trends on GBP/USD and USD/JPY.
GBP/USD: the moving averages are very close together, but we have had two consecutive bearish candlesticks suggesting that the price is moving down in the direction of the long-term bearish trend.
USD/JPY: the candlesticks and moving averages are showing a fairly strong move against the trend, but it seems to be running out of steam. I judge this by the fact that yesterday’s candle was a relatively small doji with a slight gap above the previously strongly bullish candle. Also, notice how over the last couple of weeks every candlestick is topping above 102.50 which is a very “round” number. This means that the logical trade to look for here is a short after the price reverses convincingly above or close to 102.50.
So the end of the process is that I would choose to trade GBP/USD short today over USD/JPY. I don’t have a great deal of confidence it will work out well and I might not enter a trade at all. It just means that if I do trade, I know which pair and in which direction.
Deciding intelligently what you will trade and in which direction is more than half the battle in trading. If you get this right most of the time, you don’t need to chase magic indicators on 5 minute charts. Using any reasonable entry method on shorter time frames should be profitable over time.