One of the most important concepts of technical analysis is the “trend” and every good trader has to know how to gauge the trend before trying to enter into a position. The most profitable trades are those taken in the direction of the dominant trend (longs in uptrends, shorts in downtrends). I will show you a few methods by which you can see the trend of a market. We will look at some EURUSD charts.

First, you need to understand that the market is fractal in nature, meaning that every trend has subtrends, or, better said, every timeframe has it’s own trend. You can be in an uptrend on the daily chart, but in a downtrend on the 1 hour chart. Depending on wether you’re a short-term, medium-term or long-term trader, you are interested in specific timeframes. Personally, I trade the 1 minute chart, but I try to jump into 1 hour short-term trends, preferably in synch with the daily trend.

Gauging the daily trend (medium-term)

EURUSD Daily chart - uptrend (bullish)

I plotted three EMA’s (Exponential Moving Averages) on this daily chart of EURUSD. The red EMA is a 50 day EMA. The green one is the 100 day EMA. The blue one is the 260 day EMA. These three are monitored by institutional traders. Some people also monitor the 20 day EMA, but I found that to be rather choppy. As you see from the chart, we are currently moving above all the three EMA’s and the red 50 day EMA has provided excellent support over the last 6 months. Everytime price has touched the 50 EMA, it has bounced back and continued it’s bull trend. We are clearly in a medium-term bull trend.

If we broke the 50 day EMA, I would assume we’re in a downtrend, but wait for price to use the 50 EMA as a resistance to confirm my view. Then I would watch out for bounces on the way down caused by the other two EMA’s: the 100 day and 260 day EMA.  Until we’re not below or above all these three EMA’s, we need to be cautious, as we have no clear trend.

Gauging the hourly trend (short-term)

EURUSD hourly chart - trend

Above is a 1 hour chart of EURUSD where I plotted a 24 hour EMA. On the left side of the chart, we see a ranging period, where the angle of the EMA slopes is not very steep. Basically, price is making short runs above or below the EMA over and over again. Those are sideway trends. After that, price makes a steep bull run above the 24 hour EMA, providing us a good opportunity for us to buy EUROs all day long on the 25th november . After that, it tests the EMA, but after stalling for a few hours it falls below the EMA again, making for a good opportunity to sell that day (26th november).

As I said, I am a fan of the 1 minute chart, so I actually plot a 1440 minute EMA on the 1 minute chart (24 hours = 1440 minutes) and monitor that for bounces or breaks. It keeps me from getting into bad positions and helps me catch some good trends right at their birth.

The cherry on top of the pie

There is one more little trick I have in my sleeve for gauging the trend of the current trading day. It’s pretty simple, but it seems that many people ignore it. When I open up my platform, I look at the opening price of the current daily bar (price at 00:00 on your chart). If the current price is above that opening price, my bias is bullish. If it is below, my bias is bearish. Of course, I also take into account the EMA’s when making a complete trend analysis for the day.

Cheers!

Psychology is by far the most important thing a good trader must master. And the sooner you realise that, the better. In this article, I want to write a few words about the market psychology and some psychological pitfalls that many newcomers encounter on their way to success.

So, why is psychology important?

First, you have to ask yourself “Who moves the market“. And the answer is: people. Of course, small traders like you and me do not move the market too much, but big institutions, like hedge funds and banks, do. And they have real people trading for them, not automated systems.

So, if people trade the market, then the market is actually moved by mass psychology. And the only way to success is to do what the big guys do and go with the trend. If you read a few things about Forex, you probably read this famous statement: “The trend is your friend“. You have to do your best to “guess” what the next move will be, what would others do in these circumstances? What does the news say? What are the conclusions that people take when they read the news? Which economy is good, and which is not doing so good? What would an institution do? Where would it sell and where would it buy? Where is it safe to do that?

You and I will succeed in this market if we trade with our heads, not with our guts. Banks don’t trade on instinct, they analize the market, they know the news, they know where to place a safe investment and when to stand aside.

Psychological pitfalls that drive newbies to failure

In these months of trading, I found myself to be an unpatient, emotional and greedy human being. Trading can teach you a lot of things about yourself.

Professionals are patient, rational, good managers of their money and the risk they take and are not greedy. Let’s talk about lack of patience, emotions, greed and fear, so you can see how these can get you out of trading for good.

1. Lack of patience

Most newbies think they’re going to get rich in a matter of months. They search the internet for the perfect trading system, some even pay money for good marketed trading systems (that really only bring money to the self-proclaimed gurus that sell them),  thinking they would become rich after they bought them.

I thought I was going to get rich too. But, fortunately, I didn’t believe in any Holy Grail of trading systems and did not throw my money off the window. Instead, I played 2 or 3 weeks on a demo account and then couldn’t wait anymore, so I invested some money in a live account.

In 2 weeks, I lost 40% of what I invested. Why? I was not patient. Unpatient traders make two mistakes: they overtrade and they overleverage.

Overtrading means making too much trades. Say you made a trade and lost 50 pips, then made another one and lost an additional 30 pips. Now, you’re angry and want to get revenge. So you start making chaotic trades to get your pips back. That’s overtrading. A good rule against this bad habit is: “TAKE A DAY OR TWO OFF AFTER 3 CONSECUTIVE LOSSES!”

Overleveraging is the way to maximum drawdown. Especially when it’s mixed with overtrading. I overleveraged when I lost my patience. Yeah, I earned 200 pips, with 0.01 mini-lots, but that’s just 2 dollars. So I won’t get rich soon. Well, why not trade 5 mini-lots? 200 pips could be 1000 $. That’s pretty good. Well, stop thinking like that, or you will end up sucking your finger and eating bombons. I lost 30% of my account in a matter of minutes due to overleveraging.

Be patient or be out!

2. Emotions

A professional trader is not emotional. He is rational. After you have three consecutive winners, you should take a break. That’s because you can get emotional and think the market is in your hands. Emotions confuse the mind. And you need a clear mind when trading. Likewise, after a few consecutive losers, you get sad or angry. So you start breaking rules and losing more.

3. Greed

Greed can cause you a lot of pain in the Forex market. Overleveraging and overtrading are fruits of greed too. But we already talked about them, so I’ll write about another ugly habit: skewing your risk/reward ratio.

1st example: Let’s say you enter a trade and you set a 50 pip stop loss and a 150 pip take profit level. That’s a 50:150 = 1:3 risk/reward ratio, which is what most professionals recommend. Always have 1:1 or higher! So, you’re in the trade, price starts going against you, but you can’t accept a loser, so you move your stop loss to 100 pips. Now, your risk/reward ratio is 100:150 = 1:1.5. Price continues to go against you and takes your stop loss. Now you’re devastated. You can’t believe you lost 100 pips.

2nd example: Let’s say you take the same trade, but price goes your way. You see price stalling before your take profit and you get strong hints that it’s reversing. You don’t close it, because you want more. Price reverses and gets your stop loss.

As a rule of thumb, learn how to accept a loss. Even professionals have losing streaks.

Another rule of thumb is: if you see clear signals that the price is going the other way and it’s not just a small retracement, then close the trade manually.

4. Fear

Fear can cause you a lot of troubles as a trader. It makes you close the trade before getting to your take profit level, even if you don’t have strong signals it’s going against you. That’s what happens to me a lot of times. I see the trade at 20+ pips, then it stalls a bit, and although I have my take profit set at 100 pips (for good reasons), I close it, because I fear it will reverse.

Control your emotions, or be out!

So, these are a few reasons why psychology and discipline are the corner stone of Forex trading. I hope you and I will work to become more disciplined and build up some self-control.