If you have been using this system, please drop us a comment we’d love to know how you’ve done.

Example
01/05/2007: Gold Down 2.45%, U.S. Dollar Index Up 0.22%. Difference = 2.22%
It looks like gold has overdone it compared to the U.S. Dollar Index movement, so we expect gold to drop tomorrow to close the gap.

Results:

01/05/2007
Gold Down 2.45%, U.S. Dollar Up 0.22%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.55% (Profit)
Running Profit = 0.55%

01/12/2007
Gold Up 2.39%, U.S. Dollar Down 0.30%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.32% (Profit)
Running Profit = 0.87%

01/23/2007
Gold Up 2.29%, U.S. Dollar Down 0.11%,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.20% (Loss)
Running Profit = 0.67%

02/21/2007
Gold Up 3.04%, U.S. Dollar Down 0.07%,
Expectation: Gold Down Tomorrow
What Happened= Gold Down 0.13% (Profit)
Running Profit = 0.80%

02/27/2007
Gold Down 3.65%, U.S. Dollar Down 0.50%,
Expectation: Gold Up Tommorrow
What Happened = Gold Up 1.11% (Profit)
Running Profit = 1.91%

03/02/2007
Gold Down 3.31%, U.S. Dollar Up 0.03%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 1.05% (Loss)
Running Profit = 0.86%

08/16/2007
Gold Down 2.30%, U.S. Dollar Down 0.12%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.80% (Profit)
Running Profit = 1.66%

09/06/2007
Gold Up 2%, U.S. Dollar barely moved,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.67% (Loss)
Running Profit = 0.99%

11/15/2007
Gold Down 2.78%, U.S. Dollar Up 0.69%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 0.30% (Loss)
Running Profit = 0.69%

11/20/2007
Gold Up 2.87%, U.S. Dollar Down 0.38%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.44% (Profit)
Running Profit = 1.13%

We were right on 6 out of 10 trades, taking home 1.13% profit for the year. While this certainly isn’t a big amount, the fact that we only had our capital tied up for 10 days counts. Another thing to look at could be whether a stop could be used to reduce our loss on days we’re wrong.

2. Programming trading software (like WealthLab) to trade a Forex system. You will need some programming skills to do this (or know someone who does), but if you have a good mechanical trading system this is a good option.

Some important things you should think about before you begin to back-test the system include;
- Does the system have a stop and profit target?
- Does the system have any money management rules?
- Are any of the indicators likely to ‘repaint’ causing your back-test results to be invalid?
- Does the system enter trades during a news release?

It is possible to back-test a Forex trading strategy with a currency trading demo account. However, if you are testing a strategy with time periods less than 1 day (e.g. 15 min, 1 hour, 4 hour) you may find that many Forex brokers provide limited historical data which will limit how much back-testing you can do. If you wish to do a large amount of back-testing you may need to find a source you can download historical data from that can be imported into a platform such as MetaTrader 4 or Amibroker.

To test your ability to apply the rules of the strategy it is a good idea to forward test and/or test using a simulator. Using a Forex simulator such as Forex Tester you can replay the past as if it were happening now and enter/exit trades to test your skills.

1. You could think about getting a professional trader to trade your money. Collective2 has an extensive list of Forex systems you can choose to trade, the trades are placed automatically by the trader and routed to your account automatically. This kind of setup means you can set and forget about the system.

2. You could find or develop an expert adviser (in MetaTrader 4) that will place trades for you automatically. With this kind of setup you need to keep your computer on in order for the expert adviser to run. There are also various software packages that you can program your Forex trading system into and trades will be executed automatically.

3. You could find or develop a Forex trading system with 100% mechanical entry/exit rules. While this kind of system won’t be completely automated, you may be able to setup alerts to let you know when a trade needs to be entered. Most Forex trading eBooks contain a 100% mechanical trading system you could use to practice.

Good luck with your search for an automated Forex trading system.

Strategy Runner allows clients to automate trading strategies that have been created on TradeStation, MetaTrader 4, Excel or using programming languages such as C++, Java and VB. The integration will give Forex Capital Markets clients a selection of over 300 Forex trading system’s that can be traded automatically in their account.

Signals will be automatically executed on single or multiple accounts through Strategy Runner Servers located in the Forex Capital Market’s data center.

Forex Capital Markets is one of the largest Forex brokers, with over 100,000 live Forex accounts and more than $200 billion traded each month.

When I first opened the Cracking the Forex Code e-book I was quite surprised that it was only 28 pages. Most e-books on the topic of forex have at least 100 pages. But, the point of the e-book is to teach easy forex trading methods not provide the whole history of the forex market and other topics that are not really relevant to explaining the method.

So, in order to use the Cracking the Forex Code e-book you do need to have a basic understanding of forex and how to enter and exit trades. These basics are taught by many brokers for free, so it’s not really a big deal they aren’t covered in the e-book. Customers that buy the Cracking the Forex Code e-book might even be happy that they can get through reading the e-book in an hour and don’t have to wade through stuff they already know.

I was a little annoyed when I got to the end of the e-book and found a great big ad for another forex e-book. If this forex method is supposed to make me a ton of money as the author claims, why would I need something else?

Fortunately though, the Cracking the Forex Code e-book comes with a 56 day no questions asked money back guarantee. So, you can pretty much try the system out risk-free. Or, so you think, internet reviews seem to suggest that e-mail requests for refunds or support are completely ignored.

Previous customers also seem to think that the author of Cracking the Forex Code is also the author of Blazing Forex System and Impact Forex System. All e-books that are not receiving good reviews from customers.

The first Cracking the Forex Code method uses 3 EMA’s, with the second method using 2 EMA’s and the parabolic star. You can find methods exceptionally similar to these on most forex forums. I wouldn’t be surprised at all if the author has copied a method from a forum or book and is now selling it as his own.

So is Cracking the Forex Code a scam? I guess it depends which way you look at it. For not living up to their promise of giving a no questions asked refund I would have to say yes, it’s a scam. It also seems pretty dishonest to me that the author has simply stolen this method and re-worked it into his own e-book.

Instead of buying Cracking the Forex Code, we recommend Forex Trading Machine. Forex Trading Machine receives good reviews from users and the methods taught in it are often spoken highly of among forex traders.

1. History – Does the system vendor provide a history? A good system vendor should be able to tell you the systems monthly results for at least the past year. If the system hasn’t been running for a year, you should ask what the back-test results were.

2. Draw-down – Unfortunately Draw-downs are not avoidable in trading forex. There are many forex systems making 1000’s of pips each year, but they fail to advise you that you would have lost all/most of your account before making those 1000’s of pips. You should always ask what what draw-downs the system has had in the past and use this information to determine your trading size to ensure your account is not wiped out. Think about the emotional impact of the draw-down, would you have stuck with it?

3. Reviews – Do a google search to see if other traders are trading the same forex system. Have a look what others are saying about the system. Check if the system has its own forum and check the feedback the system is receiving. Often existing users have found a better way to trade the system by tweaking it, ask what the latest settings are before you get started.

4. Win Ratio – Professional traders often have a win ratio of close to 50%. The profit is in how they manage the trade, by keeping losses short and letting profits run. Systems that have an unusually high win ratio are not necessarily better and can be too good to be true.

5. Stop/Limit Orders – Check that the system uses stop orders. A stop order is set to minimize your loss in case the trade turns against you. With no stop order set you could face a huge loss.

6. Paper Trade – Prior to trading any system with real money you should paper trade it, or trade it using a demo account. This will give you an opportunity to practice using the system until you feel comfortable with it, and give you an idea if it is worth trading with real money. Often systems can also be back-tested to give you proof of how the system performed in the past.

7. Timing – Check what time commitment the system requires and study how this fits in with your schedule. You should also ask when you need to be at your computer to trade the system.

8. Money Management – What kind of money management system does the system use? Systems that recommend you increase your trade size after a loss are not generally recommended by the trading community.

9. Additional Costs – Check what additional costs you will incur to run the system. Does the system require a specific charting package or data feed to run?

10. Refund – Check if a refund is offered and what the conditions are and if they can be met easily.

Good luck with your forex system comparison.

As an alternative to buying an ultimate forex trading secret system you could entrust your money to another person, who insists they have the winning strategy. If you’re appealed by that, take a look at places like Collective2, FX-Auto or ZuluTrade. But before you jump in take a browse at all the systems that looked good in the past, and then went down hill. Read the horror stories of people that invested their savings in a ’super’ system only to see their account balance painfully reduced to $0.

In fact, for 90% of people getting started in forex the ultimate forex trading secret system would be to not trade at all and put the money in the bank.

So how can you get in front and not be part of that 90%? By spending the time to learn, trading in a demo account, reading the massive quantity of useful free knowledge available from fellow traders, by having a plan when you get started and sticking to it. The secret is in knowing what systems you shouldn’t trade, what e-books aren’t value for your money and that there is no holy grail system that is going to take your account balance and add some 0’s on the end, without a bit of effort and patience on your part.

Stop looking for the ultimate forex trading secret system and you could actually learn something and maybe even make some money trading forex.

The ICWR forex strategy is based on a combination of the Elliott Wave Theory and Fibonacci ratios. Traders have found that corrective waves have a inclination to retrace the preceding impulsive waves by a Fibonacci ratio.

So what are corrective waves? Corrective waves are short-term corrections that move against the long-term market trend. The major waves in in alignment with the long-term market are called impulsive waves. Bring up a chart of a major currency (say the GBP/USD) with the time frame set on daily and you will easily see the long-term trend, along with several corrective waves.

The most frequent Fibonacci ratios observed in the ICWR forex strategy are 25%, 38%, 50%, 61% and 75%.

Most traders use the ICWR forex strategy with an existing entry strategy to help refine their exit strategy to get out the maximum profit possible out of the trade. In fact many traders have found that managing a trade and determining the exit point is more important than choosing an entry point and direction to trade in.

The ICWR forex strategy is very easy to use. Simply bring up a chart of an interval you wish to trade, find the preceding impulsive wave (in the direction of the long-term trend) and compute the Fibonacci ratios. Now record the Fibonacci ratios on your chart. For example if the preceding impulsive wave UP was 100 pips, for the Fibonacci ratio of 25% you will place a line 25 pips below the high of the impulsive wave. Most charting packages come with a Fibonacci tool built in, calculating the ratios and drawing in lines for you.

These Fibonacci ratios can then be used in a number of ways:
- move your stop loss with every impulsive wave in your favor to maximize profit and minimize risk (the 75% ratio is usually used for this)
- determine when the corrective wave is likely to conclude in order to determine good entry points.

Traders often tend to despair when their trade is in profit and it starts to move against them. By using the ICWR forex strategy you will be ready to ride out the corrective waves in order to get out the maximum profit from your trades.

Moving Averages
A moving average, in technical analysis, is the most used indicators in a family of statistical techniques to analyze time series data.

A moving average series in Forex trading can be calculated for any time series, but is most often applied to currency prices or trading volumes. Moving averages are used to smooth out short-term fluctuations, thus highlighting longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly.

Simple moving average
A simple moving average is the unweighted mean of the previous n data points. For example, a 10-day simple moving average of closing price is the mean of the previous 10 days’ closing prices.

In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case moving average levels are interpreted as support or resistance depending which side of the currency pair you are looking at.

In all cases a moving average lags behind the latest price action, simply from the nature of its smoothing. A Simple Moving Average (SMA) can lag to an undesirable extent, and can be influenced too much by old prices dropping out of the average. This is addressed by giving extra weight to recent prices, as in the Weighted Moving Average (WMA) and Exponential Moving Average (EMA) below.

Weighted moving average
In technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically from highest weight for the most recent days, down to zero by an equal amount each time. It can be compared to the weights in the exponential moving average which follows.

Exponential moving average
An exponential moving average (EMA), sometimes also called an exponentially weighted moving average (EWMA), applies weighting factors which decrease exponentially. The weighting for each day decreases by a factor, or percentage, on the one before it.

The N periods in an N-day EMA only specifies the α factor. It isn’t a stopping point for the calculation in the way N is in an SMA or WMA. The first N days in an EMA do represent about 86% of the total weight in the calculation though.

Other weightings
Other weighting systems in Forex trading are used occasionally – for example, a volume weighting will weight each time period in proportion to its trading volume.

There are weighting systems designed using a combination of moving averages: The DEMA indicator (and TEMA indicator (Triple Exponential Moving Average) are unique composites of a single exponential moving average, a double exponential moving average, and in the latter case a triple exponential moving average that provides less lag than either of the three components individually. The TRIX indicator uses a triple-EMA in its calculation. This ends up as just a certain set of weights on past data, and a set quite different to a plain EMA actually.

MACD
MACD is a trend following indicator, and is designed to identify trend changes. It’s generally not recommended when your currency pair is in ranging market conditions. Three types of trading signals are generated:

• MACD line crossing the signal line
• MACD line crossing zero
• Divergence between price and MACD levels

The signal line crossing is the usual trading rule. This is to buy when the MACD crosses up through the signal line, or sell when it crosses down through the signal line. These crossings may occur too frequently, and other tests may be needed to be applied.

The purpose of the histogram is to help show when a crossing occurs, since when it crosses through zero the MACD crosses the signal line. The histogram can also help visualizing when the two lines are coming together. Both may still be rising, but coming together, so a falling histogram suggests a crossover may be approaching.

A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish. These crossings are of course simply the original EMA(12) line crossing up or down through the slower EMA(26) line.

Positive divergence between MACD and price arises when price makes a new selloff low, but the MACD doesn’t make a new low, ie. it remains above where it fell to on that previous price low. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is the same thing when rising, ie. price makes a new rally high, but MACD doesn’t rise as high as it did before; this is interpreted as bearish.

Divergence may be similarly interpreted on the price versus the histogram, ie. new price levels not confirmed by new histogram levels. Longer and sharper divergences (distinct peaks or troughs) are regarded as more significant than small shallow patterns in this case.

Looking at a MACD on a weekly scale before looking at a daily scale could be a great idea as well so as to avoid making short term trades against the direction of the intermediate trend.

Parabolic SAR
In Technical analysis, Parabolic SAR (SAR – stop and reverse) is a method to find trends in currency prices. It may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend.

The indicator generally works well in trending markets, but provides “whipsaws” during non-trending, sideways phases. A parabola below the price is generally bullish, while a parabola above is generally bearish.

Stochastic Oscillator
The stochastic oscillator is a technical analysis oscillator (or two oscillators) showing the latest closing price in relation to the trading range of the past N days. This concept is unrelated to a stochastic in mathematics or statistics.

Two oscillator lines are calculated, called %K and %D, each ranging from 0 to 100. %K is the closing price within the past N-days trading range, ranging from 0 when the latest close is a new N-day low, up to 100 for a new N-day high,

The usual “N” is 14 days, ie. a fortnight’s worth of past data, but this can be varied. Levels near the extremes 100 and 0, for either %K or %D, indicate strength or weakness (respectively) with prices making or approaching new N-day highs or lows.

Levels above 80 and below 20 can be interpreted as overbought or oversold, but not on their own, only with other factors. It is recommended to wait for a return back through those thresholds, ie. when the oscillator goes above 80, wait for it to fall below 80 before selling; or vice versa on going below 20 wait for a rise back above 20 before buying; which in effect means waiting for a bit of a reversal. Or alternately levels 80 and 20 might be traded when some other technical indicator suggests a non-trending market.

%D acts as a trigger or signal line for %K. A buy signal is given when %K crosses up through %D, or a sell signal when it crosses down through %D. Such crossovers can occur too often, and to avoid repeated whipsaws one can wait for crossovers occurring together with an overbought/oversold pullback, or only after a peak or trough in the %D line.

Some traders consider the basic %K and %D too volatile, giving too many signals and too many whipsaws. This is addressed by forming “slow” stochastics. %K values are first smoothed by a 3-day simple moving average, and then the %D formed by a further 3-day SMA on that. This “slowed” %K is the same as the “fast” %D, but it’s easiest just to think of the slow form as first
inserting an extra smoothing.

%K is the same as Williams %R, though on a scale 0 to 100 instead of -100 to 0, but the terminology for the two are kept separate.

Bollinger Bands
Bollinger Bands is a technical analysis tool which evolved from the concept of trading bands, and can be used to measure the relative highness or lowness of a currency pair price.
Bollinger Bands consist of:

• a middle band being a N-period simple moving average
• an upper band at K times a N-period standard deviation above the middle band
• a lower band at K times a N-period standard deviation below the middle band
Typical values for N and K are 20 and 2, respectively.

The bands give a reliable visual picture of a stock’s price volatility. No particular significance,
however, should be attached to a price touching the upper or lower band, as Bollinger himself has pointed out. These occurrences should be considered in relation to other factors before making investment decisions.

It is of interest to note that faulty interpretation of a price touching or breaching a band based on incorrect statistical assumptions has become so widespread that some Forex traders now use these events alone as trading signals and by so doing may have unwittingly injected significance into these band-touching events that would otherwise be absent.

When the bands lie close together a period of low volatility in the currency pair is indicated. When they are far apart a period of high volatility in price is indicated. When the bands have only a slight slope and lie approximately parallel for an extended time the price of currency pair will be found to oscillate up and down between the bands as though in a channel. When this behavior is found to regularly repeat in conjunction with a fairly steady broad market, a Forex traders may, with some validity, use a touch or near touch of the upper or lower band as an indication that a the price is nearing the limit of its trading range and therefore a price reversal is probable.

SOURCE: Part of this article was taken from Wikepedia in accordance with their GNU Free Documentation License.

In this article, divided in 2 part, you’ll get a basic understanding of the different use of Technical Analysis in Forex Trading.

Pivot Point
Pivot points are frequently used by Forex traders as a means to calculate resistance and support levels which are, in turn, used as visual cues to execute trades. With the use of an arithmetic program (pivot point calculator), Forex traders will try to anticipate price movements.

As a technical analysis tool, pivot points have proven themselves to be far more effective in currency trading than equities markets. This is largely due to the fact that price movements in the trillion dollar foreign exchange market are not generally subject to the kinds of manipulation that stem from unforeseen insider trading, corporate mismanagement, misrepresentation, or the actions of institutional investors.

Basic Forex pivot point trading is based on two prevailing tendencies. If a day’s price action begins above the pivot point, prices will tend to stay above that point (fulcrum) until it reaches a resistance point. Conversely, if a day’s pricing action begins below the pivot point, the price will tend to stay below that point until it reaches a support point. A resistance level is a price that tends to prevent further upward movement. A support price is a price action point that tends to prevent further downward movement.

In its simplest form pivot point trading is based on these two tendencies and is also knows as “trading between the lines”. The most popular and hence the most successful form of pivot trading is based on reversals. Simply put, when price approaches a pivot above, a trader waits for a reversal at that point and sells. The opposite is true when price action is moving downward. The patient pivot trader waits for a bounce off the pivot of support and places an order to buy.

If the market opens or later trades at the extremes R2 or S2, pricing will exhibit a tendency to trade back toward the pivot point. Hence, traders tend to avoid buying high (at R2) or selling at the low (S2). The wisdom of this is even greater the further the price moves away from the day’s pivot point.

There are a number of formulas traders use to calculate resistance and support levels and they are based on a variety of factors but those based on price are the most popular if, for no other reason, they are the easiest to calculate. Pivot trading begins with the calculation of the pivot point which is an average of the previous day’s high, low and closing price. While the Forex is a 24 hour market, “closing” is generally defined as 5 p.m. EST which coincides with the closing of the New York Stock Exchange. However, traders use various closing times, 12 a.m. EST also being a popular reference point for calculations.

In the following formula “H” represents the previous day’s high, “L” represents the previous day’s low, and “C” represents the previous day’s closing price.

Pivot Point = (H+L+C)/3

Support & Resistance
Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern (hourly, weekly or annually), whereas a resistance level is the high or the peak point of the pattern. These points are identified as support and resistance when they show a tendency to reappear. It is best to buy/sell near support/resistance levels that are unlikely to be broken.

Once these levels are broken, they tend to become the opposite obstacle. Thus, in a rising market, a resistance level that is broken, could serve as a support for the upward trend, whereas in a falling market; once a support level is broken, it could turn into a resistance.

Once the day’s pivot point has been calculated, traders turn to the calculation of the initial resistance (R1) and support (S1) levels which assumes that trading will continue pretty much in the same range as the previous day.

Resistance Level 1 = (2*PP)-L
Support Level 1 = (2*PP)-H

A second set of resistance and support points, R2 and S2, are used in the event that the price breaks through the previous day’s trading range and continues until it meets a second higher level of resistance or lower level of support.

Resistance Level 2 = (PP-S1) + R1
Support Level 2 = PP – (R1 – S1)

Some traders attend to the calculation of extreme price fluctuations (R3, S3) but only a small minority of them actually trade on them because such price movements are a sure sign of volatility.

Resistance Level 3 = (PP-S2)+R2
Support Level 3 = PP – (R2-S2)

Some calculators also generate midpoints – trading levels that lie at the midpoint between R2 and R1, S2 and S1, R1 and PP, and finally S1 and PP. As long as trading ranges are not too narrow, these reference points hold the same relative importance as their paired resistance and support levels.

M1= (S2+S1)/2
M2= (S1+PP)/2
M3 = (R1+PP)/2
M4 = (R2+R1)/2

Fibonacci Retracement
Fibonacci retracement is a very popular tool among Forex technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the 13th century. However, Fibonacci’s sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a currency pair chart and dividing the vertical distance by the key Fibonacci ratios of 0%, 38.2%, 50%, 61.8%, 78.6% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.

For reasons that are unclear, these ratios seem to play an important role in the Forex market, just as they do in nature, and can be used to determine critical points that cause the price to reverse. The direction of the prior trend is likely to continue once the price has retraced to one of the ratios listed above.

Trend Lines & Channels
Trend lines are a simple and widely used technical analysis construction drawn on the currency pairs charts in Forex trading.

A trend line is a bounding line for the price movement of a currency pair. The principal trendline is an upsloping line drawn through lower extremes of price that is in an up trend, or its mirror image, a downsloping line drawn through the upper extremes of the price action that is in a down trend.

The other, less widely used type of trendline is an upsloping line drawn through high extremes in an uptrend, or a down sloping line drawn through lower extremes in a downtrend.

Trend lines are used in many ways by traders. One way is that when price returns to an existing principal trendline it may be an opportunity to open new positions in the direction of the trend, in the belief that the trendline will hold and the trend will continue further. A second way is that when price action breaks through the principal trendline of an existing trend, it is evidence that the trend may be going to fail, and a trader may consider trading in the opposite direction to the existing trend, or exiting positions in the direction of the trend.

In the next part of our Technical analysis article, we’ll talk more about Moving Averages, MACD, Parabolic SAR, Stochastic Oscillator and Bollinger Bands.