If you're using charts, then you want to trade the strong trends - and the Average Directional Movement Index Indicator, or ADX, enables you to do this.
Wells Wilder developed the ADX, and outlined it in his classic book "New Concepts in Technical Trading Systems".
Let's look at this essential indicator in more detail - and see how to apply it on your forex charts, to give you greater accuracy when generating your trading signals.
Determining the Strength of the Trend
The ADX is a momentum indicator, which aims to measure the strength of the trend - and attempts to determine if the market is trending, or is trading sideways.
The Advantages of the ADX
A core belief of technical analysis is that a strong trend in motion is more likely to continue, than reverse. Therefore, you always want to be trading strong trends - as your odds of success are higher. The Average Directional Movement is a good indictor - and you should consider using it as part of your currency trading system.
The Technical Bit
For the boffin's out there, here's the technical bit - don't worry if you don't understand the calculation, its easy to use when visually plotted. The ADX is based on the comparison of two other directional indicators, both of which were also developed by Wilder, and they are:
Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) to produce ADX as showed in the following formula:
ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N
Where:
N: Refers to the period of calculation. The formula above produces the ADX line, which oscillates between 0 to 100 values. The +DI and -DI are both present and can be seen to make up the indicator.
You don't need to understand the above calculation to use the indicator - you only need to accept that the indicator works.
The indicator is easy to use when it's visually plotted - and you'll find it included, with most of the good forex chart services.
How to Trade using the ADX Indicator
The ADX it's not a bullish, bearish trading signal generator - and should never be used as such.
The ADX indicator simply indicates the strength of the trend - and other indicators should be used to enter, and exit trades.
Although the ADX fluctuates from 0 to 100, it rarely moves above 60.
Use the ADX in the following way:
Readings above 40 indicate the strength of the trend.
Readings below 20 indicate range trading and flat periods of consolidation.
You can use the crossing of +DI and -DI to determine the trend direction; when +DI crosses -DI upward, it's a bullish signal, on the other hand, when +DI crosses -DI downward it's a bearish signal.
The ADX line is a great momentum indicator and like the RSI (also developed by Wells Wilder), the ADX it will help you trade the strongest trends - and give you advance warning of changes in momentum.
The Bottom Line
If you want currency trading success, you can't just trade support and resistance levels, and hope they hold or break. You need confirmation of momentum to get the odds on your side - and the ADX indicator will assist you.
Final Words
New Concepts in Technical Trading Systems was published in 1978, and was one of the first trading books I ever bought. Every trader should make this book a part of his or her forex education. If you want to learn forex trading the right way, get the book, and use the ADX indicator to increase your chances of making big FX Profits.
by Steve Todd
Forex Charts - Using The ADX Indicator For Bigger Profits
Forex Trading - How to Deal with Currency Trading Volatility
You'll read a lot about the advantages of trading currencies - yet most traders tend to turn advantages into disadvantages - due to a lack of understanding. That's why 95% of currency traders lose money - and there's one thing in particular that wipes out more trader equity than anything else - volatility! Most forex traders simply can't deal with volatility.
Volatility, Deal with it or lose Money
Currencies are volatile, and in theory you can trade for thousands in profits every day, but the reality is:
Most traders make fundamental errors when trying to deal with volatility - and they're wiped out. The main error they make is with stop placement. These traders are so keen to avoid risk, that they actually create it. They do this by placing their stops incorrectly - thus giving themselves no chance of winning.
Volatility is also more of a problem to deal with when you use leverage. Many forex brokers will grant up to 400:1 leverage - and if you can't deal with volatility, then leverage simply compounds the problem.
Many forex traders are great at picking market direction, but these traders are continually stopped out by volatility. They're frustrated when they get stopped out - and then see the trade go onto make $10,000 to $30,000 - and they're not in!
Today, in our world of instant communications, currencies are more volatile than ever before. While you can see the big, long-term trends on any forex chart, the volatility within these trends is huge. This volatility will soon take your equity - if you don't have a forex trading strategy to combat it - and lead you to currency trading success.
If you want to succeed in forex trading, then you need to deal with volatility, so here are some tips to help you:
1. Do you know what standard deviation is?
If you don't, then look it up on the net right now - or read our previous articles. If you want to deal with volatility, then an understanding of standard deviation is a necessity.
2. You Need To Take Calculated Risks
Most traders have their stops too close, and although they appear to have a lower risk, the fact is that the odds are heavily in favour of their stop being hit. It may look a low risk on paper - but it's almost a guaranteed loss in practice - making it high risk.
A perfect example is the forex day trader - who thinks they can place stops using daily support and resistance - and keep risk low. However, all volatility is random in short time periods - so they say goodbye to their equity.
If you want to win at trading, then you need to be like a successful gambler - bet big when the odds are in your favour - and don't bet, when they're not.
Only place stops behind valid resistance and support - and be VERY selective with your trading signals.
3. Accept Drawdown in Open Equity
When trailing a stop, be patient - you need to keep it back far enough, not to be taken out by market noise. This is hard when you see thousands in equity wiped out in a day. However, keep your currency trading system firmly focused on the bigger prize - and accept that you'll have to take losses in the short term - to make longer term meaningful gains.
Volatility in forex trading is a huge advantage - but you must learn to deal with it correctly, in order to achieve currency-trading success. If you can't deal with volatility and risk, then you'll lose money - it's that simple.
by Steve Todd
Forex Trading - 4 Common Myths Guaranteed To Make You Lose
I read a lot of good information online to do with forex trading but most of the information I read is rubbish, yet many forex traders believe it. The myths I am going to cover here are mostly spread by so called market gurus and system sellers, so let's look at them.
First of all before we look at the myths, let's answer a question:
Why do vendors and gurus spread them, if they know they won't make money?
The answer is they make money out of them - by selling systems and courses that don't work for the user, but earn the vendor lots of money. These people simply appeal to the greed and naivety of novice forex traders.
Let's look at a few forex trading myths that are guaranteed to lose you money.
1. Day Trading Works
If it does, why do you never see a day trading track record that has made money?
Because of course it doesn't work, yet vendors continually sell them backed by a hypothetical track record - that's a track record based upon KNOWING the market prices! Well we can all make money doing that.
They sell their systems and dont trade them because they haven't got the confidence to trade their system because they know it won't make money, but they know some mug will believe it and buy the system.
For the record - all short term volatility is random and prices can and do go anywhere in a day, so trading daily ranges is doomed to failure.
2. Markets move to a scientific law
Well if they did there would be no market, as we would all know the price in advance! Duh?
This is obvious to anyone, yet people still fall for the myth of scientific theories such as Elliot wave, or the Fibonacci number sequence.
Elliot wave says markets move scientifically yet gives no objective theory to make money! Well that gets rid of that theory, lets look at another favourite:
The Fibonacci number sequence.
This was actually based on the copulation of rabbits and had nothing to do with finance, but was hijacked by the investment community.It actually predicts nothing in financial markets and the levels break as often as they hold - If you dont believe this try and see how quickly you lose your money.
Apart from the fact these scientific theories can't work, you have to wonder if it was that easy to make money with them, why the vendor will sell it to you, for a few hundred dollars, when he could keep quite and earn millions.
3. Buy Low Sell High Will Make You Money
Try it and you will lose.
No one can predict where a low point will bottom and when a high point will be reached. If you try and predict you are "hoping" that levels break or hold and the market will kill you.
If you want to win don't try and predict, act on the confirmation of a level holding and that means looking at price momentum.
4. You can earn a regular income
No you can't. You have seen the ads earn $3,000 a month, 20 pips a day etc - this myth doesn't need any explaining it's obvious its not true and anyone who falls for it, deserves what they get - an empty account.
If you want to win at forex trading make sure you don't fall for any of the above myths - everyone of them will ensure you lose your money.
The Good News is:
When you trade you take money off losing traders so if they believe the above forex myths it increases your chances of currency trading success!
by sacha tarkovsky
Forex Trading Strategies: Self Discipline Is The Key
The biggest appeal of Forex trading is that it offers instant wealth creation. But an offer is nothing more than an offer and the opportunity will pay off only for those who approach the foreign exchange market equipped with Forex trading strategies. The strategies should be well though out, unique if possible, and leave the trader with the understanding that tactics are only one useful element in the complicated world of Forex trading.
Regardless of whether you want to participate in day trading, position trading, or swing trading, Forex trading strategies will reduce your risk, but only if you have the discipline to stick with them. Traders who are undisciplined can turn the most sophisticated trading plans into hash, but a disciplined and flexible trader can see opportunities to take profgits from even the direst situations.
The Best Forex Trading Strategies There is a school of though among some Forex traders that the very best traders have convoluted Forex trading strategies and are simply blessed with a keenly developed market sense. They also share a belief that there is a faction among Forex traders who are privy to inside information on which they can base their Forex investment strategies.
But no matter what anyone believes, there are some common traits which separate the winners from the losers in the Forex trading arena. What are they?
The best Forex traders take the time to observer market patterns and put together strategies which raise their odds of making money. They repeatedly capitalize on the same knowledge
The best Forex traders never enter a trade without having an exit strategy. They set their getting in price, and they set their getting out price. If the getting-in price never comes around, they don't change it. When the getting-out price is reached, they exit. They know when to cut their losses, and when to lock in their profits. And they have the discipline to do both.
The best Forex traders never become greedy. They are much more comfortable making many small gains than they are trying for the grand slam. They are traders for the long term.
The best Forex traders recognize the wisdom of getting in when others are getting out of a position, and exiting a position when the crowd arrives. They are natural contrarians.
Anyone Can Do It, With A Little Restraint Forex trading strategies are only as good as the discipline of the trader who employs them. For those willing to exercise self restraint, the Forex markets can be very profitable indeed. As long as someone uses only risk capital for Forex trading, and sticks to a plan, there is no reason why he or she cannot become a success at Forex trading.
by Wade Robins
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by SINJOTARO
Forex Trading - Using Neural Networks for Huge Profits
Today, we are seeing the increasing use of neural networks in financial markets to help forecast prices with greater accuracy and the complexity and research is mind boggling. This article will look at the use of neural networks in financial trading and their profit potential.
The Human Brain V Computers
The human brain is one of the most complex objects if not the most complex object known to man. It is not just its superior processing speed and storage space that make it extraordinary, but more importantly, its ability to learn and adapt.
Neural Networks Defined
Computer scientists have tried to write software that allows computers to mimic the learning power of the brain (computers already have superior storage and processing speed) and neural networks aim to help a computer learn and adapt.
A neural network is essentially a system of programs and data structures that approximates the operation of the human brain. A neural network consists of a large number of processors operating in parallel, each with its own sphere of knowledge and access to its own databank.
A neural network is "trained" by being given large amounts of data and a set of rules.
A computer program can then tell the network how to react in response to an external event and initiate reactions based on the knowledge it has access to.
Therefore in forex trading, neural networks can learn how to trade based upon the data fed to them.
Do They Work?
The answer is at present the human brain is and always will be superior, due to the fact it can THINK independently. A computer can never achieve the learning power of the human brain as it can only work with the rules it's programmed with.
A computer program can trade, but do you need a neural network.
There are computer programs today, that don't use neural networks, that have rules that make money and neural networks don't have any advantage at all.
People think that technology can solve everything, but the markets are one area where simple systems can and do work best.
An Investment Fact
The fact is that 50 years ago 95% of forex traders lost and today the same ratio applies.
This is despite all the advances we have had in market research, computers and speed of information delivery. Keeps this point in mind if you want to win at forex trading:
Trading is an odds game and the application of science to predict is doomed to failure.
There will never be a neural network with the power to learn and adapt like the human brain, as it has to be programmed by a human and there are endless variables.
Keep it Simple For Success
If someone tries to sell you a program or service based upon neural networking, ask for their real time track record and see if you get one - chances are you wont.
People are always looking for science to help but in the markets forget neutral networks and play the odds.
Either with your brain or with a currency trading system, that's simple with just a few rules - that's all you need, don't look for more.
by sacha tarkovsky
Forex Trading for Beginners - Facts You Must Accept To Win
Enclosed you will find some facts that you MUST accept or you won't win at forex trading, so check them out and see if you could succeed in the worlds most excting investment.
1. Markets are Not Scientific
If you think you can win at forex trading by applying science forget it. Scientific theories don't and never will work because humans determine the price of anything and they don't move to scientific criteria!
2. Expect long periods of losses
No matter what system you use you are going top have periods of drawdown that last for weeks or months so get ready for them and be mentally prepared to take them.
3. Currency Trading Is Risky
Most people don't like risk and are duped by vendors who try and tell them they can trade with low risk and make a regular income - Ignore this advice.
Fact is:
The bigger the reward the bigger the risk - risk goes with reward pure and simple. If you don't like taking risks forget forex trading.
4. You can buy success
You will see lots of vendors promising to give you success, but the reality is they can't. Most rely on advertising copy with no evidence they have made any money for themselves!
Don't fall for this, the only person who can give you success is you.
If these vendors could deliver the gains a lot of them claim, they wouldn't need you - they would be to busy making money.
To win you are all on your own and that's no bad thing as we will discuss later.
5. More than 90% lose
Think about it 90% lose so why should you win? If you want to win then you need a "trading edge" Before you start trading think what your edge is and have confidence in it? If you can't think what it is you don't have one!
You may be thinking that's all a bit negative, so let's look at some facts that are positive.
6. You don't need to work hard
You need to work smart - this means not acquiring knowledge for knowledge sake, just getting the right knowledge you need and this wont take long to learn and furthermore:
7. Simple systems work best
A simple system in forex trading will beat a complicated one hands down.
Why?
Because it will be more robust in the face of brutal market conditions, in fact all the best currency trading systems tend to be simple.
8. Everything about currency trading can be learned
You may ask well if that's true why do so many forex traders lose?
The answer is they don't have mental discipline to succeed.
Currency trading is as much if not more so about mindset than just a method.
If you don't have the discipline to follow your method you have no method in the first place. You will have discipline if you develop your own method, you are confident in and that's why no one else can give you success.
9. Take calculated risks and win big
If you accept risk and can take calculated risks at the right time with meaningful amounts, you can win big - this due to the massive leverage at your disposal.
Confronting risk and accepting it, is one of the keys to successful currency trading.
10. Forex trading is simple
In fact it's a lot simpler than many traders believe and you don't need a university degree to win - the opportunity is open to all.
Just keep in mind to work at acquiring the right knowledge, accept risk, rely on yourself, have mental discipline and you can become a winner in the worlds most exciting and lucrative investment medium
by Kelly Price
Forex Trading – 2 Simple Tips to Dramatically Increase Profits
Enclosed you will find 2 simple tips that will help you increase your profitability dramatically and they can be incorporated in any forex trading strategy. These tips are not commonly accepted by most traders but as 90% of traders lose, we wont let that worry us!
Let’s look at these two simple tips and why they increase your profits.
1. Don’t Diversify
If you don’t risk much you won’t make much and that’s a fact.
If you have a small trading account all diversification does is dilute your profit potential. If you trade a small account don’t spread your resources to thinly – when you see a trade go for it and hit it with as much cash as you can afford.
You hear a lot of forex guru’s saying you should risk 2% per trade well, if you have a $10,000 account that’s $200.00! If you risk a small amount, you will end up getting stopped out to soon and never catch a major move or profit.
Risk 10 – 20% and be very selective with your trades. Patience is the key, only trade the really high return low risk trades.
Forex trading is all about taking calculated risks at the Right time – if you don’t like taking a risk find another profession.
2. Hold Your Stop Back
This leads on from the above point.
You already know that you have to risk meaningful amounts to make a lot and it’s a fact that most traders try so hard to avoid risk they actually create it.
They wont risk much as we discussed in point 1 and the most common group who do this are day traders, their stops are so close they are almost guaranteed to be stopped out.
The other critical error traders make is they move stops too quickly to lock in profits, as the market moves up.
The Result?
They are simply clipped out by normal volatility and bank a small profit.
Of course, the trade then continues the way they thought and piles up thousands or ten of thousands in profit and their not in!
Get used to holding your stop back, so that you are not clipped out by random volatile reactions.
This takes courage and conviction and most traders can’t do it. Sure they want big gains, but they simply can’t hold a big profit, as they get to excited or worried it will get away, so they bank early.
Hold the longer term trends and hold your stops back and work with a profit target to liquidate.
Don't Be Scared Of Risk
If you are, stay away from forex trading.
The fact is that most traders are terrified of risk, that’s why they only risk small amounts and can’t hold a profit. There risk control is so conservative, that they give themselves no chance of making meaningful gains and their risk control simply ensures they lose.
By: Monica Hendrix