Money management

Many beginning FOREX traders are captivated by the allure of easy money. FOREX
websites offer 'risk-free' trading, 'high returns' 'low investment' – these claims have a grain
of truth in them, but the reality of FOREX is a bit more complex.
There are two common mistakes that many beginner traders make – trading without a
strategy and letting emotions rule their decisions. After opening a FOREX account it may
be tempting to dive right in and start trading. Watching the movements of EUR/USD for
example, you may feel that you are letting an opportunity pass you by if you don't enter
the market immediately. You buy and watch the market move against you. You panic
and sell, only to see the market recover.
This kind of undisciplined approach to FOREX is guaranteed to lose you money. FOREX
traders need to have a rational trading strategy and not allow emotions to rule their
trading decisions.
To make rational trading decisions the FOREX trader must be well-educated in market
movements. He must be able to apply technical studies to charts and plot out entry and
exit points. He must take advantage of the various types of orders to minimize his risk
and maximize his profit.
The first step in becoming a successful FOREX trader is to understand the market and
the forces behind it. Who trades FOREX and why? Who is successful and why are they
successful? This knowledge will allow you to identify successful trading strategies and
use them as models for your own.
There are 5 major groups of investors who participate in FOREX – Governments, Banks,
Corporations, Investment Funds, and traders. Each group has varying objectives, but the
one thing that all the groups (except traders) have in common is external control. Every
organization has rules and guidelines for trading currencies and can be held accountable
for their trading decisions. Individual traders, on the other hand, are accountable only to
themselves.
This means that the trader who lacks rules and guidelines is playing a losing game.
Large organizations and educated traders approach the FOREX with strategies, and if
you hope to succeed as a FOREX trader you must play by the same rules.
Money Management
Money management is part and parcel of any trading strategy. Besides knowing which
currencies to trade and recognizing entry and exit signals, the successful trader has to
manage his resources and integrate money management into his trading plan. Position
size, margin, recent profits and losses, and contingency plans all need to be considered
before entering the market.
There are various strategies for approaching money management. Many of them rely on
the calculation of core equity. Core equity is your starting balance minus the money used
in open positions. If the starting balance is $10,000 and you have $1000 in open positions
your core equity is $9000.
When entering a position try to limit risk to 1% to 3% of each trade. This means that if you
are trading a standard FOREX lot of $100,000 you should limit your risk to $1000 to $3000
– preferably $1000. You do this by placing a stop loss order 100 pips (when 1 pip = $10)
above or below your entry position.
As your core equity rises or falls you can adjust the dollar amount of your risk. With a
starting balance of $10,000 and one open position your core equity is $9000. If you wish
to add a second open position, your core equity would fall to $8000 and you should limit
your risk to $900. Risk in a third position should be limited to $800.
By the same principal you can also raise your risk level as your core equity rises. If you
have been trading successfully and made a $5000 profit, your core equity is now $15,000.
You could raise your risk to $1500 per transaction. Alternatively, you could risk more from
the profit than from the original starting balance. Some traders may risk up to 5% against
their realized profits ($5,000 on a $100,000 lot) for greater profit potential.

Candlestick Patterns

10 Best Candlestick Patterns
There are many candlestick patterns but only a few are actually worth knowing. Here are 10 candlestick patterns worth looking for.
Remember that these patterns are only useful when you understand what is happening in each pattern.
They must be combined with other forms of technical analysis to really be useful.
The following patterns are divided into two parts: Bullish patterns and bearish patterns. These are reversal patterns that show up after a pullback (bullish patterns) or a rally (bearish patterns).

Bullish Candlestick Patterns

Engulfing: This is a powerful candlestick pattern. This pattern consists of two candles. The first candle is a narrow range candle that closes down for the day. The sellers are still in control of the market but because it is a narrow range candle and volatility is low, the sellers are not very aggressive. The second candle is a wide range candle that “engulfs” the body of the first candle and closes near the top of the range. The buyers have overwhelmed the sellers (demand is greater than supply). Buyers are ready to take control of the market!

Hammer: The market opened, then at some point the sellers took control of the market and pushed it lower. By the end of the day, the buyers won and had enough strength to close the market at the top of the range. Hammers can develop after a cluster of stop loss orders are hit. That’s when professional traders come in to takeover at a lower price.

Harami: When you see this pattern the first thing that comes to mind is that the momentum preceding it has stopped. On the first day you see a wide range candle that closes near the bottom of the range. The sellers are still in control of the market. Then on the second day, there is only a narrow range candle that closes up for the day.

Note: Do not confuse this pattern with the engulfing pattern. The candles are opposite!

Piercing: This is also a two-candle reversal pattern where on the first day you see a wide range candle that closes near the bottom of the range. The sellers are in control. On the second day you see a wide range candle that has to close at least halfway into the prior candle. Those that shorted the on first day are now sitting at a loss on the rally that happens on the second day. This can set up a powerful reversal.

Doji: The doji is probably the most popular candlestick pattern. The market opens up and goes nowhere throughout the day and closes right at or near the opening price. Quite simply, it represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction.

Bearish Candlestick Patterns

You’ll notice that all of these bearish patterns are the opposite of the bullish patterns. These patterns come after a rally and signify a possible reversal just like the bullish patterns.

Let's figure out what is happening in each of the patterns above to cause these to be considered bearish. Look at each candle and try to get into the minds of the traders involved in the candle.

Kickers

There is one more pattern worth to mention. A "kicker" is sometimes referred to as the most powerful candlestick pattern of all.

You can see in the above graphic why this pattern is so explosive. Like most candle patterns there is a bullish and bearish version. In the bullish version, the market is moving down and the last red candle closes at the bottom of the range.

Then, on the next day, the market opens above the previous days high and close. This "shock event" forces short sellers to cover and brings in new traders on the long side.

This is the reversed in the bearish version.

Confirmation?

Most traders are taught to "wait for confirmation" with candlestick patterns. This means that they are supposed to wait until the following day to see if the market reverses afterward..

Seriously, think about it for a second. If a market pulls back to an area of demand (support) and we have a candlestick pattern that is telling us that buyers are taking control of the market, then that is all the confirmation we need.

As a swing trader we need to get in before the crowd piles in, not when they get in! In other words, We want to be one of the traders that make up the pattern itself! That is the low risk, high odds play.

Reading Candlestick Charts

How to interpret candlestick patterns

Reading candlestick charts is an effective way to study the emotions of other traders and to interpret price. Candles provide a trader with a picture of human emotions that are used to make buy and sell decisions.

On a piece of paper, write down the following statement with a big black marker:

There is nothing on a chart that matters more than price. Everything else is secondary.

Take that piece of paper and tape it to the top of your monitor! Too often swing traders get caught up in so many other forms of technical analysis that they miss the most important thing on a chart.

You do not need anything else on a chart but candles to be a successful swing trader! There is nothing that can improve your trading more than learning the art of reading candlestick charts.

Buyers And Sellers

There are only two groups of people in the market. There are buyers and sellers. We want to find out which group is in control of the price action now. We use candles to figure that out.

The picture above shows how candlesticks are constructed. The highs and lows of the time period are called the "wicks" and the open and close form the "body". The candle itself is the "range". When market close at the bottom of the range we conclude that the sellers are in control. When market close at the top of the range we conclude that buyers are in control.

Note: In the market, for every buyer there has to be a seller and for every seller there has to be a buyer.

If a market closes at the top of the range, this means that buyers were more aggressive and were willing to get in at any price. The sellers were only willing to sell at higher prices. This causes the market to move up.

If a market closes at the bottom of the range, this means that sellers were more aggressive and were willing to get out at any price. The buyers were only willing to buy at lower prices. This causes the market to move down.

Where a market closes in relation to the range, it tells us who is winning the war between buyers and sellers. This is the most important thing to know when reading candlestick charts.

We can classify candles in two categories: wide range candles (WRC) and narrow range candles (NRC). Wide range candles state that there is high volatility (interest in the market) and narrow range candles state that there is low volatility (little interest in the market).

Wide Range Candles

If we know that market tends to move in the direction of wide range candles, we can look to the left of any chart to gauge the interest of either the buyers or sellers and trade in the direction of the trend and the candles.

The importance of this cannot be overstated! You want to know if there is interest in the market and if it is being accumulated or distributed by institutional traders.

Narrow Range Candles

Narrow range candles imply low volatility. This is a period of time when there is very little interest in the market. Looking at the charts you can see that these narrow range candles often lead to reversals (up or down) because:

Low volatility leads to high volatility and high volatility leads to low volatility. So, knowing this, doesn't it make sense to enter a market in periods of low volatility and exit a market in periods of high volatility? The answer is Yes.

Hammers, Doji's and Shooting Stars

The number one rule when reading candlestick charts is this: You want to buy only when nobody wants it and sell only when everybody wants it! This is the only way to consistently make money swing trading!

I know what you’re thinking. You thought about hammers, doji’s, and shooting stars. Knowing all of the different types of candlestick patterns is really not at all necessary once you understand why a candle represents the struggle between buyers and sellers.

In this picture above we see a classic candlestick pattern called a hammer. What happened to cause this? The market opened, then at some point the sellers took control of the market and pushed it lower. Many traders were shorting this market thinking it was headed lower.

But by the end of the day, the buyers took control, forced those short sellers to cover their positions, and the market had enough strength to close the market at the top of the range.

When we are reading candlestick charts, why would we need to know the name of the pattern? What we do need to know is why the candle looks the way that it does rather than spending our time memorizing candlestick patterns!

Happy trading and good luck!