Technical Analysis, Technical Indicator, Commodity Channel Index (CCI)

The CCI measures the difference between the last typical price [(high + low + close)/3] and the average of the means over a chosen period of time. The result is then compared to the average difference over a chosen period of time and multiplied by a factor.

Remember it is not important to understand the formula, what is important to understand is the CCI behavior over different scenarios and how we could use it in order to get better results.

About 80% of the time the CCI stays between the +100 and - 100 values (varies depending on the number of periods chosen). A move above or below this levels indicates a strong move.

Usage of CCI

Usage No 1 - As almost all oscillators, it indicates overbought/oversold conditions. When the CCI reaches levels above +100 (overbought) or below -100 (oversold) and crosses back to the neutral zone (between +100 and - 100) a signal is given.

[Chart 11]

In this case we used a CCI of 50 periods: CCI(50). We need to remember that overbought and oversold conditions should only be applied in direction of the trend (when the market is trending.) For instance, we could use an EMA to determine the trend, if the market is in an uptrend, then we only take the oversold signals and vice versa. Also, remember the overbought and oversold signals are triggered when the market goes back to the neutral territory (between -100 and +100 in the CCI).

Usage No 2 - Extreme levels. This signal was the main purpose of Lambert’s CCI, as explained before, the CCI stays in neutral territory (+/-100) 80% of the time so eventual breaks of these levels could indicate a strong move in the same direction. A move above +100 is a buy signal and a move below -100 is a short signal.

[Chart 12]

We got around three signals in this chart. Two of them are long and one to go short. How could we have avoided the last signal?

Usage No 3 - Divergence. When the price reaches new highs and the CCI fails to do the same , the CCI gives a short signal, the same is also true when the indicator reaches new highs and the price fails to do so. It is also utilized for bear markets.

Divergences indicate that although the trend is still intact, it is not as strong as it was before. A possible short-term reversal might be ahead.

[Chart 13]

In the chart above the CCI fails to make a peak similar to that created by the market indicating a possible retracement, reversal or consolidation period.

Usage No 4 - Trendline breaks. Like basic trendline breakouts, the CCI also generates peaks and bottoms. When two or more successive peaks or bottoms are formed by the indicator they could be connected to form a trendline. If the indicator reading breaks such trendline, it signals a trade in direction of the break out.

[Chart 14]

At the chart above the CCI trendline break is clearly seen. These types of signals sometimes are irrelevant as what we really care about are “market levels” not “indicator levels”.

Combination of CCI Signals

Probably the best combination for these signals could be the following:

[Chart 15]

When trading the extreme levels of CCI it is also advised to trade only those signals that are in the direction of the prevailing trend. Every yellow triangle indicates a valid long or short signal, red triangles indicate false signals (and are to be ignored). The rule is, take only signals in direction of the trend measured by the position of the market in relation to the EMA. 

In the first triangle the CCI reached extreme levels but the market was just below the MA invalidating the signal. This one would have been profitable but we need to be sure the market is ready to reverse, so we need to see more movement in the suggested direction. The second red triangle was a short signal when the market is clearly up trending. All other signals are valid.

The Psychology of Forex Trading(2)

• What emotions should you watch for in yourself while trading?
To be a little bit more specific about “emotional” trading, let’s go over some of the most common emotional trading mistakes that traders make:

1-Greed – 
                       There’s an old saying that you may have heard regarding trading the markets, it goes something like this: “Bulls make money, bears make money, and pigs get slaughtered”. It basically means that if you are a greedy “pig” in the markets, you are almost certainly going to lose your money. Traders are greedy when they don’t take profits because they think a trade is going to go forever in their favor. Another thing that greedy traders do is add to a position simply because the market has moved in their favor, you can add to your trades if you do so for logical price action-based reasons, but doing so only because the market has moved in your favor a little bit, is usually an action born out of greed. Obviously, risking too much on a trade from the very start is a greedy thing to do too. The point here is that you need to be very careful of greed, because it can sneak up on you and quickly destroy your trading account.
2-Fear – 
                  Traders become fearful of entering the market usually when they are new to trading and have not yet mastered an effective trading strategy like price action trading (in which case they should not be trading real money yet anyways). Fear can also arise in a trader after they hit a series of losing trades or after suffering a loss larger than what they are emotionally capable of absorbing. To conquer fear of the market, you primarily have to make sure you are never risking more money than you are totally OK with losing on a trade. If you are totally OK with losing the amount of money you have at risk, there is nothing to fear. Fear can be a very limiting emotion to a trader because it can make them miss out on good trading opportunities.

3-Revenge – 
                           Traders experience a feeling of wanting “revenge” on the market when they suffer a losing trade that they were “sure” would work out. The key thing here is that there is no “sure” thing in trading…never. Also, if you have risked too much money on a trade (starting to see a theme here?), and you end up losing that money, there’s a good chance you are going to want to try and jump back in the market to make that money back….which usually just leads to another loss (and sometimes an even larger one) since you are just trading emotionally again.

4-Euphoria – 
                                While feeling euphoric is usually a good thing, it can actually do a lot of damage to a trader’s account after he or she hits a big winner or a large string of winners. Traders can become overly-confident after winning a few trades in the market, for this reason most traders experience their biggest losing period’s right after they hit a bunch of winners in the market. It is extremely tempting to jump right back in the market after a “perfect” trade setup or after you hit 5 winning trades in a row…there’s a fine line between keeping your feet grounded in reality and thinking that everything you do in the markets will turn to gold.
Many traders enter into a tailspin of emotional trading and losing money after they hit a string of winners. The reason this happens is because they feel confident and euphoric and forget about the real danger of the market and that ANY TRADE CAN LOSE. The key to remember here is that trading is a long-term game of probabilities, if you have a high-probability trading edge, you will eventually make money over the long-term assuming you follow your trading edge with discipline. But, even if your edge is 70% successful over time, you could still hit 30 losing trades in a row out of 100….so keep this fact in mind and always remember you never know WHICH trade will be a loser and WHICH will be a winner.

What is Technical Analysis?

 

Technical Analysis

Technical analysis is the study of the price movement on a chart of a particular Forex currency pair or other market. We can think of technical analysis or “T.A.” for short, as a sort of framework that traders use to study and make use of the price movement of a market.
The primary reason that traders use T.A. is to make predictions about future price movement based on past price movement.
Technical analysts believe that all current market variables are reflected via the price movement or price action on a price chart. So, if we believe that all market variables are reflected via price movement, it only goes to reason that we don’t really need much else to analyze and trade the markets besides price. I am a technical analyst and so are the members in my trading community, we prefer T.A. because we agree with the idea that all market variables are reflected via price action, so we see no reason to use other means to analyze or trade the market. That’s not to say that having some knowledge of fundamentals and news events is a bad thing, but we just don’t rely on them heavily (we discussed Fundamental Analysis)
Technical analysts look for patterns on the chart that tend to repeat themselves; they do this to develop their trading edge from. The underlying logic here is that since most price movement is driven by human beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in their emotion and interaction with the market.
Technical analysis also encompasses learning to analyze the market structure; find trends, support and resistance levels and generally learn to ‘read’ the ebbs and flows of a market. There is obviously discretion involved here and I will be the first person to tell you that T.A. is more of an art than a science. That said, it is something you will get more comfortable with and better at given time and practice. T.A. forms the back-bone of my core trading method of price action, which is simply a derivative or off-shoot of ‘traditional T.A.”, except with more clarity and more concise strategies that don’t involve confusing forex indicators or things like Elliot Wave Theory that are far too messy and open to interpretation for me to believe they are worth trading or teaching.
Most traders instantly think of a price chart like the one above when someone mentions the word “technical analysis”. Price charts provide us with an amazing amount of useful data that paints a complete picture of a market’s historical and current supply and demand situation, as well as the price levels that the market participants have deemed the most important. As technical analysts we need to pay special attention to these price levels as price will tend to respect them again and again, indeed, much of my price action trading course is built around learning to identify and trade price action setups from key levels in the market. Price charts are also a reflection of all market participants’ beliefs about the market and market variables, so by focusing your analysis and trading on a market’s price chart you can streamline your trading and at the same time analyze the end result of everything that contributes to the price movement of a market.

Risk Reward and Money Management in Forex Trading

This could possibly be the most important Forex trading article you ever read. That might sound like a bold statement, but it’s really not too bold when you consider the fact that proper money management is the most important ingredient to successful Forex trading. Money management in Forex trading is the term given to describe the various aspects of managing your risk and reward on every trade you make. If you don’t fully understand the implications of money management as well as how to actually implement money management techniques, you have a very slim chance of becoming a consistently profitable trader.
I am going to explain the most important aspects of money management in this article; risk / reward, position sizing, and fixed dollar risk vs. percentage risk. So, grab a cup of your favorite beverage and follow along as I help you understand some of the most critical concepts to a profitable Forex trading career…

Risk : Reward

Risk reward is the most important aspect to managing your money in the markets. However, many traders do not completely grasp how to fully take advantage of the power of risk reward. Every trader in the market wants to maximize their rewards and minimize their risks. This is the basic building block to becoming a consistently profitable trader. The proper knowledge and implementation of risk reward gives traders a practical framework to do this.
Many traders do not take full advantage of the power of risk reward because they don’t have the patience to consistently execute a large enough series of trades in order to realize what risk reward can actually do. Risk reward does not mean simply calculating the risk and reward on a trade, it means understanding that by achieving 2 to 3 times risk or more on all your winning trades, you should be able to make money over a series of trades even if you lose the majority of the time. When we combine the consistent execution of a risk / reward of 1:2 or larger with a high-probability trading edge like price action, we have the recipe for a very potent Forex trading strategy.
Let’s take a look at the 4hr chart of Gold to see how to calculate risk / reward on a pin bar setup. We can see in the chart below there was an obvious pin bar that formed from support in an up-trending market, so the price action signal was solid. Next, we calculate the risk; in this case our stop loss is placed just below the low of the pin bar, so we would then calculate how many lots we can trade given the stop loss distance. We are going to assume a hypothetical risk of $100 for this example. We can see this setup has so far grossed a reward of 3 times risk, which would be $300.
Now, with a reward of 3 times risk, how many trades can we lose out of a series of 25 and STILL make money? The answer is 18 trades or 72%. That’s right; you can lose 72% of your trades with a risk / reward of 1:3 or better and STILL make money…..over a series of trades.
Here is the math real quick:
18 losing trades at $100 risk = -$1800, 7 winning trades with a 3 R (risk) reward = $2100. So, after 25 trades you would have made $300, but you also would have had to endure 18 losing trades…and the trick is that you never know when the losers are coming. You might get 18 losers in a row before the 7 winners pop up, that is unlikely, but it IS possible.
So, risk / reward essentially all boils down to this main point; you have to have the fortitude to set and forget your trades over a large enough series of executions to realize the full power of risk / reward. Now, obviously if you are using a high-probability trading method like price action strategies, you aren’t likely to lose 72% of the time. So, just imagine what you can do if you properly and consistently implement risk reward with an effective trading strategy like price action.
Unfortunately, most traders are either too emotionally undisciplined to implement risk reward correctly, or they don’t know how to. Meddling in your trades by moving stops further from entry or not taking logical 2 or 3 R profits as they present themselves are two big mistakes traders make. They also tend to take profits of 1R or smaller, this only means you have to win a much higher percentage of your trades to make money over the long-run. Remember, trading is a marathon, not a sprint, and the WAY YOU WIN the marathon is through consistent implementation of risk reward combined with the mastery of a truly effective trading strategy.

Position Sizing

Position sizing is the term given to the process of adjusting the number of lots you trade to meet your pre-determined risk amount and stop loss distance. That is a bit of a loaded sentence for the newbie’s. So, let’s break it down piece by piece. This is how you calculate your position size on every trade you make:
1) First you need to decide how much money in dollars (or whatever your national currency is) you are COMFORTABLE WITH LOSING on the trade setup. This is not something you should take lightly. You need to genuinely be OK with losing on any ONE trade, because as we discussed in the previous section, you could indeed lose on ANY trade; you never know which trade will be a winner and which will be a loser.
2) Find the most logical place to put your stop loss. If you are trading a pin bar setup this will usually be just above / below the high / low of the tail of the pin bar. Similarly, the other setups I teach generally have “ideal” places to put your stop loss. The basic idea is to place your stop loss at a level that will nullify the setup if it gets hit, or on the other side of an obvious support or resistance area; this is logical stop placement. What you should NEVER DO, is place your stop too close to your entry at an arbitrary position just because you want to trade a higher lot size, this is GREED, and it will come back to bite you much harder than you can possibly imagine.
3) Next, you need to enter the number of lots or mini-lots that will give you the $ risk you want with the stop loss distance you have decided is the most logical. One mini-lot is typically about $1 per pip, so if your pre-defined risk amount is $100 and your stop loss distance 50 pips, you will trade 2 mini-lots; $2 per pip x 50 pip stop loss = $100 risked.
The three steps above describe how to properly use position sizing. The biggest point to remember is that you NEVER adjust your stop loss to meet your desired position size; instead you ALWAYS adjust your position size to meet your pre-defined risk and logical stop loss placement. This is VERY IMPORTANT, read it again.
The next important aspect of position sizing that you need to understand, is that it allows you to trade the same $ amount of risk on any trade. For example, just because you have to have a wider stop on a trade doesn’t mean you need to risk more money on it, and just because you can have a smaller stop on a trade does not mean you will risk less money it. You adjust your position size to meet your pre-determined risk amount, no matter how big or small your stop loss is. Many beginning traders get confused by this and think they are risking more with a bigger stop or less with a smaller stop; this is not necessarily the case.
Let’s take a look at the current daily chart of the EURUSD below. We can see two different price action trading setups; a pin bar setup and an inside-pin bar setup. These setups required different stop loss distances, but as we can see in the chart below we still would risk the exact same amount on both trades, thanks to position sizing:

The fixed dollar risk model VS The percent risk model

Fixed dollar risk model = A trader predetermines how much money they are comfortable with potentially losing per trade and risks that same amount on every trade until they decide to change their risk.
Fixed percent risk model = A trader picks a percentage of their account to risk per trade (usually 2 or 3%) and sticks with that risk percentage.
In a previous article that I wrote about money management titled “Forex Trading Money Management – An Eye Opening Article”, I argued that using a fixed dollar amount of risk is superior to the percent of account risk model. The primary argument I make about this topic is that although the % R method will grow an account relatively quickly when a trader hits a series of winners, it actually slows account growth after a trader hits a series of losers, and makes it very difficult to bring the account back up to where it previously stood. This is because with the % R risk model you trade fewer lots as your account value decreases, while this can be good to limit losses, it also essentially puts you in a rut that is very hard to get out of. What is needed is mastery of one’s trading strategy combined with a fixed dollar risk you are comfortable with losing on any given trade, and when you combine these factors with consistent execution of risk / reward, you have an excellent chance at making money over a series of trades.
The % R  model essentially induces a trader to ‘lose slowly’ because what tends to happen is that traders begin to think “Since my position size is decreasing on every trade it’s OK if I trade more often”…and whilst they may not specifically think that sentence…it is often what happens. I personally believe the % R model makes traders lazy…it makes them take setups that they otherwise wouldn’t…because they are now risking less money per trade they don’t value that money as much…it’s human nature.
Also, the %R model really serves no real world purpose in professional trading as the account size is arbitrary; meaning the account size does not reflect the true risk profile of each person, nor does it represent their entire net worth. The account size is actually a ‘margin account’ and you only need to deposit enough in an account to cover the margin on positions…so you could have the rest of your trading money in a savings account or in a mutual fund or even precious metals…many professional traders do not keep all of their potential risk capital in their trading account.
The fixed $ risk model makes sense for professional traders who want to derive a real income from their trading; it’s how I trade and it’s how many others I know trade. Pro traders actually withdrawal their profits from their trading account each month, their account then goes back to its “baseline” level.

Example of Fixed $ Risk Vs. % Risk

Let’s take a look at a hypothetical example of 25 trades. We are comparing the fixed $ risk model to a 2% account risk model. Note: We have chosen the 2% risk because it’s a very popular percent risk amount amongst newbie traders and on many other Forex education sites. The fixed $ risk was set at $100 per trade in this example just to show how a trader who is confident in his or her trading skills and trades like a sniper would be able to build his or her account faster than someone settling on a 2% per trade risk. In reality, the fixed $ risk will vary between traders and it’s up to the trader to determine what they are truly OK with losing per trade. For me, if I was trading a small $2,000 account, I would personally be comfortable risking about $100 per trade, so this is what our example below reflects.
It’s quite obvious upon analyzing this series of random trades that the fixed $ model is superior. Sure you will draw your account down a bit quicker when you hit a series of losers with the fixed $ model, but the flip side is that you also build your account much quicker when you hit a series of winners (and recover from draw downs a lot faster). The key is that if you’re really trading like a sniper and you’ve mastered your trading strategy…you’re unlikely to have a lot of losing trades in a row, so the fixed $ risk model will be more beneficial to you.
In the example image below, we are looking at the fixed $ risk model versus the % risk model:
Now this example is a bit extreme, if you are trading with price action trading strategies and have truly mastered them, you shouldn’t be losing 68% of the time; your winning percentage is likely to average close to 50%. You can imagine how much better the results would be with a 50% winning percentage. If you won 50% of the time over 25 trades while risking $100 on a $2,000 account, you would have $4,500. If you won 50% of the time over 25 trades while risking 2% of $2,000, you would have only about $3,300.
Many professional traders use the fixed dollar risk method because they know that they have mastered their forex trading strategy, they don’t over-trade, and they don’t over-leverage, so they can safely risk a set amount they are comfortable with losing on any trade.
People who trade the %R model are more likely to over-trade and think that because their dollar risk per trade is decreasing with each loser it’s OK to trade more trades (and thus they lose more trades because they are taking lower-probability trades)…and then over time this over-trading puts them much further behind a fixed $ trader who is probably more cautious and sniper- like.

Conclusion

To succeed at trading the Forex markets, you need to not only thoroughly understand risk reward, position sizing, and risk amount per trade, you also need to consistently execute each of these aspects of money management in combination with a highly effective yet simple to understand trading strategy like price action. To learn more about price action trading and the money management principles discussed in this article

Forex Trading Strategy(2)

• Trend trading
Trending markets offer us the best opportunity to profit, since the market is clearly moving in one general direction; we can use this information to our advantage by looking to enter the market in the direction of the trend.
An uptrend is marked by a series of higher highs and higher lows, and a downtrend is marked by a series of lower highs and lower lows. Note that trends do end, as we can see in the daily EURUSD chart below, the downtrend has come to an end recently after the pattern of lower highs and lower lows was broken…
I like to trade with the near-term daily trend by looking for high-probability price action strategies forming within the structure of the market trend. What I mean by this is essentially looking for price action setups forming near support as a market rotates lower in an uptrend and near resistance as a market rotates higher in a downtrend. Markets ebb and flow, and if you can learn to take advantage of trending markets, you will have a very good shot at becoming a profitable Forex trader:

• Counter-trend trading
Since trends do end, we can also take advantage of this information. However, counter-trend trading is inherently riskier and more difficult than trading with the trend, so it should only be attempted after you have fully mastered trading with the trend. Some of the things to look for in a good counter-trend signal is a price action pattern or setup forming at a very obvious and ‘key’ support or resistance level on the daily chart, see here:


• Range-bound market trading
When a market is in a trading range it means that it is consolidating between a level of support and resistance. We can use the fact that a market is bouncing between support and resistance to our advantage. As the market approaches the support or resistance boundary of the trading range, we have a high-probability entry level, since risk is clearly defined just above or below the resistance or support of the range. When trading price action in trading ranges, you can watch for obvious price action setups forming near the boundaries of the range, see here:


• Forex candlestick charts and patterns
We discussed Forex charts in Part 7, but as they are very important to the way that I trade and teach price action, I wanted to give them a little more time. I have previously written an excellent tutorial on Forex candlestick charts that you can check out here: Forex candlestick charts
It’s important to understand that candlestick patterns have certain terminology all to their self that you should become familiar with before you attempt to master a trading strategy like price action.

price action trading signal

• What is a price action trading signal?
Next, let’s discuss how we can use price action analysis to find entries into the Forex market from a raw price chart. As a result of years of trading the markets I have boiled down all I have learned into my own unique method of trading with price action. This method consists of a handful of very specific price action entry triggers that can provide you with a high-probability entry into the market. Essentially, what we are looking for is reoccurring price patterns that tell us something about what the market might do in the near-future.
For purposes of brevity and out of respect for my paid members, I won’t give away all of my trading strategies and entry triggers here, but you can learn more about the trading strategies that I teach in my trading course. In the chart below, we are going to look at a particularly good price action signal for trading with trends; the inside bar strategy.
In the example chart below, we can see one price action trading signal that I like to use in trending markets; the inside bar setup:
• How to use price action analysis to determine a market’s trend
You will probably come across many different indicators designed to tell you what the trend of a market is. However, the most time-tested and trusted way for determining a market’s trend is simply to look at the daily charts and analyze the market’s price action. To identify a downtrend, we look for patterns of lower highs and lower lows, sometimes annotated by “LH and LL”. To identify an uptrend, we look for patterns of higher highs and higher lows, sometimes annotated by “HH and HL”.
In the example chart below, we can see examples of a downtrend, an uptrend and an uptrend changing to a downtrend:

• Where and when should you trade a price action signal?
In my trading course I focus heavily on teaching my members how to trade with “confluence”. When I say “trading with confluence” I am basically referring to looking for areas or levels in the market that are clearly significant. Confluence means when things come together or intersect. Thus, when we are looking to “trade with confluence” we are trying to put together an obvious price action signal with a significant level in the market. There are different factors of confluence that we can watch for, but in the chart below I am showing you price action setups that formed at key support and resistance levels in the market; support and resistance are each a factor of confluence. Note, I have shown you two more price action setups in the chart below; the pin bar strategy and the fakey trading signal.
In the example chart below, we are looking how to trade price action setups from confluent levels in the market:
In closing…
This lesson gave you a basic overview of what price action analysis is and how to use it in the markets. From here, you should proceed to the next part of this beginner’s course and continue learning about Forex and price action trading.

Price Action Trading Analysis

 What is Price Action Analysis?

My definition of Price Action Analysis: Price action analysis is the analysis of the price movement of a market over time. By learning to read the price action of a market, we can determine a market’s directional bias as well as trade from reoccurring price action patterns or price action setups that reflect changes or continuations in market sentiment.

In simpler terms: Price action analysis is the use of the natural or “raw” price movement of a market to analyze and trade it. This means, you are making all of your trading decisions based purely on the price bars on a “naked” or indicator-free price chart.
All economic variables create price movement which can be easily seen on a market’s price chart. Whether an economic variable is filtered down through a human trader or a computer trader, the movement that it creates in the market will be easily visible on a price chart. Therefore, instead of trying to analyze a million economic variables each day (this is impossible obviously), you can simply learn to trade from price action analysis because this style of trading allows you to easily analyze and make use of all market variables by simply reading and trading off of the price action created by said market variables.

• How do you apply price action analysis to the Forex market?
First, I want to say that price action analysis can be used to trade any financial market, since it simply makes use of the “core” price data of the market. However, my personal favorite market to trade is the Forex market, mainly due to its deep liquidity which makes it easy to enter and exit the market, and also because the Forex market tends to have better trending conditions as well as more volatility which makes for better directional trading and allows price action trading to really shine.
My own personal approach to trading and teaching price action trading is that you can trade effectively from a few time-tested price action setups. There really is no need to try and trade from 25 different price patterns, the Forex market moves in a relatively predictable fashion most of the time, so all we need is a handful of effective price action entry setups to give us a good chance at finding and entering high-probability trades.
The first thing you need to do to apply price action to the Forex market, is to strip your charts of all indicators and get a “clean” price chart with only the price bars in a color you like. I choose simple black and white or blue and red for my colors, but you can pick whichever colors you like (Part 7 will cover an introduction to charting). Here’s an example of my daily chart setup on the EURUSD:
Now, let’s look at an example of a clean and simple price chart next to a price chart covered with some of the most popular indicators that many traders use. I want you to look at these two charts and think about which one seems easier and more logical to trade off of:
From looking at the two charts above, you will probably agree that it seems a little silly to hide the natural price action of a market with messy and confusing indicators. All indicators are derived from price movement anyways, so if we have a solid method to trade based only on price movement (price action analysis), it only makes sense that we would use that instead of trying to analyze messy secondary data.