Real Forex Trading pt.4

A forex trader’s responsibility is to explore any possible avenue that will explain movements in the graphs. So far, suggestions have been provided regarding how to explore, but they appear to be very difficult to work out in practise. We now need to see an example of research in action. How on earth can we enter into the minds of currency traders and thus construct a descriptive explanation for what is happening?!?!

The graphs actually betray the solution to this problem, because with every movement, they tell us the things that count. One important way that they betray their secrets is through the spikes (highs and lows) of the candles. Ever so often, a candle will shoot for no apparent reason, then regress on itself. These movements are for a reason and when you find the reason, you find out what is passing through the minds of traders at that particular moment.

We shall now undertake a brief overview of cable (GBPUSD) to see these ideas in action. It appears relatively clear that the 200 simple moving average is important in the pair, notice the white line in the graph below (25-26th Sept 2007, 15 mins):

200 Moving Average

Notice how the spikes interact with the white line on the graph. It is true that many spikes pass through the line, but there is sufficient evidence to suggest that this 200 moving average is in the minds of traders while they are looking at the pair.

Below is a graph of cable on the 12-13th Nov, 2007, 15 mins:

Line of support

The above graph demonstrates clearly that lines of support (and by implication resistance) are important. There is a lesson to be learnt from this line, look between the two arrows; the price actually goes through the line and as a consequence it is not technically line of support anymore, but at the two arrows you can see that the respective candles touch the line, demonstrating that it is respected. In this case, the initial break through the line appears to have been an indicator that traders wanted to take the price south.

This graph demonstrates the complications of constructing a trading method. One should not create rules that do not conform to the graphs. Just because a line exists, does not mean that the price cannot pass through it. Just because the price passes through the line does not mean that it is not respected. Each feature is communicating something.

Notice that the line of support does not explain why the price went up again before shooting down significantly, but the accumulation of inductive evidence following the descriptive method leads ultimately to a profitable trading model. You will find that you will be able to explain the unimaginable. This example also demonstrates the importance of specializing in one pair. It is better to be an expert in one currency pair rather than have a vague understanding of many.

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