The trend in a market determines a trader’s behavior which in turn affects the market prices. There are three categories of trends;
• The main trend is the one that remains as is for months at a stretch, determines direction of a market and therefore must be looked into before positions are opened,
• The correction trend lasts for a few days and is found out using indicators and
• The opposite trend is the shortest trend that may last for about 2 days and lies between the main and corrective trends. It flows opposite to the direction of main trend.
To open positions, the three trends must be considered for signs, while to close positions an oscillator alongside a trend indicator must be employed for.
Basic idea – youtube video:
To Open Position
Main market direction is found out by a lowly sensitive long-term indicator. Within long-term trend, indicator for medium-term is determined which generates signals after correction of the major trend is complete. A series of intermediate signals (including channel breakouts, moving averages, etc.) are also to be considered. The first intermediate medium-term signal appears before long-term indicator allows trade in the main direction. A trader must bear in mind to follow the order of signals as short-term, then medium-term and finally long-term. The starting intermediate and short-term signals begin appearing by the time trend is defined and they will keep repeating for some time. This is the starting sign for a market. Generally position is opened after this sign followed by an intermediate signal. Intermediate signals are used in aggregate and so system contains contradictory indicators. Trader is advised to select an indicator best for him.
How to close a position
The trader’s major task is to identify the correction trend’s start and end of a main trend ignoring his small profits or losses. It is imperative to bear in mind that positions opened with aid of signals may not always earn profits because indicators are not error proof. Stop signals are used for telling a trader to close a position and prevent from monetary losses. It is better for the trader to invest to gain small and big profits when trend is in the direction estimated. However several options exist for traders to use in cases with opposite direction; stop losses, trailing stops or oscillators are able to predict opposite trends and corrections.
How to use stop signals.
The mostly used stop signals are 5 in number:
1. Max stop loss signal is used when the entire initial investment set for a opened position are lost.
2. Trailing stop keeps a check on the main trend and so closes all positions when a certain amount of existing profit is lost.
3. Profit target stop is used to close a position once after achieving a preset amount of profit.
4. Breakeven stop permits an estimation of the profit level for the existing market. If market generates profits beyond the estimated level, the stop assures an exit from the position, thus securing the profit funds.
5. Inactivity stop raises the signal when the market fails to earn a preset amount of profit in a preset time period.
Additionally, trader must consider signal’s size. Stop signals are categorized into close and distant. In the best of cases stop losses should be set keeping a margin of inadvertent movements in prices and should be sufficient enough to easily being a risky trade under control.
The correct use of oscillators and trend indicators
The indicators take time to assess market movements before sending out a signal. So the trend might have shifted in opposite direction during this estimation time. So it is imperative to set stop losses to prevent traders from losing profits.
In such scenarios using oscillators would be a better selection. Oscillators are able to give good results in cases when there exists doesn’t exist any main trend and market dynamics show narrow corridor in market prices. Not only do oscillators identify limits in market corridors but can help in predicting short terms in market (aka oversold or overbought markets) when used in conjunction with prevailing tendencies in the analysis drawn from price graphs.
Full course How to develop forex trading system we can see at youtube in 3 videos:
Requirements of a trading system?
Besides considering the monetary resources, the system chosen for trade must match with the psychological temperament of the trader. Trader ought to be calm and controlled in his behavior till the very end of the trade.