Tag Archives: Educational Material

Top 3 Expert Advisor Design Tips

forex robot

Almost nobody turns their first EA into a winning strategy. Like any new task, you’re more than likely going to fumble the first few attempts. It takes time and experience to anticipate design mistakes that may lead to trading losses.

I cannot promise that following this guide will turn your expert advisor into a winning strategy. But, what I can promise is that you’ll be less likely to lose if you following these three simple tips.

Time of Day

The forex market has a personality. Each currency pair also acts somewhat differently from all the others.

We’ve all seen the warnings to never trade the Asian session, but sometimes it makes sense. Australia shares that time zone. It’s one of the most liquid times of day for AUD/JPY.

You shouldn’t avoid sessions just because they are generally bad. On the other hand, you shouldn’t be trading all time sessions either.

Adding time restrictions is one of the simplest and easiest ways to only trade when it makes sense.

Choose the right currency

A strategy is more likely to outperform on one currency over another. So, it makes sense to focus your limited trading capital where it stands the best chance of suceeding.

EAs fall into one of of two categories: range trading or trend trading. Forex pairs fall into the same categories, too. Make sure thee currency pair that you’re trading matches the expert advisor’s style.

The GBP/JPY is among the most notorious trending pairs. The EUR/GBP is a total snoozefest. Trying to trade a trending EA on the EUR/GBP is a surefire loser.

Stop trading so much

Everyone wants a scalper EA. Unless you have a compelling reason to scalp, it’s not a good idea. Trading costs a lot of money.

Consider a strategy that trades 1 standard lot once per weekday. That’s about $20 per trade in spread costs on the EURUSD for most brokers. Multiply that by 260 (the number of trading days per year) and you come out with an annual cost of $5,200. That is a steep hill to overcome.

It makes a lot more sense to kick back and let your expert advisor do what it needs to do.

Conclusion

Trading is hard. Making an EA that earns a profit over the long run is even harder.

My advice is to focus on doing the big things right and worry about the little things later. It may seem obvious, but forcing a trend trading method onto a range bound pair is something many people try. As my old boss loved saying, “Remember the 40,000 foot perspective.”

You have to fit the expert advisor into the general environment. Only once that’s done will you be able to start tweaking the finer details.

Author: Shaun Overton

Shaun Overton writes a forex blog on trading with expert advisors for his company OneStepRemoved.com. The company specializes in building automated trading strategies with a particular emphasis on MetaTrader.

Fibonacci in Nature: The Golden Ratio and the Golden Spiral

The more you learn about Fibonacci, the more amazed you will be at its importance

By Elliott Wave International

If you’ve studied the financial markets, even for a short time, you’ve probably heard the term “Fibonacci numbers.” The ratios and relationships derived from this mathematical sequence are applied to the markets to help determine targets and retracement levels.

Did you know that Fibonacci numbers are found in nature as well? In fact, we can see examples of the Fibonacci sequence all around us, from the ebb and flow of ocean tides to the shape of a seashell. Even our human bodies are examples of Fibonacci. Read more about the fascinating phenomenon of Fibonacci in nature.


Let’s start with a refresher on Fibonacci numbers. If we start at 0 and then go to the next whole integer number, which is 1, and add 0 to 1, that gives us the second 1. If we then take that number 1 and add it again to the previous number, which is of course 1, we have 1 plus 1 equals 2. If we add 2 to its previous number of 1, then 1 plus 2 gives us 3, and so on. 2 plus 3 gives us 5, and we can do this all the way to infinity. This series of numbers, and the way we arrive at these numbers, is called the Fibonacci sequence. We refer to a series of numbers derived this way as Fibonacci numbers.

We can go back to the beginning and divide one number by its adjacent number – so 1�1 is 1.0, 1�2 is .5, 2�3 is .667, and so on. If we keep doing that all the way to infinity, that ratio approaches the number .618. This is called the Golden Ratio, represented by the Greek letter phi (pronounced “fie”). It is an irrational number, which means that it cannot be represented by a fraction of whole integers. The inverse of .618 is 1.618. So, in other words, if we carry the series forward and take the inverse of each of these numbers, that ratio also approaches 1.618. The Golden Ratio, .618, is the only number that will also be equal to its inverse when added to 1. So, in other words, 1 plus .618 is 1.618, and the inverse of .618 is also 1.618.

This is a diagram of the Golden Spiral. The Golden Spiral is a type of logarithmic spiral that is made up of a number of Fibonacci relationships, or more specifically, a number of Golden Ratios. For example, if we take a specific arc and divide it by its diameter, that will also give us the Golden Ratio 1.618. We can take, for example, arc WY and divide it by its diameter of WY. That produces the multiple 1.618. Certain arcs are also related by the ratio of 1.618. If we take the arc XY and divide that by arc WX, we get 1.618. If we take radius 1 (r1), compare it with the next radius of an arc that’s at a 90° angle with r1, which is r2, and divide r2 by r1, we also get 1.618.

Now here are some pictures of this Golden Spiral in various aspects of nature. For example, on the left is a whirlpool that displays the Golden Spiral and, therefore, these Fibonacci mathematical properties. We also see the Golden Spiral in the formation of hurricanes (center) and in the chambered nautilus shell (right), which also happens to be a common background that Elliott Wave International uses for a number of its presentations and graphics.

We can also see the Golden Ratio in the DNA molecule. Research has shown that if you look at the height of the DNA molecule relative to its length, it is in the proportion of .618:1. If we look at the components of the DNA molecule, there is a major groove in the left section and a minor groove in the right section. The major groove is equal to .618 of the entire length of the DNA molecule, and the minor groove is equal to .382 of the entire length.

This graphic of the human body also shows how the Golden Ratio exists in certain relationships of the human anatomy.


Learn How You Can Use Fibonacci to Improve Your Trading

If you’d like to learn more about Fibonacci and how to apply it to your trading strategy, download the entire 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading.

EWI Senior Tutorial Instructor Wayne Gorman explains:

  • The Golden Spiral, the Golden Ratio, and the Golden Section
  • How to use Fibonacci Ratios/Multiples in forecasting
  • How to identify market targets and turning points in the markets you trade
  • And more!

See how easy it is to use Fibonacci in your trading. Download your free eBook today >>

(VIDEO) GBP/USD: How Elliott Wave Patterns Predicted Recent Drop Under 1.60

A great 6-minute video lesson in Elliott wave analysis of forex markets

By Elliott Wave International

Every Friday, the editor of EWI’s forex-focused Currency Specialty Service, Jim Martens, records a video update for his subscribers. Each video delivers a real-life lesson on Elliott wave application to forex markets.

Watch this 6-minute video Jim recorded on October 12. Jim called for cable (GBP/USD) to drop below 1.60 in wave 5 of the developing Elliott wave sequence.

Ten days later, on October 23, GBP/USD fell as low as 1.5925.


Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success”

Here’s some of what you’ll learn:

  1. Which Elliott waves to trade
  2. Which Elliott waves set up your forex trade
  3. When your analysis is wrong
  4. Guidelines for projecting price targets
  5. How to evaluate an Elliott wave structure
  6. How to use the bigger picture to give you perspective on the market’s next major move

Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading.

All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline (VIDEO) GBP/USD: How Elliott Wave Patterns Predicted Recent Drop Under 1.60. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

USD/JPY: Lemons into Lemonade

How Elliott wave analysis helps you as a forex trader with built-in, risk-defining safeguards
November 29, 2012

By Elliott Wave International

Elliott wave analysis is not a crystal ball. (No market-forecasting method is.)

But here’s what is remarkable: Even when your Elliott wave forecast doesn’t pan out, you have built-in safeguards to alert you — and help you manage risk. Here’s a real-life example.

Going into the November 14 low, USD/JPY charts had been showing an impulsive downward Elliott wave pattern. Impulses are 5-wave moves, but on November 13-14, the pattern looked incomplete: the fifth wave down seemed to be missing.

Here’s a chart our Currency Specialty Service subscribers saw early on November 13:

So, our analysis on November 13 suggested that USD/JPY would fall further. But USD/JPY just would not fall; instead, it went sideways.

That suggested to our Currency Specialty Service team that the wave (4) you see in the chart above was extending. Perhaps it was developing as another Elliott wave pattern — maybe a contracting triangle? This chart and analysis described to subscribers that scenario:

“A bearish fourth-wave triangle is another idea that’s in a position to yield new lows in wave (5). Resistance rests at 79.655/765.”

Note that line: “Resistance rests at 79.655/765” — it represents the very risk-defining safeguards I mentioned earlier.

How? Well, there are things that Elliott wave patterns just are not allowed to do. In a contracting triangle (an A-B-C-D-E formation), prices must stay within converging trendlines — and they cannot overlap the start of wave A, the origin of the pattern. Resistance at 79.655/765 was exactly that: the price point where the contracting triangle interpretation would be invalidated.

Practical application: If you were bearish on USD/JPY on November 14, you could have used the price area of 79.655/765 to manage your position risk.

As you probably know, USD/JPY did not go sideways for long. Nor did it go down. Soon after, it went higher and breached that key resistance level:

When one Elliott wave pattern ends, another one begins. As soon as that key resistance in USD/JPY was breached, a new road map for the Japanese yen became clear.


Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success”

Here’s some of what you’ll learn:

  1. Which Elliott waves to trade
  2. Which Elliott waves set up your forex trade
  3. When your analysis is wrong
  4. Guidelines for projecting price targets
  5. How to evaluate an Elliott wave structure
  6. How to use the bigger picture to give you perspective on the market’s next major move

Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading.

All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline USD/JPY: Lemons into Lemonade. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Here’s a down and dirty technique that can improve your currency trading decisions

by Jack Crooks

Jack Crooks

There is no doubt about it; currency analysis is not an easy game. Why do I say that? Because there are different types of players, playing for different reasons, trading different size positions, over varying time frames, and utilizing different forms of analysis.

This I believe is one of the big reasons why if you follow the foreign exchange market sometimes you just scratch your head because price action on a particular day may have had nothing to do with the news or price action in other asset classes.

I think if you have a better understanding of the different players, reasons, and trading styles it will help you understand why, at times, this market can move so differently than other asset classes, such as stocks, bonds, and commodities.

Different Types of Players
and Different Reasons

These can include:

  • Corporations hedging exposure on cross-border sales of goods and/or major capital transfers.
  • Banks providing these corporations the hedge while reducing their own exposure.
  • Equity fund managers hedging the foreign exchange impact on their international portfolios.
  • Major funds and propriety trading desks of major financial institutions playing for speculative gain.
  • Retail players, like you and me, playing for speculative gain.

Don’t forget central banks that may be doing currency swaps with other central banks or directly intervening in the market for one reason or another.

Each of these players may have different time frames, such as:

  • Multi-year
  • Multi-week
  • Multi-day
  • Intraday

And they use different types of analysis, including:

  • Fundamental economics
  • Technical price action
  • Sentiment based on survey and positioning data
  • Correlations

One other key point about currencies: Currency trading is real money! Players from all over the world use money (the forex market) to invest in the various global asset classes, as mentioned: Stocks, bonds, and commodities. Therefore, forex plays a dual role as fuel to drive prices in those markets and as a speculative or investment asset class in and of itself.

And it is precisely because forex is the fuel that drives various asset classes that you tend to get very nice inter-market correlations in currencies when compared to stocks or bonds. Therefore, I can’t stress enough how important using simple inter-market correlation analysis can be to either finding trading opportunities or validating or invalidating your current market view.

Correlation Analysis Made Easy

Inter-market correlation analysis tends to work well for currencies because global capital ebbing and flowing across various asset classes and markets is the source of supply and demand for currencies. And inter-market correlations help you follow that money flow and create rationales and scenarios.

There are a couple of basic ways to do inter-market correlation analysis. You can “run the numbers” or you can use the “overlay” technique. Let me briefly explain the two.

By “running the numbers” I mean you compare differing price data with another, usually using a spreadsheet, to calculate the exact correlation over whatever time-frame you use.

With “overlay,” you would put the chart of one price series over top of another. It’s a down and dirty visual analysis that allows you to see if the two price series are moving together in some type of correlation — positively or negatively — or does it just look random.

I like to use the “overlay” technique because it lets me view a lot of different series quite quickly without being bogged down in the minutia.

When using correlation analysis for currencies I compare them to the following asset classes:

  • Fixed income indices (government domestic and international)
  • Equity indices (domestic and international)
  • Commodities (oil, gold, and copper primarily)

Here’s a current example of one I am looking at.

Australian dollar-U.S. dollar versus
Chinese Stock Index Daily

This series, as shown in the chart below, used to be tightly positively correlated i.e. they moved consistently in the same direction. And it made sense in that positive growth and sentiment about China should engender the same feelings about the Australian dollar because the Australian economy is so highly dependent on China for its own growth.


But if stocks are a lead indicator for economic activity, and they may be saying Chinese growth expectations are too high, why did the Australian dollar continue to rally?

The short answer is that we don’t really know.

We can suggest reasons. For instance:

  • Maybe the Chinese stock market isn’t a good lead indicator for China’s economic activity as it is government controlled;
  • Maybe the Chinese and Aussie past correlation wasn’t accurate, and the movement in the Australian dollar is actually about its high relative yield compared to the U.S. dollar; or
  • This is a big divergence in correlation that will soon be remedied by either a big rise in Chinese stocks or a big fall in the Australian dollar or a combination of the two.

The fact is there is no Holy Grail in correlation (inter-market) analysis. Often we don’t know the real drivers of correlations, and we don’t know who leads and who follows. But I think it does help validate the other analysis you are doing. It can provide valuable information; it is another piece of the puzzle, if you will.

Here is how I interpret the divergence in the Aussie and Chinese stocks:

To me it represents a longer term investment opportunity i.e. bearish the Australian dollar, when added to the already bearish view on China for lots of fundamental reasons I shared last week.

I think the path of Chinese stocks is telling us more about China than what I refer to as the “oversized” premium still embedded in the Australian dollar. Much of that premium is based on the high positive yield differential favoring Australia.

But that is changing. And I expect the Reserve Bank of Australia to continue cutting interest rates given their growth concerns, putting a healthy dent in that yield premium going forward.

Here is another example for you to consider:

U.S. Dollar Index versus
Dow Jones Industrial Average (DJIA) Weekly

What I have noticed when comparing these two price series is that the prior tight negative correlation i.e. rising stocks and falling dollar and vice versa, has changed. Now the dollar has generally been moving higher along with the U.S. stock market. No longer are we witnessing a pure “risk on” and “risk off” environment as we did up through 2010.


This tells me money is flowing to the United States for both safe haven and relative investment opportunity. During the prior bull market cycle in the dollar, from early 1990s through 2001, we saw this same correlation — rising stock prices and a rising dollar. Stay tuned on this one!

So that is how I use inter-market correlations. I hope you see how powerful it can be and easy to incorporate into your own style of analysis to help push the odds of success in your favor.

Best wishes,

Jack

How to Build Consistent Trading Success

EWI’s senior analyst Jeffrey Kennedy shares with you practical advice on what it takes to improve the quality of your trades.

By Elliott Wave International

You’ve heard it all before:

  • If you want to trade using Elliott wave analysis, to succeed you first need to understand its rules and guidelines.
  • You need a clearly defined trading strategy (what? when? how? etc.) and the discipline to follow it.
  • Additionally, your long-term success depends on adequate capitalization, money management skills and emotional self-control.

Do you meet these qualifications, yet still struggle in the markets? If so, you may find some helpful advice in this quick trading lesson from Elliott Wave Junctures editor Jeffrey Kennedy:

We all know that the Elliott Wave Principle categorizes 3-wave moves as corrections and, as such, countertrend moves. We also know that corrective moves demonstrate a stronger tendency to stay within parallel lines, and that within A-B-C corrections the most common relationship between waves C and A is equality. Furthermore, we know that the .618 retracement of wave 1 is the most common retracement for 2nd waves, and that the .382 retracement of wave 3 is the most common retracement for 4th waves.

Knowing that all of these are traits of countertrend moves, why do traders take positions when a pattern demonstrates only one or two of these traits? We do it because we lack patience. We lack the patience to wait for opportunities that meet all of our criteria, be it from an Elliott wave or another technical perspective.

What is the source of this impatience? It could be from not having a clearly defined trading methodology, or not being able to control emotions. However, I think impatience stems more from a sense of not wanting to miss anything. And because we’re afraid of missing the next big move, or perhaps because we want to pick up some lost ground, we act on less-than-ideal trade setups.

Another reason traders lack patience is boredom. That’s because — and this may sound odd at first — “textbook” Elliott wave patterns and ideal, high-probability trade setups don’t occur all that often. In fact, I have always gone by the rule of thumb that for any given market there are only 2-3 tradable moves in your chosen time frame. For example, during a normal trading day, there are typically only two or three trades that warrant attention from day traders. In a given week, short-term traders will usually find only two or three good opportunities worth participating in, while long-term traders will most likely find only two or three viable trade setups in a given month, or even a year.

So as traders wait for these “textbook” Elliott wave patterns and ideal, high-probability trade setups to occur, boredom sets in. Too often, we get itchy fingers and want to trade any chart pattern that comes along that looks even remotely like a high-probability trade setup.

The big question then is, “How do you overcome the tendency to be impatient?” Understand the triggers that cause it: fear of missing out, and boredom.

The first step in overcoming impatience is to consciously define the minimum requirements of an acceptable trade setup and vow to accept nothing less. Next, feel comfortable in knowing that the markets will be around tomorrow, next week, next year and beyond, so there is plenty of time to wait for the ideal opportunity. Remember, trading is not a race, and over-trading does little to improve your bottom line.

If there is one piece of advice I can offer that will improve your trading skills, it is simply to be patient. Be patient and wait for only those textbook wave patterns and ideal, high-probability trade setups to act. Because when it comes to being a consistently successful trader, it’s all about the quality of your trades, not the quantity.

Developing patience isn’t easy — yet, if you are serious about improving the quality of your trades, it is vital.

How much more successful would you be if you could develop the patience to act only on high-probability trade setups?


Jeffrey Kennedy shares his 20 years of wisdom in analysis and trading — to help you decide when to act — in a new FREE report, 6 Lessons to Help You Find Trading Opportunities in Any Market.

This report includes 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow.

Get Your Free Trading Lessons Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline How to Build Consistent Trading Success. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The 80/20 Trade: “Pounce Like a Cat”

Patience Can Be Rewarding

By Elliott Wave International

Copy the tiger when stalking and capturing a “pounce-ready” trade.

Tigers know the prey they covet is elusive: they show great patience and care when stalking the target.

I came across this description of the tiger’s technique:

“When hunting, this cat…may take twenty minutes to creep over ground which would be covered in under one minute at a normal walk…the tiger will sometimes pause…move closer and so lessen that critical attack distance…before finally raising its body and charging.

“…they wait until a victim comes close and spring up…This ambush method of hunting uses less energy and has a greater chance of success.”

You must “ambush” high confidence trades. Long-time professional trader and teacher Dick Diamond says patience is vital before the ambush.

I talked to Diamond about his famous 80/20 trade, which he means literally — he says it has at least an 80 percent chance of success. It’s the only trade set-up Diamond will take.

————

Q: Could you tell me about the 80/20 trade?

Diamond: The 80/20 trade is based on indicators that create a specific trading set-up. A trader must act on this set-up immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five minute chart, the 80/20 set up may come along a few times a day. If you’re trading a longer time frame, like off of a 120 minute or 240 minute chart, the 80/20 will come along less frequently, but when it does, the opportunity will be bigger. The 80/20 trade can be especially rewarding for position traders. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades.

Q: What emotional factors do students need to work on the most?

Diamond: Traders must be calm and confident. You can’t be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques.

Q: What’s different about trading today vs. when you started out in the 1960s?

Diamond: When I started trading, execution took up to five minutes — now it takes less than a second. Time is money, so computers provide a great advantage to today’s trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.


Get instant access to our FREE report from Veteran Trader Dick Diamond

In this 12-page report, you will learn practical tips and tricks from veteran trader Dick Diamond.

He and his assistant, Roberto Hernandez, share many of their time-tested techniques with you, with excerpts from interviews and course materials designed to accelerate your trading progress.

Download your FREE 12-page report today >>

Complimentary eBook teaches you how to apply Moving Averages to your trading or investing

Dear Trader,

Elliott Wave International (EWI) has released a free 10-page trading eBook: How You Can Find High-Probability Trading Opportunities Using Moving Averages, bySenior AnalystJeffrey Kennedy.

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free eBook. Let EWI’s Jeffrey Kennedy teach you step-by-step how moving averages can help you find high-probability trading opportunities.

Jeffrey’s trading eBooks have been downloaded thousands of times because he knows how to take complex trading methods and teach them in a way you can immediately understand and apply. You’ll be amazed at how quickly you can benefit from Moving Averages with just this quick, 10-page lesson.

Improve your trading and investing with Moving Averages!

Download Your Free eBook Now.

(Don’t miss out. )

Regards,

Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.