Category — Forex Trading Techniques

Many people believe that the financial markets are totally random. The random walk hypothesis is a financial theory that states the price of a market cannot be predicted. Economists have historically accepted the random walk hypothesis. Professor Burton G. Malkiel, of Princeton University was the first person to propose this idea.

Yet many people can make a living trading the financial markets, making money time and time again. So it often makes me wonder, if the markets were random how can they do that.

Have you ever wondered how they were doing it?

Notice The Regular Spacing In Red…

I’m Mike Haran and I’m a full time trader, and I believe that the financial markets are certainly not completely random and can move with the precision of a swiss watch. The markets may appear to be random, in fact they obey the laws of chaos, I have seen markets go into fribulation before they collapse, just like a human heart, the frequency doubles then the market collapses. The markets even appear to repeat moves in time with an amazing regularity.

If you can find the correct swing in time lets call it the master swing it is possible to predict the next swing in the market with amazing accuracy. Not only that but that swing length will repeat all the way through the wave structure. Sometimes running from high to high, high to low or low to high. The thing that makes the market difficult to trade is the knowing where the next swing will be projected from.

Some People Might Say That I’m Cherry Picking…

NON RANDOM MARKET BEHAVIOUR

The non random nature of the market is very well illustrated in this example of the GBPUSD on the daily chart. On the 7.1.2010 the GBPUSD made a low, this was then followed by a second low on the 22.1.2010. This distance in time was then copied and projected from either a low or high as this wave continued to decline.

You can see that each projection points has resulted in a short term reaction against the trend in each case. Using this time cycle it is possible to estimate where the next reversal in the GBPUSD should occur, the proposed dates would appear to be the 1st April 2010 or the 7th April 2010.

The cyclic nature of the markets and reoccurring repeating patterns would seem to indicate that far from being random, the markets do seem to behave in a structured way. This structure is then disturbed by seemingly chaotic activity where the markets will suddenly fracture and move rapidly in another direction seemingly at random. The markets are thought to be a non linear dynamic system composed of a trend component and highly random price element. However, in these random move repetitive patterns form which appear to offer a predictive analysis of future price movement. This is often referred to as pattern trading.

By Mike Haran

http://www.haranfx.com

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Recently I have noticed that my target levels are being exceeded by relatively small amounts, around 30 pips or so. This is very frustrating for me and I am sure that many of you might also be getting stopped out. Therefore I decided to give you a small technique that may or may not already be obvious to you.

Usually when a level reacts as in the case of the GBPUSD, the move almost always gives a relatively small profit of 70-90 points. I would advise that those of you trading my analysis lock in 70-90 points on the first reaction – there is usually always the opportunity to place your stop at break even at some point in the trade.

News

For those of you that want to use a more effective method of trading, I would like recommend my forthcoming ebook “Precision Trading”. In my book I will show you how to run a trade and also how to extract money from your tradea even when you only get a relatively small move.

Please lookout for more details regarding the launch of Precision Trading on the blog if you are interested.

We are at a point where we might see a correction in the AUDUSD, the levels that I will be interested in are 0.89221 and 0.90347, as always use a stop and be aware that these patterns can fail. I don’t know which level will be the one it turns on so as always in trading you are in effect making an educated guess. When you are wrong your stops will save you from financial ruin.

Please see the diagram below (Click to enlarge. The diagram will open up in flickr.com, then click on the “allsizes” icon.)

Errata, GBPJPY not GBPUSD!

Thanks DAZZA for bringing this to my attention.

I typed GBPUSD and I meant GBPJPY, sorry guys  things get a little hectic around here sometimes.

Here is the post again and the new diagram.

I have a turn in time coming up on the GBPJPY today or tommorrow, as it stands this evening the .886 level was touched, and not breached as of yet. As always you can wait for the market to take out todays bar high, or you can wait for the first wave in the sequence to form, and seek to trade  a pull back which will always come. I was in at the .886 level at 148.618 with a 30 pip stop, target for this trade is the about 158.980, so the RR is good.

Please click below diagram (it will open up in another browser window, click “all sizes” to enlarge):-

I am not a great fan of just fib ratios, so I would want to see some confirmation that this level will hold. So far we have had 1.06241 as our lowest low. What would make me think that a bottom was in would be a break of the high at 1.09301. What we have at the moment is some strong support. A couple of time projections crop up at 20.09.2009 and 24.12.2009. I use time and price in combination and look for key levels in price and in time. Time like price can be estimated in advance as an additional guide. The .618 level in price occurs close to a time projection, this does not mean it will spin on its heels here, and go up, what it does mean is that you should be aware, that a potential turn might be close.

Please click below diagram (it will open up in another browser window, click “all sizes” to enlarge):-

But I do have an ultimate hard stop and so should you.

EURGBP is showing a high degree of clustering at 0.90087-0.90421, the internal wave structure does not look like we are quite ready to put a top in yet, however we are close.

Please click below diagram (it will open up in another browser window, click “all sizes” to enlarge):-

A decline below 0.85398 would indicate that we have a top in place at 0.86768, the target for this trade would be 0.81975 and the termination point is 0.81975 around the 4th October 2009 if this fractal form plays out as hoped. I have entered the trade at 0.86249 which was the .618 retrace of the last swing, I have placed my stop just above the last high at 0.86768. The risk on this trade is 50 points, if you wait for the confirmation, which has a higher degree of success you risk would be 100 points. I prefer to take trades with a lower risk and a higher probability of failure, but thats just my personality type.The potential profit target is 351 points so which ever way you play this trade the risk to reward is good.

Check out the diagram below, (click “All Sizes” to enlarge).

If you are a fan of Elliot Waves then please have a look at the chart of the EurUsd. Elliot waves are certainly something that I never had any joy with. I would recomend that any one wanting to trade Elliot waves should find a dark room and have a good lie down for an hour or so until the feeling passes. According to Elliot waves unfold in 5’s and threes. Well they might have done in his day, but they don’t any longer, it is not uncommon to see 5,7,9,13 waves up. I studied Elliot waves for a bit, and sometimes I refer to them, however I don’t trade according to them as they are only good after the fact.

I have 2 Gartley patterns completing at roughly the same point in time and price on the EURUSD. In itself this is not that unusual, what makes it more interesting is that consumer sentiment just came out far better than expected. This caused a big sell off in the EURUSD of 40 pips or so, I went to brew a cup of tea only to see the move had virtually reversed up from the daily pivot, when I came back. However I sold at the .786 retrace and now I am going out as it has been a real slow day today. If this market does decline from here, it would be a 200 point plus move not 30 pips I would be after.

Failure of the EURUSD to exceed the old high at 1.46337 might mean a potential top lasting days if not weeks might be in place. Certainly the EURUSD has had a good long run up. A stop of 30 pips should do it, beware of a retest of the high once the dealers get wind of a sell off.

I strongly favour a reversal in the USDJPY certainly around the 89.90 area, so far we have had a sectacular decent, but all sell offs eventually hit a wall and reverse. I have put a date in where I would expect to see the reaction occur by 18.09.2009. Now that date has more than one significance for me, but certainly plus or minus 1-2 days is where I would be looking to get in.

(Click to open and choose other sizes to enlarge image)

I will be looking for a reaction on one of the levels, and I will only buy at the close of the reaction bar.

We could be setting up for a potential top in the NZD/USD, my target levels are shown in blue at .74053 and .72900, we have hit the .618 level on the monthly chart of the complete wave down and we might well have a reaction here. Having looked at the COT report (Commitment of Traders) none of the commercials are long the NZDUSD, which makes me wonder whats holding it up?

See Diagram below (CLick to enlarge):-

Looking on the daily chart it looks like we might have 5 waves up, I am not a fan of Elliot waves, but I can count 5 wave up in this last leg. Elliot waves are best left alone in my view, because they are so prone to failure

Yesterdays low was broken by todays candle, which for me would be a shorting signal, stop on yesterdays high plus 20 points or so making a risk of 50 pips or so

EURGBP

Potentially we have a possible short term top formation target around .86749 stop .88398, beware of setting your stop at the last high, the market has a way of catching those with micro stops. Better to give an extra 20 pip stop and get a good trade than go in too tight and get stopped out. Market currently at .88007 which is a nice triple zero nunber.

See Chart:-