Analysis Toolbox – The Building Blocks
By Jody Samuels
This article in The Trader’s Indicator Series is the first mentoring session which lays out the foundation for what’s to come. In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. Now we will talk about the mechanics of trading.
The Building Blocks!
There are certain skills that a trader needs, which I call the building blocks for building strategies and trade plans. These building blocks support the skills required to read the charts like a story book. Each chart tells a story about what part of the market cycle we are in and once we understand how to read the various market cycles, we will be better apt to trade what the chart is telling us.
The tools in the toolbox help traders to stick with their positions during trend moves, to know when the end of the trend is near, and to understand which indicators to use during trend and sideways markets. By understanding a basic approach to the market cycles through Elliott Wave Analysis, a trader will be more skillful at navigating the markets, similar to using a GPS when navigating the roads.
Trends and Market Cycles
Let’s begin by discussing trends and market cycles, two of the key building blocks in the Analysis Toolbox. There are only three things that a market can do: go up in an uptrend, go down in a downtrend or move sideways in consolidation or retracement. A trader learns how to identify trending vs. sideways markets with an understanding of the market cycles across different time frames.
We often hear from the trading world that “the trend is your friend”. What does that really mean? It means that price may move in one direction and stay there for a long time. And if that’s the case, trading with the trend will be profitable.
Usually if the long-term trend is up, you want to be long; if the medium-term and short-term trends are also moving in the same direction, that provides added confirmation to go long. The same concept holds true for going short when the markets trend. Nevertheless, we know that markets move in cycles. It is possible that short-term downward movements will occur within the longer-term uptrend. For example, if the daily long-term trend is up, the short-term 15-minute trend might be down on any given day as it works its way through the short-term market cycles.
Traders who keep the big picture or big trend in mind are more likely to hold positions longer, take trades in the direction of the trend, and really understand how to trade the cycles on the smaller time frames. For example, the smaller time frames will cycle up and down, moving from trending to sideways markets, within the context of the bigger time frame trend direction. When the bigger time frame is trending up, the trader’s job is to buy the dips on the smaller time frames, and keep buying until the end of the trend. When the bigger time frame is in a downtrend, the trader’s job is to continue to sell the rallies. (See accompanying chart of the weekly GBP/USD). Next week we will delve into trend indicators.
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.