What Is One of the Most Common Mistakes that Forex Traders Make?

Category: Forex Market Analysis and Signals | Sunday, June 22nd, 2008

Before analyzing the currency pairs, I’d like to talk about one of the most common mistakes that forex and also stock traders make. I have already made the same mistake several times and I still make it if I enter to a trade before enough analysis and correct prediction. This common mistake is selling above the support line and buying under the resistance lines. A support line is a line that doesn’t let the price goes lower. So if you sell short when the price is retesting a support, it is highly possible that the price goes up. A resistance line is a line that doesn’t let the price go higher. So if you buy, the price may go down.

Nobody can say when a support or resistance will be broken. Sometimes they last for several years. You have to know that a support/resistance that has been able to control the price for a long time and have been retested by the price for several times but could not be broken, can last for a longer time.

So why do the traders make such a mistake?

There are two reasons for that. 1- Some traders think and predict that the price can break a support/resistance line this time that the price will retest it. They may do this prediction through fundamentals (news) or just by following their emotions and imaginations. 2- Some traders are not good enough in technical analysis and finding the support/resistance lines.

Even if you are a fundamental trader, you have to be aware of the support/resistance lines. An important news can break a support/resistance line but it doesn’t have any guarantee. For example it is several years that EUR-USD has been going up. So you can say that it may keep on going up for several more years and so you buy and keep your position. It may keep on going up but please note that any market, has a limited and special capacity. The capacity of a market can be added but it needs some special conditions.

Going up for several years doesn’t mean that it will go higher and visa versa. So one of the other things that a trader should not do is buying under a resistance and selling above a support line. You have to wait for a true breakout.

EUR-USD:

In the weekly chart the price is moving around the 161.80% level. This level is working as resistance currently. Although it seems it became broken up at about 10 weeks ago (#1 in the image below), it can be considered as a false breakout because the price couldn’t go higher after that and started going down. Then the broken 161.80% level that was a resistance line, couldn’t work as a support after breakage and the price went down easily. The 161.80% level became retested as a resistance line again about 5-6 weeks and also 3 weeks agoÂ (#2 and #3 in the image below) unsuccessfully.

Also the Bollinger Middle Band is working as a strong support. So If you are a swing trader and you have no open position already, You need to wait. You can take a long position if the price truly breaks up the 161.80% level and also the thick brown line. Also if the price breaks down the Bollinger Middle Band and then the thick green line, you can take a short position.

The daily charts says that the price is going up to retest the resistance levels once again. RSI also admits this. The price has formed a channel between 1.5922 and 1.5326 levels.

The 4hrs also shows the upside but please note that it may go down - at least a little - if the price and also the RSI touch the thick red lines. I expect the RSI to retest the red line sooner than the price.

So those who have long positions according to daily and 4hrs can keep their positions and hopefully the price will keep on going up. Move your stop loss to 1.5580.

Those who have no position should wait. We need to see if the price will go up to breakup the resistance or will change the direction.

GBP-JPY:

I have found 5 levels in the weekly chart that have been used to work as support/resistance in the past few years. Please find the same levels in your charts and find the points that these levels have been retested by the price.

The 5th level - that has been broken as a support - is supposed to be retest as a resistance. This the what the RSI admits. So the main direction of the market is upward.

In the daily chart, the RSI shows two support levels. The first level is being retested now. If broken down, the price will go down to retest the second level but as the weekly chart is Bullish, the second level may act as a strong support and the price will start going up again. We have to wait and see. The same story happened during the past March, April and May.

Here below I am showing you the support/resistance levels in the 4hrs chart.

Further Reading:

3 Comments:
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Comment by darrell

2008-07-02 12:54:44

you must be on R&R…. :+}

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Comment by Burnsie

2008-08-08 14:02:24

The point about forex and pip trading is that folks tend not to first learn the process and check to be sure it is not a rip off, a scam, or fraud. Knowledge and education should be the very first step before one invests the hard earned money. With proper training one then has a better chance of doing well. The web site http://best-forex-guide.com shows the forex programs that one should review and learn from. They have all proven to work, are not scams, rip-offs or fraud.

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Comment by silas

2008-09-19 02:49:50

i will like to listing or having your forcast/lecture in my mail

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