What System Do I Use to Pick the Signals in Forex Market?

Category: Technical Analysis | Saturday, February 21st, 2009

Since I have started publishing forex buy/sell signals recently, most of you ask about the system I use to pick the signals. The first time that I started publishing forex market analysis on this weblog, I was used to analyze some currency pairs and show the direction. I didn’t publish buy/sell signals. That was really good and was used to help my weblog users to learn more. Teaching and educating was my most important goal from the first day that I created this weblog but it was really too hard to analyze several currency pairs and then post the results on the weblog everyday. I did my best to keep on doing it but after a while I gave up because it was too time consuming and tiring. I stopped it for about one year but one day I told myself that I really don’t have to publish the analysis everyday. I can just give the signals and then analyze some of the pairs during the weekends when I find some free time. So I could have both the signals to help people to make money and also the education that was the main goal.

This week is almost the first week after about one month that I want to analyze some of the pairs here. Before that I just want to answer some of the questions that I am always asked:

1. What time frames do I use? I look at the weekly, daily, 4hrs and sometimes 1hr charts.

2. What indicators do I use? Japanese Candlesticks is the first and most important thing that I use. If you really want to follow me and learn my system you have to learn the candlesticks signals. I have already written an article about it but I have to make it more complete.

So price chart with the candlesticks are the first and most important things that I use. I do have Bollinger Bands on my charts too. I sometimes take a look at RSI too but my decisions are not made based on its signals.

3. What system do I use? I use technical analysis to find support and resistance lines, pennants, patterns, trends and … . At the same time I use candlestick signals. I do consult Fibonacci numbers too. I also consider the Elliott Waves to be aware of the situation of trends. I have been sitting and watching the formations of trends, patterns like head and shoulders, double and triple tops and bottoms and … for hundreds of hours in small time frames like one minute chart. It is the best time to tell you that the behavior of a currency pair is the same in different time frames. For example all the head and shoulders that a currency pair like EUR-JPY forms in one minute chart look so similar to the head and shoulders it forms in the daily chart. They have the same form, pattern and behavior and effect. The only difference is that in one minute chart you can see at least one head and shoulders everyday but it takes several months to form a head and shoulders on the daily chart.

My eyes and brain are trained to predict the formation of the patterns when they are at the beginning because as I said I have been watching the one minute chart for hundreds of hours (or even more!). So when I look at the daily chart I can easily say that it is forming a double top or head and shoulder and the trend is exhausted and will reverse very soon or this head and shoulders it is forming is just a continuation and the trend will be continued after that. This ability can be gained only through practicing and spending the time that I spent. You can not gain it through back-testing because in back-testing you see the trends and patterns while they are already formed but in live trading you watch them while they are being formed. In live trading you have to predict the next direction whereas in back-testing the bias is in front of your eyes. So you have to watch the trends and patterns while they are forming if you like to become successful and skilled in live trading.

Ok! Now let’s analyze one of the positions we took last month. I try to analyze and write about at least one position every week.

EUR-USD:
SELL Pending Order (7:02pm EST; 12 January 2009)
Entry price: 1.3269
Stop loss: 1.3829
Trailing stop: 80 pips
Take Profit: 1.3169
Result: Triggered the target and made 100 pips

As I said first I check the weekly chart. Candlestick #1 has a big upper shadow which is bigger than the body. This means a bearish pressure. Candlestick #2 which is a small candle reflects the indecision situation of the market. Its small size shows that there were a very small amount of trades during that week and most traders preferred not to take any position and just wait to see what would happen. They thought as the market has been going down for a long time, it just changed its direction but the candlestick #1 made them think that probably it wants to keep on going down. So they just waited. Candlestick #3 worked as a beautiful confirmation indicating that the market wants to go down and as you see candlestick #4 confirmed this strongly. We went short on 5th candle. The arrow shows the candlestick that we went short. So based on the weekly chart, taking a short position was a good decision.

Now let’s check the daily chart. Candlestick #1 and #2 are the candles that formed the long upper shadow for the candlestick #1 in the weekly chart (above). Candlesticks #3 are the candles that show the indecision situation I talked about when I was explaining about the candlestick #2 in the weekly chart. You can easily see the indecision in the shape of these candles. Candlestick #4 confirms the sell signal formed by candles #1 and #2. If I had seen that candle (#4) I would definitely take a short position and my stop loss would be placed several pips above the candle #1. As you see it would go against me the next day (candle) but it couldn’t make me scared and I would keep my short position because candles #1, #2 and #4 could give me the confidence that I needed to keep my short position. I am trying to say that sometimes a good and correct position can go against you and you should not get scared and close your position. Who says that a correct position is a position that goes to profit right away?

Candlesticks #5 and #6 are also good confirmations indicating that the market will keep on going down. On 12th January 2009 I placed a short pending order when the candlestick #7 was formed completely. The entry price was 1.3269 which was about 30 pips below the low of candlestick #7. And as you saw it went down, triggered our pending order and made 100 pips for us (candlestick #8). It was very easy, wasn’t it?

Now the question is would I take another short position the next day? The answer is no because candlestick #8 broke out of the Bollinger Lower Band strongly and it was possible that the next candle would go up and form a buy signal and as you see it formed a Doji.

Further Reading:

24 Comments:
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Comment by priawansyah

2009-02-22 03:35:46

Vahid,,,

It Really Open my mine how you analyze the market. really very helpful to move forward in forex trading. Hope to continously be able to beat the market. Thanks much for your wonderful article

Cheers
pria