Thus look again at the chart as a loss maker and think how much you could lose (the waves are going against you). High leverage and this tendency is problematic, because it allows you to have more taken by the waves. Even a stop loss won't help you if you keep going, it is just many small bites making a big meal of your cash, until you get a margin call.
Even if the resistance is a breakout, the tendency is to exit before than happens because of time or volatility, and anyway most breakouts retrace back significantly or even become serious reversals – or just volatility. Resistance is a dangerous place to be, there is a lot of positioning going on which moves price up and down. Part of the steepness of the learning curve of forex is not to do all this.
The point about a clear candle pattern (like an evening star) or a divergence on RSI and prices or a head and shoulders or any other move like this is you will get most of the move if it happens and you stay in, they are great things. But if it does not then you are in at resistance again (at a local level of support).
The point about forex is these patterns tend to work, because the trading programs and systems will activate and the market likes to move in a direction, but the question is always, is this just a program reaction and if it is when should you get out. One could ask as well is their clear appearance a program consequence.
There are many ways to deal with this (consult those expert in trading methodologies for trading advice, this blog has referred to a number of them), but this is the reality of forex, computer or system driven structural moves which may or may not be followed through.
But I will say look for clear well known reversal patterns, but if they are reactions you need to enter near the reversal point, which differs them from equity patterns where you tend to have more room.
The concept of confirmation is a tricky one, I would prefer myself a sense of coherence rather, if it is possible. Confirming patterns or indicators may simply be showing the same thing...but it may be expert traders can see when it is coherence with underlying structure, there may be a strong reason to follow them or keep on eye on their trades.
In all events the risk appears essentially because patterns are imposed on underlying structure which may not be or become coherent with that pattern (i.e. what this blog called following structure not patterns). Now working out more systematically if the structure coheres with that pattern is something else.
But that is where multiple time frames are useful, but as this blog has pointed out there are problem with this and it may well be the case this underlying structure is basically hidden, possibly because of the adversarial nature of this market.
Any clarity is bid and sold away quickly, as anybody who has tried to exploit structural regularity discovers (for example what happens when some liquidity disappears when a market closes). Past structure helps as well, it provides a reference which can direct coherence in some cases.
But the human brain is your greatest weapon, it is good at resonating with structure, that sense of: 'I know the market is turning', but take careful account at order flow structure to enter, that tends to fake out a lot of good intuitive trading decisions.
The money and the thrills is a motivation to learn and stay with forex. This blog does not give financial advice, you need to consult an advisor for this. But there are ways to use high leverage in ways which do not cause financial disaster as you learn. I find micro lots useful for example, but there is more in terms of management you need. Consult an expert.
When you are learning something and getting stuck it is a good idea to take breaks and let your mind process things. Things can be clearer when you go back in. The first programing language I ever learned was LISP, an AI language based on recursive list processing (as fiendish as it sounds). That was a steep learning curve, to put it mildly, but the way I got it was to take a break at my mother's house, then go back to it. Downhill all the way after that ;)
© 2010 Guy Barry - All Rights Reserved.
