When you’re trading Forex, strength and weakness agreements have a tendency to come in handy. One of my favorite indicators for tracking strength and weakness patterns is the ADX. Today, we’ll cover ADX trends and their respective strengths and weaknesses, and an example of ADX weakness in time, on consecutive charts.

That’s some of what’s on today’s video on ADX Trends:

So the first thing you need to have a trend showing on the ADX is for there to be strength showing on a move. If the market moves lower and the ADX increases, that’s a stong move down, and the first step needed to have an ADX trend.

The second component needed is for the market to retrace some of the strong move, and have the ADX decrease, saying that there’s weakness in the counter-strength direction. So if the market moves lower and the ADX increases showing strength, then the market moves higher with the ADX decreasing, that’s the second part of having an ADX trend.

The third and final component is for the market to move farther in the direction of the prior strength.
Then there is an ADX trend on that chart, and that trend is either strong or weak.

In a strong trend, the ADX moves higher than it was at the end of the strong move in the same direction. In a weak trend, the ADX does not move higher than it was at the end of the strong move in the same direction.

Example: The market moves down, the ADX increases - shows strength in moving lower.
The market then moves higher, and the ADX decreases - shows weakness in moving higher.
The market then moves farther down than it was before the retracement up began.

That’s an ADX trend, and it is either strong (if the ADX is also higher than it was as the market moved farther), or weak (if the ADX does not move higher than it was as the market moved farther).

That’s it on the ADX trends. If you have any questions or comments, please leave them and I will get back to you as soon as I can. Have a tremendously successful trading day!

Yes, Risk and Money Management is that important when you’re trading Forex.

The basic risk and money management model is quite simple: it’s just the “previous peak take-out point” type of strategy that, over a sufficient amount of time, has proven itself profitable. That profit is made in trending markets, where the market keeps moving in basically the same direction. The losses incurred using just the basic model can be disheartening and frustrating, incurring many losses in a row, and quite often unacceptable.

The big “but” here is that it is NOT the system, it is a very basic model that will be built upon. Like any other basic models that are intended to be built upon, like any other foundation in any building that is intended to be built upon, it is not the final structure.

Imagine for a moment that you pay someone to build a house for you and stop by one day and there’s only the foundation in place. You wouldn’t immediately assume that you’re going to be moving in as is because the rest of the house isn’t there yet.

This is the same type of thing: this very basic model is only a foundation, and the rest of the pieces to build the full “house” are not in place. Without a strong foundation, the house will not long stand. This foundation is prime to be built upon.

In getting started with the very basic model, you will notice on the chart below that there are no indicators on the chart. All that is there are the bars for one time frame.

The “bars” on the chart above are called “Open-High-Low-Close Bars” or “OHLC bars” because on each bar there is a point which represents each of the Open, High, Low, and Close. The tick on the left side of each bar is the opening price for that bar. The highest point on each bar is the highest price the market reached during the time period of that bar, so the highest point on a bar is the high. The lowest price level on a bar is the low for that bar. The tick on the right side of a bar is the closing price for that bar.

Each bar represents the market action during the time period of that bar. The above chart is from a 5-minute chart, so each bar represents the market action during a five-minute period.

There are other types of charts, but this type, the OHLC bar chart is, in my opinion, very good and very useful, and there is not necessarily any more information on any other type of chart.

What is important about this type of chart is that we can see what are called “peaks”. In order to understand what a peak is, we have to define the characteristics of peaks and see what they look like in their various forms.

A “peak” is defined as “a point or plateau which exceeds the previous and next bars’ same-side extreme.” You can get the idea from looking at your pen and holding the point so it is facing up. You can see that the high point in the middle is higher than the left and right sides. If you then hold the pen upside down, you will see that the point is lower than the left and right sides.

Below you can see a chart with all of the peaks marked except one (can you find it?):

The grayed-in areas show “plateau-type” peaks, where the market hit the same price point during two or more consecutive bars and that price point extends beyond the extreme of both the left and right sides of that plateau. (Can you find the one plateau-type peak which is not grayed? There is one.)

After studying the above chart for a few moments, you can really see what a peak is and what does not constitute a peak. If you do find what you think is a peak by definition, but it is not marked, look for yourself to determine why it is not a peak (except for the one that is not marked).

Also note that it is impossible to have a peak in present time. In other words, there can be no peak in real time, right now, because there is no “next” bar for the current bar to be more extreme than. So in real time, there is never a peak “right now”. That’s a very important point to know.

Now that you know what a peak is, what is a “previous peak take-out”? What we’re talking about here is a previous peak on the same side, and the current bar, the “now” bar in real time, moves at least one tick farther in price. If we’re on the top side of the chart, then we’re looking to see if the market moves higher in price than a previous peak. If we’re on the bottom side of the chart, then we’re looking to see if the market moves lower in price than the last peak on the bottom side, or lower on the chart than that previous peak.

As soon as a new peak forms on the same side, that new peak becomes the last peak, or the “revious”peak. That peak two peaks ago becomes a previous peak, but not the previous peak. Please note that distinction, because later on it will be crucial to your understanding the difference between when I write the previous peak, and a previous peak. The is more specific, and a is general.

Since this “foundation” is the previous peak take-out point, it is the specific form.

So in starting out the foundation with no indicators, we are only relying on previous market peaks on one chart, one time frame, to tell us what to do – in this basic model, which we will not be using as it is directly, but are using to build from – and the chart on the next page will show the previous peaks, and when the previous peak was taken out, at what price level.

[Note that there is version of this basic model that is a previous peak take out, and the basic difference is that any old peak on a side that the price extends beyond, you trade in that direction as long as the peak is wide open to the price. “Wide open to the price” means that from the peak in consideration to the current bar there are no price bars (or candlesticks if you’re using candlesticks) in the way if you were to draw a line from the past peak to the currrent price bar.]

Please pay close attention to the previous peak, and when it was taken out, or the price moved beyond the previous peak’s extreme point. Each sequence is in a different color, so it shouldn’t be too difficult to figure out which goes with which. So look on the next page now:

From each “Previous Peak Take-Out Point” there is marked “The Previous Peak”, and in real time, it was that way. Notice that there are more of “the previous peak”s that were also taken out, or where the price moved beyond that level, but I want you to understand the concept. You should feel free to mark up where “the” previous peak was taken out by a market move to help you better be able to apply the basic information.

Great, so now we have what a peak is, the difference between the previous peak and a previous peak, and what it look like when the previous peak was “taken out” and what it means to have the previous peak taken out. So, what do we do now? How do we use that?

We use the previous peak in this basic model to get us in the market in a direction – in this basic model only. We will not be actually using this exactly as stated, but we will be building upon this basic model, this basic foundation, to be building upon.

What we do in this basic model is to let the market form a range, a peak on both sides of a chart, like the 5-minute chart, then we let the market enter us in a trade by setting the stop orders on both sides of the range defined by the peaks.

So what we do when the market has shown us a high peak and a low peak is to then set a buy stop for one contract above the high peak, and a sell stop for one contract below the low peak. How far? One tick beyond each peak. The buy stop is placed one tick above the high peak, and the sell stop is placed one tick below the low peak.

The Market Open is marked with the green line. After that line, the first market peaks are formed. When both are formed, you place a buy stop one tick above the first high peak, and a sell stop one tick below the first low peak.

When a new peak is formed on the bottom side one bar after the first high peak was formed, you move your sell stop to one tick below the new low peak and cancel your first sell stop, which was not filled because the conditions were not met yet.

Notice the red dot above, which shows where your sell stop was triggered, where the conditions were satisfied for your order to sell at that point. What this means is that you have sold one contract, assuming you are trading a futures market, and that means that you are now one contract “short”. Short means that you sold first looking for the price to move lower so you can then buy at a better price, a lower price, later on. So you are now short one contract, and your buy stop is now one tick higher than the second high peak.

Right after the market filled your sell stop, you are in a short position, you now change your buy stop to 2 contracts instead of one contract. What that does is to take your stop loss (the buy stop above the market, where you say you are now going to stop taking a loss on the position) and when it is triggered, you will now be long one contract. Being long one contract means that you have purchased one contract thinking the market will move higher in price so you can then sell your contract for a profit.

So in this basic strategy, you are always in the market either long or short. You always have an open position until near the end of the day once your first position is filled. The major plus of this strategy is that you are always protected with a stop order. The major negative is that on wildly swinging days, there would be considerable losses incurred.

You continue to move your stop orders for two contracts as new peaks are formed throughout the day until you close your final position near the end of the day. When you close your final position near the end of the day, you will do so by placing a market order directly against your final position. So if you are long one contract, you will sell one contract. If you are short one contract, you will buy one contract. That closes out your open position near the end of the day.

Your first exercise for this basic strategy is to mark and write down what would have happened on this particular day. Would you have been profitable or not? (Answer: Profitable.)

While this basic strategy works well on trending days, on non-trending or wildly swinging (whipsaw) days, the wins will tend to turn to net losses for those days.

Your next exercise for this basic, foundation-only strategy is to actually paper trade it for a day or two on a 3- or 5-minute chart in the market of your choice. Once your first trade is filled for the day, you should always be in the market either long or short until very near the end of the trading day’s regular trading hours (on most markets), or most active times (if a 24-hour market, like the FOREX). You must be able to think with the basic mechanics of this basic system, even though it will not be used directly in the full model. You should understand the mechanics of the previous peak take-out model – regardless of whether or not it is profitable for the day(s) you are paper trading it – before you progress to incorporating the basic add-on model, which follows. That means that if you are relatively new to trading, you will not have any indicators on your chart(s). You will only have the market action with a 5-minute OHLC bar chart representing that action.

[If you’re already very familiar with the basics involved and can follow it without hardly thinking, you may feel free to move on to the basic add-on model.]

So, how can we take this basic model and make it so we can make even more on the trending days than we lose on the non-trending or wild days?

When we look at the trading rules, we see rule number three: Let your profits run and multiply as safely as possible. Without the multiplication aspect, we are only making linear profits and losses, zig-zagging on either side of net profit and loss, with a long-term, gradual increase in account size. That is an undesirable condition. I certainly don’t tolerate it, and this leads us to the basic add-on model. You might just like this one really, really well because over time it’s usually very profitable when sticking to the rules.

Okay, I’ve been challenged on Facebook to take the Forex Challenge. The Forex Challenge ends October 31, 2008. The first place trader is at $95,550+, starting with $10,000. I don’t know when the challenge actually started, but I’m new to it.

I’m trying to figure out the rules more, but it looks like being so far behind from my start, I’m going to have to forego my normal risk and money management rules for a while and just go balls to the wall. So I’ll either die miserably, or get my butt up the ranks quickly. There’s no in-between here for me.

I’ll get started on the trading side on Monday, June 23, 2008 (or Sunday night) and we’ll see what happens. Either way, it should be fun.

I’m willing to take a bit of time to learn the platform for the Forex Challenge on Facebook, and I’ll be trading anyway, but I’m not sure how I’m going to correlate the trades. Frankly, I think I should use what I’m teaching here so far and just use that as an example, of course using the add-on model because that’s where I’m headed here.

Would you rather see me trading this contest using only what I’m teaching here? Or using what I use to trade my own funds? Using what I’m teaching here, I’ll make videos, ongoing about using the system, and write about it, so there will be practical example. Using what all I use, I won’t because I’m not revealing everything here (there’s just too much to overload you with - really).

Let me know. Ask questions. Have a phenomenal weekend. I’m not sure if there’ll be a video this weekend, but there should be at least two next week. Stay great and trade great!

Divergences are the “secret fractal” that fractal searchers have been looking for. I’ll explain more about their use in Forex trading in a few moments. A fractal is repeating pattern. That’s the essence. The use of finding a fractal is that fractals allow prediction. Much like calculus allows the prediction of rates of change, and differential equations allow predictions in effects of the differences of rates of change. You don’t have to know calculus or diff-eq to use anything I’ll be writing about - they’re examples.

In case you don’t know what a divergence is in reading charts, I’ll explain that for you. Basically a divergence is a comparison between what the market does and what an oscillating indicator does, and when there is a difference between “point to point” comparative motions. Here’s a sample chart:

Please not that this is for illustration purposes only to show what a divergence is. Notice that we are starting here from a valley on the MACD, and starting on the price bar that is at that valley. (There are definite rules to drawing divergences and they’ll be covered in another post.)

The starting point is always in the past, and we always start in the past and draw our lines toward the present.

Notice that as soon as the market’s price moves below the low of the starting bar, we have a divergence. The entire yellow zone, A, is a divergence zone. In other words, as the market keeps moving lower, the divergence between the market’s price action and the MACD action are not the same. The market moves lower while the MACD does not. That is a “divergence”.

That particular type of divergence, where the market moves farther in a direction while the indicator does not, is often called a “reversal” or “weakness”. I call it “past weakness” when it is accompanied by other price/indicator “divergences” (convergences are also included in the term).

You know what? I’m just going to make a video of the basics of all this for you. I’ll be up just below once I get it made and up (figure about 8 hours, or about 2:00am NYC time - 7:00am London time)

Keep in mind that the info above and in the video are very far from complete. I’ll tell you about the rules for having divergences tomorrow, though it might be late.

By the end of this series of blog posts and lessons in forex trading, you will understand that these divergences are, indeed, the secret fractal - and you might even feel good enough to trade with the info. But that’s up to you.

If you have any questions or comments or additions - PLEASE ask or leave them. Good, bad, doesn’t matter. I want to provide you with what you want to know. I’m not very good at guessing.

Have a truly pheonomenal trading day!
Russell

Welcome to Domination Trading! This site will not only teach you about being a great currency trader, but if you’re bright enough, pretty much how to dominate the Forex market of your choice.

What is planned for this site is nothing short of ground-breaking, and could change the face of Forex trading for a long time to come. The principles that will be taught by me (and hopefully others will contribute, too) are the foundation of all successful trading, and will be built upon into anything you want for yourself.

With all of the so-called “trading systems” out there, and I’ve personally bought, studied and tested over 250 of them in the past 14 years, only two were actually complete trading systems. Two out of over 250 - which is less than 1%. Well, that isn’t right.

The basic philosophy, the foundational philosophy, to the forex trading systems coming, all start with basic risk, money and profit management. That IS the foundation of all great trading. And the discipline to take the required actions when told to by the system that you’re using.

That boils down to trading system management. A lot more of that is forthcoming. I beg you to ask me questions so I can make you videos, write more content that you want to read, and direct you to becoming the best trader you can possibly become. There’s a lot involved. There’s a lot to learn. There’s a lot to know about currency trading in the Forex markets.

Let’s get a good start tomorrow. So register, comment, and tell people about this site… More is on the way.