Daily Forex Analysis – As Price Extends, Pullbacks Loom
Measuring overextended markets can be a bit tricky at first. The main reason is because you don’t really have anything to compare current price too. All RSI or MACD will tell you is that price is overbought of oversold. As I discussed in a different article titled “Daily Forex Signals: Why Overbought Oversold Indicators Are More Difficult To Trade Then the Make It Seem” these conditions can last for quite some time.
What you need is a base line to measure the current price against where it was recently. This reference line should accomplish three things.
1. You should know the value line before trading. Unlike other indicators that have a value that fluctuates until the candle is closed, you reference line should be set for a given period of time. Some examples of appropriate lines would be Price Channels, Pivot Lines, Ichimoku Lines as well as others.
2. You need to be able to calculate statistics around these lines. For instance, I know that the R1 Pivot line I use gets hit less that 41% of the time. The R2 line is touched less than 8% of the time and the R3 line is closed beyond less than 3% of the time. These statistics will help you develop sound trading strategies.
3. Finally you need to be able to back test the lines. These will be no sense in calculating the line and building a trading system for yourself if you can not back test the lines. These back tests should be a basic guide to price action. As I back test. I keep a stack of printouts in front of me that have example of the trade setup I am after.
When I see one that is close to the current market example I pull it to the front and study it. This help me formulate my plan for this trade.
I write articles on a daily basis that explain the Forex market and many of the things associated with it. I enjoy the challenge of the market and enjoy sharing my thoughts. Learning to Trade Forex is Learning Self Control http://easyfxtrades.com.
Author: Kimball Hall
Article Source: EzineArticles.com
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