Richard Donchian, no longer with us, was the devisor of several trend-following systems, not least the Turtle Trading system, which is still with us.
Donchian channels are a measure of market volatility, much the same as Bollinger bands
and are about as simple as you can get:-
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Golfers get the yips – darts player get dartitis…
General over-analysis is one thing – too many indicators on a chart, too complicated a system, with too many ifs and buts in it – and common enough when you’re starting out learning about forex.
But what can happen after a while, maybe when you’ve been generally successful, had a few nice winning trades, but also a few losers, bigger than you’d like, is that you just don’t want to click that trade button. Call it overcautiousness, fear of failure, whatever.
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Weird times – but good to learn about trading, while all this is going on.
The Royal Bank of Australia (RBA) cut its rate by 100 basis points this morning- the fifth consecutive cut by the RBA.
Thursday will have a similar deal – the European Central Bank (ECB) and the Bank of England announce their interest rates. The ECB is forecast – only forecast – to keep things the same, resisting any pressure to cut – which the larger members of the EU, France, Germany, would prefer – but others, Portugal, for example are dead against it.
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When you take a loss on a forex trade, the plain fact is you’re making an admission that you were plain wrong. And that’s uncomfortable – and that’s when all the avoidance mechanisms kick in. We all, on occasion, are good at hanging in there too long just avoid have to admit the screw-up.
So why is it going to get better?
Hanging a bad position round your neck will suffocate you slowly. Better to cut it free and then you really can begin the process of learning then forgetting. Yes, learn from mistakes, it takes a bit of steel to go back and have a close look at what went wrong – it’s painful, no doubt about it – then keep the lesson and forget the feeling.
If you don’t, you’ll carry it for a day or two, and then – usually – your broker will do the job for you, like it or not. And those 2 days won’t have made you enjoy forex trading any more…
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The Average True Range (ATR), like Bollinger Bands, is a measure of volatility.
It’s another J Welles Wilder production, starting with an index he called the True Range, defined as the greatest of the following 3 values:
Current High – the current Low
Absolute value of (current High – previous Close)
Absolute value of (current Low – previous Close)
The Average True Range is commonly calculated using 14 periods. See the chart below, showing a period of level trading, relatively low volatilitiy, followed by a down trend and higher volatility. Standard Bollinger bands are also plotted.
Two indicators – same principle. Combine the current price with an exponential moving average (EMA), which is a trend-following, lagging, indicator.
Bull power = Current High – EMA of closing prices
Bear Power = Current Low – EMA of closing prices
Both of these are then plotted as histograms. The exponential moving average is usually 13-period as a good compromise.
See a (5-min) chart of Bears power on GBP/USD.
Here’s a tricky question.
It’s a 5-min chart so the action is thick and fast – doesn’t matter which pair… And the question is what to do at the little bump in the down trend. Parabolic SAR has reversed, and the RSI, plotted below, has also come back above 30 – but, with the wonderful benefit of hindsight, it’s only a pause in the trend…
Heiken Ashi, in Japanese = “average bar”. The standard candlestick uses open, high, low, close price values over the same time period. With Heiken Ashi, previous time periods enter the calculation to provide a modified candlestick. See the chart below of a downtrend…
Ichimoku Kinko Hyo is a Swiss Army knife of an indicator which tries to do the whole lot on one chart – support/resistance levels, trend direction, and entry/exit points of varying strengths. The name is something like ‘one glance’ in Japanese.
Having previously discussed the basics of Moving Average let’s look at the 3 different types:
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