28 Elliott Wave Principle and Combination (Double and Triple Three)

 

28  Elliott Wave Principle and Combination (Double and Triple Three)

 

free forex signals Elliott called a sideways combination of two corrective patterns a "double three" and three patterns a "triple three." While a single three is any zigzag or flat, a triangle is an allowable final component of such combinations and in this context is called a "three." A combination is composed of simpler types of corrections, including zigzags, flats and triangles. Their occurrence appears to be the flat correction’s way of extending sideways action. As with double and triple zigzags, the simple corrective pattern components are labeled W, Y and Z. Each reactionary wave, labeled X, can take the shape of any corrective pattern but is most commonly a zigzag. As with multiple zigzags, three patterns appear to be the limit, and even those are rare compared to the more common double three.

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Combinations of threes were labeled differently by Elliott at different times, although the illustrative pattern always took the shape of two or three juxtaposed flats, as shown in Figures 1-45 and 1-46. However, the component patterns more commonly alternate in form. For example, a flat followed by a triangle is a more typical type of double three (which we now know as of 1983; see Appendix), as illustrated in Figure 1-47.

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A flat followed by a zigzag is another example, as shown in Figure 1-48. Naturally, since the figures in this section depict corrections in bull markets, they need only be inverted to observe them as upward corrections in bear markets.

Figure 1-47

Figure 1-48

For the most part, a combination is horizontal in character. Elliott indicated that the entire formation could slant against the larger trend, although we have never found this to be the case. One reason is that there never appears to be more than one zigzag in a combination. Neither is there more than one triangle. Recall that triangles occurring alone precede the final movement of a larger trend. Combinations appear to recognize this character and sport triangles only as the final wave in a double or triple three.

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Although different in that their angle of trend is sharper than the sideways trend of combinations (see the guideline of alternation in Chapter 2), double and triple zigzags (see Figure 1-26) can be characterized as non-horizontal combinations, as Elliott seemed to suggest in Nature’s Law. But double and triple threes are different from double and triple zigzags not only in their angle but in their goal. In a double or triple zigzag, the first zigzag is rarely large enough to constitute an adequate price correction of the preceding wave. The doubling or tripling of the initial form is usually necessary to create an adequately sized price retracement. In a combination, however, the first simple pattern often constitutes an adequate price correction. The doubling or tripling appears to occur mainly to extend the duration of the corrective process after price targets have been substantially met. Sometimes additional time is needed to reach a channel line or achieve a stronger kinship with the other correction in an impulse. As the consolidation continues, the attendant psychology and fundamentals extend their trends accordingly.

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As this section makes clear, there is a qualitative difference between the series 3 + 4 + 4 + 4, etc., and the series 5 + 4 + 4 + 4, etc. Notice that while an impulse wave has a total count of 5, with extensions leading to 9 or 13 waves, and so on, a corrective wave has a count of 3, with combinations leading to 7 or 11 waves, and so on. The triangle appears to be an exception, although it can be counted as one would a triple three, totaling 11 waves. Thus, if an internal count is unclear, you can sometimes reach a reasonable conclusion merely by counting waves. A count of 9, 13 or 17 with few overlaps, for instance, is likely motive, while a count of 7, 11 or 15 with numerous overlaps is likely corrective. The main exceptions are diagonals of both types, which are hybrids of motive and corrective forces.

Orthodox Tops and Bottoms

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Sometimes a pattern’s end differs from the associated price extreme. In such cases, the end of the pattern is called the "orthodox" top or bottom in order to differentiate it from the actual price high or low that occurs intra-pattern or after the end of the pattern. For example, in Figure 1-14, the end of wave (5) is the orthodox top despite the fact that wave (3) registered a higher price. In Figure 1-13, the end of wave 5 is the orthodox bottom. In Figures 1-33 and 1-34, the starting point of wave A is the orthodox top of the preceding bull market despite the higher high of wave B. In Figures 1-35 and 1-36, the start of wave A is the orthodox bottom. In Figure 1-47, the end of wave Y is the orthodox bottom of the bear market even though the price low occurs at the end of wave W.

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This concept is important primarily because a successful analysis always depends upon a proper labeling of the patterns. Assuming falsely that a particular price extreme is the correct starting point for wave labeling can throw analysis off for some time, while being aware of the requirements of wave form will keep you on track. Further, when applying the forecasting concepts that will be introduced in Chapter 4, the length and duration of a wave are typically determined by measuring from and projecting orthodox ending points.

Reconciling Funtion and Mode

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Earlier in this chapter, we described the two functions waves may perform (action and reaction), as well as the two modes of structural development (motive and corrective) that they undergo. Now that we have reviewed all types of waves, we can summarize their labels as follows:

— The labels for actionary waves are 1, 3, 5, A, C, E, W, Y and Z.

— The labels for reactionary waves are 2, 4, B, D and X.

As stated earlier, all reactionary waves develop in corrective mode, and most actionary waves develop in motive mode. The preceding sections have described which actionary waves develop in corrective mode. They are:

— waves 1, 3 and 5 in an ending diagonal,

— wave A in a flat correction,

— waves A, C and E in a triangle,

— waves W and Y in a double zigzag and a double three,

— wave Z in a triple zigzag and a triple three.

Because the waves listed above are actionary in relative direction yet develop in corrective mode, we term them "actionary corrective" waves.

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Elliott Wave and Diagonal

Elliott Wave and Diagonal

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A diagonal is a motive pattern yet not an impulse, as it has two corrective characteristics. As with an impulse, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, a diagonal is the only five-wave structure in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one and within which all the waves are "threes," producing an overall count of 3-3-3-3-3. On rare occasions, a diagonal may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. This pattern substitutes for an impulse at two specific locations in the wave structure.

Ending Diagonal

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An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it. A very small percentage of diagonals appear in the C-wave position of A-B-C formations. In double or triple threes (see next section), they appear only as the final C wave. In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement.

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A contracting diagonal takes a wedge shape within two converging lines. This most common form for an ending diagonal is illustrated in Figures 1-15 and 1-16 and shown in its typical position within a larger impulse wave.

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We have found one case in which an ending diagonal’s boundary lines diverged, creating an expanding diagonal rather than a contracting one. However, it is unsatisfying analytically in that its third wave was the shortest actionary wave.

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Ending diagonals have occurred recently in Minor degree as in early 1978, in Minute degree as in February-March 1976, and in Subminuette degree as in June 1976. Figures 1-17 and 1-18 show two of these periods, illustrating one upward and one downward "real life" formation. Figure 1-19 shows our real-life possible expanding diagonal. Notice that in each case, an important change of direction followed.

Although not so illustrated in Figures 1-15 and 1-16, the fifth wave of an ending diagonal often ends in a "throw-over," i.e., a brief break of the trendline connecting the end points of waves one and three. The real-life examples in Figures 1-17 and 1-19 show throw-overs. While volume tends to diminish as a diagonal of small degree progresses, the pattern always ends with a spike of relatively high volume when a throw-over occurs. On rare occasions, the fifth subwave falls short of its resistance trendline.

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A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level where it began and typically much further. A falling ending diagonal by the same token usually gives rise to an upward thrust.

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Fifth wave extensions, truncated fifths and ending diagonals all imply the same thing: dramatic reversal ahead. At some turning points, two of these phenomena have occurred together at different degrees, compounding the violence of the next move in the opposite direction.

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Leading Diagonal

It has recently come to light that a diagonal occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. In the few examples we have, the subdivisions appear to be the same: 3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is out on a strict definition. Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves, as illustrated in Figure 1-8. A leading diagonal in the wave one position is typically followed by a deep retracement

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Figure 1-20 shows a real-life leading diagonal. We have recently observed that a leading diagonal can also take an expanding shape. This form appears to occur primarily at the start of declines in the stock market (see Figure 1-21). These patterns were not originally discovered by R.N. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity.

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Corrective Waves

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Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure. This struggle between the two oppositely-trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend. As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves. Further, they occasionally increase or decrease in complexity as they unfold so that what are technically subwaves of the same degree can by their complexity or time length appear to be of different degree (see Figures 2-4 and 2-5). For all these reasons, it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us. As the terminations of corrective waves are less predictable than those for motive waves, you must exercise more patience and flexibility in your analysis when the market is in a meandering corrective mood than when prices are in a persistent motive trend.

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The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections are never fives. Only motive waves are fives. For this reason, an initial five-wave movement against the larger trend is never the end of a correction, only part of it. The figures in this section should serve to illustrate this point.

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Corrective processes come in two styles. Sharp corrections angle steeply against the larger trend. Sideways corrections, while always producing a net retracement of the preceding wave, typically contain a movement that carries back to or beyond its starting level, thus producing an overall sideways appearance. The discussion of the guideline of alternation in Chapter 2 explains the reason for noting these two styles.

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Specific corrective patterns fall into three main categories: Zigzag (5-3-5; includes three types: single, double and triple);

Flat (3-3-5; includes three types: regular, expanded and running);

Triangle (3-3-3-3-3; three types: contracting, barrier and expanding; and one variation: running).

A combination of the above forms comes in two types: double three and triple three.

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Elliott Wave Principle and Basic Tenets

Elliott Wave Principle and Basic Tenets

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The Wave Principle is governed by man’s social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

 

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.

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The market’s progression unfolds in waves. Waves are patterns of directional movement. More specifically, a wave is any one of the patterns that naturally occur, as described in the rest of this chapter.

 

The Five Wave Pattern

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In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, as shown in Figure 1-1. The two interruptions are apparently a requisite for overall directional movement to occur.

 

Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

 

R.N. Elliott did not specifically say that there is only one overriding form, the “five-wave” pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

1.3 Wave Mode

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There are two modes of wave development: motive and corrective. Motive waves have a five-wave structure, while corrective waves have a three-wave structure or a variation thereof. Motive mode is employed by both the five-wave pattern of Figure 1-1 and its same-directional components, i.e., waves 1, 3 and 5. Their structures are called “motive” because they powerfully impel the market. Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1-1. Their structures are called “corrective” because each one appears as a response to the preceding motive wave yet accomplishes only a partial retracement, or “correction,” of the progress it achieved. Thus, the two modes are fundamentally different, both in their roles and in their construction, as will be detailed throughout this chapter.

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Figure 1-1

The Complete Cycle

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One complete cycle consisting of eight waves, then, is made up of two distinct phases, the five-wave motive phase (also called a “five”), whose subwaves are denoted by numbers, and the threewave corrective phase (also called a “three”), whose subwaves are denoted by letters. Just as wave 2 corrects wave 1 in Figure 1-1, the sequence A, B, C corrects the sequence 1, 2, 3, 4, 5 in Figure 1-2.

Figure 1-2

Compound Construction

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When an initial eight-wave cycle such as shown in Figure 1-2 ends, a similar cycle ensues, which is then followed by another five-wave movement. This entire development produces a fivewave pattern of one degree (i.e., relative size) larger than the waves of which it is composed. The result is shown in Figure 1-3 up to the peak labeled (5). This five-wave pattern of larger degree is then corrected by a three-wave pattern of the same degree, completing a larger full cycle, depicted as Figure 1-3.

As Figure 1-3 illustrates, each same-direction component of a motive wave (i.e., wave 1, 3 and 5), and each full-cycle component (i.e., waves 1 + 2, or waves 3 + 4)of a cycle, is a smaller version of itself.

It is neccessary to understand a crucial point: Figure 1-3 not only illustrates a larger version of Figure 1-2, it also illustrates Figure 1-2 itself, in greater detail. In Figure 1-2, each subwave 1, 3 and 5 is a motive wave that must subdivide into a "five," and each subwave 2 and 4 is a corrective wave that must subdivide into a "three." Waves (1) and (2) in Figure 1-3, if examined under a "microscope," would take the same form as waves â‘  and â‘¡. Regardless of degree, the form is constant. We can use Figure 1-3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring.

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Figure 1-3

 

 

The Broad Concept - Elliott Wave Principle

The Broad Concept - Elliott Wave Principle

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In The Elliott Wave Principle — A Critical Appraisal, A. Hamilton Bolton made this opening statement:

As we have advanced through some of the most unpredictable economic climate imaginable, covering depression, major war, and postwar reconstruction and boom, I have noted how well Elliott’s Wave Principle has fitted into the facts of life as they have developed, and have accordingly gained more confidence that this Principle has a good quotient of basic value.

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

Although it is the best Forex Signals tool in existence, the Wave Principle is not primarily a Forex Signals tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market’s position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis and FREE Forex Signals . This context provides both a basis for disciplined thinking and a perspective on the market’s general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable. Many areas of mass human activity display the Wave Principle, but it is most popularly used in the stock market. Truly, however, the stock market is far more significant to the human condition than it appears to casual observers and even to those who make their living by it. The level of aggregate stock prices is a direct and immediate measure of the popular valuation of man’s total productive capability. That this valuation has form is a fact of profound implications that will ultimately revolutionize the social sciences. That, however, is a discussion for another time.

R.N. Elliott’s genius consisted of a wonderfully disciplined mental process, suited to studying charts of the Dow Jones Industrial Average and its predecessors with such thoroughness and precision that he could construct a network of principles that reflected all market action known to him up to the mid-1940s. At that time, with the Dow near 100, Elliott predicted a great bull market for the next several decades that would exceed all expectations at a time when most investors felt it impossible that the Dow could even better its 1929 peak. As we shall see, exceptional stock market forecasts, some of pinpoint accuracy years in advance, have accompanied the history of the application of the Elliott wave approach.

Elliott had theories regarding the origin and meaning of the patterns he discovered, which we will present and expand upon in Chapter 3. Until then, suffice it to say that the patterns described in Chapters 1 and 2 have stood the test of time.

Often one will hear several different interpretations of the market’s Elliott wave status, especially when cursory, offthe- cuff studies of the averages are made by latter-day experts. However, most uncertainties can be avoided by keeping charts on both arithmetic and semilogarithmic scale and by taking care to follow the rules and guidelines as laid down in this book. Welcome to the world of Elliott.

 

Leading Diagonal

 

Leading Diagonal

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When diagonal triangles occur in the wave 5 or C position, they take the 3-3-3-3-3 shape that Elliott described. However, it has recently come to light that a variation on this pattern occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. The characteristic overlapping of waves 1 and 4 and the convergence of boundary lines into a wedge shape remain as in the ending diagonal triangle. However, the subdivisions are different, tracing out a 5-3-5-3-5 pattern. The structure of this formation (see Figure 1-20) fits the spirit of the Wave Principle in that the five-wave subdivisions in the direction of the larger trend communicate a "continuation" message as opposed to the "termination" implication of the three-wave subdivisions in the ending diagonal. Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves. The main key to recognizing this pattern is the decided slowing of price change in the fifth subwave relative to the third. By contrast, in developing first and second waves, short term speed typically increases, and breadth (i.e., the number of stocks or subindexes participating) often expands.

 

Figure 1-21 shows a real life example of a leading diagonal triangle. This pattern was not originally discovered by R.N. Elliott but has appeared enough times and over a long enough period that we are convinced of its validity.

WAVE FUNCTION Elliott wave

WAVE FUNCTION Elliott wave

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Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary or countertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters. Reactionary waves are labeled with even numbers and letters.

All reactionary waves develop in corrective mode. If all actionary waves developed in motive mode, then there would be no need for different terms. Indeed, most actionary waves do subdivide into five waves. However, as the following sections reveal, a few actionary waves develop in corrective mode, i.e., they subdivide into three waves or a variation thereof. A detailed knowledge of pattern construction is required before one can draw the distinction between actionary function and motive mode, which in the underlying model introduced so far are indistinct. A thorough understanding of the forms detailed in the next five lessons will clarify why we have introduced these terms to the Elliott Wave lexicon.

Lesson 4: Motive Waves

Motive waves subdivide into five waves with certain characteristics and always move in the same direction as the trend of one larger degree. They are straightforward and relatively easy to recognize and interpret.

Within motive waves, wave 2 never retraces more than 100% of wave 1, and wave 4 never retraces more than 100% of wave 3. Wave 3, moreover, always travels beyond the end of wave 1. The goal of a motive wave is to make progress, and these rules of formation assure that it will.

Elliott further discovered that in price terms, wave 3 is often the longest and never the shortest among the three actionary waves (1, 3 and 5) of a motive wave. As long as wave 3 undergoes a greater percentage movement than either wave 1 or 5, this rule is satisfied. It almost always holds on an arithmetic basis as well. There are two types of motive waves: impulses and diagonal triangles

 

 

Common trading mistakes: part two

Common trading mistakes: part two

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Overreliance on software

Most people use some form of technology to assist their trading.

 

For example, you might study chart patterns or use automated alerts and algorithms as prompts to trade.

 

But, as useful as all of these tools are, it is important to remember that they are only tools, and must be employed wisely.

 

Just as your satnav can occasionally direct you to drive into a deep torrent of water because it doesn't know the river has flooded, trading technology isn't something to follow blindly. You still need to keep your eyes open and react intelligently to the signs you see.

 

Car

So when using technology, such as charting software or other analysis tools, it's important that you understand the underlying concepts and the reasons behind what the charts are telling you. This will allow you to see the bigger picture and avoid unnecessary mistakes.

 

Lack of record keeping

Do you remember your first trade? What about the third, or the fifth?

 

If you're new to trading, the details may still be clear in your memory. But in a few months' time will you still be able to describe each step and decision in detail?

 

Unless you keep a trading log or diary, the chances are that this information will be lost. And if you can't remember what you did right, how can you replicate it? Similarly, if you don't know where you went wrong you could easily make the same mistakes again.

 

Your trading diary will let you look back at your experiences with the value of hindsight and learn from them. So what should you record in it?

 

Question

Which of the following is NOT worth putting in your trading diary?

A

Why you decided to trade

B

What you were wearing at the time

C

Where you placed your stops or limits

D

How you felt at the time you opened and closed the trade

 

Reveal answer

Bad timing

Timing is not only the art of good comedy - it's also central to good trading.

 

In the same way that a stand-up artist needs to deliver the punchline at exactly the right moment, you need to time your entry and exit from a market perfectly to maximise any profit or minimise any loss.

 

Timing mistakes are common among new traders. So how can you avoid them? Although getting your timing right isn't an exact science, there are a few tools that will help you to act at the right moment:

 

Chart analysis will help you forecast potential scenarios by revealing market patterns

A trading plan will help you to define your strategy, meaning you're more likely to avoid impulsive actions

Stops and limits will allow you to go about your business without having to monitor the markets constantly

summary

Remember the limitations of software and use it intelligently

Keep a trading diary and reflect on the strategies that have worked well (or not so well)

Use tools such as charts, stops and limits to help you get your timing right when opening and closing positions

Controlling emotions that cloud your judgment

Controlling emotions that cloud your judgment

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Some types of emotion can affect the clarity of your thinking, and so impact any trading decisions you make.

Anger

A losing trade can make you furious - often simply with yourself, for making a bad decision.

 

But we all make mistakes - it's an important way to learn. If it happens to you, as it inevitably will one day, put it down to experience and make a mental note about what to do differently next time.

 

One common impulse in moments of anger is to try and 'get back at the market' by placing another trade. This sort of knee-jerk reaction - or 'hair-trigger trade' - is nearly always a bad idea. Alternatively, you might just start buying anything and everything indiscriminately. This is known as 'shotgun trading'.

 

Take a moment to sit back and breathe deeply, then consider objectively whether your proposed trade really makes sense and is in line with your overall trading strategy.

 

Relax

Regret

Another common source of annoyance is missing an opportunity - something that's easy to do in the fast-moving world of financial markets.

 

When this happens, it's easy to give yourself a hard time about it, repeating things like 'I should have bought there' or 'I knew that was going to happen'. But this sort of mentality can lure you into traps capable of undoing all your hard work at a stroke.

 

You might, for example, be tempted to place a belated trade anyway, or to risk placing a number of trades in quick succession - known as overtrading - to set things right. You might even 'go on tilt', a particular state of mind which means you make irrational decisions, rather than those based on the merit of what's right in front of you.

 

That's why, if the moment has passed, you need a few tricks to remain clear-headed until the next signal comes along.

 

Fortunately, those tricks are as simple as taking a break, casting an eye over your original trading plan and exercising a positive mentality - remember, missing a move is not the end of the world.

 

Sentimentality

Suppose you've traded gold several times, and each time you've made a healthy profit. It might be tempting to start believing (perhaps subconsciously) that 'gold is your friend', and that it will reward you in the same way every time.

 

Gold

Once this conviction grows, there's a danger that you'll open further positions in gold without properly considering the current situation.

 

Unfortunately, the fact that a particular instrument has been profitable in the past is no guarantee that it will continue to perform for you. But likewise, if you've had a bad experience with a certain asset that's no reason to shy away from any future opportunities it offers.

 

Stress

There are times in all of our lives when events beyond our control affect our ability to think clearly.

 

It could be divorce, family illness, bereavement, or just moving house or changing jobs. All of these things will distract you from trading and could cloud your judgment.

 

The world of financial trading can be hectic, demanding your undivided attention. So when you're going through stressful periods, it's often safest to put your trading on hold until you can commit the necessary time and energy to it again.

 

summary

Don't beat yourself up about poor decisions or missed opportunities. Learn from your mistakes and look forward to getting it right next time

To avoid going on tilt when things go wrong, take a break, remind yourself of your trading plan, and wait until you're back in a positive state of mind

Remember that sentimentality and superstition have no place in trading. No market is your friend or enemy, and every opportunity should be assessed on its merits

When you're suffering from stress in other areas of your life, it may be wise to put your trading on hold

Controlling emotions that hold you back

 

Controlling emotions that hold you back

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So far, we've explored many different aspects of the financial markets and the techniques of trading. But there's one key component that affects the success of every trade you make, and that's you.

 

No matter how strong or level-headed you can be, you are a human being, so you have emotions. And naturally your feelings can influence your thinking and your behaviour as a trader.

 

Controlling emotions

Trading is an exciting and absorbing activity that can bring you moments of euphoria when things are going well, while equally it can be psychologically tough if markets turn against you. By understanding the emotions you're likely to experience at every point in the trading process, you can mentally prepare yourself to handle them effectively. That way, your feelings won't get in the way of your decision-making or harm your potential profits.

 

In this course, we'll look at some of the emotions you may need to deal with when you trade.

 

Anxiety and doubt

It's great to be cautious and considered in your trading, but if your worries are crippling you that's counter-productive.

 

The transition to a live trading account after using 'play' money in a demo environment is one step that worries some traders. It's a bit like doing a parachute jump: you've learned the theory and done all the preparation, but making that leap still takes courage.

 

Live and demo

There are, however, things you can do to make it a little less daunting:

 

Reflect on the lessons you learned while using the demo account

Apply the same strategies that brought you success in demo trades

Follow a trading plan

Start by trading in small sizes until you feel comfortable

Use risk-management tools, such as stop-losses

As long as you trade sensibly, use the skills and knowledge you've already gained and keep your positions modest, there's every reason to expect success. Of course you will make mistakes - we all do - but by managing risk carefully you'll minimise your losses.

 

Fear of loss

Another time that you might experience fear is when a position is moving against you and you begin to see a growing loss.

 

Example

Imagine you've bought EUR/USD because your analysis strongly suggests it's about to rise. You've considered the risk involved and set a stop-loss.

However, as time passes the currency pair seems to be stuck in a downtrend. It hasn't hit your stop, but the rise you predicted remains elusive. You start to feel nervous: should you close the position now and cut your losses? Should you adjust your stop closer?

Before taking any action, ask yourself:

Was my original analysis flawed?

Have circumstances affecting this market changed since I opened my trade?

Did I place my stop at the wrong level?

If everything suggests your original analysis is still valid, and if you've positioned your stop correctly to protect yourself against unacceptable loss, there's no reason to alter or kill your trade. Have confidence in your original judgment and let things play out - your loss could turn into a profit.

summary

Your emotional state can have a strong influence on the bottom line of your trading, so it's important to learn how to manage your feelings

Don't allow doubts and fears to paralyse you. Markets move swiftly, and hesitation can lead to missed opportunities

By following a plan, trading in small sizes and using risk management tools, you'll feel more secure and confident in your trading decisions

What is forex?

What is forex?

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What is forex?

If you've ever gone on holiday and exchanged say, pounds for euros, then you've participated in the forex market. Simply put:

 

Forex is how individuals and businesses convert one currency to another.

 

Forex

Forex, also known as foreign exchange, FX or the currency market, is the largest financial market in the world. On average over $5 trillion worth of transactions take place every day. That's around 100 times more than the New York Stock Exchange (NYSE) - the world's biggest stock exchange.

 

As well as being traded by individuals and businesses, forex is also important for financial institutions, central banks, and governments. It facilitates international trade and investment by allowing companies that earn money in one currency to pay for goods and services in another.

 

Who trades forex?

There are a huge number of market participants looking to trade forex at any particular time, from individual speculators wanting to turn a quick profit, to central banks trying to control the amount of currency in circulation.

 

However, by far the most significant players in the forex market are the major international banks. Between them, Citigroup, Deutsche Bank, Barclays, JPMorgan and UBS account for around 50% of global forex trade.

 

Euromoney FX Survey

Why do people trade forex?

Individuals and businesses participate in the forex market for two main reasons:

 

Speculation

The vast majority of forex transactions are made simply to make money. This means the person or institution making the trade has no plans to take delivery of the currency, they are just looking to turn a profit on movements in the market.

 

With major financial institutions always looking to profit from small changes in forex prices, many large trades can occur throughout the day. This activity means currency rates are some of the most consistently volatile financial markets in the world - which in turn provides more opportunity for speculators to make money.

 

Purchasing goods or services in another currency

Every time a transaction is made between two entities in different regions, a foreign exchange transaction needs to take place to pay for the goods or services exchanged. Transactions such as this happen globally, every second of every day.

 

Despite the number of transactions, the amount of currency traded is often very small compared to trades made by large speculators. Therefore commercial trading tends not to have such a big effect on short-term market rates.

 

How do you trade forex?

Unlike share trading, forex is an over-the-counter (OTC) market. This means that currencies are exchanged directly between two parties rather than through an exchange.

 

The forex market is run electronically via a global network of banks - it has no central location, and trades can take place anywhere via a forex broker of your choice. This also means that you can trade forex at any time, so long as it's during trading hours in any one of the four major forex trading centres (London, New York, Sydney and Tokyo).

 

Forex trading hours: April-October (UK time)

Forex Trading Hours

In practice, that means you can trade most forex pairs from around 21:00 or 22:00 (UK time) on Sunday to 21:00 or 22:00 (UK time) on Friday, every week. The exact times can vary due to daylight saving time changes in the UK, USA and Australia.

 

How does a forex trade work?

Forex prices are always quoted in pairs such as AUD/EUR, which stands for the Australian dollar versus the euro. This is because if you want to purchase Australian dollars you need to buy them with another currency, like euros.

 

When trading forex you are simultaneously BUYING one currency while SELLING another.

 

 

Lesson summary

Forex is how individuals and businesses convert one currency to another

The main players in the market are major international banks

Speculation accounts for the vast majority of transactions

It's an over-the-counter (OTC) market, where trades take place directly between two parties rather than through an exchange

Forex is traded in pairs - you are simultaneously buying one currency while selling another

The first currency in every pair is the base or primary currency. The second is the quote or counter currency