Understanding Rectangles on Forex - Currency Trading Article

By:Martin Chandra

Here's is where we start to have some fun. Regardless of how you want to trade the markets you need an approach. It might be spinning a bottle, asking your Aunt Jenny what she thinks or just gut feel. However you do it, even though you may not think so, you have an approach.

The majority of traders will eventually use some form of technical analysis (also known as chart traders, market technicians and chartists). For every book that there is on making money trading there is probably an opposite book explaining why it can't be done. Before you dismiss the last statement out of hand. Lets explore the argument that no matter what you do you can't beat the market.

Rectangles can occur in any time frame and any market you are following. As with many chart patterns the pattern is in the eye of the beholder. I have found that some traders are better than others at identifying chart patterns. It may take some time before you can spot the most common patterns.

The rectangle contains price movement between two points in a rectangular shape to which we add lines to signify the upper boundary and lower boundary. These lines should be horizontal. Slanted rectangle will most probably fall into the realm of "Flags", which we will discus in another lesson.

The top line should connect at least two bars and the bottom line should connect at least two bars. As most markets are in congestion most of the time rectangles are fairly common.

It is not necessary to draw the top and lower lines at the extreme of the congestion points but rather make sure the lines contain at least 95% of the congestion area. The longer the rectangle continues the more important the breakout.

To help identify a valid breakout there should be an increase in volume on the day (or time period) of the breakout. The breakout can occur in either direction but if you are in a defined up trend then an upside breakout is favored and vise versa for a down trend. If I am in a defined trend then I tend to view this pattern as a continuation patter unless it starts to break the other way.

There are a number of ways to trade the rectangle. You can buy or sell the breakout as it happens or you can wait to see if there is a pullback to the neckline. Once you have defined the rectangle you can also buy and sell at the boundaries of the rectangle. I prefer to buy at the lower boundary if in an up trend and sell at the upper boundary if in a down trend. This can be a very effective trade as the risk is small. If you sell at the upper boundary then your stop loss can be close to the boundary and vise versa for the long trade at the lower boundary.

If you sell the breakout place your protective stop inside the rectangle and do the same for buying the upside breakout. You can also measure the distance between the upper and lower boundaries and project the distance forward to get an indication of the size of the next move. If the distance from the upper to the lower boundary were 20 ticks then I would expect the next move to be at least 20 ticks.

Digg del.icio.us Blink Stumble Spurl Reddit Netscape Furl

Article keywords: forex, trading, money, exchange, currency, investment, fund, foreign, market, stock, success, dollar

Article Source: http://www.articles2k.com

Martin Chandra is a full-time investor. Learn more at here.

Top Currency Trading Articles
1). How To Spot Forex Fraud By : Willie Reynolds As the popularity of Forex increases so do the number of scam artists attempting to cash in on the Forex gravy train. Since Forex involves trading money internationally, often over the Internet, a whole new breed of scams have come about. Ironically many of these scam artists are finding their marks through newspaper, television or other print media advertisements.
2). Hot Tips for Successful Online Forex Trading - Part 2 By : Jimmy Cox In the first article in this series, I passed on several tips to help you become a successful trader.
3). Trading In Black And White Forex Trading Newsletter – 5/9/06 By : Eddie Yakubovich When is a night that you don’t get into a trade a good trading night? Well the obvious answer is when the market goes against you, but since you did not get to your entry price you did not lose any money.
4). Why Forex is a great trade By : Mark Slattery The Forex market seems to be one of the hottest markets right now. Let’s take a look why It takes small amount of capital to get going and you get leverage with it. This is important because a lot of people entering the market are looking for ways to make money and not just to invest their spare cash. Leverage means that you can use other people’s money to make your investment bigger.
5). Electronic Currency Exchange: Trading Digots for a profitable living By : Armand Mont First of all, if you're just finding out about electronic currency exchange trading, then probably you're still asking "what in the world does this electronic currency business is", and most importantly, "how do I make money from it?" Well, you are reading this at the right time, because electronic currency exchange is a business that is expanding and offering new ways to profit from it.
6). Mechanical Trading systems – Spotting the Ones That Make Money! By : Stephen Todd Mechanical trading systems are, as you would expect, systems that make trading decisions for you. The thought of having mechanical trading systems you can simply use to generate automatic profits, is obviously very attractive to many traders.
7). How Useful Are Charting Indicators? By : Erik Teh Many Forex Traders have computerized charting software to help make trading decisions. There are many excellent indicators that can assist a trader- such as MACD, Relative Strength Index and Moving Average Lines, just to name a few. Using indicators alone can reduce the probability of trading success. Why? Because the Forex market is driven by human emotion and charting software is a computerized program.
8). A Look Back At Forex Trading - 4/18/06 By : Eddie Yakubovich Cable final broke through the super resistance at 1.7600 yesterday. Even though we had a losing trade last night, I have to say I am glad to see that tight range behind us. Maybe now we will see a few prolonged and definable trends.
9). Trading In Black And White Forex Trading Newsletter – 5/17/06 By : Eddie Yakubovich Ok, we admit it, this is even a good trading week for us. A couple of weeks ago, when we made 700 pips we did it in a market that was incredibly volatile. There were 300 pip ranges throughout the week.
10). Understanding What Influences Forex Prices By : Internet Wealth Mentor This article will explain some of the differences between Technical Analysis and Fundamentals and explain a bit about each type of trading. Excerpts are taken from the best-selling book ‘Market Wizards’ where Jack Schwager interviews Ed Seykota and Bruce Kovner. Ed is a trend trader (uses technical analysis) and also relies on hunches from 20 years of experience.

New Currency Trading Articles
1). Why Forex Trading Is So Popular By : Sandra Stammberger The Forex market is often more appealing to people that like to live on the edge. There is more uncertainty by far and the rewards of knowing when to buy and sell can be immense.
2). What Is Forex Or The Forex Market? By : Ali Jamalan The forex market is the largest financial market in the world, trading currencies against each other. This market has the potential for investment and trading for profit having great earning scopes in the trade. Access to this market has become commonplace for any individual who’d want to participate in contrast to the olden days when only large bank buildings could trade in the market.
3). Pick Your Trading System By : Gail Metcalf Many investors keep trying one system after the other until they find something they are comfortable with and that works.
4). Money Management Tips For Trading On The Forex By : David Mclauchlan Money management in the foreign exchange currency market requires educating yourself in a variety of financial areas.
5). Intro to Forex Fundamental Analysis By : Matthew Bass This article looks at the principles of using fundamental analysis skills in Forex trading.
6). Why Should You Trade Forex Market? By : Nofie Iman Simply said, there are no other trading instrument comes even closely to forex market when it comes to liquidity, 24hr market environment and last but not the least, profit potential. Forex (currency) market is the largest (most liquid) financial market in the world, with an average daily volume of more than US$ 1.5 trillion, which is more than all of the global equity markets combined.
7). Understanding Concepts of Online Forex Trading By : Vickie Lovett With a little knowledge and a good forex trading system, you too can profit substantially with minimal risk using online forex trading.
8). Forex Day Trading Versus Position Trading - The Pros and Cons By : Cynthia Macy Trading can be fun and exciting when you daytrade and very boring when you position trade. Our motto: get in, get out and go play!
9). Word Cloud Sites Rock the Web! By : Cynthia Macy If you have a business website that is for trading forex, commodities, stocks or options, etc., then you might be interested in a new advertising method that will send massive new traffic to your business sites and get you tons of valuable one-way back links to improve your page rank, all hands-free!
10). Introduction to the Forex Trading By : Nofie Iman As you might know, the foreign exchange market is the largest financial market in the world. There are over $1.2 trillion changing hands every single day. Compare that to the $25 billion a day trading volume at the New York Stock Exchange. In fact, it is three times larger than all of the US Equity and Treasury markets combined together.