Impulse Vs. Correction wave: How to spot Market’s Next Move

Stocks market default move as all know is going up unless there is a correction move where prices will go sideways because people collect their profits or down when there is a problem in the company. But that is not the case in Forex Market where the move can be either up when the main currency is stronger than the secondary one or down when the opposite is true. In this type of market, traders who bet in the price action and its movement will find it hard to spot which move is the correct wave and which is the correction wave. It will be hard to know which one the actual direction of the price and which one is the correction of the actual move. The following is some tips that can be helpful for traders to spot which move of price is the impulse and which is the correction. Once these two movement have been identified trading will become more easier, because traders can stick to the original direction of price whenever an opportunity has been rises.

The first approach to identify the impulse and the correction is to use long time-frame such as weekly or monthly, and try to identify if the price in these time frame has multi[pl tested trend line. Once this trend line has been identified then the impulse will be always with the direction of that trend line, and the correction will be always in the opposite diction of that trend line. Like the figure below:

Multi tested down-trend line

Another approach to identify the impulse wave and/or the correction wave is using MACD. MACD has two lines, one of which is called the MACD line and the other is Signal line. When MACD line is above the Signal line and all above zero its an uptrend, and when MACD line is below the signal line and all below zero this is a downtrend. But what if the MACD is above the signal line but both below zero line, or MACD is below the signal line and all above zero line. In these two cases the market is in correction phase and once you identify the original trend you can wait until the correction phase end and the price start move with the impulse direction again . Here where you can use the MACD to see if the price impulsing or correcting:

 Above Zero lineMACD above Signal lineUptrend, impulse
Above Zero lineMACD below Signal line Correction in uptrend
Below Zero lineMACD above Signal line Correction in downtrend
Below Zero lineMACD below Signal line Downtrend, impulse
MACD and impulse and correction waves

As you can see in the below chart:

Note: MACD should be used as secondary confirming tool not as major tool. Never use it by its own, the only major tool that you can rely on is the price action and its movement.

Sometimes the correction wave has an impulse and strong wave where the impulse will be in the opposite direction of the general market, and the correction wave for this impulse is in the direction of market. Here where many traders loss their money in market specially in Forex where there is lack of volume. The only way that will help traders to avoid this types or trades is to make sure that they get in trade with the direction of general market impulse wave after the momentum of the correction wave is faded and that happened when the MACD line is crossing signal line or retrace back from it and all lines are either below zero( for Sell) or above zeros (for buy) which means that the market will resume in the main direction like the figure below.

One of the great tool that can be used to tell if the trend line (either was up or down) about to be broken and the correction wave which suppose to hit the trend-line and resume with movement of main trend line direction is about to become an impulse, is using a momentum tools such as (RSI). Once the price reached a down-trend such as the one in the figure below with high RSI that either at 70 or above , then there is a high probability that the price will valid break the trend line and move up in new up-trend and new impulse wave.

Price Hit Down Trend with RSI hit 70 or above

Those are some tips that might help traders in how to indicated which move is the correct one (impulse) and which one is the correction move. Trader need to stick to the original move and avoid trading in correction move especially if she is not experts. Because as I said before all money that traders make in the original move can be wiped of and more once the price get in a correction wave.

Trading probabilities: Clear approach to Trade Forex

Forex’s Traders always heard that trading probabilities is one of the most effective strategy that will guarantee sustainable profits and the best way to minimize lost. But many of them don’t know how to do so. This article will explain trading probabilities from engineering background in order to sustain profit and minimize lost, and most of all to make traders accept any lost and never get greedy when won because it will make trader realize that FOREX market are just a simple random movement that no one can guarantee where is the market is heading.

First of all let us prove that the market is a random movement of price where traders try to predicate its next move in systematic way but 90% failed. Many traders use indicators such as moving average, MACD, RSI and stochastic in order to decided either to buy or sell. And many traders who buy or sell based in those indicators lost there trades. why is that?

The answer is very simple and straight forward, because the market is not moving in systematic way. Because if it was, then when you buy based in these indicators you should win as well as when you sell, but since the market is moving in random way you keep losing even when you used these indicators which suppose to help you to win not losing.

Since market moving randomly, the only way to understand it is by applying possibilities or outcomes for its next move and assigned probabilities for those outcomes and see which possibility is more likely to happen next.

When traders treat market as random experiment they will understand it clearly. Any random experiment has an outcome and each outcome has probability of occurrence. If you deal with Forex market as random experiment the outcomes lie in three possibility (up, down, or sideways). Each one of theses outcomes will be assigned probability as following:

Market’s next Moveprobabilities
Up33.3%
Down33.3%
Sideways33.3%
Error0.01%
Total100%
Market outcomes and probabilities

Once siting the outcomes and their probability, traders have to build a hypothesis for each outcome and either accept or reject that hypothesis ( hypothesis mean that assuming the market will move up and then test that assumption with evidence and see if this assumption is still valid or not).

The first hypothesis is market will go up. To test this hypothesis in order to accept or reject it you can ask the following question :

  1. Is the market making higher high and higher lows, if yes that mean the market is in uptrend, and this hypothesis is still accepted.
  2. Does the market pullback to a support and retrace to its original direction which is up with strong candlestick reversal pattern, if the answer is yes then this hypothesis is still valid.
  3. Keep going in asking questions to end up with either accepting this hypothesis or reject it.
  4. Then you divided the probability for this hypothesis which is (33.3%) by the number of the questions to get probability for each question.
  5. In the above example we had two questions and the probability for each question will be (33.3/2) = 16.65%.
  6. Then let us assume that the answer for question one is (yes) it is an uptrend, and the answer for question two is (no) the retrace was not strong.
  7. That means we had (+16.65%) and (-16.65%) because the second question’s answer was no.
  8. That mean the remaining probability for this hypothesis which is uptrend is (33.3%-16.65%)= 16.65%.
  9. Now we have a probability for our first hypothesis which is one of the outcome that market is heading up equal to = 16.65%. Sometimes when all answers are not satisfied that mean we reject this hypothesis and the probability for this outcome equal =0.
  10. Now we can be certain with a probability of 16.65% that market is moving up. But the remaining percent which was substructure earlier can be added to either the down move hypothesis or sideways in order to end up with higher outcome from three which are (up,down or sideways) and see which one has the higher probability and trade it.
  11. Now you can repeat the process form (1 to 10) to end up with the probabilities for down movement and sideways.
  12. Once you preform these processes and come up with all the probability for all three outcomes then you can trade in direction of the outcome that has higher probability using price actions or any other secondary indicators such as (Moving average,MACD,RSI).

Randoms experiment can be varied from tossing a coin to see the outcome if it was head or tail, to more sophisticated experiment such as predicting the Market movement. In my opinion Forex market is a random experiment where a lot of factors contribute to its movement that hidden from the ordinary trader. For traders to understand this market I urge her to go back and study the random experiment in details to come up with a strategy – or update the above explained one – that help her beat the market by making profit consistently and accept lost. I know that will never be hard for Forex traders because they were able to make profit with this giant market but were not able to keep it because they never think about the market as it is moving randomly.

Investing vs. Trading

A lot of people asked me about the difference between investing and trading. I keep telling them that there is slight difference between these two methods or styles regarding the Security markets as well as commodities and Forex. Investors always buy and hold for long time like for example 10 years at minimum, while traders on the other hand juts buy security to sell it may be within a hour or may be less or sometimes they keep it for months. Also investors are always watching the companies finance to see which one is more better than the other, but traders are not interesting in these kind of stuff , instead they are interested in seeing if the price rich 52 weeks high or lows , and how this price will react against specific support and resistance level. This explanation still did not deliver my message to all those who still asking about the difference between these two type of people, until I realize new way to tell people what is the real difference between investors and traders which is really simple and straight forward.

Investors are betting in companies. They see potential in a company and put their money and invest in it for long time to see if this bet was right or wrong and they don’t care if it was wrong because they manage their money very well and diversify their investment in so many companies that they don’t want all them to be successful. Instead, they just want few of them to be successful and they don’t care about others. Because the success of one company where they invested in it, is willing to cover all their losses and made them rich for the rest of their life. Good example for investors is Warren Buffet and Venture capital investors who are willing to invest in so many companies and they are not looking for all of them to be good investing, instead they are looking for only one company to be successful and the rest they don’t care about it because the success they are waiting for is not 10% or 20% or 100% in investment, they are looking for a profit of 2000% or may be more in their investment.

While traders betting in stocks or security price itself and see if there is a potential that this price will move up or down based in their analysis, they will buy or sell that stock or security accordingly. Traders’ money management is different than investors’ money management. They are looking for 10% to 20% or may be in best scenarios they are looking for 100% profit, and they always put stop loss orders where they don’t want all their money to be wiped out and loss everything if the market goes in the other direction against their interests which made them exposed for the risk that all their stop loss to be hit before the price goes in their favor and loss all their money. Because of that they never made a lot of money or if some of them is good and was able to made some profits in trading is because he/she are so experts in money management.

To summarize my point, investors have the potential to made a lot of money in stocks market or other financial market than traders because they are using time in their side and have the ability to wait for long time in order to their betting to be fruitful.