The Investor Diary Entry #45: June 30, 2023
Charts are really fun to read when a person gets the hang of them. We normally use charts as a visual depiction of a set of numbers. The chart shows us the behavior of those numbers in a different way than reading them as a table.
Forex charts involve different timeframes, with each timeframe having its own patterns and trends. The bigger the timeframe the more important the patterns and trends. Therefore, I needed a way to know how to read forex trading charts with all the timeframes simultaneously.
The first thing I did, is to find a broker that has charting on the website without having to even create a demo account. The beautiful thing about it is that you can also have multiple chart windows. I used their services to view different stocks at the same time.
To have multiple windows is a great thing, but unfortunately not all the other tools that I use are available. Therefore, I turned to using Tradingview.com which I can use for free for my current needs. There are limitations of course, such as, not being able to use multiple windows and cannot have more than three indicators on one chart.
My Current Tools
Currently I am using very basic drawing tools to identify direction. As per the training course that I am taking, I am drawing support and resistance levels on multiple timeframes. I am also looking for shapes that can form including triangles, Head & Shoulders, Double Tops, Rounded Top, False Swings…etc.
Based on those tools, yesterday I analyzed the EUR/USD and was able to open a trade using a demo account that has 10k in virtual money.
Although I have 10K in virtual money, but the money management rules that I am using are based on an account that has 1k only. This is the amount that I intend to deposit once I have a live account.
This entry concentrates on how to read Forex Trading Charts; therefore, I will be concentrating on the methodology in which I am currently building my charts and setting them up. If space allowed I might talk about the money management system that use; otherwise I will postpone this topic to another diary entry.
I really wanted to talk about the trade that I opened yesterday and closed today, and describe the analytical process that I went through to reach my conclusion. Let us see how things go, and what we can cover here.
Color Coded Charts
For any Forex pair that I want to analyze, I first open the monthly timeframe. I allocate the support and resistance levels, patterns, trend, and shapes. I extend to the right all the lines that I draw, and make them appear on all lower timeframes.
I do the same for weekly, daily, 4-hour, and 1-hour timeframes. I make sure to allocate a different color for the drawings for each timeframe. When looking at any timeframe, I want to understand each line from which timeframe it is coming so that I can feel its importance. The higher the timeframe, the more important the information is.
As I said before, I set each of the lines to appear on the current timeframe and lower. I don’t allow the lines to appear on higher timeframes. Look at this 1-hour chart for the EUR/USD pair.
At the top of this 1-hour chart you will see big pinkish rectangular area. The pink color is coming from the weekly timeframe. The Blue color comes from the daily chart. The Yellow is from the 4-hour chart, and finally the green comes from the 1-hour chart.
Where is the Monthly timeframe? I use the red color for the monthly timeframe, but it does not appear on this 1-hour chart as the price is far away from those levels.
As you can see, in one lower level timeframes, I can see the higher timeframe lines, if the price approaches them. This makes me able to identify the importance of the line.
Just as I am writing this entry, one of the training course attendees said on our Telegram group that he is still facing difficulties assigning stop loss level to his trade. The instructor gave a way, which I thought was a good idea, to look at lower timeframes, as their support and resistance levels can give clues to secondary lines.
This is something that I did when I took the trade in the chart above. Notice the vertical rectangular shape to the right of the chart. The pink color is the space from entry point to stop loss level, and the green is from entry to take profit level. This trade was opened yesterday and closed with profit today.
Money Management In Trading
Notice in the chart above the lower green rectangular area. It is also bigger than the one above. This is a current support area on the 1-hour chart. The price broke it when it was a resistance. I waited for the retest. I took the trade, based on the both; money management rules, and chart lines.
The money management rules that the training course is talking about is to be exposed with 2% of your capital per trade. Therefore, on a 1k account, the exposure per trade is $20. Look at the above chart to see the entry point on the vertical rectangular. It is the price level at the level cutting between the two different colors. The entry was at 1.09113. The question is how did we decide on the SL(Stop Loss) and TP(Take Profit) levels using Technical Analysis and Money Management Rules?
Let us start with how we decided on our SL level. The first thing we decided on is based on our money and risk management rules, is that our exposure per trade is $20 as we indicated earlier. On a standard lot, this is amounts to two pips. Therefore, our go to lot size is a mini lot. This will give us the space to allocate the SL below the support area (lower green rectangular).
We placed our SL at 1.08900 which is around 22 pips away from the entry point. This is fine because the exposure can be between 2% and 3%. In addition, the total exposure of all opened positioned should not exceed 5%. Therefore, we did not break the risk management rules by having the 22 pip distance from the entry point.
Now the next rule that we need to cover is related to the TP. The risk reward ratio (RRR) of each trade should be at least 1:1. It is better though to have the minimum ratio at 1:2. The other consideration is the resistance levels.
Our first thought was to target the higher green area, but we noticed other resistance levels which we did not draw on the chart. Another piece of psychological information that we read is that normally traders have a mental focus to choose rounded price levels. All those considerations made us choose the TP price level at 1.09400. This made our RRR at 1:1.35.
Our Analysis was right this time, and the price moved in our direction, but it closed the next day. This caused us to incur a USD0.75 swap interest for an overnight position on a mini lot.
You can see that the price moved way higher, but our target of gaining 2% for the day was achieved.
Analyzing & Risk Management
I started writing this entry yesterday, but I am not able to finish it till now for two main reasons. The first is that it turned out to be a very long entry. The second reason, is that there are so many social events happening and family commitments.
This is not only affecting my blog writing, but also my ability to keep building my Forex Trading Charts. In building my Forex trading charts, I am trying to build a view that will enable me to read the trend and price movement. This is analysis.
The game of Forex is a game of probabilities, there is nothing exact or sure. Therefore, I will need a system to protect me if the odds turned against me. This is Risk Management.
One thing that the training course kept on saying; you can be the best analyst in the world but still lose money. If emotions take you, and greed controls you, and no risk management to protect you, then your are not a trader, you are a gambler.
Conclusion
I follow a color coded chart based on five timeframes. Others say, keep your chart simple. Some use indicators, others use only lines. Each trader will have what they feel relaxed with.
For me, I want to learn the basics and apply them, then I would know to which school I belong. Currently, I feel more relaxed reading a chart based on five time frames. The lower timeframe includes all lines from the above timeframes.
In one of the paragraphs I mentioned that this entry took me a couple of days. Now I am saying that It took me several days. I cannot remember anymore when I started writing it.
The next step for me to do in trading, is to build charts on multiple currency pairs, and add some other instruments such as gold, oil, indices…etc. I want to build around 10 different items to trade.
In the past I was enjoying trading one item only. The advantage was that I would know this item by heart. The disadvantage is that I would sometimes force a trade when there was really no opportunity. My line of thought if I had 10 items to trade, then I won’t feel having to force a trade, and the probability of finding a clear trading opportunity is higher.
After a period of pause because of a long national holiday, the course stopped, and my work routine was dysfunctional. Tomorrow is still a holiday, but the trading course will continue.
The Investor
Friday 30 June 2023
About The Author
I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second, as a place where I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly, as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.
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Furthermore, this site is in no way or form giving any financial or investment advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my progress and share it for informational, educational, and entertainment purposes.