As we read the charts, analyze market conditions, and plan our next possible trade, it may helpful to begin our analysis from a money management point of view. We should first consider the fact that our trading capital is very limited, and psychologically excessive percentage losses can be devastating, especially to those new to trading. With this in mind, traders will employ the assistance of various technical indicators simply to create a basis when & why we should enter and exit the market, and when its best to simply do nothing. The following (1-hour) chart shows the EURUSD during the course of a normal trading period. The Bollinger Bands (black lines) set to a standard 2-standard deviation relay the markets current state of relative volatility while the Price Channels (green lines) illustrate the recent high and low regions the market was able to accomplish. At times we can see the market will penetrate above or below either line. However when the market is able to cross above both lines during the same period of time, this movement generally speaking can represent the end of a short-term move, and a greater likelihood of a reversal back to the center. Traders in this situation may choose to play the range as we look for additional signs of confirmation that the market will in fact reverse back to the middle of the range, in its never ending state of regressing to the mean. Proper money management rules will provide us with the basis to wait for the best trade, and preserve our trading capital for only those situations that deserve a small amount of relative risk.
Al Bawaba
