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Forex Trading For BeginnersTalk About Flags And Filtering Entries
In forex markets, there is a situation when the traders often witness the price fall rapidly, then consolidate, and then continue its fall. In between these two falls is a period of rest, also known as consolidation. A currency pair consolidates its gains or losses before moving on. A rest period in
dicating that the exchange rate will continue to move in its previous direction is referred to as the continuation pattern.
The Flags
Flags, as well as pennants, are short-term continuation patters. After the formation of the flags, the exchange rate has the tendency to resume its movements in the same direction as it was preceding the consolidation. Flags are usually found on intraday and short-term charts.
In the case of the flags, the preliminary move is a sharp, sudden directional thrust. Even if the move is an advance or decline, it does not matter. What matters is the velocity of the move. The sharp burst generates a long candle or even a series of long candles on a short-term chart; this is also known as the flagpole.
Flag formations are also in continuation patterns, which mean that the most likely decision of the consolidation will be a breakout in the similar direction as the flagpole. Generally, flags contain two parallel lines sloping away from the direction of the flagpole.
The Filtering Entries
There are impatient traders who opt to enter when the price clears the upper line of the flag, instead of waiting for the price to reach the right entry point. This is absolutely a mistake. Normally, if the exchange rate escapes from the formation of the flag but fails to clear the top of the flagpole, there is no reason to assume that the trade should be triumphant. However, by waiting for the exchange rate to clear the top of the pattern by an amount equal to 10 percent of the flag, traders can filter out a poorer entry that would have been disastrous.
The Volatility Cycle
It is not unusual for volatility to run in cycles. Usually, periods of high volatility are followed by periods of low volatility. An explanation for this event is best described in a situation when the market is trending. Forex market often trends and the participants have a definite opinion regarding the direction of the trade.
The cycle can be observed in any trading market though it is most closely distinguished with options trading. Traders in this kind of market write put and call contracts during times of high volatility in order collect the cost of the contract, or the premium. Premiums that are attached to the contracts have the tendency to be fatter when the markets are volatile.
The option writer then assumes that the volatility will go back to normal levels in the future. This would allow him to buy back the contracts at a reduced premium. This concept is also known as selling volatility. This kind of cycle in volatility can also be observed in the foreign exchange market.
Moving the Market through Perception
Traders show a strong preference for one currency over another, when a currency pair begins to trend. When strong trends happen, the market is volatile due to the price movement. The perception of value has altered and the price must move to reflect this change of opinion.
When the time comes that the trend has continued for a while, the pair will achieve a certain point where the participants feel that the exchange rate is valued fairly. More so, there will come a point when the bears and the bulls reach an agreement, temporarily, that a currency pair is reasonably priced.
This period of rest or consolidation will eventually come to an end. The bulls and the bears may have attained a temporary agreement, but eventually new information will be introduced into the market. Hence, the perception of the value of the currency pair will modify as this news is absorbed.
Normally, the catalysts for this alteration of opinion are the economic indicators. Exchange rate breaking out of its narrow period of consolidation and run until the price achieves a new area, where the bulls and bears are once again able to reach a temporary break can be caused by unexpected news events.