READ ME: How to use PipHut’s free forex signals

I get a LOT of questions about how to use our free forex signals. And they are all usually the same – so I’ve decided to put up this handy “how to use our signals” guide for all traders new to PipHut or regular PipHutters just looking for a little clarification..

First things first, it is hard to explain the signals without explaining the purpose of PipHut, so this leads to our first question:

What is the purpose of PipHut?

PipHut’s goal: The goal of PipHut is to help you become a better trader by building a community of forex traders.

Period. PipHut’s free signals are not about telling you exactly when to enter, at exactly what price, exactly when to exit, etc. That will not help you become a better trader. If PipHut shut down tomorrow you would be right back to square one. It’s teaching you to fish vs. just handing you a fish. And the other important part of that is the community aspect. I am not the only experienced trader on PipHut. We have traders of all levels here. Some just read the analysis and don’t participate. Others participate rarely, others participate in the discussion throughout the entire trading day. I encourage discussion as you can learn a lot from your fellow traders. That’s how I got better and it is how you can too!

Why not provide exact entry/exit points with the free signals?
The next question is always then “can you provide exact entry/exit along with the analysis? The short answer is: read the above answer. The long answer is that I can see the value in doing this the right way, but it is not something I currently do. A large part of the problem lies in the amount of time it would take to explain all of my trade details. Sometimes I wait for a candlestick. Sometimes you don’t need to. Sometimes I use entry orders, other times I buy/sell a market movement. Sometimes I use multiple lots. Sometimes I adjust stops/take profits on the fly. Updating all of that, constantly, and then answering the resulting questions would eat up nearly my entire trading day. The goal is to build a community of traders, each with their own style, each using my analysis in their own way, all helping eachother. On a side note there are plans to roll out a exact signals service before around June of 2010 but that is all I will say about it for now.

How do I use your signal???
I am going to respond to this in the general sense first and then breakdown an actual signal for you.

First, in the general since, I want you to use the signal as a supplement to your own trading. One PipHutter put it best (I forget who said this – if it was you send me an email and I’ll give you credit) when he said “First thing I do in the morning is check your signal. If your analysis matches my analysis I know it is going to be a good day.” Perfect. What that means is that this trader is doing his own analysis, has his own opinions about the market movement, and is using my analysis/signal to compliment his own trade arsenal. That is the end goal. If you are not there yet, don’t worry! Read the signals, talk with the other traders and we will get you there.

With any PipHut signals there are a variety of ways you can trade an analysis! For example I might have a signal that says “selling rallies” that shows several support/resistance levels. I know some traders that will just ignore the analysis and scalp the support/resistance levels…

Analyze a Specific Signal Example

Now, lets look at  specific free signal example and a breakdown of what it means, how to apply it, etc.

First things first – you have to understand the terminology. If you’re not sure what something means (e.g. ‘fading rallies’, ‘break-even’, ‘approaching support’, etc.)  you  should first check out the Forex Signals Glossary or, if it is not in there, then just ask the other traders. Myself or another trader will help you.

For this exercise we are going to look at an actual signal that was sent out on 11/1/09. Click here to view the signal. Here is what the signal said along with the chart attached that day (some sentences have been taken out as they are not relevant to this example):

Welcome to November! Got good pips off Friday’s breakout signal as the lower support was pierced and we rode the fall down to profit. This Monday the signals are a little less clear. The pair dropped almost 400 pips last week on weak fundamental news, meaning a lot of drop could have been due to profit taking after EUR/USD rise over the past several months. Technically on the 4-hour chart the pair just bounced off of its support around 1.4700, established support that has held three times this month. On the daily and weekly charts we are still in a clear uptrend though more profit taking could occur and push the EUR/USD lower.

If the outlook sounds mixed that is because it is – but because we have such a strong uptrend on the daily chart and because the pair just bounced off of 1.4700 support (the 61.8% fibonacci retracement of October high/low) for the third time in the past month we will look to steal some pips on the upside bounce.

Trading Idea: Looking to buy dips at support levels above 1.4670. Support at 1.4700 and 1.4725 may offer opportunities. Candlesticks will be important to confirm the trade. Long targets at 1.4755, 1.4790 and 1.4830.

I’m going to break this down sentence by sentence:

“Got good pips off Friday’s breakout signal as the lower support was pierced and we rode the fall down to profit.”

Self-explanatory. Just a recap of yesterday’s trade.

“This Monday the signals are a little less clear. The pair dropped almost 400 pips last week on weak fundamental news, meaning a lot of drop could have been due to profit taking after EUR/USD rise over the past several months.”

Here I give a brief fundamental overview of the pair if anything has changed. What I am basically saying here is that the pair was overbought and a large population of investors covered their positions (i.e. took profit and close their longs) and when that happens the pair will fall.

“Technically on the 4-hour chart the pair just bounced off of its support around 1.4700, established support that has held three times this month.”

Brief technical update on the pair. When a pair ‘bounces’ of support it means exactly what it sounds like: imagine a rubber ball you drop towards the floor. It hits the floor and bounces right back up! Same concept here except that instead of the floor we have a “support level” and instead of a rubber ball we have the market price of the EUR/USD. You can read more about support and resistance levels here if you are still have questions about what these are, how to identify them, etc.

“On the daily and weekly charts we are still in a clear uptrend though more profit taking could occur and push the EUR/USD lower.”

Larger time frames are much more reliable than shorter time frames and I always consult them. If they are relevant I bring them up in the analysis. What I am saying here is that the larger time frame is bullish even though we’ve seen a recent drop.

“If the outlook sounds mixed that is because it is – but because we have such a strong uptrend on the daily chart and because the pair just bounced off of 1.4700 support (the 61.8% fibonacci retracement of October high/low) for the third time in the past month we will look to steal some pips on the upside bounce.”

Here I give my rationale for why I am still looking to go long even though we have seen some bearish movement recently. Fibonacci is another method of calculating support and resistance levels. I’m writing an article on this but for now you can read more about Fibonacci levels here. I use Fibonacci in addition to my standard method of determining support/resistance levels.

“steal some pips on the upside bounce.”

Just a fancy way of saying I am going long at support.

“Trading Idea: Looking to buy dips at support levels above 1.4670. Support at 1.4700 and 1.4725 may offer opportunities. Candlesticks will be important to confirm the trade. Long targets at 1.4755, 1.4790 and 1.4830.”

Ok, here is the real meat and potatoes of the signal. This is my main PERSONAL trading strategy for the day. Could it change based on events that unfold? Yes. Might you trade differently based on the same analysis? You bet. Let’s take a closer look at every piece of this:

Looking to buy dips at support levels above 1.4670.

My analysis above was bullish correct? Since I trade with the trend I am looking “buy dips” or go long, and I’m looking to do it as long as 1.4670 holds (i.e. has not been broken yet).

Support at 1.4700 and 1.4725 may offer opportunities.

These are support levels ABOVE 1.4670 and BELOW the current market price that I will look for buying opportunities on.

Candlesticks will be important to confirm the trade.

Since we have just seen some substantial weakness in the pair and because I believed the fundamentals to be weak I was more conservative on this trade and I’m saying here that I would wait for a bullish candlestick confirmation signal (if you’re not sure what candlestick signals are hold tight, there is an article coming out for you). This part is important because it can be a big variable in your interpretation of my analysis and comes down to my/your experience. If, for example in the above analysis you believed the fundamentals to be more bullish than I did, or you knew a guy who knew a guy who knew something I didn’t, you might enter on support or a dip WITHOUT a candlestick signal. Since I did not, my trade for the day would be to wait.

Long targets at 1.4755, 1.4790 and 1.4830.

Here I give the resistance levels above that I use as targets for my trade. I usually give at least three targets, sometimes four. Generally speaking I always aim for the farthest target (in this case 1.4830) but will cover my trade (close and take profit) on a failure of one of the levels. A “failure” here would be if, for example, the pair charged up to 1.4820 and gave me a bearish shooting star. At that point I would probably either close the trade and take my 100 pips profit, or move the stop-loss up to lock in profit or eliminate risk. Whether I move the stop-loss to break-even or to the first target 1.4790 will probably depend on the volatility of the pair. If volatility is high (as measured on the ATR indicator) and will either just take all profit then or move it to break-even to give the pair room to swing. If volatility is low I might move it to the first target at 1.4790 which will give the pair less room to swing but still keep me in the trade for my higher target at 1.4830.

The chart.

I always include my personal charts with my signals. This is what I look at. What you see is what you get. I use no additional indicators, technical studies, etc. Just support and resistance, the occasional Fibonacci and different time frames. You can always see what time frame I am looking at in the top-left of the chart (in this case you see H4 or the 4-hour chart). The red lines are my support and resistance levels. White line is where the price is at the time of my signal. Yellow lines are (usually) fibonacci retracement levels. And the blue indicator  at the bottom is the ATR which is a standard indicator to measure volatility. Many times you will see charts with no Fibonacci and no ATR. That is normal. I believe in keeping it simple. The blue arrow is for reference only and illustrates the general trade idea that day.

So what are the different ways to trade this analysis?

I’ve mentioned throughout this article that there are multiple ways to trade each signal. Lets talk about some of those ways right now:

The PipHut way: this is to follow the “trading idea”, which is my personal inclination. In this example that means waiting for a bullish candlestick in the area of 1.4725 support.

Scalping method: We’ve talked about the support and resistance levels. Some traders take this and scalp those levels. I do scalp levels occasionally but only if the setup is darn near perfect. I find myself doing this less and less as time goes on.

Trending method: Some traders will trade in the direction of the trend given, but not at the given support/resistance levels. I’m fully behind this and I do it myself. If my analysis says the trend is strongly to the upside I might do a couple things: a) skip waiting for candlestick confirmation or b) buy a bullish candlestick signal that is not at my predetermined support. In the example above I don’t feel that strongly about the trend so I decide to wait.

Against the trend: My least favorite way some traders use the analysis and I think the least reliable. Some traders will read the above analysis and say “well the pair is going to fall to 1.4700, right? I’ll just sell now, take profit at 1.4700 and then go long!” Double the money right? I dislike this method and strongly advise you to not use it because it produces the most bad trades. I don’t generally trade against a trend, even a weak one.

Different pair method: This is a bit more advanced method. Perhaps my analysis is for a very strong USD on the day but the Euro has news coming out or is strong itself that day. Some traders (myself included) take that information and look for opportunities to buy the USD against other currencies. This works best if you feel comfortable applying your own analysis to other pairs. For example I might analyze the AUD/USD and see a great level to buy at support there and enter on that pair if it looks like it won’t happen with the EUR/USD.

Ignore it method: Some traders might completely disagree with my analysis and trust their own analysis more. It is your money, you can trade however you want :).

So, in the example signal above, what happened with the trade?

Well, you can view the next days analysis chart and chart here. Basically the pair dropped right down to my support at 1.4725 and then rose, as predicted, right up to my third target at 1.4830 – a net profit of 105 pips! Not bad, but the pair never showed the bullish candlestick signal that I was looking for. So anyone using the pure “PipHut trading idea” method above missed it. More aggressive traders got in. I consider it a successful trade. Anytime I do a solid analysis and follow that analysis I consider it a successful trade, even the trade itself loses. I know if I do the right things, everytime, in the long-run I will come out ahead. I view it like shooting a basketball. Imagine that there are two basketball players. One shoots with perfect form and the other with horrible form. On any one shot the player with the great form might miss and the player with bad form might make it. Does that mean bad form is better than good form? Of course not! In the long run the player with better form will make a lot more shots and be  more successful basketball player than the player with bad form.