Just to provide some light reading for the weekend, I wanted to talk briefly about the famous “Turtle” traders, for those who may not be familiar with them.

In the early 1980’s, a well-known commodities trader by the name of Richard Dennis gathered a group of individuals and trained them to trade commodities using his specific trend-following methodology. This came about because Dennis intended to prove to his friend, another trader by the name of William Eckhardt, that good traders were made, and not born. The individuals that were recruited for this experiment were attracted to the opportunity by major newspaper ads. The final group was narrowed down through interviews with Dennis, and the ones that made the cut were eventually dubbed, the “Turtles.” This was due to the fact that Dennis had just returned from Singapore, and he wished to “grow traders just like they grow turtles.”

The set of trend-following trading rules that Dennis taught the Turtles are now widely-known. Back in the 80’s, these rules helped the Turtles earn over $100 million in trading profits as a group. The trading rules, which were based largely upon Richard Donchian’s channel breakout methods, are generally simple and easy to follow. One of the primary differentiators between those Turtles that were successful and those that were not as successful was the ability to follow these rules to the letter, without emotions or individual biases. In a nutshell, the entry rules, at their most basic level, are described by the following two sets of general system guidelines:

System #1 (shorter-term) – Enter a long position on a breakout above the price high of the preceding 20 days, or enter a short position on a breakdown below the price low of the preceding 20 days. If the most recent breakout was a true breakout that resulted in a winning trade, any current breakout entry signal would be ignored. If the most recent breakout was a false breakout (i.e., one that moved against the position by a certain predetermined amount after the breakout signal was given), the current breakout signal could be taken. If a breakout signal is not taken due to a winning trade on the most recent breakout, a trade would be taken anyway on a 55-day breakout signal to capture any major price moves.

System #2 (longer-term) - Enter a long position on a breakout above the high of the preceding 55 days, or enter a short position on a breakdown below the low of the preceding 55 days. Unlike System #1, regardless of whether the most recent breakout was a winning trade or a losing trade, all breakout signals are taken.

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

I will be giving a webinar here on FXstreet.com entitled “Combining Candlesticks with Western Technical Analysis.” It is open to all, and will be held next week on Thursday, November 12, 2009 at 17:00 GMT (12:00 PM U.S. Eastern Time).

Learn how to identify the best combinations of Japanese candlestick patterns and Western technical analysis to find high-probability forex trading opportunities. When used in conjunction with each other, this powerful combination unveils potential entries and exits that are far more reliable than when either element is used alone.

For more information or to register for this free webinar, please click on the following link: http://www.fxstreet.com/live/sessions/session.aspx?id=03d77947-739f-4631-b04e-5d5dacdef86a .

I hope to see everyone there!

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

A few days ago, I led a webinar on the subject of price-oscillator divergences. There was a lot of interest in the subject, so I thought I would post the chart illustrations of the different kinds of divergences here, along with some explanations:

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Bearish Regular Divergence – price makes a higher high while the oscillator makes a lower high. This is a warning or indication of a potential impending bearish reversal after an uptrend.

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Bullish Regular Divergence – price makes a lower low while the oscillator makes a higher low. This is a warning or indication of a potential impending bullish reversal after a downtrend.

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Bearish Hidden Divergence – price makes a lower high while the oscillator makes a higher high. This is a warning or indication of a potential downtrend continuation.

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Bullish Hidden Divergence – price makes a higher low while the oscillator makes a lower low. This is a warning or indication of a potential uptrend continuation.

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

I will be giving a webinar entitled, “Trading Price-Oscillator Divergences in the Forex Market” right here on FXstreet.com next week. It will be held on Tuesday, October 27, 2009 at 15:00 GMT (11:00 AM U.S. Eastern Time). Discover the ins and outs of trading price-oscillator divergences in the Forex market. Various types of divergences occur often on currency charts. Learn how they can be used as important warnings or confirmations of significant impending price events. For more information and to pre-register, please click on the following link: http://www.fxstreet.com/live/sessions/session.aspx?id=156b7317-d2e0-4f3a-902b-3113baea3c0a .

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

I will be speaking at the FXstreet.com International Traders Conference (http://www.traders-conference.com) in Barcelona, Spain for much of next week, and will post updates and commentary from the conference when time permits. Very much looking forward to meeting those of you who will be attending!

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

The registration deadline is quickly approaching for FXstreet.com’s International Traders Conference (ITC) that will be held on October 14-16, 2009 in Barcelona (Spain).  I will be a key speaker along with a roster of prominent, top-notch forex traders and analysts: Valeria Bednarik, Rob Booker, Kim Cramer Larsson, Markus Heitkoetter, Ashraf Laidi and Andrei Pehar. It will be the most interactive forex event of the year. You will be in direct contact with the experts for several hours each day, learning specific strategies and LIVE TRADING side-by-side during the American and European trading sessions.

DEADLINE TO REGISTER IS OCTOBER 2ND: http://www.traders-conference.com/ .

Hope to see you in Barcelona!

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

Fibonacci theory as we know it today originated from a 13th century Italian mathematician by the name of Leonardo of Pisa, otherwise known as Leonardo Fibonacci. His work that eventually led to such mainstream technical analysis standards as Fibonacci retracements originated from a sequence of numbers that led to the discovery of the Golden Ratio, approximately 1.618. This ratio can be found in many areas of nature, science, music, and, very importantly, the financial markets. This includes the forex market.

The Fibonacci sequence begins as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 … A noteworthy aspect of this sequence is that the sum of each two consecutive numbers results in the next number in the series. Therefore, 0+1=1, 1+1=2, 1+2=3, and 2+3=5, etc. As the Fibonacci sequence grows to greater values, the ratio of one number to the one before it progressively approaches the Golden Ratio of 1.618.

In forex trading and analysis, the primary purpose of Fibonacci analysis is to determine potential retracements within trends. Trends move in one general direction, up or down, but there are always periods of retracement within trends, where the currency exchange rate moves in a counter-trend manner. In a currency uptrend, for example, there are invariably a significant number of bearish moves that retrace a portion of the prior bullish moves.

Therefore, there are always minor dips in uptrends and minor rallies in downtrends. These areas are among the best places to enter trades in the direction of the trend. In an uptrend, for example, traders always seek to buy low and sell high. Buying on a minor dip within an uptrend means entering at a relatively low price. In a downtrend, traders always seek to sell, or short, high and then buy back, or cover, low. Selling on a minor rally within a downtrend means entering at a relatively high price. These are considered advantageous trade entries.

Fibonacci retracements allow traders to estimate price regions where price may retrace to during dips and rallies. The primary Fibonacci retracement percentages are based on the inverse of the 1.618 Golden Ratio, which is 0.618, or 61.8%. Besides this key level, there is also the important 38.2%. Another very significant Fibonacci retracement percentage is 50%. Other percentages include 23.6% and 76.4%. For the most part, however, the most popular Fibonacci retracement levels, by far, are 38.2%, 50%, and 61.8%.

Fibonacci retracement percentages are used primarily by forex traders to forecast the location of potential bounces on dips and rallies where high-probability trade entries may be made. For example, in an uptrend, when a bearish retracement occurs, many traders will wait for any potential bounce around the 38.2% retracement of the original uptrend move. If this occurs, these traders may enter long trades, pushing price further up in its bounce from the 38.2% price level.

Other popular uses of Fibonacci analysis include identifying price targets in the form of projections and extensions. Additionally, Fibonacci levels can be excellent tools for confirming other technical studies, like support and resistance. Fibonacci analysis is one of the most popular aspects of technical analysis in the forex market. Perhaps because of this, it is relatively common that significant price action events occur around key Fibonacci price levels.

- James Chen, CTA, CMT

* I will be key speaker at FXstreet.com’s International Traders Conference in Barcelona, Spain in October 2009 - for more information, please go to: www.traders-conference.com .

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

There are still a few seats left for FXstreet.com’s 2009 International Traders Conference in Barcelona, Spain on October 14-16. I will be speaking and leading live trading sessions along with a world-class roster of top forex traders and educators: Valeria Bednarik, Rob Booker, Kim Cramer Larsson, Markus Heitkoetter, Ashraf Laidi, and Andrei Pehar. This conference will be an extremely useful and productive event for all attendees. Registration is limited to 60 seats. For more information and to register, please go to: www.traders-conference.com . Hope to see you there!

- James Chen, CTA, CMT

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

(Please click on the accompanying chart to enlarge. Chart courtesy of FX Solutions’ FX AccuCharts.)

I often get asked about different ways one may determine trending conditions, or lack thereof, in the forex market. There are many ways to do it, including trendlines, trend channels, linear regression, slopes of moving averages, the Average Directional Index indicator, simple visual estimation, and more.

One rather reliable method that I tend to use often is called the “correct order of moving averages.” For this technique, I usually use five different exponential moving averages (EMAs), although more or less may be used according to a particular forex trader’s experimentation. The periods of the moving averages may also be varied according to experimentation, but I will generally use the following five EMA periods: 10, 20, 30, 50, and 100. Many traders have been known to choose periods based upon Fibonacci numbers (for example: 5, 13, 34, 55, and 89). Extensive experimentation with the quantity and periods of moving averages helps tremendously in identifying a good set of multiple moving averages that works well for the market being traded.

Once the quantity and periods are identified, trend determination with multiple moving averages simply consists of seeing whether the EMAs are in the correct order at any given time. If the longest period EMA is on the bottom and progressively shorter period EMAs stacked above it, with the shortest period EMA on top, that can be considered the correct order for an uptrend. If the shortest period EMA is on the bottom and progressively longer period EMAs stacked above it, with the longest period EMA on top, that can be considered the correct order for a downtrend. Whether an uptrend or a downtrend is indicated, strategies can then be implemented to enter into trades in the direction of the trend. If the moving averages are NOT in correct order, that is an indication that there is NO directional trend. In this event, one might be well-advised to stay out of trading in that particular currency pair at that particular time, especially if one prefers to trade in the direction of the prevailing trend.

- James Chen, CTA, CMT

* I will be key speaker at FXstreet.com’s International Traders Conference in Barcelona, Spain in October 2009 - for more information, please go to: www.traders-conference.com .

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX

Price-oscillator divergences in the forex market are instances when there is a technical imbalance between the price movement on a currency pair and an oscillator’s movement. Divergences should not be considered complete, self-contained trading strategies. Rather, they should be regarded as signals that warn of some potential impending directional bias. As such, divergences are not standalone indicators - they should confirm or be confirmed by other technical indications.

The oscillator that is used to identify divergences can be any of a number of different chart studies that can be found on any forex charting platform. These include: Stochastics, Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), MACD Histogram, Rate of Change (ROC), Momentum, Commodity Channel Index (CCI), Williams %R, or any other oscillator that travels between defined horizontal bounds.

Once an oscillator is chosen, the process of searching for divergences is straightforward. There are two types of divergence that every technical forex trader should be aware of: regular divergence and hidden divergence.

Regular divergence is the most popular type, and it is what most traders mean when they refer to the general concept of divergence. Regular divergence serves as an early potential signal that a loss of momentum and a potential price reversal may be in the making.

The signal is manifested in an uptrend when price makes a higher high while the oscillator makes a lower high. This is called bearish regular divergence, and warns of a potential reversal and possible subsequent move to the downside. The opposite is called bullish regular divergence and occurs during downtrends. In a bullish divergence, price makes a lower low while the oscillator makes a higher low. In both cases, bearish and bullish, the oscillator diverges from price, giving an indication that price momentum in the currently prevailing direction may be waning.

If either type of regular divergence is identified on a currency chart, forex traders should immediately seek confirmation of a potential reversal before taking any trading action. This confirmation can take many forms, and usually involves other technical indications like a trendline or moving average break, a reversal candle pattern, or some other chart reversal pattern.

In contrast to regular divergence, the second type of divergence, called hidden divergence, can be considered the polar opposite. This signal is also a technical imbalance between price movement and oscillator movement. But instead of signaling a potential reversal, hidden divergence is used primarily to signal a potential continuation in the prevailing trend. As with regular divergence, there are also two basic manifestations of hidden divergence.

Bearish hidden divergence usually occurs during a downtrend, and is characterized by price making a lower high while the oscillator makes a higher high. In this case, price and the oscillator are diverging in their signals, but the overriding signal that should be taken from an occurrence of bearish hidden divergence is a potential continuation of the lower highs in price, which is the equivalent of a potential continuation in the prevailing downtrend. Bullish hidden divergence usually occurs during an uptrend, and is characterized by price making a higher low while the oscillator makes a lower low. In this case, price and the oscillator are diverging in their signals, but the overriding signal that should be taken from an occurrence of bullish hidden divergence is a potential continuation of the higher lows in price, which is the equivalent of a potential continuation in the prevailing uptrend.

As with regular divergence, confirmation should also be sought for instances of hidden divergence before any trades are actually placed. This confirmation can also take many forms, and usually involves other technical indications.

Divergences are common and useful signals that are best utilized as warnings, or confirmations, of potential reversals (regular divergence) or potential trend continuations (hidden divergence).

- James Chen, CTA, CMT

* I will be key speaker at FXstreet.com’s International Traders Conference in Barcelona, Spain in October 2009 - for more information, please go to: www.traders-conference.com .

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX