Technical Analysis I: Introduction

There are two major approaches to analyzing the currency market, fundamental analysis and technical analysis. The fundamental analysis focuses on the underlying causes of price movements, such as the economic, social, and political forces that drive supply and demand. The technical analysis focuses on the studies of the price movements themselves. Technical analysts use historical data to forecast the direction of future prices.

The premise of technical analysis is that all current market information is already reflected in the price movement. By studying historical price movements, investors can make informed trading decisions. The following articles aim to give a thorough presentation of technical analysis tools and theories.

The primary tools of technical analysis are the charts. The articles first introduced common kinds of charts available on charting software. Charts are also used to identify trending and ranging markets. The articles continued on how to identify support and resistance price, trend lines and price channels. Next, it presented simple trading strategies in trending and ranging markets.

Through careful observation, technical analysts have found recurring patterns on the charts that can give us indication about future price movements. The articles introduced the important patterns, such as the trend reversal and trend continuation patterns. In addition, the Japanese Candle Stick has its own implications in terms of patterns, the articles then introduced how to read the Japanese Candle stick and the inference of its patterns.

Technical indicators are mathematical calculations based on historical prices, they are used extensively in technical analysis to predict changes in trends or price patterns. The final part of the technical analysis is a serious of articles introducing two major types of indicators: trend following indicators and oscillators.

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Basic Concepts VII: Margin

What is Margin?

Margin is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.

Trading a margin account is also described as trading on a leveraged basis. Most online forex firms offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.

The equity in excess of the margin requirement in a trading account acts as a cushion for the trader. If the trader loses on a position to the point that equity is below the minimum margin requirement, meaning the cushion has completely worn out, then a margin call will result. Generally, in online forex trading, the trader must deposit more funds before the margin call or the position will be closed. Since no calls are issued before the liquidation, the margin call is better known as ‘margin out' in this case. The account will be margined out, meaning all the positions will be closed, once the equity falls below the margin requirement.

Example:



Consider Account A, the margin requirement for 1 lot of position is 50USD. The free usable margin is Account Equity - (Margin Requirement + Spread) = 500 - (50 + 3) = 447. The account will be margined out if EUR/USD moves 447 pips against the position.

Why Margin Requirement Matters?

Leverage is a double-edged sword. With proper usage, it can enhance customers' funds to generate quick returns and increase the potential return of an investment. However, without proper risk management, it can lead to quick and large losses. Consider the following example:



The initial conditions of the accounts are the same, except for account A, the margin requirement per lot is 50USD and account B is 200USD.

Free usable margin = Account Equity - (Margin Requirement + Spread)*no. of lots

Maximum number of lots open at one time = Account Equity / (margin requirement + spread)

In account A, for 1 lot of position, the free usable margin is 500 - (50+3) = 447, which means the account will be margined out if EUR/USD moves 447 pips against the position. The max number of lots open at one time = (500/(50+3)) = 9 lots, with 500 - (50+3)*9 = 23USD free usable margin left for 9 lots. Once EUR/USD moves 23/9 = 3 pips against the positions, there would be not enough usable margin and account A will be margined out.

In account B, the free usable margin for 1 lot is 500 - (200+3) = 297, which means the account will be margined out if EUR/USD moves 297 pips against the position. The max number of lots open at one time = (500/(200+3)) =2 lots, with 500 - (200+3)*2 = 94USD free usable margin for 2 lots. If EUR/USD moves 94/2 = 47 pips against the positions, account B would be margined out.

With 1 lot of open position, account A has 447USD usable margin as cushion before being margined out, while account B only as 297USD. However, with more usable margin, account A has higher probability of being over traded. As shown in the above example, the more open positions, the easier is the account to get margin out.

Most forex trading firms offer customizable leverage; traders can choose the leverage ratio they feel most comfortable with. Customers should be aware of how to guard against over trading an account and managing overall risk.

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Basic Concepts VI: Types of Orders

The forex market provides different kinds of orders for trading. The following are some major types of orders that can be found on forex trading stations.

Market orders - A buy or sell order in which the forex firm is to execute the order at the best available current price. It is also called at the market.

Entry orders - A request from a client to a forex firm to buy or sell a specified amount of a particular currency pair at a specific price. The order will be filled once the requested price is hit.

Stop Loss orders - An order placed to close a position when it reaches a specified price. It is designed to limit a trader's loss on a position. If the position is opened with buying a currency pair, the stop loss order would be a request to sell the position when the price fall to the specified level. And vice versa. Traders are strongly recommended to use stop loss orders to limit their losses. It is also important to use stop loss orders when investors may enter a situation where they are unable to monitor their portfolio for an extended period.

Take Profit Orders - An order placed to close a position when it reaches a predetermined profit exit price. It is designed to lock in a position's profit. Once the price surpasses the predefined profit-taking price, the take profit order becomes market order and closes the position.

Good Until Cancelled (GTC) - In online forex trading, most of the orders are GTC, meaning an order will be valid until it is cancelled, regardless of the trading session. The trader must specify that they wish a GTC order to be cancelled before it expires. Generally, the entry orders, stop loss orders and take profit orders in online forex trading are all GTC orders.

The above are the basic orders types available in most of them trading systems. Some trading systems may offer more sophisticated orders. Traders should be familiar with the different orders and make the most of them during trading.

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Basic Concepts V: Spreads

What is a spread?

In margin forex trading, there are two prices for each currency pair, a "bid" (or sell) price and an "ask" (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm.

Bid/Ask

For example, when you see the price quote of EUR/USD is 1.2881/1.2884 as in the above picture, the bid is 1.2881 whereas the ask is 1.2884. That means traders looking to sell must do so at 1.2881, those looking to buy must do so at 1.2884.

The difference between the bid and ask price is the spread, which constitutes the cost of the trade. In fact, all traded instruments - stocks, futures, currencies, bonds, etc. - have spread. If a trader buys at 1.2884 and then sells immediately, there is a 3-point loss incurred. The trader will need to wait for the market to move 3 points in favour of his/her position in order to break even. If the market moves 4 points in your favour, he/she starts to profit.

Many online trading firms like to promote margin forex trading as an almost cost-free instrument - commission free, no service charge, no hidden cost, etc. Traders should know that spread is the cost of trading, and in fact, it also represents the main source of revenue for the market maker, i.e. the forex trading company. The spread may appear to be a minuscule expense, but once you add up the cost of all of the trades, you will find it can eat away quite a portion of your account or your profit. If you check the price tag of a T-shirt before you buy it, do the same thing when you trade forex, look into the spread before you decide to trade. Your trade needs to surmount the spread (the cost) before it profits.

Know your expense: the spread

Spread is the cost to a trader. On the other hand, it is a revenue source of the firm who executes the trade. In the foreign exchange market, the spread can vary a lot depending on the executing firm and the parties involve. Inter-bank foreign exchange can have spread as tight as 1-2 pips, while the bank can widen the spread to 30-40 pips when dealing with individual customers. If you check out the spread of those small exchange shops nearby the tourists' sights, you may find the spread can go up to 400 to 600 pips.

Thanks to keen market competition, the spread of online forex trading is getting tighter in the past few years. For major online forex companies, their spreads are essentially the same. The table shows the typical spread of four major currencies of online forex trading at the time being:

Currency pairs Spread
EUR/USD 2-3 pips
USD/JPY 3-4 pips
USD/CHF 5 pips
GBP/USD 5 pips

It is important for a trader to find the tightest spread as possible, but anything that is far lower than the typical spread is skeptical. The spread is the main source of revenue of a forex trading firm, if the firm cannot earn enough from the spread, there maybe some other hidden cost in the transaction.

Another point to note is that many market makers often widen the spread when market conditions become more volatile, thus increasing the cost of trading. For instance, if an economic number comes out that is off expectations, thereby creating a flood of buyers or sellers, the market maker may often widen the spread to restore the balance between buyers and sellers. As a result, traders should inquire about the execution practices of their clearing firm; firms with poor execution of orders and a tendency to widen spreads will ultimately result in higher trading costs for the end user.

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Basic Concepts III: History and Recent Trend of Online FX Market

The recently technology advancement has broken down the barriers that used to stand between retail clients of FX market and the inter-bank market. The online forex trading revolution was originated in the late 90's, which opened its doors to retail clients by connecting the market makers to the end users. With the high-speed Internet access and powerful central processing unit, the online trading platform at home user's personal computer now serves as a gateway to the liquid FX market. Retail clients can now trade together with the biggest banks in the world, with similar pricing and execution. What used to be a game dominated and controlled by major inter-banks is becoming a common field where individuals can take the same opportunities as big banks do.

Technology breakthroughs not only changed the accessibility of the FX market, they also changed the way of how trading decisions were made. Research showed that, as opposed to unable to find profitable trading methodologies, the primary reason for failure as a speculator is a lack of discipline devoted to successful trading and risk management. The development of iron discipline is among the most challenging endeavors to which a trader can aspire. With the help of modern trading or charting softwares, traders can now develop trading systems that are comprehensive, with detailed trading plans including rules of entry, exit, and risk management model. Furthermore, traders can do backtesting and forward testing of a particular strategy on a demo account before commitment of capital.

When the system trading softwares were first introduced into the store of trading tools, traders would need programming skills and a strong background in mathematical technical analysis. With the effort of system trading software companies making their products more adaptable to mass market, the system trading softwares are now more user-friendly and simpler to use. At this point, non-programmers with basic understanding of mathematical technical analysis can enjoy the amusement of system trading.

While system trading might not provide the 'holy grails' of trading, it offers as prototypes or guidelines for beginners to starting trading with sound mathematical model and risk management. Over time, traders can develop trading systems that match their individual personality.

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Forex Basic Concepts II: Nature of the Foreign Exchange Market

The Foreign Exchange Market is an over-the-counter (OTC) market, which means that there is no central exchange and clearing house where orders are matched. With different levels of access, currencies are traded in different market makers:

The Inter-bank Market - Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.

The Online Market Maker - Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.



Market Hours

Forex is a market that trades actively as long as there are banks open in one of the major financial centers of the world. This is effectively from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, or roughly 5 days, 24 hours per day.

Price Reporting Trading Volume

Unlike many other markets, there is no consolidated tape in Forex, and trading prices and volume are not reported. It is, indeed, possible for trades to occur simultaneously at different prices between different parties in the market. Good pricing through a market maker depends on that market maker being closely tied to the larger market. Pricing is usually relatively close between market makers, however, and the main difference between Forex and other markets is that there is no data on the volume that has been traded in any given time frame or at any given price. Open interest and even volume on currency futures can be used as a proxy, but they are by no means perfect.

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Forex Basic Concepts I: Introduction

The Foreign Exchange (often abbreviated as Forex or FX) market is the largest market in the world with daily trading volume of over 1.9 $trillion in September 2004*. With its high liquidity, low transaction cost and low entry barrier, the 24-hour market has attracted investors around the world.

The following articles aim to introduce the key concepts in forex trading, the terminologies and the characteristics of the FX market.

The articles first introduced the concept 'spread', which is the most important transaction cost in forex trading, how the spread is presented in the price quotes, what is the significance of it and what is the trick behind it. As most of the retail customers choose to trade forex with margin account, the articles then introduced what is margin trading, what is the significance of margin, how to trade a margin account and how to choose the correct leverage ratio.

In trading online forex, there are many types of orders that you can make to facilitate your trades. The articles then explained the rationale behind each type of orders, when and how to use each of them.

Being one of the most actively trading markets, the forex market is yet, may not be the most well known market. The articles then gave a little historical background and explained the nature of the forex market, and made an overall comparison of various trading markets. It also discussed the pros and cons of trading forex market and what are the recent trends.

Like any other trading instruments, traders should understand the terminologies and the basis of the market before he/she starts real trading. The above articles serve as an essential beginners' guide to the world of forex trading.

*According to the Triennial Central Bank Survey of the foreign exchange market conducted by the Bank for International Settlements and published in Sept 2004.

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How to Read a Chart & Act Effectively

Introduction

This is a guide that tells you, in simple understandable language, how to choose the right charts, read them correctly, and act effectively in the market from what you see on them. Probably most of you have taken a course or studied the use of charts in the past. This should add to that knowledge.

Recommendation

There are several good charting packages available free. Netdania is what I use.

Using charts effectively

The default number of periods on these charts is 300. This is a good starting point;

* Hourly chart that’s about 12 days of data.
* 15 minute chart its 3 days of data.
* 5-minute chart it’s slightly more than 24 hours of data.

You can create multiple "tabs" or "layouts" so that it’s easy to quickly switch between charts or sets of charts.

What to look at first

1. Glance at hourly chart to see the big picture. Note significant support and resistance levels within 2% of today’s opening rate.

2. Study the 15 minute chart in great detail noting the following:

* Prevailing trend
* Current price in relation to the 60 period simple moving average.
* High and low since GMT 00:00
* Tops and bottoms during full 3 day time period.

How to use the information gathered so far

1. Determine the big picture (for intraday trading).

Glancing at the hourly chart will give you the big picture – up or down. If it’s not clear immediately then you’re in a trading range. Lets assume the trend is down.

2. Determine if the 15 minute chart confirms the downtrend indicated by big picture:

Current price on 15-minute chart should be below 60 period moving average and the moving average line should be sloping down. If this is so then you have established the direction of the prevailing trend to be down.

There are always two trends – a prevailing (major) trend and a minor trend. The minor trend is a reversal of the main trend, which lasts for a short period of time. Minor trends are clearly spotted on 5-minute charts.

3. Determine the current trend (major or minor) from the 5 minute chart:

Current price on 5-minute chart is below 60 period moving average and the moving average line is sloping downward – major trend.

Current price on 5-minute chart is above 60 period moving average and the moving average line is sloping upward – minor trend.

How to trade the information gathered so far

At this point you know the following:

* Direction of the prevailing trend.
* Whether we are currently trading in the direction of the prevailing (major) trend or experiencing a minor trend (reaction to major trend).

Possible trade scenarios:

1) Lets assume prevailing (major) trend is down and we are in a minor up-trend. Strategy would be to sell when the current price on 5-minute chart falls below the 60 period moving average and the 60 period moving average line is sloping downward. Why? Because the prevailing trend is reasserting itself and the next move is likely to be down. Is there more we can do? Yes. Look for further confirmation. For example, if the minor trend had stalled for a while and the lows of the past half hour or hour are very close to the 5 minute moving average then selling just below the lows of the past half hour is a better place to enter the market then just below the moving average line.

2) Lets assume prevailing (major) trend is down and 5-minute chart confirms downtrend. Strategy would be to wait for a minor (up trend) trend to appear and reverse before entering the market. The reason for this is that the move is too “mature” at this point and a correction is likely. Since you trade with tight stops you will be stopped out on a reaction. Exception: If market trades through today’s low and/ or low of past three days (these levels will be apparent on the 15 minute chart) further quick downward price action is likely and a short position would be correct.

3) A better strategy assuming prevailing trend down, 5-minute chart down, and just above days lows is to BUY with a tight stop below the day’s low. Your risk is limited and defined and the technical condition (overdone?) is in your favor. Confirmation would be if today’s low was a bit higher than yesterday’s low and the price action indicated a very short-term trading range (1 minute chart) just above today’s low. The thinking here is that buyers are not waiting for a break of today’s or yesterday’s low to buy cheaper; they are concerned they may not see the level.

4) Generally speaking, the safest place to buy is after a sustained significant decline when the bottoms are getting higher. Preferably these bottoms will be hours apart. By the third or forth higher bottom it is clear a bottom is in place and an up-move is coming. As in the example above your risk is limited and defined – a low lower than the last low.

5) The reverse is true in major up-trends.

Other chart ideas

* There are always two trends to consider – a major trend and a minor trend. The minor trend is a reversal of the major trend, which generally lasts for a short period of time.

* Buying above old tops and selling below old bottoms can be excellent entry levels; assuming the move is not overly mature and a nearby reaction unlikely.

* When a strong up move is occurring the market should make both higher tops and higher bottoms. The reverse is true for down moves- lower bottoms and lower tops.

* Reactions (minor reversals) are smaller when a strong move is occurring. As the reactions begin to increase that is a clear warning signal that the move is losing momentum. When the last reaction exceeds the prior reaction you can assume the trend has changed, at least temporarily.

* Higher bottoms always indicate strength, and an up move usually starts from the third or fourth higher bottom. Reverse this rule in a rising market; lower tops…

* You will always make the most money by following the major trend although to say you will never trade against the trend means that you will miss a lot of opportunities to make big profits. The rule is: When you are trading against the trend wait until you have a definite indication of a selling or buying point near the top or bottom, where you can place a close stop loss order (risk small amount of capital). The profit target can be a short-term gain to nearby resistance or more.

* Consider the normal or average daily range, average price change from open to high and average price change from open to low, in determining your intra-day price targets.

* Do not overlook the fact that it requires time for a market to get ready at the bottom before it advances and for selling pressure to work it’s way through at top before a decline. Smaller loses and sideways trading are a sign the trend may be waning in a downtrend. Smaller gains and sideways trading in an up trend.

* Fourth time at bottom or top is crucial; next phase of move will soon become clear… be ready.

* Oftentimes, when an important support or resistance level is broken a quick move occurs followed by a reaction back to or slightly above support or below resistance. This is a great opportunity to play the break on the “rebound”. Your stop can be super tight. For example, EURUSD important resistance 1.0840 is broken and a quick move to 1.0860, followed by a decline to 1.0835. Buy with a 1.0820 stop. The move back down is natural and takes nothing away from the importance of the breakout. However, EURUSD should not decline significantly below the breakout (breakout 1.0840; EURUSD should not go below 1.0825.

* After a prolonged up move when a top has been made there is usually a trading range, followed by a sharp decline. After that, a secondary reaction back near the old highs often occurs. This is because the market gets ahead of itself and a short squeeze occurs. Selling near the old top with a stop above the old top is the safest place to sell.

* The third lower top is also a great place to sell.

* The same is true in reverse for down moves.

* Be careful not to buy near top or sell near bottom within trading ranges. Wait for breakaway (huge profit potential) or play the range.

* Whether the market is very active or in a trading range, all indications are more accurate and trustworthier when the market is actively trading.

Limitations of charts

Scheduled economic announcements that are complete surprises render nearby short-term support and resistance levels meaningless because the basis (all available information) has changed significantly, requiring a price adjustment to reflect the new information. Other support and resistance levels within the normal daily trading range remain valid. For example, on Friday the unemployment number missed the mark by roughly 120,000 jobs. That’s a huge disparity and rendered all nearby resistance levels in the EURUSD meaningless. However, resistance level 200 points or more from the day’s opening were still meaningful because they represented resistance to a big up move on a given day.

Unscheduled or unexpected statements by government officials may render all charts points on a short-term chart meaningless, depending upon the severity of what was said or implied. For example, when Treasury Secretary John Snow hinted that the U.S. had abandoned its strong U.S. dollar policy. Read More..

Pivot Point Trading

You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This gives you an opportunity to trade.

If you would rather work the pivot points out by yourself, the formula I use is below:

Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot) As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249

This gave us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

Have a look at the 5 minute chart below



The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3.

There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.



The Pullback Trade

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high - peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.



Breakout of Resistance

As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.



Advanced

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.



We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade. Read More..

How to Find a Successful Forex Trading System

The Foreign Currency Exchange Market, or more commonly known as the Forex market is the largest financial market in the world. Over $2 Trillion dollars are traded on the Forex market every day. Forex traders make money in the currency exchange market by playing one currency against another. They play currency pairs and bet that one currency will either increase or decrease in value and the other currency (or cross currency) will go in the opposite direction.

As I mentioned, Forex traders trade currency pairs. For example a trader might play the Euro against the US Dollar (EUR/USD pair). If the trader thinks the EUR will increase in value over a certain period of time, the trader will go "long" the EUR/USD pair. If the trader goes long this currency pair, he/she is betting the EUR will "increase" in value against the USD. If the trader is right, they make money. If they're wrong, then they lose money. Successful traders always employ a good forex trading strategy so they consistently profit from their trades.

There are two ways to play the Foreign Currency Exchange Market that all experienced Forex traders use. One is called Fundamentals and the other is called Technicals. Fundamentals refer to news events that move the markets. For example if a country increases interest rates, then most likely that will cause the currency to increase in value. If a country releases poor housing numbers then that could cause the currency of that country to decrease in value.

The technical side of trading the Forex markets refers to using charts and indicators. Price charts and other technical tools are used to determine a possible trade. Indicators like MACD, Stochastics, moving averages and more are just a few of the tools in the technical traders toolbox. The best Forex traders use a combination of both fundamental and technical trading. Great traders never rely on just one side.

Some traders trade longer term and some trade short term. A long term trader is considered a position trader. Position traders take a longer term approach to trading the forex market. For example if one currency looks like it could be bullish over the next few weeks or months, they may place a long position trade and let it ride for weeks or months until they exit their trades to take profits.

Traders who take a short term approach to trading are considered day traders or intraday traders. These traders only have open trades for a short period of time and most of these Forex traders open and close their trades in the same day or within hours. Most technical traders don't like to have open position around news time because some major news events can actually cause a great technical trade to fail because of an unexpected news surprise.

No matter what style of trading you use, as long as you use a great forex trading strategy and stick with the rules of those strategies, trading the forex market can be a very profitable way to make a living. Not only is a good forex trading strategy important but good money management plays a big role as well. As long as you manage your winners and losers and set the appropriate stop losses and profit targets, you will quickly find that trading the Forex market can be a very profitable business. Read More..

Leverage In Forex

Leverage financed with credit, such as that purchased on a margin account is very common in Forex. A margined account is a leverageable account in which Forex can be purchased for a combination of cash or collateral depending what your brokers will accept.

The loan (leverage) in the margined account is collateralized by your initial margin (deposit), if the value of the trade (position) drops sufficiently, the broker will ask you to either put in more cash, or sell a portion of your position or even close your position.

Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers so always check with the company you are dealing with to ensure you understand their policy.

Up until this point you are probably wondering how a small investor can trade such large amounts of money (positions). The amount of leverage you use will depend on your broker and what you feel comfortable with. There was a time when it was difficult to find companies prepared to offer margined accounts but nowadays you can get leverage from a high as 1% with some brokers. This means you could control $100,000 with only $1,000.

Typically the broker will have a minimum account size also known as account margin or initial margin e.g. $10,000. Once you have deposited your money you will then be able to trade. The broker will also stipulate how much they require per position (lot) traded.

In the example above for every $1,000 you have you can take a lot of $100,000 so if you have $5,000 they may allow you to trade up to $500,00 of forex.

The minimum security (Margin) for each lot will very from broker to broker. In the example above the broker required a one percent margin. This means that for every $100,000 traded the broker wanted $1,000 as security on the position.

Margin call is also something that you will have to be aware of. If for any reason the broker thinks that your position is in danger e.g. you have a position of $100,000 with a margin of one percent ($1,000) and your losses are approaching your margin ($1,000). He will call you and either ask you to deposit more money, or close your position to limit your risk and his risk.

If you are going to trade on a margin account it is imperative that you talk with your broker first to find out what their polices are on this type of accounts.

Variation Margin is also very important. Variation margin is the amount of profit or loss your account is showing on open positions.

Let's say you have just deposited $10,000 with your broker. You take 5 lots of USD/JPY, which is $500,000. To secure this the broker needs $5,000 (1%).

The trade goes bad and your losses equal $5001, your broker may do a margin call. The reason he may do a margin call is that even though you still have $4,999 in your account the broker needs that as security and allowing you to use it could endanger yourself and him.

Another way to look at it is this, if you have an account of $10,000 and you have a 1 lot ($100,000) position. That's $1,000 assuming a (1% margin) is no longer available for you to trade. The money still belongs to you but for the time you are margined the broker needs that as security.

Another point of note is that some brokers may require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher. Also in the example we have used a 1% margin. This is by no means standard. I have seen as high as 0.5% and many between 3%-5% margin. It all depends on your broker.

There have been many discussions on the topic of margin and some argue that too much margin is dangerous. This is a point for the individual concerned. The important thing to remember as with all trading is that you thoroughly understand your broker's policies on the subject and you are comfortable with and understand your risk. Read More..

Trade Forex Using News - 5 Most Watched Indicators

Currencies do not become weaker or stronger randomly. A large portion of a currency's value is based on confidence in the economic strength of the country. Economic strength is judged by certain key indicators that are closely watched in FX trading. When these economic indicators change, the value of a currency will fluctuate. A currency is a proxy for the country it represents and the economic health of that country is priced into the currency.

Fundamental releases have become increasingly important market movers. When focusing on the impact that economic numbers have on price action in the FX market there are 5 indicators that are watched the most because of their potential to generate volume and to move prices in the market.
Why Does Economic News Impact Short-Term Trading?

The data itself is not as important as whether or not it falls within market expectations. Besides knowing when all the data is released, it is vitally important to know what economists are forecasting for each indicator. For example, knowing the economic consequences of an unexpected monthly rise of 0.3% in the Consumer Price Index, the Actual, is not nearly as vital to your short-term trading decisions as it is to know that this month the market was looking for CPI to fall by 0.1%, the Consensus.

Analyzing the longer-term ramifications of an unexpected monthly rise in prices can wait until after you've taken advantage of the short term trading opportunities presented by the data typically within the first thirty minutes following the release. Market expectations for all economic releases are published on our calendar and you should track these expectations along with the release date of the indicator.

Average Pip Ranges
1. Non Farm Payrolls - Unemployment
Avg. Move: 124 Pips
2. FOMC Interest Rate Decisions
Avg. Move: 74 Pips
3. Trade Balance
Avg. Move: 64 Pips
4. CPI - Inflation
Avg. Move: 44 Pips
5. Retail sales
Avg. Move: 44 Pips
* 2004 Data from DailyFX Research

1. Non Farm Payrolls – Unemployment

The unemployment rate is a measure of the strength of the labor market. One of the ways analysts gauge the strength of an economy is by the number of jobs created, and the percentage of workers unable to find jobs. Strong job creation is indicative of economic growth, as companies must increase their workforce in order to meet demand.

Release Schedule: First Friday of the month at 8:30am EST
2. FOMC Interest Rate Decisions

The Federal Open Market sets the discount rate, which is the rate at which the Federal Reserve Bank charges member banks for overnight loans. The rate is set during the FOMC meetings by the regional banks and the Federal Reserve Board.

Release Schedule: 8 meetings scheduled per year. Date is known in advance so check the economic calendar
3. Trade Balance

The balance of trade measures the difference between the value of goods and services that a nation exports and the value of goods and services that it imports. A trade surplus results if the value of exported goods exceeds that of imported goods, whereas a trade deficit exists if imported goods exceed exported goods.

Release Schedule: Generally released around the middle of the second month following the reporting period. Check the economic calendar
4. CPI – Consumer Price Index

The CPI is a key gauge of inflation, as it measures the price of a fixed basket of consumer goods. Higher prices are considered negative for an economy, but since central banks often respond to price inflation by raising interest rates, currencies sometimes respond positively to reports of higher inflation.

Release Schedule: Monthly - around the 13th of each month at 8:30am EST
5. Retail Sales

Retail sales is a measure of the total goods sold by a sampling of retail stores. It is used as a gauge of consumer activity and confidence as higher sales figures would indicate increased economic activity. Read More..

Trading Forex with a Strategy

Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.

Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.

Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:

Trade with money you can afford to lose:

Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.

Identify the state of the market:

What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.

Determine what time frame you're trading on:

Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.

Time your trade:

You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.

If in doubt, stay out:

If you're unsure about a trade and find you're hesitating, stay on the sidelines.

Trade logical transaction sizes:

Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.

Gauge market sentiment:

Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.

Market expectation:

Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.

Use what other traders use:

In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa. Read More..

Trading Techniques

Automated trading gives most traders their best chance for success in forex, but it's not the only element of a successful trading record. Traders must know how to apply automated trading techniques and be willing to manually manipulate trades when possible. Combining these two methods – mechanization and discretion – is the path to profitable trading.

ANALYSIS

* Learn about different ways to use automated trading.
* Analyze systems to gauge their suitability for automated trading.

ACTION

* Build engines to see how they execute in an automated environment.
* Experiment with manual manipulation of trades with automated tools.
* Take your results live and succeed.

RELATED MATERIAL

Test-drive FX Engines for free online at www.fxengines.com to see the power of system building, system testing, and system automation.

ABOUT THIS REPORT

The Forex Report is a periodic publication that investigates advanced strategies for superior trading performance in the foreign exchange markets. These reports utilize advanced statistical and econometric modeling techniques to create new insight into the trading strategy of the average trader. This Data Brief, When to Trade, is intended for all audiences, including those new to the forex market.

To learn more about The Forex Report or to register for delivery of all future reports by email, including Case Studies & Data Briefs, please visit www.fxengines.com.
ANALYSIS

The Holy Grail of trading – does it exist? Yes, and its name is Hard Work! All of the debates surrounding the value of hard work vs. automation miss one main point – automation is hard work! Automated trading is not an end in itself, but a tool that immeasurably helps traders cope with the unique demands of the forex market. Once you've made the choice to pursue automated trading, you'll find a wealth of new trading techniques at your disposal.
THE MANY USES OF AUTOMATED TRADING

The first impression of most traders is that automated trading creates a system where a "robot" takes over and makes all of the trading decisions, then executes them. Another version has the trader crafting the strategy and leaving the actual execution – the part that requires the physical presence – to the automation platform. FX Engines is such a system.

Some trading systems are excellent candidates for complete automation. They have simple rules but may require off-hours trading, frequent trading, or some other element that is ideally suited for automation.

Beyond those systems are more advanced and discretion-driven systems. These kinds of systems require trader intervention at some point. Advanced automated systems like FX Engines allow for this kind of nuanced interaction, but some traders are simply more comfortable knowing their hands are on the wheel. These traders often believe that discretion, or the "art" of trading, is the key element, and since a machine cannot possibly employ the level of nuance a human can, they discount automated trading altogether. Yet there is something in automation for all traders, beginning with the basic trading techniques of automated platforms like FX Engines:
Entry Type Exit Type Best Use
Automated Automated Simple, mechanized systems
Automated Manual Mechanized entry with discretionary exit
Manual Automated Discretionary entry with mechanized exits
Manual Manual Discretionary entry and exit

With FX Engines, all of these options are available, with more on the way. A trader can manually enter an engine but walk away – knowing that the engine's exit signals will take over and direct the trade to its conclusion. The same is true for automated entry – perhaps while during the night – with manual exit at the point in time determined to be the best exit.
NOT ALL SYSTEMS ARE MADE FOR COMPLETE AUTOMATION

A skilled trader can make money using any toolkit, and in some cases systems will simply be outside the realm of complete automation. Some examples of these systems include:

* Event Driven Systems. Since events are spontaneous, manual entry is required for these systems. Still, an automated system can assist event traders by providing complete control after entry has occurred, all the way to the exit of the trade.
* Non-Quantitative Systems. Though technically driven systems have grown in prominence, many traders reply upon fundamental indicators that do not readily lend themselves to automation. In some cases these systems can employ automated entry or exit, and for some the advanced intra-trade tools like FX Engines' Contextual Exits allow for extremely fine, automated control of trades.
* Highly Discretionary Systems. Some traders work off pure feel of the markets, or use little-known chart patterns to dictate their trading choices. In these cases some form of automation will give these traders an edge they did not have access to previously.

What's the best way to know if a system is suitable for automation? Historical testing. Traders can create engines and test them historically, then let the results speak for themselves. Some engines will show dramatic results with no intervention. Other engines may show excellent results but be dominated by "giveback" – a hint that perhaps some manual tweaking is required. A quick look at the actual trades in the historical test report will allow the trader to determine what happened and how they could have possibly intervened to improve the results.

Once engines with a comfortable set of parameters are in place, live testing can begin. Remember, FX Engines' test trades are identical to its live trades, so demo trading with complete automation or with some manual manipulation will replicate live trading conditions. Once tests have successfully met targets, real trading puts the trader in a position to have automated trading techniques like these positively affect the bottom line.
ACTION

Using automation in combination with discretion as a complementary trading tool is a new idea. Explore it by building mechanized and discretionary engines that take advantage of different trading techniques and optimize the return on your trading efforts.
1- BUILD

Build your engines and test them. Take a close look at the results and see what they tell you. Is the engine best suited to total automation? If not, take a look at the results and see where you may have intervened, then factor those changes into your results.
2- EXPERIMENT

If you find systems that are a perfect fit for automation, great. Set them to test against our live feed and leave them alone. For the engines you suspect might need manual manipulation, set them to test and be sure to follow them when they enter the market. Use FORCE EXIT when you feel that the exit system in place in the engine will pull back too far below your optimal exit point.
3- BEGIN

Fund your account and get going! Once you've tested with FX Engines you'll have the confidence to trade in a real account. Start with a mini account if you need to, and prove to yourself that this is an automated platform that works. As your success increases, so will your trades, and your profits. Read More..

FX Trading The Martingale Way

Imagine a trading strategy that is practically 100% profitable - would you be interested? Most traders will probably reply with a resounding "Yes", especially since such a strategy does exist and dates all the way back to the eighteenth century. This strategy is based on probability theory and if your pockets are deep enough, it has a near 100% success rate. Known in the trading world as the martingale, this strategy was most commonly practiced in the gambling halls of Las Vegas casinos and is the main reason why casinos now have betting minimums and maximums and why the roulette wheel has two green markers (0 and 00) in addition to the odd or even bets. The problem with this strategy is that in order to achieve 100% profitability, you need to have very deep pockets - in some cases, they must be infinitely deep. Unfortunately, no one has infinite wealth, but with a theory that relies on mean reversion, one missed trade can bankrupt an entire account.Also, the amount risked on the trade is far greater than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy. In this article, we'll explore the ways you can improve your chances of succeeding at this very high risk and difficult strategy.

What is Martingale Strategy?
Popularized in the eighteenth century, the martingale was introduced by a French mathematician by the name of Paul Pierre Levy. The martingale was originally a type of betting style that was based on the premise of "doubling down". Interestingly enough, a lot of the work done on the martingale was by an American mathematician named Joseph Leo Doob, who sought to disprove the possibility of a 100% profitable betting strategy.

The mechanics of the system naturally involve an initial bet; however, each time the bet becomes a loser, the wager is doubled such that, given enough time, one winning trade will make up all of the previous losses. The introduction of the 0 and 00 on the roulette wheel was used to break the mechanics of the martingale by giving the game more than two possible outcomes other than the odd vs. even or red vs. black. This made the long-run profit expectancy of using the martingale in roulette negative and thus destroyed any incentive for using it.

To understand the basics behind the martingale strategy, let's take a look at a simple example. Suppose that we had a coin and engaged in a betting game of either head or tails with a starting wager of $1. There is an equal probability that the coin will land on a head or tails and each flip is independent, meaning that the previous flip does not impact the outcome of the next flip. As long as you stick with the same directional view each time, you would eventually, given an infinite amount of money, see the coin land on heads and regain all of your losses plus $1. The strategy is based on the premise that only one trade is needed to turn your account around.

Examples
Scenario No.1 (Head or Tails 50/50 Chance):

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $ 1 Heads $ 1 $11
Heads $ 1 Tails $ (1) $10
Heads $ 2 Tails $(2) $8
Heads $ 4 Heads $ 4 $12

Assume that you have a total of $10 to wager, starting with a first wager of $1. You bet on heads, the coin flips that way and you win $1, bringing your equity up to $11. Each time you are successful, you keep on betting the same $1 until you lose. The next flip is a loser and you bring your account equity back to $10. On the next bet, you wager $2 in the hope that if the coin lands on heads, you will recoup your previous losses and bring your net profit and loss to zero. Unfortunately, it lands on tails again and you lose another $2, bringing your total equity down to $8. So, according to martingale strategy, on the next bet you wager double the prior amount (or $4). Thankfully, you hit a winner and gain $4, bringing your total equity back up to $12. As you can see, all you needed was one winner to get back all of your previous losses.

However, let's consider what happens when you hit a losing streak like in scenario No.2:

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $1 Tails $ (1) $9
Heads $2 Tails $ (2) $7
Heads $4 Tails $ (4) $3
Heads $3 Tails $ (3) ZERO

Once again, you have $10 to wager with a starting bet of $1. In this scenario, you immediately lose on the first bet and bring your balance down $9. You double your bet on the next wager, lose again and end up with $7. On the third bet, your wager is up to $4, your losing streak continues and now you are down to $3. You do not have enough money to double down and the best you can do is bet it all. If you lose, you are down to zero and even if you win, you are still far from your initial $10 starting capital.

Trading Application
You may think that the long string of losses such as in the above example would represent unusually bad luck, but when you trade currencies, they tend to trend and trends can last for a very long time if you are caught in the wrong direction. However, the key with martingale when applied to trading is that by "doubling down" you in essentially lower your average entry price. In the example below, at two lots, you need the EUR/USD to rally from 1.2630 to 1.2640 to break even. As the price moves lower and you add four lots, you only need it to rally to 1.2625 instead of 1.2640 to break even. The more lots you add, the lower your average entry price. Even though you may lose 100 pips on the first lot of the EUR/USD if the price hits 1.2550, you only need the currency pair to rally to 1.2569 to break even on your entire holdings. This is also a clear example of why deep pockets are needed. If you only have $5,000 to trade, you would be bankrupt before you were even able to see the EUR/USD reach 1.2550. The currency may eventually turn, but with the martingale strategy, there are many cases when you may not have enough money to keep you in the market long enough to see that end. (To learn more, see Common Questions About Currency Trading.)

EURUSD Lots Average or Breakeven Price Accumulated Loss Break-Even Move
1.2650 1 1.2650 $0 0 pips
1.2630 2 1.2640 -$200 +10 pips
1.2610 4 1.2625 -$600 +15 pips
1.2590 8 1.2605 -$1,400 +17 pips
1.2570 16 1.2588 -$3,000 +18 pips
1.2550 32 1.2569 -$6,200 +19 pips

Why Martingale Works Better With FX
One of the reasons why the martingale strategy is so popular in the currency market is because unlike stocks, currencies rarely go to zero. Although companies easily can go bankrupt, countries cannot. There will be times when a currency is devalued, but even in cases where there is a sharp slide, the currency's value never reaches zero. It's not impossible, but what it would take for this to happen is too scary to even consider.

The FX market also offers one unique advantage that makes it more attractive for traders who have the capital to follow the martingale strategy. The ability to earn interest allows traders to offset a portion of their losses with interest income. This means that an astute martingale trader may want to only trade the strategy on currency pairs in the direction of positive carry. This means that he or she would buy a currency with a high interest rate and earn that interest while, at the same time, selling a currency with a low interest rate.With a large amount of lots, interest income can be very substantial and could work to reduce your average entry price. (For related reading, see Trading The Odds With Arbitrage.)

Minding the Risk
As attractive as the martingale strategy may sound to some traders, we stress that grave caution is needed for those who attempt to practice this style of trading. The main problem with this strategy is that oftentimes, that sure-fire trade may blow up your account before you can turn a profit - or even recoup your losses. In the end, traders must question whether they are willing to lose most of their account equity on a single trade. Given that they must do this to average much smaller profits, many feel that the martingale trading strategy is entirely too risky for their tastes. Read More..

Forex Strategy: Trading with Stochastics

Stochastics are amongst the most popular technical indicators when it comes to Forex Trading. Unfortunately most traders use them incorrectly. In this article we will review the correct way to use this popular technical indicator.

George Lane developed this indicator in the late 1950s. Stochastics measure the current close relative to the range (high/low) over a set of periods.

Stochastics consist of two lines:

%K – Is the main line and is usually displayed as a solid line

%D – Is simply a moving average of the %K and is usually displayed as a dotted line

There are three types of Stochastics: Full, fast and slow stochastics. Slow stochastics are simply a smother version of the fast stochastics, and full stochastics are even a smother version of the slow stochastics.

Interpretation:

Buy when %K falls below the oversold level (below 20) and rises back above the same level.

Sell when %K rises above de overbought level (above 80) and falls back below the same level.

The interpretation above is how most traders and investors use them; however, it only works when the market is trendless or ranging. When the market is trending, a reading above the overbought territory isn't necessary a bearish signal, while a reading below de oversold territory isn't necessary bullish signal.

Trending market

When the market is trending is necessary to adapt the oscillator to the same conditions: When the market is trending up, then the signals with the higher probability of success are those in direction of the trend “Buy signals”, on the other hand when the market is trending down, selling signals offer the lowest risk opportunities.

Thus when the market is trending up, we will only look for oversold conditions (when the stochastics fall below the oversold level [below 20] and rises back above the same level) to get ready to trade, and in the same way, when the market is trending down we will only look for overbought conditions (when the stochastics rise above de overbought level [above 80] and falls back below the same level. Read More..

What is Online Forex Trading?

Online Forex Trading is the arena where a nation's currency is exchanged for that of another currency of another nation. The foreign exchange market is the largest financial market expression within the world and is the equivalent of over 1.5 trillion USD changing hands daily, which is more than three times the collective amount of the US Equity and Treasury markets combined.

Unlike other financial markets, the Forex Trading market lacks physical location and has no central exchange. Thus it operates all the way through a global network of banks, corporations and individuals that trade one currency for another.

The need of a physical exchange enables the Online Forex Trading market to operate on a 24 hours a day and 7 days a week basis, spanning from one zone to another in all the major financial centers in the world.

By resting on the Forex Trading market a person can easily trade main and exotic currency pairs and crosses quickly and easily, from his or her home or the office too. Many companies offer both individual and institutional customers instant "click and deal" trades on live deal-able quotes during the Online Forex Trading.

The Online Trading is very much influenced on a margin that allows a person to open positions as large as 200 times the opening amount. A person can easily earn interest on a strong currency position even if the market is not moving enough.

Dealing in Online Forex Trading

Companies dealing with Online Trading try to be as practical as possible to their customers which is why the companies are constantly improving and enriching their services.

In such a stage the customers can execute directly from streaming prices through a platform, which is fast, reliable, stable, easy to use, secure and also contains powerful functions. They even highlight within the most demanding trading environments of the Online Forex Trading.

The orders are executed and finalized within seconds. Real-time tables and real-time interactive charting are both flexible and customizable. They include a precision feature that allows the customers to work with other applications and yet are able to monitor their trading activities.

The platform that is used is proprietary software that has been created in-house by Online Forex Trading stock's information technology department. They enjoy a distinctive ability to repeatedly develop the same and to meet the evolving needs of their customers.

All the trading activity is tracked onscreen in real time, including the current open positions, real-time profit and loss, margin availability, account balances, and all the historical transaction details too.

The responsive and well-informed staff is available 24 hours a day and 7 days a week to assist the customers with any question that comes to their mind. While dealing with the Online Forex Trading customers can trade currency via our online dealing room and also by the telephone in English, 24 hours during the working days and can also easily chat with the dealers round the clock.

To deal with Forex Trading there are many online Forex trading platforms available with proprietary softwares that are based on the superb qualifications of professional currency traders. They are effective, efficient and reliable to use too.

Placed direct orders in Forex Trading are executed on streaming currency prices and can never be re-quoted. The market orders that have not been filled instantly are confirmed within seconds at prices accepted by the client during Online Forex Trading.

As soon as a live trading account is opened, the customers are provided with the Charting package. Multiple Online Forex Trading forex charts can be opened in virtually any time to view the currencies that matter most to the customers.

The transparency feature helps the customers to work with multiple windows as it supports the multiple screens and yet keep a bull's eye on each and every single one of them.

Eliminating all commissions and fees enhances the trading performance. In addition, various companies offer complete transparency of where the Forex market is Online Forex Trading and where it can be bought or sold.

Through the unique map function that some companies offer, the customers can easily place the open platform's windows outside the visible area of the screen and easily move them back in. Thus facilitating in the process of trading.

The Online Forex Trading platform has user-friendly, customizable windows, through which you can easily track the current Forex holdings in your account, the quantity of your position their average price and the current market price too. Read More..

What is Foreign Currency Trading?

Foreign Currency Trading is a complete manual on effectively taking advantage of trading, both as a source of profit and income, and also as a sophisticated enclose in an investment selection. Foreign Exchange is the name given to the "direct access" trading of foreign currencies. Hence the word as Foreign Currency Trading.

Currency Trading is different from investing, since it is more speculative in nature. Currency Trading offers high potential returns because of the fact that you can control your money.

Lets try understanding the concept of Foreign Currency Trading with the help of an example. Leveraging your account balance by 100 to 1 means you can capture the change in value of $100,000 worth of a currency with only $1,000 in your forex margin account.

Some Currency Trading accounts may also offer 200 to 1 leverage. In contrast, a homeowner that puts 5 percent down on a home purchase only has 20 to 1 leverage. Thus, understanding the fact that a currency move can force liquidation of open positions if adequate margin isn't maintained in the account.

Knowing Foreign Currency Trading Better

With an average daily volume of $1.4 trillion, Currency Trading is understood to be 46 times larger than all the future markets combined and, for such similar reasons, is the world's most liquid market till date. In the past, Foreign Currency Trading was limited largely to enormous money center banks and other institutional traders.

But in just the recent few years, technological innovations and the development of online trading platforms, such as that used by the FX, allow mostly many small traders to take advantage of the significant benefits of Currency Trading with foreign Exchange.

Primarily, in the beginning of the era of Foreign Currency Trading, only very large enterprises had access to the foreign exchange, trading countenance within the inter-bank business, the largest and most liquid financial market countenance within the world.

In this market, currencies valued around USD2, 000 billion are bought and sold by thousands of worldwide participants every repeated day and 24 hours per day.

Recently, within the past few years this highly attractive market has become more and more accessible to the private clients too.

The market participants in Currency Trading, who are linked worldwide by the readily available modern communication systems, control the rates, because this market follows the law of supply and demand. As a result continuous changes in rates are registered.

The Foreign Currency Trading involves purchasing and selling of different currencies. It consists of making profitable use of these changes and the market fluctuations on the magnificent basis of well-tried Currency Trading models.

The special advantage of this investment as compared to the well-established investments like the fixed interest shares is that profits can also be made. For instance, the USD is falling instead of rising compared to, say for an example, the Euro.

In Foreign Currency Trading, a deal is always finalized between two different currencies, with one currency theoretically representing the loan currency that is the debit, and the other one the investment currency which is the credit. Results are restricted with limitations to the amount of the difference between the entry and exit prices.

Also an added advantage of Currency Trading is that it is possible to trade currency with up to 100 times or more of your own capital. This is called as leverage or say gearing. A relatively small market movement can almost have a proportionately larger impact then on the magnificent funds you have deposited or may think to deposit.

This can both options available as either it may work against you or it may work in favor for you.

In the Foreign Currency Trading market, currencies are always priced and traded in pairs. You simultaneously can buy one currency and sell another, but you can determine which pair of currencies you wish to trade.

As an example, if you believe the value of the Eurodollar is going to increase in comparison to the U.S. dollar, then you would buy the euro in the euro/U.S. dollar pair.

The objective of Currency Trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold.

If you have bought a currency during Foreign Currency Trading and the price increases in value, then you must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

As with most traded financial products, Currency Trading quotes include a "bid" and "ask." The ask is the price at which a market maker will sell (and you can buy) the base currency in exchange for the counter currency.

Now, the bid is the price at which a market maker is willing to buy (and you can sell) the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread.

An advice that can be helpful is that if you posses a small amount and have no knowledge at trading currencies, then always start practicing with a Free Demo Account.

Familiarize yourself with the trading platform and develop one or more trading strategies. Foreign Currency Trading has become one of the primary most lucrative businesses resource within the world. Read More..

Why 90-95% of Forex Traders Fail to Comprehend Risk

I can recall many moons ago reading an article regarding the success rate of forex traders. I don't know how factual the figures where, or where the person who wrote the article obtained the figures from, but I do remember the figures presented. Initially it came as a surprise, but considering my own track record when I begun trading the forex market I didn't doubt the facts bites you back and its not long (around 3-6 months) that you find yourself glaring at an account balance below the amount available to buy one contract.

Just recently I decided to write up a quick article on what I thought was the number one determining factor personally. In this particular article it stated that about 90-95% of forex traders lose their capital within the first 3-6 months.

Now, everybody who opens up a forex account believes they will be the 5-10% of traders who super-naturally just happen to make money with the small amount of experience they have. I know I did! But this mild sense of arrogance of why 90-95% of forex traders lose their shirt within their first 3-6 months? After looking at my own starting performance and reading around the forums and talking with forex friends I think I have found the number 1 reason.

And here it is...

FOREX TRADERS FAIL TO TRULY UNDERSTAND THEIR RISK

I know I know, you've heard it before right? And you've been to all the special risk management classes and read all the money management books, visited all the risk courses on the internet, etc etc, but please read on.

See, I thought I knew all there was to know about risk, and I thought the skills that I had acquired from the stock market were easily transferable to the forex market. I mean, how complicated can understanding risk be? Isn't it just what we can lose from our trade? Well, lets make sure we are all on the same page with the definition of risk...

While we might all have our own different interpretations on what risk means, I personally define it as being the amount that can be lost if our stop were hit once our trade is transacted.

As an example: If I were to buy 10 EURUSD contracts at 1.2401 and were to place a 20 pip stop I would lose 10 x $10 x 20 = $2,000. The equation variables are: quantity of contracts x value per pip per contract x distance of stop price from opening price. Therefore, we were willing to risk $2,000 on that trade.

So our risk is defined as the initial amount we are willing to lose when we place our trade. With this understanding let us know see why so many budding forex traders fail to truly comprehend it.

Forex Trading Risk Questionnaire:

Answer these questions about your forex trading experience to gauge your understanding of risk in the forex market:

Do you use stops? Yes/No
Do you know how much you are likely to lose in a trade if it happened to go wrong immediately after the trade was transacted? Yes/No
Do you know how much you are risking as a percentage of capital per trade? Yes/No
Do you place similar orders in the same direction on different currencies? Yes/No

If you answered "NO" to the very first question, I would hate to think of the excuses you use to justify not using stops. Here are some reasons that I have come across from people who do not attach stops to their orders:

My broker is out to get me (SOLUTION: Either change broker, or place a stop that is ridiculously way outside where you would get out, then hit close trade when it hits your stop point)

I use entry stop reversal orders instead (be very careful with this method as FXCM has certain restrictions on this)

I use mental stops (I would hate to be around your place when the computer, electricity, internet or certain body organs need emptying... place a ridiculously far stop anyway, then hit close trade when it hits your stop point) I'm a man... I don't need stops (I can't help you here... maybe surgery?!)

If you do not employ stops in your trading then you have very lax risk management principles, and if you happen to wipe out within 3-6 months representing another statistic then I would strongly recommend that you re-think your stop loss part of your trading plan.

If you answered "NO" to the second question, then either you do not use stops (see the two paragraphs above), or, you do not know how to calculate your risk. If you would like to know how much you are risking then use this simple formula:

Quantity of Contracts x Value per Pip x Loss in Pips

As a quick example: If you bought 7 EURUSD standard contracts and had a 16 pip stop loss, then your risk would be 7 x $10 x 16 = $1,120. A standard contract is where each contract uses $1,000 in margin per contract. If you use a mini contract you will notice that each contract requires you to have $100 in margin per contract (the "Value per Pip per Contract" variable would be worth $1 in the above example and your risk would only be 7 x $1 x 16 = $112).

If you answered "NO" to the third question I would assume that you either thought it was of little importance, or did not know how to do it. If you do not know how to calculate it just use the formula above (Qty x Value per Pip x Loss) and divide that result by the amount of capital you have.

So why is risk as a percentage of capital important? I have read many times before that the optimal risk percentage is about 2% per trade. If you find yourself wiping out often it could be due to the fact that you risk far too much per trade. Knowing your risk percentage can also show you what amount of consecutive losses you can take before you wipe out. The calculation is below...

To find out how many consecutive losses will wipe you out divide 100 by your risk percentage. As an example, if I were risking 4.5% per trade it would only take 100 / 4.5 = 22 consecutive losses until I was wiped out. If you are backtesting a system you might want to check the number of consecutive losses your system has had in the past and then make sure that the systems string of losses is less than the calculated figure above.

The Hidden Risk

The last question brings it all home. Even if you think you have mastered risk by successfully answering all the above questions, you may still find yourself wiping out. The reason for this is due to the correlation between the currencies you trade.

It should come as no surprise to you that the EURUSD and GBPUSD currencies move in similar fashion, likewise the EURUSD and USDCHF in a mirrored fashion (when one moves up the other moves down). This relationship is known as a correlation and can be measured statistically. If the correlation between two currency pairs is above 0.90 then they are said to have a "strong correlation". Conversely if the correlation between two currency pairs is below -0.90 then they are said to have a "strong negative correlation" (when one moves up it is more than likely the other will move down).

This high correlation between currencies can blow your risk by at least twofold and as much as threefold if you trade the EURUSD, GBPUSD and USDCHF in a similar direction.

I once analyzed the correlation that existed between the currencies and found some amazingly high correlations (even between currencies I really didn't think had much of a correlation). As you can see from clicking the link below the chart highlights some of these strong correlations.

Daily Forex Correlations

The warning I would like to make is that if you find you are placing similar trades on two different currency pairs you are doubling your risk! Instead of risking the initial 2% per trade, you are now actually risking 4% per trade! Instead of 50 consecutive losses wiping you out, you only now have 25! I hope you can see the importance of this.

What to do? First of all recognize the problem and do one of two things: Decrease the quantity of contracts for each trade that has a high correlation (if you are trading the EURUSD & the USDCHF halve the quantity between both), or Only trade one currency. Reducing your risk can be as simple as that.

I hope this lesson has impressed on you the importance of risk in the forex market. It's not just a case of knowing what your risk is, but knowing that there exists a high correlation between currencies and that by doing similar trades you can be doubling or even tripling your risk. Don't forget the first rule in trading: Protect your capital at all costs. Managing your risk safely will help you achieve this.

by currencysecrets.com

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FOREX vs. FUTURES TRADING

This article tries to highlight why FOREX is considered a better option for investors when compared to Futures Trading.

You pay ZERO commissions and exchange fees!

In the futures market, you must pay commissions and exchange fees. In the FOREX market, you pay NONE of that. No commissions. No exchange fees. Not one red cent. How can FOREX do that? Simple. Because you deal directly with the market maker via a purely electronic online exchange, you eliminate both ticket costs and middleman brokerage fees. There is still a cost to initiating any trade, but that cost is reflected in the bid/ask spread that is also present in futures trading. And, because the FOREX trading platform offers instant execution off firm two-way prices, you never have to worry about price "slippage" or bad fills which happen all too often in other financial products. To see for yourself how these benefits work, open a free demo account.

You get more leverage than futures

The sheer size of the currency market (46 times greater than all futures markets combined) and the greater price stability allow you to trade with a much higher degree of leverage than is typical with futures contracts. Plus, you are able to select the degree of leverage that you wish to employ in trading. Unless you specify otherwise, FOREX sets your leverage level at FOREX's most lenient requirement. The actual margin requirements for leverage vary with account size.

For example, if your account has $30,000 in it, then the margin requirement is $1,000 for every position (approximately equal to $100,000 worth of currencies). Thus, the margin requirement is just 1% of the total value of the currencies traded - a 100:1 ratio. Click here for a demo.

Your risk is strictly limited

With FOREX, you can NEVER have a debit balance! In the event that funds in your account fall below margin requirements, the FOREX Dealing Desk will simply close all open positions. That means that, even if you are dead wrong and there is a catastrophic market move against you, you can never lose more than the amount of money you have in your account. In addition, by using stop loss orders that are guaranteed by FOREX, your risk can be further limited and defined. That provides you with tremendous peace of mind. See for yourself by making a few risk-free virtual trades in your FOREX demo account.

You get instantaneous execution and firm prices

The futures market does not offer instant execution or price certainty. Even with electronic trading and limited guarantees of execution speed, the price for fills on market orders is far from certain. In the futures market, the prices represent the LAST trade, not necessarily the price for which the contract will be filled. With FOREX currency trading, in contrast, you get instantaneous execution and price certainty. On the FX trading, you trade directly off real-time streaming prices. Your trades are filled instantly. There is no discrepancy between the displayed price and the execution price. This holds true even during volatile times and fast moving markets. Experience the benefits of instant fills and guaranteed prices by opening a free demo account.

You get maximum liquidity

Due to its enormous size (46 times bigger than all futures markets combined), the currency market is the most liquid market in the world. The spot currency market is a $1.4 trillion daily market, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the $30 billion per dayfutures market, it becomes clear that the futures market provide only limited liquidity. The currency market, in contrast, is very liquid, meaning positions can be liquidated and stop orders executed without slippage. In just a few minutes, you can open a demo account and see how this works.

You can easily trade 24 hours a day

Unlike most futures exchanges, the currency market is a seamless, 24-hour market. At 5 p.m.Sunday, New York time, trading begins as markets open in Sydney and Singapore. At 7 p.m. the Tokyo market opens, followed by London at 2 a.m., and finally New York at 8 a.m. As a trader, this allows you to react to favorable or unfavorable news by trading immediately. It also gives you the added flexibility of determining your trading day. By comparison, the currency markets in the United States, such as the Chicago Mercantile Exchange and Philadelphia Exchange, have regulated hours. The CME, for instance, opens at 8:20 a.m. New York time and closes promptly at 2 p.m. Therefore, if important data comes in from England or Japan while the U.S.futures market is closed, the next day's opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they can be thinly traded, not very liquid and difficult for the average investor to access.) Open a free demo account and get the ability to trade whenever you want.

by 2work-online.com

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