If you are cooking something and you check on it and you see that it is “overdone”, what is your immediate reaction? Exactly…you take the dish out of the oven. Remove it from what caused its current overdone state and the sooner the better.What if your car’s engine is “overheated”? Same deal…you do what it takes to get the engine cooled down. Immediately stop doing what caused the engine to become overheated in the first place.Given these natural reactions, it is easy to see why the initial and almost immediate reaction by many newer traders to an overbought or oversold trading scenario is to do the opposite in that case as well.They reason that since many buy (long) orders moved price up and pushed the indicator into overbought territory, we must do the opposite and take a short (sell) position. Conversely, if many sell orders caused price to drop and the indicator to move into oversold territory we must begin to take long positions. It’s almost as though they expect price to snap back like a rubber band when it reaches these overextended zones.Well…what is the proper reaction for casseroles and car engines is not necessarily the right reaction when trading.When an indicator goes into the Overbought/Oversold areas, remember that it can remain there for quite some time. Just because the RSI or Slow Stochastics indicator reads Overbought for example, does not mean that price action on the pair is like a tightly compressed spring that is going to immediately snap back toward the Oversold area.Let’s take a look at the Daily chart of the NZDJPY below for an example on this… Notice on this chart that the first time Slow Stochastics went above 80 into the Overbought area, price continued to go up for another 780+ pips and Stochastics stayed overbought the entire time. Clearly a trader who went short when it first went into Overbought territory would have missed out on a great move. They also would have gotten stopped out of their short position in fairly short order.To see an example of where price retreats when Slow Stochastics goes into Overbought territory we need to look no further than the area labeled “A” on the chart. In this case the candlesticks around “A”, dojis, spinning tops, shooting star and a hammer, indicate the potential for a pullback.The point to be made is that either scenario can play out so don’t have a knee jerk reaction to the Overbought and Oversold areas of an indicator.Remember…Only take entry signals from an indicator that is in the direction of the longer term trend.For example, if the trend has been strong and prolonged to the upside, it stands to reason that the indicator will be in Overbought territory since it reflects the bullish push of price action. To take a short position at that point would be to trade against the trend and that would be introducing more risk into the trade.
Traders like to make use of indicators in their trading but, oftentimes, they resent the fact that they “lag the market”. This question again came up during last night’s webinar on Moving Averages.Keep in mind, that all indicators are going to "lag the market" to a greater or lesser degree since they are all based on an average of price action that has already taken place. Moreover, the longer the chart time frame we use or the greater the number of periods analyzed by the indicator, the more of a lag that we will see.Even though every trader would like to be in on the very first pip of a move, it is fine to miss the initial move that a pair makes in favor of entering a trade that has a greater level of confirmation behind it.If we are looking to enter a trade at the very first sign that a move may be taking place, we are going to find ourselves entering many trades based on very short term signals and, consequently, we will be basing our trades on what ultimately can turn out to be a "false" entry signal…one based on very little data.While we will give up some pips at the beginning of the move, the lagging nature of indicators will get us into trades that have a more confirmation behind them.Let’s take a look at a 4 hour chart of the GBPUSD for our example… Moving Averages will give an entry signal when the faster MA crosses over the slower MA in the direction of the intended trade. In this case the 20 period is the faster MA and the 50 period is slower MA.The initial move to the downside begins at 1.6615 but our Moving Average crossover does not signal an entry until about 1.6455…some 160 pips later. This is what is meant by a “lagging indicator”.Keep in mind however that entering at the crossover provides the trader with additional confirmation that the move may continue. The trader would not have had that confirmation if they entered at the very first indication that this pair was moving down. Now that we have hindsight, it appears obvious. But at the point where the “Downward Move Begins” on the chart, had we entered there the potential for that being a “false” entry would have been very high.Also, take note that the pair when shorted at the Moving Average entry signal at 1.6615 is still moving down on the chart at 1.5980…a gain of over 600 pips.This example is by no means meant to indicate that this is the type of gain traders can expect when using Moving Averages and/or waiting for greater confirmation prior to entry. However, waiting for that confirmation, regardless of the indicator being used, can lead to higher probability entries.
Talking Points:* Sentiment helps decipher traders feelings towards an asset* SSI shows net positioning on currency pairs* Changes in sentiment provide insight into trends, and market reversalsSSI (Speculative Sentiment Index) is a proprietary tool to display retail positioning in real-time to display retail-market sentiment. Once a trader understands how SSI works and how to read the sentiment data, it can then be worked in to any existing trading strategy.So today we will examine what sentiment is and how you can analyze sentiment through SSI data. Market SentimentMarket sentiment in its most basic definition, defines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude sentiment can become negative.While sentiment is not unique to the Forex market, it can be directly translated to currency pairs. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment. The graph above shows sentiment in action. Going back to November of last year sentiment has been negative on the GBPUSD, however prices have continued trending higher. Sentiment has recently become even more extreme as the majority of traders in this case are attempting to pick a top on the GBPUSD.Now that you are more familiar with sentiment, let’s look how we can analyze sentiment in the Forex market. SSISSI is a ratio that gives us a picture of trader sentiment. SSI reveals trader positioning by determining if there are more positions net long than short, and if so by how much. Above we can see the current SSI ratios posted on DailyFX.com.If clients are net short a currency pair SSI will be negative, and if clients are net long the number will be positive. As mentioned above, the more extreme the SSI reading becomes, the more credence the information should be given.Using our example again with the GBPUSD, the last reading on SSI was -8.15. This ratio means that trader’s positions are net short at a rate over 8 to 1 when compared to all open buying interest. This can be interpreted again as traders attempting to position themselves for a possible turn in the market. Contrarian investors knowing this can look to open new long GBPUSD positions back in the direction of the prevailing trend. Changes in SSILastly, traders should also be aware of changes in sentiment. Changes in sentiment can be used to decipher whether trends are set to continue, pause or even reverse. In the event that sentiment is at an extreme, a reduction in net open interest can signal that a trend is winding down. Likewise if a pair with neutral sentiment begins changing rapidly, in one specific direction, this can signal a potential change in market direction.
Many people around the world are now looking to Forex as a safe haven in these shaky financial times in which the future is accompanied with a big question mark. The Forex market enjoys a unique benefit, as a result of its size, that it is not affected by the recession. Traders can continue to profit from their trades even in these troubling times.However, new traders, upon encountering Forex websites, whether it is sites belonging to brokers, auto traders, or any other Forex service, are quickly overcome with excitement at the thought of becoming wealthy overnight. There is no shortage of Forex sites promising traders immediate wealth and taking advantage of their Forex newbie status.Smart traders, before beginning to trade, should spend significant time reading articles bolstering their Forex education before risking any money. The information available to traders online is literally endless with thousands of articles uploaded daily, people sharing their trading experiences on various platforms, and tutorials popping up in every corner. As a trader, this is bound to overwhelm you, and most new traders will want to hear a few golden rules that they can use to begin trading.I am not claiming that you will become a Forex expert after implementing these rules, but I do think that if you properly internalize these points and use them effectively in your trades, you can avoid the disaster most traders experience when trading with no prior knowledge. I have said this many times before, and I will continue to say it, Forex has huge potential, but the danger is just as great.The following are three golden rules of Forex trading, that if implemented, will give traders a head start over their colleagues:Do Not Depend on Luck : If you are looking to make Forex and intend it to be a serious endeavor, you need to show you are serious and make a plan. Don't jump in without a trading strategy and money management techniques in place. Remember that no matter how good you are or how much of a natural trader you think you are, you will lose, and you will lose more than once. The big question is, and this is what separates the boys from the men, how are you going to handle those losing trades? Are you going to be forced to close your account because of 5 bad trades? If the answer is yes, you are doing something wrong.Let's stop talking philosophy and get down to the numbers. Imagine for a second that you have decided to open an account with $10,000. You can now choose how much of that capital you are going to risk per trade. Obviously, the higher the risk, the more potential for profit, hence the famous saying “No pain, no gain”.So if you decide to risk 10% of your entire account on each trade, simple math dictates that after 10 bad trades, you will be closing up shop. Now imagine you did the same thing but risked only 5% of your account per trade. You just doubled your chances of making it, or cut the chances of a margin call in half.However, money management is not only about preventing margin calls, it is also an important tool in ensuring continuous and steady profits. The Forex industry is always evolving and new tools are introduced daily. Even now, as I write this, almost all Forex trading platforms offer important and useful tools that you must take advantage of, if you want to succeed. Set up Stop Losses, do not let your losses go on forever. Implement Take Profits, I know it is hard to stop the trade when you are ahead, but that is exactly what you need to do if you want to stay ahead.Bottom line is, when it comes to trading Forex, you do not want to rely on your human emotions or your hunch, you want to depend on a well thought out strategy that makes sense and was custom tailored to meet your personality and trading needs.Implement Bullet One : OK this is not just a fake point to add more meat to the article, this is real and crucial for your Forex success. Let me explain. It is easy to plan your strategy, it is a lot harder to put it into action when in the moment, and the strategy is telling you to do something that is the exact opposite of what your heart is telling you to do.Studies have shown that close to 60% of Forex failures can be attributed to this one factor. People do not stick to their plans. You need to understand that Forex and emotions do not, and must not mix. If you are an overly emotional person who tends to get excited quickly or have been known to make rash decision in high pressured situations, you need to step away and let your technique do its work. Do not let your emotion dictate your Forex decisions, this will be your downfall.If you are finding that you are not sticking to your trading plan and it is not the emotions getting in your way, the only other possibility is your lack of confidence in the plan itself. You need to do your research and make sure the plan you intend on using fits you perfectly. It might take some time to find, and you might feel like you want to get in and trade already, but skipping this step will almost definitely lead to your ultimate failure. It might not happen right away, but if you have no strategy, and you are trading randomly, you will eventually join the 90% of traders that fail at the Forex game. Make a plan and stick to it, no matter what.Use Leverage Responsibly : Anyone who has ever visited a Forex website of any kind, has undoubtedly seen the words leverage and margin thrown around. First thing's first, margin and leverage are not the same thing. Margin is your money and leverage is the broker's. For clarity and emphasis, I am going to repeat that, leverage is not your money, it belongs to the broker and you are for all intents and purposes, borrowing that money.Another important and possibly detrimental point that traders must understand when it comes to leverage is that while it increases your chances for larger profits, it also magnifies your risk and can easily lead to the destruction of your account.Just to clarify, using a 100:1 leverage means you can now trade 100 times more money than you could have before borrowing that money. What is also means is that you have multiplied the speed at which you will lose that money by 100 as well. Using a high leverage is literally giving up the control of your account to someone else, namely the broker.If you are sure you will win the trade, which you cannot be, use high leverage, because your profits will be multiplied. If you are unsure of the outcome of the trade, use this dangerous resource responsibly. Think of leverage, as I have said before, as the speed at which you are driving. The higher the leverage, the faster you are going. The faster you are going, the more deadly a small mistake can be.There are many more tips that can be given to someone who is testing out the Forex waters for the first time, but I think it is safe to say that if the above three pieces of advice are understood properly and implemented correctly, disaster can be avoided.Of course, if you want to make it big in the market, you are going to need to learn how to analyze the market, understand the fundamentals, and process the various technical indicators used in the Forex trading arena. The most important thing to do, and these three tips will assist you in doing it, is damage control, because as I explained above, no one trades Forex without experiencing losses. You are going to fall, the important questions are, are you going to get back up and are you going to learn from your mistakes?
Many traders bemoan the fact that the indicator they are using does not signal an entry on the first few pips of a move. They condemn the indicator for “lagging behind the market”…that is, signaling an entry after the initial move has begun.Keep in mind that it is the very nature of indicators to lag the market.All indicators, RSI, MACD, Stochastics, Moving Averages, etc., are going to be lagging to a greater or lesser degree since they are based on an average of price action that has already taken place. The result is that pips can be left behind since the initial part of the move has taken place before the entry signal is generated.The longer the time frame of the chart and the greater the amount of periods comprising the indicator, the more reliable it will be since the signal is derived from a greater amount of data. While shorter time frames and fewer periods will generate more entry signals, because they are based on a lesser amount of data, more “false entry” signals will likely result.Even though every trader would like to be in on the very first pip of a move, in my opinion, it is fine to miss the initial move that a pair makes in favor of entering a trade that has a greater level of confirmation behind it.And therein lies the benefit of the lagging nature of indicators.If we are looking to enter a trade at the very first sign that a move may be taking place, we are going to find ourselves entering many trades based on very short term signals and a low amount of data.While we will give up some pips at the beginning of the move, this lagging aspect of indicators will get us into trades that have a bit more confirmation behind them based on the greater amount of data.In other words, the indicator will force us to wait a bit before entering.Let’s take a look at the historical 4 hour chart of the CADJPY with the MACD in place below… If a trader had based their short entry on the MACD crossover, when the MACD line (red) crossed over the Signal Line (blue) to the downside, they would have given up the pips between point A and point B on the chart…about 26 pips.However, inasmuch as the downward momentum signaled by the MACD cross was in place, there was the greater likelihood that the bearish move might follow through. As it turns out, it did; posting a gain of 220 pips between points B and C.While this type of confirmation will not translate into a winning trade each and every time, waiting for the move to “mature” a bit before entering will result in taking higher probability trades.Bottom Line: I would rather enter later and be right than enter earlier and be wrong.
There are dozens of national currencies being traded full time on the foreign exchange, and nobody can potentially monitor them all at the same time. That’s why many traders depend on currency exchange signals to keep them apprised of movement in the market. Many brokers and other forex-related enterprises offer currency exchange signals to subscribers. Currency exchange signals are simply suggestions to sell or buy based primarily on mathematical routines and professional know-how. Sometimes these signals include specific entry, stop and target levels. They might say something similar to, effectively, “Right now the EUR / Dollars bid is at 1.2529 and dropping. When it gets to 1.2465, sell. “ Currency exchange signal suppliers often charge for their service, sometimes as much as $100 a month. For this the customer gets 1-5 signals a day, sent through e-mail, SMS message or instant messenger. The trader is under no need to do anything with the info, of course. They are advisory in nature, and the trader is free to overlook them wholly if he wants to. But most traders generally go with the advice that comes to them through currency exchange signals. They wouldn’t pay for the service if they didn’t find the advice useful. There are two schools of thought about currency exchange signals. One announces that you’re a sucker if you pay for them, with the reasoning that if the folks behind them are so good at playing the market, why do they have to sell signals to make a living? The opposing point of view says that since signals need research and experience to create, why shouldn’t the people who distribute them receive payment for their efforts? If you do choose to pay for a signals service, you need to get a test subscription first. Be dubious of a service that won’t give you a no-cost trial period prior to starting paying, or that only offers a testing period of a few days. ( What do they have to hide? If their service is good, showing it to you for a week or two will only help sell it to you. ) On the other hand, one maxim usually is true : You get what you pay for. Sites which offer free currency exchange signals won’t be as trusty or experienced as the professional sites. And in either case, you should not blindly follow the advice of currency exchange signals. A smart investor will look at the trends himself to make sure he agrees with the signals he was given. The choice to purchase or sell is finally his, after all.
The first thing to remember when using an indicator, any indicator, is that it is a function of price action. The indicator itself is not the ultimate tool when it comes to trading…it comes in behind price action. Price action governs the information that the indicator will ultimately provide on the chart.Price action is Indicator #1.As such, a trader must determine what price action is doing (i.e. the trend) before consulting the indicator for an entry signal. Once the trend is determined, the trader can then consult the indicator for an entry signal in the direction of the trend.Now, let’s take a look at the 1 hour chart of the EURGBP below… First of all we note that the currency pair is in a downtrend. We know this because on longer time frames, the Daily and the 4 hour, the pair has been making lower highs and lower lows which signify a downtrend. Also, on each of the charts, the pair is trading below the 200 SMA. Lastly, when we do a Strong/Weak analysis, we find that the EUR is weak and the GBP is strong. Given each of those pieces of information, we know we want to sell the pair since that is the direction of the trend and that will be the higher probability trade.Now, let’s take a look at the indicators on the chart.The three indicators that we have on the chart are oscillators…Slow Stochastics, MACD and CCI. In a downtrend, the entry signals for a sell from each indicator are as follows: Stochastics – when the K line (blue) crosses over the D line (red) to the downside; MACD – when the MACD line (red) crosses over the Signal line (blue) to the downside; and, CCI – when the CCI line crosses below +100.As can be seen on the chart, each of the indicators provides a sell signal at virtually the same time. So, given that, which one of the three is the “best”? In my opinion, in this key area they are all the same. They all provide the same signal at the same time. The choice will depend on the one that each individual prefers.As in the case of so many things in trading, there are no absolutes.To determine which is the best one for you, we recommend that traders simply try all three individually over the course of many trades (100+) before they decide…kind of like test driving a car before you buy. Once you make your decision on which you like the best, stick with that one and discard the other two. Having all three on a single chart would be redundant.
Talking Points:- In our last article, we looked at the necessity of managing risk for FX traders. In this piece, we delve into the mechanics of trading with Support and Resistance.- Price action is the study of technical analysis without the use of indicators in the effort of removing ‘lag’ from technical analysis. Traders can utilize price action with support and resistance in the effort of taking a risk-efficient approach into markets.- If you’re looking for trade ideas, please check out our Trading Guides. And if you’re looking for shorter-term trade ideas, please check out our IG Client Sentiment.Price action is the permutation of technical analysis that involves stripping indicators from the charts in order to focus on the most important variable available to traders: Price itself. While battles are waged within the spread on short-term variations, longer-term charts can display potential entry and exit points that can assist traders with strategy planning. While no form of technical analysis will be perfectly predictive in nature, simply because the past doesn’t replicate in the same exact way in the future, removing technical indicators can allow traders to focus on near-term price movements without the lag often introduced with oscillators or moving averages.In this article, we’re going to look at how traders can use price action to trade support and resistance.Support and ResistanceGiven that markets are unpredictable, and also given that history often rhymes while it never perfectly repeats: Support and resistance are probably one of the most valuable tools available to traders, technical or otherwise. We previously looked at the necessity of risk management, and with support and resistance – traders can more adequately manage risk for their trading activities. If one wants to buy – there’s no reason to get long and just hope that it works out: Instead, wait for support to show up, so that a stop can be placed underneath that zone so that if the setup doesn’t work out, the loss can be mitigated. But if the setup does work out and if support holds, traders can sit in a winning position and scale-out as prices move-up.The key here is finding that area of support so that the stop can be properly placed. There are a plethora of ways to find support and resistance in a market, and we previously looked at a few of the more common in our Strategy Architecture series. On the chart below, we’re adding a Fibonacci retracement over a recent ‘major move’ in USD/JPY. Drawing the retracement involves starting at the beginning of the move, and ending at the finish of the move, which would encapsulate a ‘major move’ that’s been seen on the chart. Within the move, retracement levels are applied at pre-set intervals, and those intervals are based on the golden ratio of the Fibonacci sequence of: 23.6%, 38.2%, 50% (which is the half-way point, and not a true Fibonacci number), 61.8% and 76.4%. Some traders use slightly different retracements, choosing to use 78.8% as opposed to 76.4%; but for purposes of this article, we will stay with the more popular level of 76.4%.Recent Major Move in USD/JPY (in Red) Helping to Define Support/Resistance (in Blue) You’ll probably notice from the above chart that support and resistance is rarely ‘perfect’. More normally, we’ll see support tested before prices may move up or we’ll see resistance breech ever so slightly before sellers can take over. The reason for this is what we mentioned earlier: Inside the spread is chaos, and if we look at the way that price action moves during news announcements, with low levels of liquidity allowing prices to swing violently, this makes sense.The key with trading support and resistance is to be realistic in the fact that you’re probably not going to catch many exact bottoms or tops. Trying to do so is usually a quick-way into the loss column, so traders will often evaluate support or resistance inflections with current price action in the effort of trading directional momentum in a market. Let’s look at one of those prior examples in USD/JPY on a much shorter-term chart to illustrate.From the above chart, you’ll probably notice the double-top that printed in USD/JPY around 114.30. This was the top in May and again in July; but in each case, prices were on a bee-line higher until this resistance level came into play, at which point a rather extended reversal began to play out. On the hourly chart below, we’re looking at how the first of these two resistance inflections worked-out. Notice that price first resists at this level (blue box), only for buyers to jump-back in after prices softened. Buyers re-gained control after a quick pullback (green box), but on a subsequent re-test of that resistance, buyer motivation waned and sellers began to take-over (red box). For the trader that was buying on the first break of resistance at 114.30, they probably ended up regretting it. Even buyers looking to trade the subsequent resistance break probably ended up regretting it. If we look at the same move on the four-hour chart, we’ll notice that each candle tapered up to resistance, with sellers keeping each candlestick body subdued below resistance (shown in blue). This capped gains in the pair until bears could take-over, and as we can see from the lower-low and lower-high showing after that second resistance inflection (each in red), sellers began to take over after resistance failed to yield: Know Your Time FramesThe key variable in the above relationship was one of patience: To the trader quickly acting on the first test of resistance, they likely ended up in a losing trade. This is not to say that breakouts cannot happen and that every support and resistance level will hold; but for the trader taking a patient approach, they could’ve waited for the four-hour candle close to highlight those wicks above resistance as evidence that sellers were responding to this zone; opening the door to potential short-side reversal scenarios.As those four-hour candles closed with wicks around resistance, this opened the door for a short-side reversal setup so that the trader can look to place stops on the other side of resistance. This would allow for a relatively small risk outlay so that if resistance did end up breaking – the damage could be mitigated. But if that resistance did hold and if sellers were able to take control, the potential upside could be rather large compared to that initial risk outlay.We discussed the various time frame relationships in the article, The Time Frames of Trading. In that piece, we discuss multiple time frame analysis as a way to more-fully grasp what’s going on with price action at the time. This can allow traders to utilize longer time frames to read trends and grade market conditions, while using shorter-term time frames to look for entries in the direction of that ‘bigger picture’ market environment. On the table below, we look at popular time frames for various approaches or, by ‘desired holding period’. Look for Wicks on Closed Candles to Highlight Support/Resistance ReactionsAfter traders have identified potential support and resistance levels and after the actionable time frames have been decided upon, traders can then look to confirm support and resistance by looking for reactions around these levels. Candlestick wicks can be used to help highlight reactions. If prices temporarily dip below a support level, only for bidders to bring price back-above, then a wick will show through that price, and this is highlighting a potential reaction that can be used to trade that level. Let’s look at a recent move in EUR/USD to help illustrate:Coming into Non-Farm Payrolls last Friday, EUR/USD had been on a rather brisk top-side run. Over the previous seven months, the pair had climbed by more than 1,400 pips, with 700+ of those arriving since mid-June. If we draw a Fibonacci retracement around the major-move that started in latter-July, the 38.2% retracement from that level comes-in at 1.1743.After Dollar-strength took over on the back of a rather solid NFP report, EUR/USD began to drive-lower in a counter-trend move. Prices moved all the way down to the 38.2% retracement, at which point buyers responded, as you can see from the under-side wick highlighted in red on the below chart.EUR/USD Hourly: Three Consecutive Wicks at Fib Support Highlight Buyer reaction The benefit here isn’t that the above wicks show that the down-side move is over; it’s in the fact that this highlights an area where traders can look at a risk-efficient way of trading the continued up-trend in the pair. The fact that buyers had responded in this region merely highlights the potential for support, with the possibility of a tight stop for continuation approaches. Let’s look at another example to help illustrate, but this time we’re going to look at the Japanese Yen. We’re going to look at a longer-term move here, as well, as we’ve drawn a Fibonacci retracement around the ‘post-Election’ move in the pair, taking the election night-low up to the high set on January 3rd, shown below. Over the past two months, we’ve seen a rather range-bound move in USD/JPY, as the pair has oscillated between 109.00 and 114.50. But despite this lack of discernable direction on longer-term charts, the Fibonacci retracement produced from the above major move has helped to set support and resistance on the four-hour chart numerous times. On the below chart, we’re illustrating resistance inflections in red and support in blue; and notice how that while not every inflection ‘holds’, the ones that do lead-in to rather extended runs. Notice how the apex of the reversal in the above chart shows right at the 23.6% retracement at 114.50, while near-term support followed by resistance showed at the 38.2% while, at least so far the lows have been cauterized at the 50% retracement. Each of these reactions can be actionable, in one way or another.Applying Trend-Side BiasesTraders looking to trade a directional move can benefit greatly from support and resistance analysis, as it can allow the trader to buy uptrends at support or sell down-trends at resistance in a relatively risk-efficient manner. For up-trends, potential resistance can be used as profit targets, while support can be utilized for re-entry or stop placement. For down-trends, potential support levels become targets while resistance can be used to add to the position or to set stops.We can even add support and resistance from other avenues, such as psychological levels or pivot points or even other Fibonacci retracements. This can add significant texture to the chart to allow the trader to more efficiently manage their risk. On the chart below, we’ve focused-in on this recent move lower in USD/JPY to illustrate how this can be done. In purple, we’ve outlined a prior support swing that eventually showed-up as resistance. We’ve also added a second Fibonacci retracement, taking the June 2015 high down to the June 2016 low, shown in Green.After prices break below the purple zone, we have lower-lows and lower-highs. Traders, at that point, would likely want to move forward with a bearish side-bias in the effort of trading in the direction of the trend. And given that traders would likely want to be selling resistance to jump-in the down-trending direction, we’ve outlined four various areas where this took take place at. 1) Prior price action support around 112.83 becomes fresh resistance as prices break-lower. 2) Resistance shows at the 50% retracement of the longer-term Fibonacci retracement. 3) Resistance shows at prior support at the 38.2% retracement of the shorter-term move and finally 4) psychological support at 111.00 becomes new resistance.For each of these reactions, the candlestick wick showing sellers responding to resistance open the door for entries in the direction of the trend.Combining Methodologies: Sell Resistance on the Way Down, Buy Support on the Way Up
Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to utilize more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to1 or less.In looking at the trading records of tens of thousands of clients from a major FX broker, as well as talking with even more traders daily via live webinars, Twitter, and email, it appears that traders enter the Forex market with a desire to cap their potential for losses on their risk based capital. Therefore, many newer traders choose to start trading forex with a small capital base.What we have found out through the analysis of thousands of trading accounts is that traders with larger account balances tend to be profitable on a higher percentage of trades. We feel this is a result of the EFFECTIVE LEVERAGEused in the trading account. Figure 1 Since many smaller traders are inexperienced in trading forex, they tend to expose their account to significantly higher levels of effective leverage. As a result, this increase in leverage can magnify losses in their trading account. Emotionally spent, traders then either give up on forex or choose to compound the issue by continuing to trade in relatively high amounts of effective leverage. This becomes a vicious cycle that damages the enthusiasm which attracted the trader to forex.No matter how good or bad your strategy is, your decision (or non-decision, as the case may be) about effective leverage has direct and powerful effects on the outcomes of your trading. Last year, we published some tests showing the results over time of the same strategy with different leverage. You can read it in the article Forex Trading: Controlling Leverage and Margin. Figure 2 In figure 2, we have modified 2 elements of the chart in figure 1. First, we renamed each column to represent the highest dollar value that qualified for the given column. For example, the $0-$999 equity range is now being represented as the $999 group. The $1,000 - $4,999 equity range is now being represented as the $4,999 group. And likewise, the $5,000 - $9,999 range is now being represented as the $9,999 group.The second change made was that we calculated the average trade size of each group and divided it into the maximum possible account balance for that group. In essence, this provided us a conservative and understated effective leverage amount. (A larger balance reduces the effective leverage so the red line on the chart is the lowest and most conservative calculation of the chart.) For example, the average trade size for the $999 group was 26k. If we take the average trade size and divide it by the account equity, the result is the effective leverage used by that group on average.As the effective leverage dropped significantly from the $999 group to the $4,999 group (red line), the resulting proportion of profitable accounts increased dramatically by 12 basis points (blue bars). Then, as further capital is added to the accounts such that they moved into the $9,999 category, the effective leverage continued to incrementally drop pushing the profitability ratio even higher to 37%.Game Plan: How much effective leverage should I use?We recommend trading with effective leverage of 10 to 1 or less. We don’t know when the market conditions will change causing our strategy to take on losses. Therefore, keep the effective leverage at conservative levels while using a stop loss on all trades. Here is a simple calculation to help you determine a target trade size based on your account equity.Account Equity X Effective Leverage Target = Maximum Trade Size of All Combined PositionsA trader’s account size and the maximum trade size based on 10 to 1 leverage. That means if you have $10,000 in your account, then never have more than 100,000 of open trades at any one time.The precise amount of leverage used is decided entirely by each individual trader. You may decide that you are more comfortable using an even lower effective leverage such as 5 to 1 or 3 to 1.Most professional traders enter into trading opportunities focused on how much capital they stand to lose rather than how much capital they are looking to gain. Nobody knows the future movement of prices so professional traders are confident in their trading approach but conservative in their use of effective leverage.Adjusting the effective leverage to suit your risk toleranceOur research indicates that accounts with the smallest capital base (the group labeled $999) have an average trade size of 26k for each trade. Their effective leverage is at least 26 times which is significantly higher than the 10 times leverage discussed earlier. If these traders want to trade at no more than a 10 to 1 effective leverage, they would need to make at least one of the adjustments noted below:Increase their trading account equity by depositing more funds to an amount that reduces their effective leverage to less than 10 to 1. So our average trader, who is averaging 26k trade sizes, would need at least $2,600 in their account to trade 26k on a 10 to 1 effective leverage.Decrease their trade size to a level that reduces their effective leverage to less than 10 to 1. Use the figure 3 calculations and chart above. Figure 3 In the chart above, notice how the trade size remains relatively stable as the account equity increases from the $999 group to the $4,999 group. In essence, this indicates that traders are looking for, on average, at least $2.60 per pip (if they average 26k trade size, that is approximately $2.60 p/l per pip in most currency pairs).There could be many reasons why traders average at least 26k for each trade, or $2.60 per pip. Perhaps they want a large enough trade size to make their time invested trading worthwhile. In other words, traders may be seeking a price per pip value and $2.60 is the minimum threshold on average. If these traders were to use no more than 10 to 1 effective leverage, they would need at least $2,600 in their account to support $2.60 per pip.Another possibility is that many newer traders simply don’t understand the power of leverage and how one large losing trade can wipe out several winning trades in a row. Using a conservative amount of leverage will help slow down the rate of capital losses when a trader goes through a losing streak.Regardless of the reasons, our goal is to use conservative amounts of leverage. If you know how much risk capital you have available, then use the chart and calculations used in Figure 3 to determine an trade size appropriate to your account size.If you have a target “per pip” value, then use the calculations in figure 5 to determine the minimum amount of account capital needed to support your trade size. Increasing your capital base does not mean you will become more profitable. It means that you can stay in a trade longer if it goes against you. On average, traders that use a combination of sufficient capital (at least $5,000) and conservative use of effective leverage (10 to 1 or less) tend to be more profitable.
The EURGBP has recently tested resistance after a 250 pip advance. As the pair stalls traders can turn to DMI to find the prevailing trend.The primary objective of a Forex trader is to find market direction. There are a variety of methods for finding the trend however interpreting price action can often be difficult and sometimes misleading. To help ease in this process traders often will employ the use of technical indicators.In todays example we will be looking at the EURGBP daily chart pictured below. The pair has advanced as much as 394 pips from its July 23 low. However, resistance has been met near its October high at .8164. So what is a trader to do in present markets? Which direction is the EURGBP trending? To answer these questions, we will tae a closer look at the DMI indicator.Learn Forex – EURGBP Daily Trend The DMI indicator is derived from two lines, the positive directional movement indicator (DMI+) and the negative directional movement indicator (DMI-). Both lines run in a range between 0-100 to help identify if a currency pair is trending up or down. The DMI + line is depicted as a green line and as its name suggests helps track price in an uptrend. The DMI - line is depicted as a red line and measures the strength of a downtrend. Traders will watch both lines as they oscillate between 0-100 and change their market preference as one line crosses above the other.Reading DMI is relatively straightforward. Traders will look for the DMI line that is moving higher than the other. This is also known as the dominant DMI line. In the chart below, DMI + has crossed above DMI - , making it the dominant DMI line and suggesting that the trend is up. If DMI – was the dominant line the opposite would be true. Traders would then conclude that the market was intending to move lower.Learn Forex – EURGBP with DMI Using DMI my preference is to look for continued strength on the EURGBP. This will continue as long as DMI + remains above DMI -. One way to trade this market bias is to look for breakouts toward higher highs. If DMI + increases in value, traders may look to employ a trending strategy asAn alternate scenario includes price moving to higher highs. If this occurs traders will be notified as the DMI - line will cross back above DMI +.
Well you are trading currency on the foreign currency market and as a consequence you’ve recently been informed we have a far better solution to accomplish your investments without having to involve your current brokerage. Precisely what you need can be described as trustworthy Automatic Trading System. There are a number of Automatic Trading System products that you can purchase. Each will function in a very much the same method, but the key distinction between each system may be the experience associated with the creator(s) as well as precisely what method the particular Auto Trading System has been based upon. The actual base method for the package is actually what sorts out the men from the boys. Should you be serious, I would like to be able to share with you some capabilities which can be significant to think about in the Automatic Trading System which you are likely to purchase and use to invest on the foreign currency market. A profitable created Automatic Trading System: integrates years of forex trading experience, mastering how the market behaves, integrating long-term experience into the method, programming computer systems to master the particular method. In the same manner you just cannot open up your car hood in order to rebuild the engine without years of mechanical experience. A truly fantastic Automatic Trading System has to be meticulous in every single market place situation. That is what rules, it again makes the vital big difference. Commercial Finance institutions know it and that’s how these companies have generated substantial profit margins for decades. Your ultimate Automatic Trading System must be making absolutely consistent and even results for in addition to long period of time never making average outcomes for a specific time period. Your foreseeable future in the foreign currency market depends upon just how good your Automatic Trading System can adapt to new market forces, the difference somewhere between being able to generate profits and generate losses can be extremely fine. There are actually hardly any Automatic Trading Systems that can adapt to long term market forces. Of course an additional crucial have to have feature in the Automatic Trading System is that the software must be invisible to your current brokering service. A few, not all broker agents can begin to play games with your account, such as raising the spread of any currency pair you might be buying and selling or maybe not allow you from trading together with your Automatic Trading System. An inbuilt sleuth mode allows you and your Automatic Trading System the flexibility to be able to make trades at anytime night or day every time the forex market is actually open. I guess the last thing to go over will be the saving it and operation of the Automatic Trading System. Again these must be simple, a total newbie ought to be able to down this system and also have it functioning within a few minutes from downloading it. The operation guide book ought to be laid out in an simple structure consequently every single step is completely thorough and follows on from one another. Anyone should be able to confirm all of the earlier mentioned product or service benefits within the product or service sales information when undertaking your search to the most suitable Automatic Trading System before you purchase. If the sales details has only pointed out some product or service benefits it is a signal to move on to your next product offer.
“Good fortune is what happens when opportunity meets planning.”Thomas Jefferson“Reduce your plan to writing. The moment you complete this, you will have definitely given concrete form to the intangible desire.”Napoleon HillFinding quotes exuding the benefits of planning is not hard to do. Above are just two of the more common, reverent quotes exalting the benefits of planning. Or there is this one:“He who fails to plan, plans to fail.”ProverbsHowever you want to look at it, or whomever you may want to listen to, the benefits of planning can be profound; particularly when embarking on a difficult activity. It can give form to the process that, hopefully, will help us achieve our goals.In this article, we will look at the ‘Trader’s Plan,’ and many of the elements that traders look at to outline their plans.The Trader’s Plan can differ greatly between traders, often around personal preferences and maybe even more importantly - goals. For this reason, I choose to start my trading plan with my daily goal. This is the first line in my plan – and functions as a reminder of what it is that I want to accomplish in markets on a daily basis. I color and keep this line ‘green,’ so that it sticks out on my plan. At quick glance of the plan, the green goal sticks out – further reminding me of what my job for the day is.Goals:New traders will often ask how many pips they should target when first getting started out. I recommend that new traders on the demo should look to be profitable, setting initial goals small and increasing as experience and comfort builds. Trading can be tough, and setting extremely lofty goals could end up becoming a discouraging element of the plan. Goals should be realistic, attainable, and worthwhile all at the same time. These can differ greatly from trader to trader; but realistic expectations are of extreme importance to the plan, and to the approach. This will often dictate the rest of the plan, so I start the plan with this line item of my daily goal in ‘Pips.’ When am I going to trade?This is probably one of the most neglected parts of trading plans that I’ve seen. The FX Market is open 24 hours a day and many traders want to use this to their benefit. The fluid nature of price being traded around the clock is a compelling prospect for traders, particularly those such as myself that came from other markets such as equities or commodities; markets in which gap risk can greatly influence a trading approach. Since FX is open 24 hours a day, there are fewer gaps simply because the market doesn’t close as often as most equities, futures, and commodities markets.An important element of note is that the various trading sessions can exhibit different ‘characteristics,’ around the way that prices move.In the article “When is the Best Time of Day to Trade Forex?” by David Rodriguez and Tim Shea, they examine the ‘Tokyo,’ trading session.David and Tim propose the thesis statement that movements in price can potentially be smaller during the Tokyo Trading session, and, as such, may be more accommodative for newer traders.David and Tim first establish that average price moves of a target currency during the Tokyo Session (in this study David used EUR/USD) could be smaller than that of other trading sessions, or times of the day.David and Tim’s research comes to the conclusion that range strategies, such as the RSI example used in their research, may be better served during the Tokyo Trading Session.I would highly recommend this article to anyone unsure of how to build this part of their Trading Plan:“When is the Best Time of Day to Trade Forex?” By David Rodriguez and Timothy SheaHow much am I going to risk per trade?The next step in the trading plan is – in my opinion – the most important part of the plan. This is where a trader’s risk parameters are set.There isn’t one answer to this question that is, across-the-board, better than another. Once again, this part of the plan should be built around an individual trader’s goals, objectives, and risk tolerances.For anyone looking for some help in setting this part of the plan, in the module for Money Management in the On-Demand Video Course, we propose a max of 5% at risk at any one point in time.Traders also need to determine if that amount at risk is going to be on one trade, or many. If I risk 5% of my account on 5 ideas, that’s 25%. If I lose on all 5 of my ideas, I only have 75% of my account balance when I begin trading tomorrow.I then need to make 33% just to get back to my previous break-even level!Personally – I find that level of risk intolerable on a day-in and day-out basis as a trader. I want a maximum of 5% of my account at risk – across all of the ideas that I’m trading. That way, if I have an extremely bad day and lose on all of my trades I can come back with 95% of my account value tomorrow.How much profit will I seek on each trade taken?Once again, this part of the plan can differ greatly from trader to trader depending on trading style, risk characteristics, and goals.Risk and Reward is extremely important to traders, and once again, Mr. David Rodriguez has accompanying evidence to help further illustrate this point.In “What is the Number One Mistake Forex Traders Make?”David and Tim arrive at the thesis statement that a minimum 1 to 1 ratio should always be used. This means that if I am risking 100 pips in a trade, I want to look for at least 100 pips as a gain. David continues, “for lower probability trades, such as trend trading strategies, a higher risk/reward ratio is recommended, such as 2:1, 3:1, or even 4:1.”In the Money Management module of the On-Demand Video Course, we recommend a minimum of 2:1 or greater; meaning if I’m taking the same trade with 100 pips of risk as above, I’m looking for a minimum of 200 pips to the upside if I’m correct.How am I going to enter trades?This is one of the more simplistic parts of the trading plan, as this will often be dictated by the trading strategy (or strategies) itself. I want to make sure that I’ve written out the exact situation that I am looking for.If I were using the ‘Model Strategy,’ that David and Tim had used in “When is the Best Time of Day to Trade Forex?”this section of the trading plan would read:I’m looking to trade RSI crossovers between 2:00 PM EST and 6:00 AM ESTI want this to be as descriptive of the strategy as possible in this section.How am I going to exit trades?A natural extension of the previous section, this area should address each strategy being traded. For each strategy listed in ‘How am I going to enter trades,’ I want to have an exit planned.Some exits may be: “I will close my trade when 2 times my initial risk level is met.” Others may be: “I will remove a part of the lot and move my stop to breakeven at a 50 pip gain, and I will then trail my stop on the remainder of the position by 30 pips until an oscillation takes me out of the trade.”How am I going to manage my trade(s)?Once again, this area is going to differ greatly between traders as this should be highly customized based on the previous sections of the trading plan. This can also be built around the specific strategies or market conditions being traded.Trending moves can often continue for an extended period of time, meaning trailing stops may be more of a requisite option in trending/breakout markets than in ranging environments.For traders looking for more information, I share my point of view in the article “In-Trade Management.”RulesI saved the best for last.This is where I will build and manage my personal ‘rules,’ of my trading approach. If I find myself continually running into an issue or problem, the only rational thing to do is identify the issue and build a rule around it. That’s where my personal rules come into play.These will differ greatly amongst traders, but as an idea, one of the rules that have existed on my plans for quite awhile:“I will not throw good money after bad.”This means that if I open a trade, and am losing – I will not add to that loss.It also means that if I set my stop, and the trade moves against me – I will not, under any circumstances, ‘widen,’ the stop or give it more room in the hope of being right.I noticed this deficiency in my trading quite awhile ago, built a rule around it, and have kept it as a reminder. I encourage you to notice what areas of trading are causing you difficulty, and address them in this section.
Forex trading is not actually new in the finance marketplace. In point of fact, it’s not merely acknowledged by large players on the planet, but also by not so big businesses and even individuals lately. At this moment, forex is no longer reigned over by the big members; individuals from almost all avenues of life can in fact do forex trading. Before plunging in transacting, it is important to comprehend certain terms which have been made use of in the marketplace. A particular fundamental key phrase will be the forex trading method. What it is about, and also precisely what is its use. The rise of the internet has transformed the public presence of forex trading. Due to this quite treasured system, the Forex sector is easier to access, rendering it far more convenient to undersized members. And all most especially, all this happens in real time, which is why online investors can in fact produce swift choices relating to their trade. Currency trading method is ergonomic and also intuitive. All of the mandatory attributes associated with forex trading can be performed from your main screen. You are able to place a trade and leave an order. And furthermore, also you can carry out margin investigation and also position/order direction. There are numerous organizations, located in distinct nations around the world, which will provide you with a forex trading method. The very first element that your method ordinarily will incorporate is financial commitment of money. Certain corporations would probably require you to commit just five dollars while some could certainly ask you for as high as 500 dollars for in advance obligations. Fx solutions substantially vary, and it will depend predominantly on the provider offering such service. With the method, you can buy firms, securities, and make ventures even in other places. It is easy to greatly enhance your prosperity and individual preferences by way of purchasing a forex trading method. By investing some initial capital, you can make all the more money down the road. The forex trading method a growing number of investors know about is built amongst top providers, traders, and also intercontinental currencies. The trading method can be in the real world or online. You are liberated to opt for which method works effectively for you. Having said that, online trading systems are actually gaining more and more worldwide recognition as you have got easy accessibility to the capital that you’ve invested. Offline trading systems normally will involve loads of documents; while with an online method, you’ll be able to immediately make investments, buy and sell, move, and remove money faster. All it requires is for you to find out about the investment, and the way to have confidence in the best fx brokers in the event that you may need to make extra choices down the road. You have to be involved with a firm which you can contact whenever you need during a business day. This particular corporation must be able to supply you with a phone number, fax number, and email address. Steer clear from corporations which do not reveal this type of information. Without the right investing method, you cannot buy and sell successfully. Accordingly you are required to go with a method that is certainly suited to you as an individual. You have to consider the currency trading style and the threat which it entails. A method which usually concentrates much more in hazard and money management strategies is an efficient one. Locate a firm that has been in business for ages and the ones that have confirmed certified experience. It also needs to furnish you with methods and strategies that will help when it comes to formulating your personal online trading method. If you select the correct company, you will discover one that’s of best bang for your buck. Your choice of suitable, and in all probability the best, forex trading method is one of the first details you will need discover within forex trading. You’ll find three elements frequently thought about when deciding on a forex trading method, specifically: profitability, acceptability, and one that fits your daily routine. Profitability is in all probability the key consideration. People invest resources to produce revenue, and a good method should provide that. It’s revealed through dollar amounts or pips/month. Every method has a drawdown, which is as well listed in pips. It’s the most important decline in equity up to now. In comparing and contrasting diverse products, you might want to take a close gaze on its traditional drawdown. Furthermore pay attention to the programs revenue and reduction ration, and also its win and loss percentage. The method must have reliability and you can effectively tell this by way of considering their month to month or quarterly, and yearly results. Once you have selected a method, read and learn all about it, and you will definitely attain a lot from your investment.
Although often overlooked by some traders, forex trading risk management is extremely important if you want to be a successful trader. Why? Well, as you may know, as the forex market is quite volatile – and there is a substantial amount of leverage available, there is a chance that you can lose all – and more – of your invested money if you do not properly employ risk management. One of the best ways to combat the problem is to plan for each trade in the proper manner. One way to properly plan your trades is to minimize your trade losses. In other words then, you should know when to control your losses before you engage in a specific trade or trades. For instance, you can set a hard stop – or set your loss stop at a specific point before engaging in a trade. Conversely, you can also set up a mental stop – which is less concrete than a hard stop, but it nonetheless is another way to minimise forex trading losses. The most important aspect of implementing a stop loss though is to stick with this stop loss. Emotions will often come into play when the actual trades are in progress and there is a chance that you may let the stop loss move further in the hopes of seeing a currency recovery. However, this practice will most likely result in you losing more money. You should also ensure that your lot sizes are a reasonable size. Lot sizes refer to the forex transaction sizes; a standard forex transaction size is 10 000 units, but mini-lots may be 1000 currency units. While some forex brokers may encourage you to get larger lots, in order to minimize risk, it is a good idea to keep your lot size on the smaller side. If you keep your lot sizes smaller initially, you will more likely use less emotion when you make trades – and thus, you will learn to depend on sensible logic and decision making. Along similar lines, while you should keep your lots sizes small, you should also not open too many of these lots. Additionally, it is vital to understand currency pair correlations. As an example, if you were to go long on EUR/CHF and short on USD/EUR, these pairings equal to two long lots of EUR. This situation is not an ideal one because if the EUR decreases in value, you will feel this effect twice as bad. Thus, it is important that you are both knowledgeable and keep track of your exposure. Overall then, due to the higher risks involved with forex trading, risk management is more important when it comes to trading currencies. As you may realize, traders need to act – and quickly – when there is an opportunity in the forex trading marketplace. If you have proper risk management strategies already in place, you will be in a better position to act upon these opportunities. After all, if you want to be a successful forex trader that is involved in currency trading for the long haul, you must be disciplined and adhere to certain risk management procedures. If not, you do stand a chance of losing everything within an extremely short period of time – even minutes.
While I occasionally trade from the Daily chart, primarily I use it to determine the trend of the pair.Once I have identified the pair that I feel has the strongest trend based on the Daily chart, I will usually enter on a 4 hour or 1 hour chart...whichever time frame best optimizes my entry.Here's what I am looking for chart by chart...The Daily Chart: The Daily Trend on the NZDJPY is down. This determination is made based on the pair making lower highs and lower lows, price action is below the 200 SMA and pulling away from it and, at the time of the analysis, the NZD was the weakest currency and the JPY was the strongest. Also, looking at Slow Stochastics, I see that it is below 20 which is a very bearish sign.Given all of the above, I know I will only be looking for opportunities to sell the pair as they will have the greater likelihood of success. (Trading in the direction of the longer term trend offers us that edge.)The 4 Hour Chart: Then I will look to the 4 hour chart and look for a retracement (a move against the Daily trend) to be finishing and beginning a new move to the downside. In other words, a fresh move back in the direction of the Daily trend. Sometimes that fresh move will present itself straightaway or I may have to wait for the set up to occur.In the case of this particular 4 hour chart I would need to wait for the pair to cycle back up as a new move to the downside has already taken place over the last five red candles on the far right of the chart.I will also run through this same process on the one hour chart looking for the same set up.Once a“fresh move” begins on either the 4 hour or the 1 hour chart, an entry can be made with a stop placed above the highest level of the recent retracement. (Stochastics, MACD or RSI can be used to further time the entry.)The 1 Hour Chart: In the case of this 1 hour chart, I would be waiting for a pullback/retracement to take place to short the pair.Since the pair has been in a strong, on-going downtrend on the Daily chart, I would have been able to successfully sell the pair at any of the points on the chart after the retracement (black arrows) takes place. The short position would be opened when momentum shifts back to the downside (Stochastics crossover within the black circles). In each instance the stop would go above the most recent high approximately at the black lines.Sidebar: Some traders will become frustrated when they see price is moving opposite the direction of the Daily trend. Don’t worry about it. It is fine since that means a retracement is taking place and once that is complete, we will be looking at an opportunity to enter the trade in our direction of choice...the direction of the Daily trend.
One of the key components of Money Management is the 5% rule. That is, never put more than 5% of the trading account at risk at any one time. The rationale behind this is that when we have losses (and we WILL have losses, make no mistake about that) they will be small and manageable as opposed to large and catastrophic. Oftentimes however, this rule is erroneously interpreted as meaning 5% per trade. This is not accurate. The 5% rule pertains to the TOTAL amount of the account balance at risk at any one time…NOT on any individual trade. So, if you have one trade open, 5% is the maximum allowable risk. If you have two trades open or five trades open or ten trades open, the maximum that could be lost if the stops on all of the trades triggered at the same time is 5%. Think of it this way, if the rule were 5% pertrade, a trader could open five trades risking 5% on each trade and still be within the rules. What would prevent a trader from opening up ten trades and only risking 5% on each one? There has to be something that prevents the trader from over leveraging their account and that something is the “5% risk at any one time” part of the rule. Otherwise, as you can see from the previous 5% per trade example, the trader with five trades with 5% account risk on each one would have 25% of their account at risk and the trader with ten trades would have had 50% of their account at risk. Clearly, neither of those would be a situation in which a prudent trader would want to find themselves.
Novices need to acquire trading experience in order to be able to select good stop-losses and profit targets for all the positions that they open. These are important activities to master because Forex has such an unpredictable and volatile nature that it is easily stop-out positions protected by small stops only i.e. up to 50 pips. The following chart taken from a forex trading platform shows such a trading setup. In the above diagram, price is trading a tight range before it breakouts to the downside. A new short is opened protected by a stop-loss positioned about 50 pips above the old resistance level. Unfortunately, in this case a large bull spike stopped out the short forcing a loss. Those people that are involved in options trading, CFDs, binaries and other derivatives are also advised to develop trading strategies that have good risk-to-reward and win-to-loss ratios. However, these techniques also take time to master. Do novices have any plausible shortcuts available to them? Yes, they do because a trading strategy has been designed to overcome these problems. How does a Large Stop-loss Strategy work? Although this strategy looks strange as its main concepts appear to contradict many of the recommended principles associated with Forex Trading, many traders have achieved success using them. The basic principle is that you trade using a very large stop, in the order of 500 pips, while plundering profits of 50 pips or so per position. This idea could even be consider as a macro version of scalping strategies. Again, the central idea behind scalping strategies is to nip in and out of positions quickly which will minimize your risk exposure as well as capturing small profits of 5 to 10 pips. With regards to large stop-loss strategies, you will appreciate that a large stop-loss of 500 pips is difficult for price to stop-out. This concept therefore provides a basis for beginners to trade because they no longer need to develop the skills to protect normal positions using smaller stop-losses. The risk-to-reward ratio of 1 to 10 of this type of trading strategy is not very good. However, the central point is that the effort required by the price to stop-out a 500 pip stop is exponentially higher than that a 50 pip one. So, the idea is to attain an impressive win-to-loss ratio which will then counter a weak reward-to-risk ratio. For example, if you could record 6 wins of 100 pips against 1 loss of 540 pips, then you would register a profit of 60 pips. Overcoming Potential Problems However, although this theory appears plausible, you must perform this strategy accurately. This is because your trades could become stranded in negative territory. Price could simply remain within this area for extensive time periods. Should such a development then you would not be able to record any new profits for some considerable time. To resolve this issue, you need to deploy a well-proven money management strategy. For example, you should just wager between 0.1% and 0.2% of your total equity per trade. You will provide optimum protection for your equity by doing so. You will also be able to permit a few trades to become isolated until they record profit status. Also by risking such minimum amounts, you will be able to initiate a quantity of positions concurrently. The following chart illustrates this problem. The above chart shows that a new short position was opened after the breakout identified towards the bottom left. A large stop-loss was used and positioned above the blue line at the top of the chart. Unfortunately, price reversed direction leaving the position in limbo before it finally return to profit months later. An important benefit of this trading strategy is that it permits the less experienced trader more room to make errors which they would not otherwise be able to if they persistently instigated trades protected by smaller stop-losses. Some newbies enquiry why they cannot wager a greater percentage of their account balance e.g. 10%. They believe that this action should be possible because they are utilizing such a large stop-loss. However, this is definitely not a good idea if you acknowledge that 10 consecutive losses risking 10% per trade would lose in excess of 66% of your account balance. In comparison, by risking just 2% per position than a series of 10 successive losses would lose about 17% of your account balance. Clearly, the latter produces significantly better protection. Although the concepts of large stop-loss strategies appear strange at first, they can be molded into effective tools possessing many benefits especially for novice traders.
It is not uncommon to see binary options trading and Forex trading being linked, as both are considered to be alternate forms of trading outside of traditional market trading. However, this is really where the similarities end, as each of these two forms of trading present several different elements that are in no way similar. A key difference between the two is the amount of funds required to begin trading. The cost of opening a Forex trading account averages around $500, but can be much higher. Binary options broker accounts can be created for free, with the minimum deposit amount being as low as $100. The most than one might expect to need to deposit to being trading binary options is $250. The difference in start up costs must be noted, as most prefer having the ability to get started trading with a smaller amount of funds. Another key difference would be the potential loss amounts. In Forex trading, loss amounts can be infinite and therefore a stop loss is needed in most situations. The maximum possible loss in binary options trading will always be the investment amount of each trade. Nothing more, nothing less. This allows for a high level of money management control, as the trader is free to never risk more than he or she can comfortably afford to lose. Unlike Forex trading, no stop loss will ever be necessary. The expiry times of trades will also differ. Binary options trading, depending on the broker, will offer expiry times as short as sixty seconds. This presents the possibility of accumulating profits quickly. Forex trading will offer reasonably short expiry times as well, though none as short as one minute. Both forms of trading also offer lengthier expiry times. However, Forex trading will require careful monitoring over these longer periods in order to halt loss accumulation. Live trade monitoring takes place in binary options trading as well, but with the potential loss amount fixed, it is not an absolute must. There is no need to choose between one or the other, as both binary options trading and Forex trading can be done simultaneously. In fact, many choose to use both financial instruments, applying the same research and analysis within each platform. The knowledge gained in either form of trading can be applied to the other, potentially helping to increase profits. Though there are stark differences between the two, any knowledge of currency trading will be beneficial.
Are you a medium-term technical trader that uses automation software to place your Forex trades, or are you more of a long-term fundamental trader that places discretionary trades? Neither? With so many different ways to trade, it’s difficult to keep track of them all. Traders come in all styles in flavors which is the topic of today’s discussion. Technical vs. FundamentalTechnical analysis is the art of studying past price behavior and attempting to anticipate price moves in the future. These are traders that focus solely on price charts and often times incorporate indicators and tools to assist them. They look at price action, support and resistance levels, and chart patterns to create trading strategies that hopefully will turn a profit.Fundamental analysis looks at the underlying economic conditions of each currency. Traders will turn to the Economic Calendar and Central Bank Announcements. They attempt to predict where price might be headed based on interest rates, jobless claims, treasury yields and more. This can be done by looking at patterns in past economic news releases or by understanding a country’s economic situation.Short-Term vs. Medium-Term vs. Long-TermDeciding what time frame we should use is mostly decided by how much time you have to devote to the market on a day-to-day basis. The more time you have each day to trade, the smaller the time frame you could trade, but the choice is ultimately yours.Short-Term trading generally means placing trades with the intention of closing out the position within the same day, also referred to as “Day Trading” or “Scalping” if trades are opened and closed very rapidly. Due to the speed at which trades are opened and closed, short-term traders use small time-frame charts (Hourly, 30min, 15min, 5min, 1min).Medium-Term trades or “Swing Trades” typically are left open for a few hours up to a few days. Common time frames used for this type of trading are Daily, 4-hour and hourly charts.Long-Term trading involves keeping trades open for days, weeks, months and possibly years. Weekly and Daily charts are popular choices for long term traders. If you are a part-time trader, it might be suitable to begin by trading long term trades that require less of your time.For a more in-depth look at multiple time frames and how to integrate them properly, check out The Time Frames of Trading.Discretionary vs. AutomatedDiscretionary trading means a trader is opening and closing trades by using their own discretion. They can use any of the trading styles listed above to create a strategy and then implement that strategy by placing each individual trade. The first challenge is creating a winning strategy to follow, but the second (and possibly more difficult) challenge is diligently following the strategy through thick and thin. The psychology of trading can wreak havoc on an otherwise profitable strategy if you break your own rules during crunch time.Automated trading or algorithmic trading requires the same time and dedication to create a trading strategy as a discretionary trader, but then the trader automates the actual trading process. In other words, computer software opens and closes the trades on its own without needing the trader’s assistance. This has three main benefits. First, it saves the trader quite a bit of time since they no longer have to monitor the market as closely to input trades. Second, it takes the emotions out of trading by letting a computer open and close trades on your behalf. This means you are following your strategy to the letter and are not able to deviate. And third, automated strategies can trade 24 hours a day, 5 days a week giving your account the ability to take advantage of any opportunity that comes its way no matter the time of day.Good trading!
There is a very simple formula to identifying the strongest and weakest currencies. Once you’ve done that you can follow a checklist for finding favorable entries in the direction of the predominant trend.Trading in favor of the strongest currency and selling the weakest is the bread and butter trade for trend followers and swing traders alike. The only difference is that trend traders hold the trades for much longer and swing traders often have defined risk to reward entries. Trend followers purposely trade these currency mismatches because they tend to trend longer than many people expect.To help you visualize what a strong weak match up looks on a chart, here is a trend at the hands of a notable strong currency unevenly trading against the weakest currency.Learn Forex: CADJPY houses the strongest and weakest currencies to trend traders’ delight To see for yourself what the current strongest and weakest currency pairs are, you need to perform a Strong and Weak Analysis . Once you’ve done that, you can add fractals and the CCI to your chart to find entries or look for breakouts.Strong Weak Analysis BreakdownPlace a large moving average on a major currency pair, preferably on an hourly chart or larger. We recommend you do this on excel or a piece of paper with the major individual currencies listed out as opposed to the pairs. This will make it easier for you to take the strongest and look for entries against the weakest.If you’re using a 4 hour chart, as recommended in the original article, then you will place the large moving average and give each currency credit to the strong or weak category either with an up or down arrow or strong / weak checkmarks. So if you’re looking at the EURJPY which is above the 200 day moving average, then you would tally a strong mark for the EUR and a weak mark for the JPY.As it currently stands in January 2013, the JPY is far and away the weakest across the board thanks to Shinzo Abe promising to weaken the JPY at all costs to bolster the Japanese economy. The two strongest currencies using the 200 period simple moving average on the 4 hour chart is currently the Canadian Dollar and New Zealand Dollar respectively. Identifying the strongest and weakest will also prevent you from trading two strong or two weak currencies against each other’s unreliable patterns.Learn Forex: NZDCAD Do Not Provide Clear Chart Patterns as the Two Strongest Currencies Now that we’ve clearly identified the strongest and weakest currency pairs, you now want to pull up the opposing charts to look for entries. Naturally, we always encourage patience in finding the right entry. With your patience honed we can look to entry techniques to buy the strongest currency pair while selling against the weakest.Strong vs. Weak Entry Methods #1 – Breakouts with Price ChannelsLearn Forex: Donchian Channels are utilized for Entries & Stops Based on Price Alone The first entry method we’ll discuss is the breakout entry method. Breakout entries are a technical strategy to help you to catch a developing trend and avoid some losing trades. The most common tool used to easily spot breakout entries are Donchian Price Channels.When using price channels, traders will often look to 20 or 55 period highs and buy price breaking through an old high or breaking below and old low as renewed interest carries the pair in the predominant trend. The argument for entering on breakouts as opposed to “buying low” is that price is the only credible indicator and if price is entering new territory then the trader should follow.Strong vs. Weak Entry Methods #2 – Combining the CCI with Fractal IndicatorLearn Forex: Combining CCI’s with Fractals Help Identify Respected Market Swings If you’re not a fan of buying new highs and would rather buy pull backs in an uptrend, then I’d recommend you become familiar with fractals and the Commodity Channel Index (CCI) to time entries.Fractals help pinpoint changes in market behavior. Many traders will base trading decision like stops and entries on hard turns in market behavior and fractals point that out to you. Adding Fractals to your chart will only show you up or down arrows when a recent top or bottom has been made within the last 5 price bars.To give more depth and meaning to fractals, we can add the CCI. The CCI is an unbound oscillator that helps measure variation from the average price over a specified period.When you’re trading the strongest currency against the weakest and find a rare spot on the chart where the weakest currency has temporarily strengthened against the strongest currency beyond the average then you can use that to time entries in the trend. In an uptrend, you’re looking for lows on the CCI ideally crossing below and back above -100.As you can see above, depending on the strength of the trend, you may not see a CCI reading below -100 (oversold) and that is when it’s best to find a bottoming of the indicator paired with a fractal on price before trading back toward the direction of the trend.Regardless of your method for entering the trade, finding the strongest currency and buying it against the weakest currency will do a lot of the work for you. Regardless of the mismatch and the entry, we recommend you set your trade size appropriate to your account size and risk goals.