Trading the Rate of Change Indicator
Finding and trading long term movements is the primary goal of Forex trend traders. However once a trend is found, it can be difficult to time an exact entry point for market orders. Below we can see an example of the EURGBP currency pair trending 413 pips higher over the past three months. How can traders plan their potential market entries? Today we will identify opportunities to trade the EURGBP trend using the Rate of Change indicator.
The Rate of Change indicator (ROC) can be extremely useful in pinpointing entries in the Forex market. Used as an oscillator, the ROC displays the amount a currency has changed over a designated period of time in reference to a zero line. A reading above the zero line indicates that the market price of the currency is greater than the start of the ROC period. A reading below is the opposite and contends that price is trading lower compared to the first ROC period. It is important to note that ROC is an unbound oscillator similar to CCIand that the higher or lower a reading is, the greater the previous change in price.
Taking the trend into consideration should always be primary when using ROC. Below we can see the EURGBP daily trend heading towards higher highs, meaning trend traders will look to buy the EURGBP. These new buy positions can be found using one of the most popular ROC signals, a zero line crossover. Traders in an uptrend will wait for the market to retrace, allowing the ROC oscillator to move below the zero line. As momentum returns with the trend buy signal may occur when ROC closes back above the zero line. Once a trade has been entered using ROC, risk can be managed by setting stops under a trendline or other area of support while setting up a positive risk/reward ratio.
Using the ROC indicator, my preference is to buy the EURGBP on a new zero line crossover near .8030. Stops should be set under trendline support near .8000. First targets can look for a minimum 60 pips profit for a 1:2 Risk/Reward ratio.
Alternatives scenarios include the EURGBP breaking support and moving to lower lows.
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While traders tend to focus more on trading strategies for gold, the trade specifications which are actually very important are often given least priority. Trading Gold CFD's requires a completely different approach than trading currencies. This is simply due to the nature of the way gold prices behave compared to other markets. For most traders, gold and fx are often used inter-mixed especially when it comes to trading strategies. Without understanding the basics of what is going on in your gold trades, it can be difficult to make consistent profits. The following three points are quite important when it comes to trading gold and something a trader must know at any point in time.Gold - SpecificationsInitial Margin: The initial margin is the amount of collateral required to hold a position in Gold. At Orbex, the initial margin for gold is $1000 for a trade size of 1 lot (100,000). So if you are trading 0.50 lots, your initial margin would be $500, or $100 margin requirement to trade 0.10 lots of Gold.Why is margin important?Understanding the initial margin can be beneficial for you to plan your trade size. For example, if you had a trading equity of $1000, then it makes sense to trade with 0.10 lots in Gold, where the requirement margin of $100 is locked in. This leaves you with a free margin of $900.Minimum contract size: The minimum contract size to trade Gold is 0.10 lots. A 1 standard lot in gold is equal to 100 ounces. Therefore, when you trade, 0.10 lots is trading 10 ounces of Gold.Understanding the minimum contract size can help you in your position management. Because the contract size or lots are directly related to the required margin, by knowing these details, you would be able to position your trade sizes better based on the trading capital that you have.Tick Size and value: The minimum tick size is 0.01. At Orbex, gold is priced in two decimals, such as 1200.12 and so on. Each tick or 0.01 is $1 for a standard lot or $0.10 if you are trading the minimum trading size of 0.10 lots.The value of the tick size in gold is perhaps the most important. Because each tick is equal to $10 for a standard lot size, you can quickly do the math in terms of knowing how much loss or profit you can make off your trades.Swaps: When you keep your positions in gold open overnight, then your trades attract overnight rollover swaps. For long positions, the swap on your gold trade is a -0.347 points and for short positions that are kept open overnight, the swaps are -0.236. So when you are trading 1 lot position in Gold, long positions held overnight have -$0.347 (rounded to -$0.35) swap and short positions have -$0.236 (rounded to -$0.24) swap.Gold - Trade Example:We purchased 1 lot in Gold at $1250.98. Therefore, the required margin was $1000 and each tick (0.01) is worth $10. So if gold had risen from 1250.98 to 2151, a 0.02 tick move, which would give a profit of $2. Likewise, if gold prices fell from 1250.98 to 1250.68, that is a 0.30 tick move, which is $30 (0.30 x $100).Why is it important to understand gold specification?Understanding the margin requirements, swaps and tick size can help traders to remove any ambiguity from their trades. By knowing exactly how much you can make or lose on a trade that you hold, including the additional swaps that are applied, traders will be able to use this information to better manage their gold trading positions.